The Online Music and Movie Rental Myth

According to proponents of this myth, the real road to obscene profits in movies, music, software, and other digital media lies with online subscription rentals, not direct sales. They're wrong, here's why.

Why the Myth was Woven

Think Secret reported yesterday they had "learned exclusively" of a surprise announcement at Apple's WWDC: iTunes would begin renting movies.

Of course, they didn't exclusively learn anything; if such an effort was really underway, a lot of involved people would also have to know about it! Perhaps they meant to say they were "exclusively reporting" the idea. Then again, by reporting it, it prevents it from being a WWDC surprise, so there are multiple problems with their story.

Despite that, there is a general perception among industry analysts that Apple, by showing up late to the subscription rental party, faces the threat of losing their majority ownership of online media sales. We'll have to wait a few weeks to find out if Think Secret invented their rumor, or if it is based on any real information, but the underlying myth of the holy grail of media subscription rentals can be taken apart right now.

The Invented Demand for Rental Media DRM

This myth has been around so long that it has come to be regarded as conventional wisdom. Essentially, it states that the best way to make money is not to sell media, but to rather sell temporary access to it.

Rentals sound like a good idea to marketers of intellectual property such as software, music, and movies. The problem isn't with the idea itself, but how well it works in the real world: how poorly it competes as an alternative in the free market.

Major industry players have driven hard to develop new markets where they can sit back and collect automatic sales, similar to how Microsoft positioned Windows as a tax on every PC sold. However, even Microsoft has failed to replicate that business; their attempts to market WinCE as a tax on game consoles, phones, and PDAs have all failed, and a similar approach with WMA to create a tax on every music player and music store sale has also gone nowhere.

A primary reason for WMA’s failure lies with Microsoft’s blind faith in the Online Music and Movie Media Rental Myth.

Unraveled with Extreme Prejudice

What's wrong with the idea of subscription rentals? As it turns out, consumers may act like sheep when it suits their purposes, but there are limits to how much suffering individuals will take before revolting with a vengeance.

That limit has a lot to do with the alternatives available to them. The industry continues to gestate three wrong ideas about music, movies and software:

•consumers want to rent, not own;
•consumers want freedom of choice, even it if does not suit their needs;
•consumers will pay any price to be passively entertained.

Market Realities and Intellectual Property

These three wrong ideas ignore the dynamics of free market competition. In the real world, it's easier to understand how supply and demand work. When talking about intellectual property, and in particular consumer demand for software, music, and movies, analysts seem to forget about the very real factors of competition, supply, and demand.

Instead, they create an idealized fantasy world where the nearly infinite supply of digitally duplicated entertainment must also have an infinite demand, and conveniently forget about competition. The idea behind media subscription rentals seems simple:

Sell a man a fish and you get paid for a day; Sell a man a subscription to fish and you'll get paid forever.

There's a big difference between real goods like fish, and intellectual property such as software, music, and movies, but market rules still apply. In reality, selling a subscription to fish would be difficult to broker.

Real goods require a lot of work to collect, manufacture, or process to the point where they are worth selling to others at a profit. The effort required to produce them results in a limited supply, making them a scarce resource. The market determines prices of real goods based on this scarcity.

•The more abundant something is, the lower the price it can command.
•If demand for a product wanes, its price will drop.
•If a price drops too low, production will cease and supply will drop.
•If supply drops below demand, prices will rise.
•If price are artificially set too high, it will either cause demand to wane, or create a supply vacuum that will be filled by new competition.

Intellectual property doesn't exist until somebody thinks it up. Once an idea, method, algorithm, or performance has been originated, it can often be digitally reproduced at virtually no cost.

Market principles still apply; however, the idea of “supply” suddenly changes from the scarcity of an actual item, into one of two factors, depending on your perspective: the limited supply of scarce original ideas, or the vast abundance of perfect digital copies of that idea.

Those two perspectives are held in extremist ways by two fundamentalist camps:

•Media producers like to delude themselves into thinking that their software, patents, music, movies, or other intellectual property is so unique that it has near infinite value and can command any price they want.
•Peanut gallery freeism fanatics think that anything that can be duplicated at little cost effectively has no inherent value, and should be free for anyone to obtain, copy and redistribute.

Of course, extremist ideas are generally based on a scarcity of facts, and therefore tend to be wrong. In part two, I’ll consider five examples that prove that intellectual property, while offering some new challenges, still has to obey the rules of the market. Along the way, I'll also prove why the market has rejected digital media rentals, even if those pushing it haven't figured out why.

Next Article: New Media and Free Market Choice

This Series

Tech: Online Music & Media

Tech: Open Source & Intellectual Property

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