Grand Unified Theory of Economics of Free

Mike Masnick has a terrific, brief post up about the economics of free and the scarce and infinite components of a company's offering. It's a thought provoking framework to think about scenarios such as "All music is legally free for consumers by 2015 — how do the artists make money?" Here's how Mike thinks a recording company should think about the economics of their business:

1. Redefine the market based on the benefits you're providing rather than the specific product you're selling. If you're a musician, for example, you're not just selling a specific song — you're selling the experience of musical enjoyment.

2. Break the benefits down into scarce and infinite components. An infinite good is something that costs nothing to give away to someone else. E.g., the music itself. Scarce goods are everything else — concerts, backstage passes, people's time and attention.

3. Set the infinite components free, syndicate them, make them easy to get — all to increase the value of the scarce components. When people can easily listen to your songs, they're more likely to get interested in your concerts or merchandise.

4. Charge for the scarce components that are tied to infinite components. E.g., charge for the concerts and t-shirts, access to the band becomes more valuable.

Most record labels stumble on Step 1: redefining their offering in broader terms. Same with newspaper companies. Most have a hard time thinking about themselves as news companies instead of newspaper companies.

Speaking of which, Marc Andreessen says the "game is completely over" when it comes to newspapers and that the New York Times should turn off the printing press tomorrow. I assume he would also say record companies should stop manufacturing CDs and distribute music exclusively online.

(thanks Jon Bischke for pointing me to this article)

7 Responses to Grand Unified Theory of Economics of Free

  1. Max Marmer says:

    Great Thoughts. I love it when I stumble on well articulated ideas that succinctly express something I’d noticed but hadn’t put words to yet.

    Both record and newspaper companies are not willing to change. And even if they did I still think they’d lose out, because the barrier to entry is so slow, someone who is not so bogged down with the ways of the past will be more innovative due to their fresh perspective.

    Oh and by the way I caught the tail end of the Andreessen interview with Charlie Rose where he made that comment. But interestingly regarding the record industry he said that he loves CD’s. He owns thousands of them, and still buys them frequently. He said the record companies just need more Marc Andreessens and they could keep selling records.

    I guess we all have our nostalgic tendencies. It occurred to me that his unshaken nostalgic habits might be a sign he too is over the hill. Is it possible to be both nostalgic and possess the fresh perspective necessary to innovate?

  2. Back in 2000 Courtney Love –of all people– wrote a prescient article about music that I still think off in the context of “free”.

    “Music is a service to its consumers, not a product. I live on tips. Giving music away for free is what artists have been doing naturally all their lives.”

    link to archive.salon.com

  3. Ben Casnocha says:

    Wow. Love hits it on the head ­ nine years ago!

  4. Ben Casnocha says:

    I think it¹s possible to be nostalgic but to understand that your nostalgia
    doesn¹t represent a viable market.

  5. Toli Galanis says:

    Ben, the person I read regarding these new models is Bob Lefsetz at: link to lefsetz.com

    Trent Reznor from NIN has been using those 4 points Mike mentions to excellent results.

  6. Mike Masnick says:

    Hi Ben,

    Thanks for the link… just a quick note that the post is actually from almost two years ago, though, it does seem to hold up well. :)

    Also, in reference to Toli’s comment above about Trent Reznor making this work, I recently did a presentation (to music industry execs, actually) that was a case study about exactly how Reznor has put all of this into practice. I actually avoided the discussion of “scarce” and “infinite” goods, because that makes recording industry execs hit the snooze button, but you might enjoy it as well:

    link to techdirt.com

  7. Toli Galanis says:

    Mike – I should have put two and two together. That was an excellent presentation.

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