We’re halfway through the 20 Things You Must Understand About Music Online — and it’s time for one of the most important concepts of all: the Internet breaks Economics.

I studied Economics at school when I was 15. And I remember that there was one fundamental, unbreakable law. It was the law of Supply and Demand — and it had to do with scarcity. It was clearly an important concept. It seemed the more time you wrote the word ‘scarcity’ in an Economics essay, the more marks you were awarded.

As you may not have attended the fifth form at Edgewater College in Pakuranga yourself, and so are not privy to the same kind of sophisticated understanding of the field of Economics, allow me to explain.

There’s a limited amount of stuff. It is scarce. If there are 3 packets of cornflakes on the supermarket shelf, and the supermarket sells 3 packets of cornflakes, then there are no more cornflakes. If nobody buys the 3 packets of cornflakes, then the supermarket is stuck with the cornflakes. If cornflakes are really popular, the supermarket can put the price of cornflakes up. If the price of cornflakes is too high, people won’t want the cornflakes as much. If the cornflakes aren’t moving off the shelf, you can create more of a demand for cornflakes by cutting the price. Simple times.

Enter the internet, where it all breaks down.

If an online music store sells a song, they keep one instance of that song ‘in stock’. If they sell 1 copy or a million, they still only ever have one copy of that song in stock. There is no need to worry about being stuck with the leftover shelf space, and nor is there concern about ever running out. There is no scarcity of that song.

So what does that mean for someone who wants to make a living through music online? Everything changes.

There may have been a time where you would press a thousand copies of a CD, give away a couple of hundred as promos, and try and sell the other eight hundred. Now, you can press a thousand, give away a million, and still sell the thousand.

The death of scarcity makes a nonsense of the notion of the ‘lost sale’. If someone would never have bought your music in the first place, but acquires the music through some other means (perhaps as a recipient of one of those million promotional copies), you haven’t “lost a sale”, you’ve gained a listener. More importantly, you’ve gained attention (remember that word — it becomes important).

The death of scarcity in the online environment also means that super-serving niches is now a better market strategy than banking on hits. We’ve already discussed The Long Tail back at Thing 5. Just to recap, it’s Chris Anderson’s fairly indisputable idea that the future of business is selling less of more.

Well, Anderson has taken his ideas a step further, and has introduced the phrase The Economics of Abundance.

As David Hornik explains:

The basic idea is that incredible advances in technology have driven the cost of things like transistors, storage, bandwidth, to zero. And when the elements that make up a business are sufficiently abundant as to approach free, companies appropriately should view their businesses differently than when resources were scarce (the Economy of Scarcity). They should use those resources with abandon, without concern for waste. That is the overriding attitude of the Economy of Abundance — don’t do one thing, do it all; don’t sell one piece of content, sell it all; don’t store one piece of data, store it all. The Economy of Abundance is about doing everything and throwing away the stuff that doesn’t work. In the Economy of Abundance you can have it all.

Best of all, abundance means that the tools of production and distribution are far more widely distributed. I’m not saying we live in a utopian media landscape where all messages are equally conveyed, but the balance has certainly shifted in what most of us would consider to be the right direction.

Look at broadcasting. There’s a scarcity of broadcast spectrum, so the way to become a radio or television broadcaster was always to either be a major corporation, or a government (or a ‘criminal’ and a pirate).

Leaving aside whether I think streaming audio online is ‘radio’ or not, there are certainly far more channels available to far more people than ever there were — simply because there is an abundance of space online, and so the price of entry is considerably lower.

Maximum capacity for FM stations in any given town? Probably about 50. Maximum number of online audio streams available for reception in that same town? Practically infinite.

And not only are things abundant by nature online, they are increasingly abundant. Look at hard drive space and bandwidth. The 56kbps dial-up modem was a revelation. Now, it’s unthinkably slow. Ethan Zuckerman gives the example of online mail storage:

Hard drive storage has become abundant to the point where GMail is able to give users 2 gigabytes of mail, instead of the 2 megabytes Hotmail used to give you. “Your mailbox is full? What was that about?”

Moreover, as Michael Goldhaber points out, the basis for economics online shifts from a concern with the scarcity of goods and services to an economy primarily centred around attention (there’s that word again).

Attention is the basis on which success is measured online, because there is no shortage of the goods and services. But this is not to say that money is not part of the equation:

…money now flows along with attention, or, to put this in more general terms, when there is a transition between economies, the old kind of wealth easily flows to the holders of the new.

It’s no accident that Google spent in excess of US$1.5b on YouTube — and more than twice as much on its recent acquisition of DoubleClick. Money flows to the attention — and both of these services, while providing no actual content themselves, generate masses of attention. Google itself is the most looked-at site online.

That’s not to say that money will automatically turn up in the pockets of whoever gets the most eyeballs (or ears) to take note online. Rishab Aiyer Ghosh critiques this position in an article entitled Economics is Dead! Long Live Economics!. Have a read if you wish to go deeper with this. Suffice it to say his position is “well, actually, it’s more complicated than that.”

And this is a topic you should read about. Despite what I thought when I was 15, Economics is actually important. Understanding the economic environment within which you work is crucial for your survival as a music enterprise — or any enterprise for that matter.

I’ll talk about how to get that attention in an upcoming thing about Search Engine Optimisation. In the meantime, you go ponder how the death of scarcity might impact upon what it is you do for a living. Just remember that you’re not going to run out of music, and there’s no shortage of products, services, or — for that matter — customers.


Further reading:

A good starting point is a series that Techdirt has been running on just this issue. You could do a lot worse than read one of these each morning with your cup of coffee:

The Importance Of Zero In Destroying The Scarcity Myth Of Economics

Economics Of Abundance Getting Some Well Deserved Attention

In A World Where Everything Is Digital, Economics Gets Screwy Fast

The Economics Of Abundance Is Not A Moral Issue

A Lack Of Scarcity Has (Almost) Nothing To Do With Piracy

A Lack Of Scarcity Feeds The Long Tail By Increasing The Pie

Why The Lack Of Scarcity In Economics Is Getting More Important Now

Infinity Is Your Friend In Economics

Saying You Can’t Compete With Free Is Saying You Can’t Compete Period

An Economic Explanation For Why DRM Cannot Open Up New Business Model Opportunities

Recognizing That Just About Any Product Is A Bundle Of Scarce And Non-Scarce Goods

Scarcity Isn’t As Scarce As You Might Think

UPDATE: To assist with your mastery of the field, here are the ten fundamental principles of economics explained and translated by Yoram Bauman, PhD, aka the Standup Economist.