How to Win a Nobel Prize in Economics

Time will tell whether last Friday's U.S. Court of Appeals "broadcast flag" ruling will stand up under further appeal (or, possibly, Congress subsequently passes a law giving the FCC explicit authority on the topic). However it turns out, it's going to raise a lot of public debate and, with hope, awareness on the whole topic of digital rights: who gets to do what with whose bits?

This debate gets unconstructively polarized by absolutism. "The creators of bits own and control them", at one pole. "The consumers of bits get to do with them what they darn well please", at the other. I seldom find either one of these positions tolerable to listen to for long because both are fundamentally flawed. And, both sides deep down know it.

Deep down, creators know that they are also consumers. All artistic endeavor builds upon what went before it. Film makers re-tell millenia-old stories, mixing in their own life experiences. Software developers recast patterns and algorithms, adding their own nuances and insights.

And, consumers know (abstractly, at least) that denying creators compensation will ultimately undermine the enterprises of entertainment and software.

The tension between creators (producers) and consumers is ultimately about economics. In reasonable marketplaces this gets sorted out with a supply-demand equilibrium set by price. As supply becomes scarce relative to demand, prices increase. As supply becomes abundant relative to demand, prices fall. Microeconomics 101.

It works because physical goods (atoms) are rivalrous. If I sell you an apple, you've got it and I don't; supply just got decremented. But it breaks down in the digital world because bits ain't. If I sell you some bits, you've got them and I do too; supply is unaffected.

The historical way of dealing with this is to tie the bits with some atoms (e.g., imprint them on a CD), and pretend like we are in a traditional economy. That worked pretty well --- if I sell you my CD, I'm deprived of it --- until it got really cheap to copy and store the bits off of the CD. I could make a copy, give you my CD, and I still enjoy the bits.

This was still okay, to a point, because it required effort and energy to redistribute the CD. But with the relentless growth in Internet access bandwidth, \*distribution\* costs are also driven to zero. The result is that just about everything we have come to depend upon in capitalist markets disintegrates.

Bearing in mind that it still costs real money to create those bits (a song, a movie, a program), but essentially zero dollars to give everyone connected a copy, well, Houston, We Have a Problem. DRM, broadcast flags, copy protection and the like are designed to "solve" this redistribution problem by making it tough to do so. Mostly, I think these attempts will fail because the tighter you try to make the system, the more they inconvenience the consumer.

What's the answer? It's neither the perfection of DRM, nor the absolution of digital property rights. I am sure that there IS aneconomic system that solves the problem. I don't know what it is, but I can speculate about its properties.

I want to start by turning this all around by thinking about the people who are LEAST able to pay for bits. The world's economically poor. That is, most of the people with whom we share this planet. If you produce some bits --- say, a program, a movie, research or a textbook --- it literally costs you nothing to share these bits with people who couldn't come even close to affording what people on the connected side of the digital divide can.

And we really have to ask ourselves, on what basis can we deny these people access to bits? Because they can't afford them? Remember, it costs you nothing to deliver copies of them.

(You could come to the conclusion we have: encourage global participation in software development by making access free, and design a license (CDDL) that stimulates diversity and the development of derived works. Solaris is free. So is OpenOffice. For those who can afford it, you can pay us for support.)

Let me make this a little easier. What if someone could pay you only a dollar for software you usually charge a hundred? Would you do it? As long as you didn't fear it being resold, of course you would. It's in your economic interest. You would have a dollar that you wouldn't otherwise have.

And it's in the world's social interest because that person is less disadvantaged, digitally speaking. They are, in fact, peers to those who could afford the hundred dollar price tag.

Both parties, creator and consumer, are better off. This is why I know there must be an economic solution. What maximizes a capitalist good also maximizes a social one.

An essential aspect of the solution is that people pay what they can afford to. There are a number of ways to get to that. One of my favorites is a kind of "subscription to everything" that was first introduced to me by Steve Ward at MIT. He originally cast this as a solution to software pricing wherein you would a pay a flat fee for all of the software you could possibly consume. Statistical sampling of the software that you actually consumed would help apportion the revenues to the software writers, much in the way that ASCAP apportions revenue for broadcasted music.

Now imagine that you extended this model to all bits. Suppose that you paid a monthly "digital tax" proportional to your income and consumed whatever your heart desired. Make copies, share freely, whatever. Statistical sampling of aggregate consumption --- it can be made anonymous --- would divide revenues among creators. In a system like this, anyone (read: everyone) can also contribute their bits to the pool, and benefit according to their popularity. As long as we are creating a Utopia, we can imagine that renumeration is somehow proportional to entropy added: you'd get very little claim on a new music playlist you assembled (the artists getting most of it), a lot of claim on a new song you just wrote and performed, and something in the middle for a remix.

The really nice aspect of this system is that copying is strongly encouraged, because the more chances someone has of consuming your bits, the better your chances are of getting some revenue from them. Advertising for demand creation is also incented. You might decide to spend money advertising in order to entice people to consume your creation.

The parts that don't work are pretty obvious. How is the subscription rate set for a person? Is it a government role? What if I choose to live my life digital-free: should I have to pay taxes at all? Finally, how do I possibly compare the consumption of a bit of software versus a bit of music or a bit of video? (It turns out that time spent consuming the content is an interesting measure.)

Again, I don't really have an answer. But I know what it's not. It's not the absolute control over a device's ability to render digital content. The answer is something (such a sampled subscription service) that makes use of the very network to solve the problem that gave rise to it in the first place. Actually, I view it all as opportunity and upside. It's about sharing and eliminating the digital divide.

If you can figure it out, you are on your way to Stockholm.

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