iEconomics

 Chelfyn Baxter writes about how technology is fundamentally changing the basic principles of economics. Changing distribution and production methods for books, music, tv & film have cut out the need for an industry full of middle men. Listen to Chelfyn on the Radio Wammo breakfast show on Kiwi FM.

1. Basics

Out in the physical world, the default action is a move. If I have something you want, it must move from me to you. If you don’t give me something in return, it is theft. Copying that object would require additional cost and effort. Our entire economy is based on this principle, so much so that it is utterly implicit in the system. 

Online, in the non-physical arena, the default action is a copy. There is no such thing as a move, only deletion of all other copies. There can be no such thing as theft in the traditional sense as copying does not take away the original. Only deliberate deletion can do that, but all sensible computer users (and many modern file systems) make back-ups, so in effect true deletion is all but impossible. 

2: Distribution

The entire economic system of the physical world is based on cost, supply and demand. Cost is based on a finite supply, and runs the risk of become negative when there is insufficient demand for a badly estimated supply. Distribution costs of these physical objects are finite and often high, as they cover warehousing, transport, shelf space in shops and staff to sell them.

The internet breaks these equations.

With a digital object, you need only ‘manufacture’ a single item, the copies come free, there is no risk of over-supply and the only distribution cost is the data transfer from the server. This leads to a back-end cost quite close to zero, and a near-infinite supply. This comes very close to breaking economic models with stray infinities and divide-by-zero errors, and the only way to keep these economic models working is to artificially add cost to keep the zeroes from appearing, and to artificially restrict supply (through the use of DRM) to prevent the infinity of supply from breaking all the maths.

This is further compounded with distribution systems like bittorrent. With bittorrent, the consumers themselves pay the distribution costs on a dynamic basis. As demand goes up, so does available supply, and at no extra cost to the producer. This breaks all the economic models based on the creation, movement and sale of physical objects, which is why economists are getting everything wrong right now, they are simply ill-equipped to grasp this fundamental change in the environment, and have a lifetime invested in the paradigms of the physical world.

It is important that people understand that zero cost and infinite supply are concepts that have never before been faced by the economic models we have relied on all these years, but we now face a future filled with them. We have to learn to deal with them, not just artificially force the virtual world into emulating the physical systems. The digital natives will simply ignore these Luddite mechanisms and forge ahead with new, efficient systems based on new economic principles and laws which we’ve yet to discover in these early days.

3: Production

Production costs are still non-zero, but are massively affected by technology none the less. I will look at 3 prime examples, and how they differ in a computing-rich environment.

3.1 Books

For the reasonably foreseeable future, there will always be a need for the author to actually write the book. This cost is time and research, though the internet has made the letter easier by far since google has changed every game on the planet. All the other costs, however, such as typesetting, proofing etc have been replaced with software. No man hours at all need to be put into spell-checking a document written in any modern word processor, and the skilled and time-consuming job of typesetting has been replaced by Desktop Publishing software, once again at near-zero cost. It becomes apparent that modern computer technologies have reduced the production costs of the first book (remember that online copies come free) to a tiny fraction of that from the pre-computer world of 20 years ago.

3.2 Music

20 years ago it took a multi-million dollar facility to make a professional recording. It required a skilled team of engineers, producers and golden-eared mastering gurus to make a professional quality track.

Fast forward to 2009 and a typical mid-range laptop, running software of a similar value, is capable of much more than most studios of yesteryear, and there are plenty of free alternatives for the cash-strapped musician.

Modern multi-track recording software has no limit on number of tracks, instruments or effects. Virtual synths and effects sound as good as the originals, but without the noise and tuning problems. Drum software can provide a sound taken straight from the best kits, studios and players in the world, and deliver them to your desktop software for less than the price of a budget drumkit and a pair of the shoddiest microphones in the world. Auto-tune software and microphone modelling can create an acceptable vocal performance from even the worst singers. It might not be good enough for a lead vocal in most people’s minds, but it sure saves on backing vocalists. Guitar Rig allows you to plug your guitar direct to your PC and then choose from a massive range of simulated amps, cabs, rooms and effects. No guitarist I know has tried it and then gone back. Why would you, when you can go from a Marshall stack to a Fender twin with the click of a mouse?

Finally, golden eared mastering is no longer out of access to the cash-strapped amateur, as modern software mastering solutions such as har-bal or isotope ozone allow the bulk of this process to be done graphically and methodically. It may not replace the best in the business, but it does a better job than most for very little cost, time and effort.

In short, desktop music technology has reduced the cost of making music by several orders of magnitude. What once cost millions can be done equally well by an enthusiast on a hobbyists budget.

3.3 TV & Films

Much like music, TV & film-making is undergoing a technical revolution that is reducing the cost by almost unimaginable amounts. A broadcast quality camera used to cost tens of thousands, and is now eclipsed by a sub $4000 pro-sumer camcorder. To put this in some sort of perspective, old media companies are used to paying over $15,000 for a tripod. For less than that, a reasonably-priced PC running software such as Adobe’s Creative Suite can replaced or even eclipse the entire editing and production process, from beginning to end. With a decent camera, a cheap laptop and powerful software, you can produce professional quality video with effects that once cost millions, all ready for distribution and with little more investment than the time it takes to learn the skills.

Learning these new tools has become cheaper and easier as thousands of people share their knowledge free online, using the very same software to make easy-to-follow video tutorials.

It doesn’t even require costly software. Free open source software like Blender is capable of results that cost Hollywood millions a decade ago. Ubuntu Studio comes with all of these creative capabilities out of the box, for free. It’s not as good as the professional product, but it gets better every year and is running approximately 5 years behind and is closing fast.

All of these industries failed to pass on the plummeting production costs to the public, and have relied on ignorance of true scale of these issues to keep their products at an artificially high value. They simply never expected this to happen. Hardly anyone foresaw a future this close where a common laptop could replace so many expensive, specialised pieces of kit, and replace so many specialised jobs.

So, in the digital world, both production and distribution costs have been slashed by orders of magnitude. So much so that the entrenched industries are forced to manipulate the value through legislation, DRM and other methods solely to make the internet act like the physical world that they understand.

4: The end of the middleman

In all of the above cases, there is still a role for artists, and plenty of people are eager to consume that art. What has changed is the number of middlemen and intermediary services required to connect the two, and this is the big change that these industries have to deal with. A huge swathe of middlemen have just become surplus to requirements, their roles replaced with software or better communication, data collection and workflow practices.

Writers can now self-publish on sites like lulu.com. Musicians have great services like cdbaby.com and jamendo.com, both of which offer ways to distribute and promote your music for free, yet earn much more money per sale than the old record company model that offered typically less than 10% to artists. Online, 50/50 has become a standard deal, and if this figure changes, now it is in favour of the artist, not the distributor. Most importantly, these new deals leave the artist maintaining rights over their own work.

Budding TV producers can output their work on mogulus.com and use distribution services such as tubemogul.com to distribute a single video to many sources with a single click, and then get accurate viewer stats for free, something that used to cost TV and Radio stations tens of thousands of dollars a year to get from other outdated middlemen, media survey companies. These statistics are gold dust to advertisers and sponsors.

I think that many of the middlemen in the creative industries are really budding artists that were never given the chance to flourish in the specialised winner-takes-all environment of the old media. Now they have the chance to use the knowledge they gained from their old industry jobs to find a niche in the new media, many as creative producers that utilise these incredible new technologies to make more art, music and literature than ever before.

5: The great analogy

Think of us as life, leaving the water and venturing out on to land for the first time. It’s pretty obvious with hindsight that fins and gills have no future on land, but to the first mudskippers, that’s all they had. We’re in that situation right now. We’re floundering around, desperately trying to evolve lungs and legs, without knowing what lungs and legs are because we don’t have them yet.

What won’t help is legislating against anything that doesn’t closely resemble fish features. Neither will killing the mutants, some of whom may have mutated early versions of the legs and lungs we need to sing and dance on land with the grace we once moved through the water. We need to encourage these mutations, and support those that show promise.

We then need to emulate the successful, or we will be left behind, flapping uselessly on the shore, unable to survive away from the seas while other better adapted prance away into the distance, leaving those mudskippers behind like the evolutionary throwback that they are.