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)