I’m going to get into some Econ 100 type discussion here, so if you’re easily bored, you may want to look away.

People are generally familiar with the concepts of supply and demand. In it’s basic form, when demand increases, prices will go up, due to scarcity. This is commonly depicted with a graph,

plotting supply and demand on axes of price and quantity. As the price increases, more people are willing to sell their scarce resources, and less people are willing to buy them. The market price is assumed to be where the two lines cross.

In the 70’s OPEC realized that their supply/demand graph looked more like this:

(in the short term anyway) - ie, the demand was not very responsive to price changes, or “inelastic.” They quickly realized that since they controlled the supply, they could set their price at whatever they wanted, and people would pay it. In the medium term, people reduced their consumption, but buying more fuel-efficient cars was not a viable short term solution.

What does this have to do with digital things? Well, essentially, the supply line has become very inelastic - people are willing to give their “scarce” goods away because they aren’t really scarce. In fact, when you give a digital file away, you still have the digital file yourself. The only cost involved is the cost of actually giving the file away. With the availability of high speed internet connections, this cost approaches 0 because people are just making use of a service that they were going to get anyway to perform the delivery. The end result is the rampant piracy of digital files that the recording and motion picture industries consider to be the bane of their existence. The thing that they have not yet realized is that the “free” availability of these digital files leads to a much increased demand and people who would otherwise just not “purchase” the file/content are now accessing it.

It’s all about value. Personally, I find DVDs to be decent value for the money, and not worth the bother of trying to “steal” by downloading from the various internet file sharing things that are out there. Conversely, I find very few CDs to be worth the money that is asked for them. I don’t go online looking for music though - it’s just not worth the effort to me. “Free” radio is good enough for me, but if it weren’t, I might hit the file sharing networks to collect a library of music to listen to. Obviously, the higher your price, the more people you will find who think your price is too high, and the more people who will expend the effort to download them for “free.”

The effort involved with downloading a movie is fairly high still (I think) as compared to downloading a song. I think this is partly why movie piracy isn’t a huge issue right now - though it will become an issue if DVD duplication hardware ever gets to the point that CD duplication hardware is. Given that the price of DVDs is still fairly reasonable (again, in my opinion) the movie studios generate pretty good revenue, and filesharing doesn’t impact them nearly as much as the overpriced music industry.

My point is that in order to prevent piracy completely, you have to price low enough that piracy is no longer worth the effort to anyone. Given that pricing that low will never make a company rich, piracy will always exist. The trick is to price low enough so that most people aren’t willing to put out the effort, and will buy legitimately instead.

The advent of file sharing applications obviously reduced the effort by huge amounts, so human nature dictated that piracy would increase - and it did. At the same time, it greatly reduced the cost to distribute digital files - remember, they’re not scarce, you can give it away, and still keep it for yourself. Continuing to price a non-scarce good like a scarce good is where the content producers are making their biggest mistake. Well, ok, second biggest. The biggest mistake was getting caught in a market where your goods became non-scarce in the first place. The movie industry does ok still because they have scarcity of seating at theatres, but the music recording industry isn’t content to generate revenue in the same manner (ie. via concerts.)

The content publishing industries exist because it used to be far too difficult/expensive to publish content. Fewer books would exist were it not for publishing companies. In the past, it wasn’t likely that a band could record an album and sell it worldwide without help from the recording industry. At best, they could tour to pay the bills, and sell tapes/cds at the shows. A fairly limited market. With the inexpensive delivery mechanism that the internet puts at our disposal, those same artists can now sell their music to a much larger cross section of the world. The old problem was distribution, the new problem is promotion. How can that band reach people who will want to listen to their music? Napster, and other file sharing products answered that by letting you see what other people who have similar tastes to you like. Like yodelling music? Find someone who has a bunch of yodelling songs you’re familiar with, and see what else they have. From there, you can find more people, etc, etc. Amazon’s “People who bought this also bought” feature works in the same way. So, now that the distribution and promotion problems have been solved by filesharing, what’s left for the RIAA to do? Unfortunately for them, not much. If they get their act together, and take advantage of their position in the current distribution channels, they might be able to survive as the new clearing house for distribution and “word of mouth” promotion. Napster, if it had been allowed to survive, would have replaced the functions of the RIAA almost completely.

Either way, I wouldn’t want to be a “bricks and mortar” music store right now. Their days are even more numbered.

Simpson’s quote of the day: “Could this town be any stupider?” - Snake