The Myths of Marginal Cost and Free, Part One
Monday, May 11th, 2009 by Patrick Ross
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What is the link between the airline industry and creative works? Having flown five round-trips in six weeks, two of them cross-country trips, I’ve had a lot of chance to think about air travel. (I’m also joining my wife and kids in celebrating my decision to pass on another cross-country trip I originally thought I’d be taking this week.)
On one level there is no difference between a glorified bus service and the creation and distribution of a unique product of a creative mind or minds. But both often involve commercial transactions.
A digital creative work is scarce in the sense that there is only one work of its kind, but not in the sense that it can be replicated indefinitely. A seat on a flight is by definition scarce; FAA rules will only allow so many people on a given craft. But planes fly with empty seats; not as often as used to be the case, as I learned this spring, but with some frequency.
The marginal cost of filling an empty seat with an additional passenger is minimal. The extra weight will not significantly decrease fuel efficiency. The extra person to serve will not prevent the flight attendant from addressing all passengers’ needs. And if it’s like some airlines now where they charge a dollar for a soda, they might even make a few cents even if the passenger flies for free.
So why don’t airlines let you pay, say $50 bucks if you walk up as the plane is completing boarding and there are empty seats?
Because there are tremendous fixed costs with airlines, costs paid before that flight takes off. Purchase of and critical maintenance of the planes. Large numbers of employees, all highly trained and requiring continuing education. Airport gate fees. And yes, those soda cans. An airline needs some assurance of revenues, at a given amount, before a plane takes off. If it were known that one could buy a last-minute seat for $50, everyone not needing to fly at an exact time would hang out at airports looking for the best price. Airlines wouldn’t know what revenues a given flight might earn until it was too late to change the schedule.
Airlines are struggling, for some obvious reasons*, but selling empty seats at marginal cost isn’t a viable answer. That’s because it’s a fallacy to think that airlines, with massive fixed costs, can consist solely on pricing based on the marginal costs of their seats at liftoff.
The same is true for creative works. The studio engineers and musicians on a new sound recording, the hundreds of workers behind a motion picture, the dozens of talented individuals creating the latest video game. These are all human resources costs, added on with the technological investments made in producing these works. Yes, once digitized, they can be reproduced at very little cost. But in order for those investments to be made in the first place, there must be some understanding that the money can be recouped. (There is of course no guarantee, and some flights probably cost more than they received in ticket fees, but that is the gamble of any major fixed cost industry.)
This is, of course, a derivation on my Copyright Canard on marginal cost, Canard # 5 of 10. But some would say that we need to throw out entirely the notion of return on fixed cost through direct sales. Sell that motion picture at marginal cost, and figure out some other revenue streams to ensure the tens of millions spent on making the film.
This is the “free” model, one that some in the free culture movement feel justified in imposing on creative industries, because technology allows it. They say it’s the only way they’ll participate in a legal model because technology has made the old one obsolete.
So by that model, airlines should not charge a dollar for the soda, they should charge $10. After all, they have you captive, you can’t go to a 7-11 at 30,000 feet, right? And they should have kiosks outside the gate where you can buy, say, an American Airlines T-shirt. You want to look cool, right? Maybe they can sell those little plastic wings flight attendants used to give some of us of a certain age when we flew as children.
You know what? Airlines need to recognize that times of changed. They need to adjust to the waves of creative destruction, read Clayton Christensen, and seek revenue streams other than tickets. And from now on, I’m going to start flying for free until they recognize their new reality.
Oh wait. I can’t do that. But hey, I can keep acquiring creative works for free until those industries change. And I’ll just tell myself that because of that technological difference, I feel better about stiffing an artist than I do stiffing a flight attendant, even if the latter have become incredibly testy in recent years and no artist has ever snapped at me for wanting ice with my soda.
For more on the “free” model, read the next post.
* In my opinion, airlines are suffering because of government regulation, particularly antitrust regulation. Yes, airlines were “deregulated,” but there are too many of them for the market, and the government won’t permit sufficient consolidation so carriers can better amortize costs. This artificial government-imposed competition results in poor customer service and airlines going in and out of bankruptcy. If some airlines were allowed to fail, and others allowed to merge, we’d have fewer airlines, but they would be like other large-fixed cost industries, leaner and more competitive. Of course, we’d lose a lot of jobs, which is why government policies around the globe allow us to have too many auto manufacturers as well, but that’s another story and certainly not relevant to the focus of this blog. My apologies for the digression.
May 11th, 2009 at 9:26 am
[...] The Myths of Marginal Cost and Free, Part One [...]
May 11th, 2009 at 9:52 pm
If the MPAA and RIAA were *truly* interested in protecting the music and movie industries, they’d set up funds for music studio engineers and movie crew people who are in need of funds for family emergencies, have trouble finding work, medical emergencies, that kind of thing.
It would be a real, sincere way to show the corporations are serious about protecting industry jobs when the industries are losing money.
But they’ll never do it because they are greedy, corrupt and unethical.
May 12th, 2009 at 11:03 am
Neal -
In the motion picture industry, the unions handle that level of interaction with and support for the “music studio engineers and movie crew people.” For example, there is IATSE which represents the technicians and craftspersons for the entertainment industry in both the US and Canada. There is also the Producers Guild of America, the Screen Actors Guild, and the Writers Guild of America, to name a few.
You might be surprised if you glance at their websites at how much they do take care of their union members in the ways you suggest above. For example, IATSE offers college scholarship awards for their members’ kids and they also provide other services to help pay for college. If you dig deeper, you will find a whole slew of information on benefits and services for union members.
You might also be surprised to know how much piracy affects unions. Things that unions provide for their members, like health insurance and retirement pensions, come from residual movie and DVD sales. So, every time a movie is pirated and a DVD sale is lost, that’s less in the pot for the union members to divide up. That’s less that they have to live off of and fund those emergencies that you mention.
I find it sad, really, that though so many of us in society claim that we are for the hard-working creative worker, we are still able to justify hurting them by pirating movies (music, etc.) and take away that which they work so hard for - health insurance, emergency funds, and pensions.
May 13th, 2009 at 7:26 pm
Good point. That’s like you can buy the mp3 album off itunes for $1 or ect and it’s $10 for the cd or transfer to your mp3 player. I suppose if these people were actually making the music and putting their money and sweat into projects the tune would change drastically.
May 15th, 2009 at 12:58 pm
There you go again. As phrased, your “fixed costs” point /almost/ works. Airlines consume gasoline and human resources, etc. in the transportation of physical things. To imply that it is /the same/ with digital copies is illogical. Yes, some forms of publishing imply high fixed costs. But not all. Other forms of digital publishing entail only marginal costs. “Freely distributed” is an option for those who elect to use it. Or else are you trying to rule out blogging and other social media?
May 15th, 2009 at 1:16 pm
By definition, publishing is a reproduction of an original work, a work that would never have existed without the creative spark of an individual or a team. That is the ultimate in scarcity, and is most definitely a fixed cost beyond monetary measure in that no one, anywhere, could have exactly replicated that original work. Perhaps you believe if you have enough monkeys they’ll type the complete works of Shakespeare, but even then their effort would not be original. I am open to hearing an example of something published digitally that both has no fixed cost involved in its creation AND has monetary value such that copyright is important to it.
Apparently I need to start including a disclaimer in every post: “Patrick Ross supports any decision regarding any creator’s works, whether she wishes to give it away or hide it in the bottom of her piano bench.”
The key here is that the creator, through the rights given to her, has choices, and we should respect those choices. We as consumers have no right to dictate — through piracy, anyway — what business models we think she should or should not choose. We can attempt to sway her in the marketplace by not honoring ones we dislike, but not by violating her rights.
I wonder sometimes why so many skeptics of copyright jump to the conclusion that because I defend one approach to exercising creators’ rights, I somehow “rule out” other exercises. Perhaps it’s because they have decided one exercise is the “right” one and choose not to honor others as a result, and thus assume their opponents also insist on believing others are “wrong” and not worthy of pursuit.
May 15th, 2009 at 1:31 pm
Interesting analogy, Patrick.
Which reminds me, United Airlines has applied for Federal permission to outsource piloting, and employ cheaper, less well-qualified, foreign pilots. A friend shared this with me:
“Do you want the experience of military trained or airline trained experts, or some kid who chose between goat herding and airline flying (kid…take the goat herding!) from some third world nation that pays their pilots with grain and rice? You don’t see this happening? The pilots of United, Aer Lingus, Continental and most other large U.S. airlines do. This goes beyond union propaganda and labor issues. It goes beyond party lines. It goes into the category of AVIATION SAFETY.”
To return to the movie/pilots analogy, maybe we need to get rid of all the expensive (good looking, uniquely talented) movie stars. Perhaps all movies ought to be cartoons shot using computer animated “Poser” people.
Dave, I don’t know what your idea of a marginal cost is. Some authors can write a pretty good book in a month, if they work all day every day at it (I can’t). That’s a lot of time and effort. To copyright a work costs around $40. Editors, cover models, cover artists, copy editors, typesetters all need to be paid too. Also, distribution agents, also vendors.
I’ve never yet seen a pirate torrent offering to share someone’s blog.