The Economics of Content

by Krishna on September 21, 2009

Paul Graham has a strange take on publishing (emphasis mine):

Publishers of all types, from news to music, are unhappy that consumers won’t pay for content anymore. At least, that’s how they see it.

In fact consumers never really were paying for content, and publishers weren’t really selling it either. If the content was what they were selling, why has the price of books or music or movies always depended mostly on the format? Why didn’t better content cost more? […]

Almost every form of publishing has been organized as if the medium was what they were selling, and the content was irrelevant. Book publishers, for example, set prices based on the cost of producing and distributing books.

The premise that the cost of books does not vary is not true at all. You can verify this by going to Amazon and checking out the prices of books. There is a great disparity in prices. Textbooks, for example, cost way more than novels. Even in the same genre (novels or non-fiction), you can see some books selling at prices several times that of others. New books command a greater price than older books.

Book publishers do not set the price just based on production costs. They base it on the market. How much are people willing to pay? How many people would be willing to pay at a particular cost? Are there substitutes (such as second-hand books) that compete with the books? The prices, like those of any other manufacturer of goods, are based on the principle of profit maximization.

Some content may be much better than others (“Forrest Gump” versus “Armageddon”, for example). But in this case, the better way to maximize profits is to get more people to watch it than get people to pay more. The other aspect of this is to look at the second-hand or yard-sale market: You will find more poor movies in that market at highly reduced prices. People do not throw away their “Godfather” collection or sell it for $1.

Graham’s bigger point is relevant. Fewer people are likely to purchase content (books, music, video) when such content is available for free, as in pirated digital versions of the same content. With high bandwidths of this age, file uploads and downloads have become so streamlined. I continue to be amazed at the thousands of people who have willingly donated their hours to record and upload videos on YouTube and other places.

But the focus on publishers is misguided. Book publishers, movie producers and record publishers are easily vilified. But let us not forget the content producers like authors, actors, singers, musicians and other artists. They will be just as hurt by these changing models. The typical answer (give content for free and cash in on solid items like T-shirts) is not going to work for everyone. Nor is advertising.

Like Graham says, no one has an answer yet. But we can take some confidence from how software creators have tackled piracy by moving away from bundled software to web applications and services. Graham may say that programmers are now selling server CPU time, but that is the way it goes.

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