A Feast of Abundance – ISN

A Feast of Abundance – ISN
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Too much information can actually be a good thing.

Worried about the shortage of natural resources? The reverse problem is arising in the digital world, where abundance is turning economics on its head, Emilie Boillat writes for ISN Security Watch.

By Emilie Boillat for ISN Security Watch

Technological progress has led to a turning point in the digital realm by making many goods abundant. Books, music, software, newspapers and any digital product can now be reproduced and transported at a cost so low that it is negligible. This phenomenon poses serious challenges to the way we traditionally understand economics, because abundant goods do not behave in the same way as scarce ones. This has potentially profound implications on market mechanisms and even on the rules governing the market.

With a tradition of economics based on assumptions of scarcity, it is counter-intuitive for our society to look at economics from an abundance perspective. For many, abundance represents only an ideal case or even a divine post-mortem state. The very definition of economics, the study of the allocation of scarce resources, negates the concept.

The idea of an economics of abundance has been recently popularized by Chris Anderson, editor of Wired magazine. He argues that for digital goods, the costs of producing one extra unit of the product have fallen so close to zero that these goods can be given out for free. In his book, Free,  released this summer, Anderson explores zero price economics, arguing that for producers to cover their fixed costs and make a profit, a variety of innovative business models are arising or waiting to be created.

Signs of the times

The challenges posed by situations of abundance are visible across all information-based industries. In the book business, for example, while Amazon and others release e-book reading devices, publishers are scratching their heads wondering either how to make the best of electronic books or how to survive despite the trend. Libraries are also redefining their roles as democratic providers of information, putting electronic media at the center of their efforts.

At the same time, this fall, a legal settlement around Google’s plans to digitize millions of out-of-print books has caused controversy. While some feared it would give the internet giant too strong a monopoly power, others welcomed the initiative in the name of universal access to knowledge.

The turning point we have reached has been compared to the invention of the printing press. Its effect is even greater since goods based on units of information have expanded beyond text to include music, software, video, telecommunication and anything that can be digitized.

While the positive effects of Gutenberg’s invention on knowledge transmission and society in general have been great, it took a high degree of institutional upheaval to adapt to the new technological situation. Not only was a ‘business model’ transformed (monks would copy old texts by hand), but medieval society’s power structures were also affected.

Two trends can be observed in the way the economy adapts to the abundance of digital goods. On the one hand, there are those who develop mechanisms to make abundant goods more like traditional scarce goods. Others attempt to redefine market mechanisms and property rights to fit the new features of the goods they are selling.
The entertainment industry is probably the most efficient in resisting change by preserving the scarce properties of its digital goods. It has used legal mechanisms and developed a variety of technologies to prevent the reproduction of video and audio material. The Pirate Bay trial last winter seems to have set the tone for a while, but it remains to be seen whether this answer is definitive.

The news industry seems to have the most difficulty in adapting, with newspapers battling to find a way to stay afloat. Some editors for whom the ‘free’ model failed to work out are turning their online platforms into pay sites. However, at the same time, other media outlets such as hyperlocal papers  (papers that focus on neighborhoods and small communities rather than entire towns) have outsourced the bulk of content production to their readership, only retaining the validation function of the journalist.

Alternatives to scarcity economics

What the exponential growth of computer power and network capability has triggered is not so much that it costs less to write a newspaper or compose a song, although computers have unquestionably helped to increase productivity. The revolution has happened when it comes to producing an additional unit of these products: The cost of reproducing and distributing a news article or a song is insignificant if you do so electronically

This has profound implications on the supply side of market mechanisms, because at least in the short term, variable costs determine the quantity and the price of a good produced rather than fixed costs.  For an abundant good, the optimal price tends to be very low or even nothing, while the quantity produced corresponds to anyone who would want the product at all, regardless of their willingness to pay.

Two mechanisms are emerging for digital goods producers to cover their fixed costs and make a profit. One is price discrimination, which consists of charging different prices to different kinds of consumers, depending on how important the good is to them. A software company providing a free version of its anti-virus program for private individuals, but charging companies for a premium version of the software is a good example.

The second way consists in trading attention and reputation instead of money. When you see advertisements related to the content of your e-mails in your Gmail account, Google is making you pay for its services by taking some of your attention. Another example is the fact that bloggers are willing to do a considerable amount of work for free in return for recognition.
An abundant digital product can also be used to subsidize another non-digital good. For example, unknown musicians have been able to build reputations by giving their music out free of charge on the internet. This has allowed them to make a living out of CD sales, concerts and merchandising.

As such, these mechanisms are not new: People have been doing voluntary work for a long time, and ad-sponsored as well as cross-subsidized products probably go back as far as brands have existed. But they take on a new dimension and scope in the digital realm.

Intellectual property

In the short term, it is possible to supply an abundant good without making it artificially scarce, but how do the long-term implications look? In the information realm, the perspective of high revenues is a key incentive needed to foster the creation of new products. Traditionally, intellectual property law has been a major institution fostering innovation for all goods based on ideas.

Economist Paul Romer, who is famous for his work on long-term growth, stresses that technological progress is not the only recipe for sustainable growth. The second essential element is good rules, whether formal or informal. Sustainable growth is conditional upon regulations and institutions matching technological progress, he argues.

The turning point in business models triggered by the emergence of abundant goods will have to be matched by an evolution of intellectual property law. File sharing, Google Books and the like have taken authors, producers and publishers by surprise. At the societal level, we are faced with a dilemma between the benefits of encouraging innovation and those of disseminating knowledge and information. Ultimately, copyrights, trademarks and patents determine the price of ideas.

Some new models have emerged, reducing that price to zero. The Open Source philosophy allows people to earn money with the work they do on a product, but specifies that the ideas behind this work must be open for all to see and cannot be restricted. It is different from the Creative Commons framework, according to which a product cannot be sold, but the author can limit the way it is used.

This does not necessarily mean that it will not be possible to make money with ideas in the future. At the time when radios started broadcasting records instead of paying for live bands, the music industry had to adapt property rules and the licensing fee appeared.

As for the monks in Gutenberg’s time, there will be losers in the process of adapting to the new realities of digital technology. But the opportunity for society as a whole to benefit is unprecedented. Leveraging this potential depends on innovative business models and the reform of the rules governing the market for information-based goods.

Source: http://www.isn.ethz.ch/isn/Current-Affairs/Security-Watch/Detail/?lng=en&id=110653

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