It is a bone-headed decision from the customer perspective. No going concern would completely disregard the preferences of their client base in this manner unless there was something more compelling, such as the cost side. From CNN Money in July: "Pachter predicts Netflix's streaming content licensing costs will rise from $180 million in 2010 to a whopping $1.98 billion in 2012." (http://money.cnn.com/2011/07/08/technology/netflix_starz_contract/index.htm).

Netflix is looking at a 10 fold increase in their licensing costs. They can't pass that on to their customers, the demand side is too price sensitive. Their former corporate structure probably restricted their ability to negotiate these fees because they couldn't differentiate the user bases, streaming from physical. The key difference with this change is that this is the only way to separate the client bases into two separate companies.

Their setting themselves up for the 2012 negotiations with the content providers. This gives the two companies additional leverage and could potentially save them $1 billion (give or take a few hundred million dollars) in the process. In the long run, it probably is the best way to serve their customers, and their shareholders.

From what I understand of the article, the author it dealing with a subset of economics, specifically with the economics of a gift culture. As was mentioned in a prior post, economic analysis of gift cultures and voluneerism is not a new thing.

The author's premise is that economics is the study of the allocation of scarce goods. Adam Smith defined economics (or polictical economy) as the study of "the nature and causes of the wealth of nations." Since then, the focus of the dismal science has not changed. Economics is concerned with how nations, or other arbitrary divisions, produce and increase wealth. In its basest terms, it is the study of rational decision making given certain conditions. It is always assumed that the decision makers are rational, and scarcity is nearly always included as a condition of the environment.

So scarictiy is a common condition (much too common for our tastes), but it is by no means the focus of economics. Economics usually deals with goods and services, because for most cultures that is what the culture consumes and that is how wealth is made. Good, by their nature, are always scarce to some extent. Services are limited first by the time of the individuals that provide the service (there are only so many hours in a day) and by the number of people available to perform the service (not everyone wants to code in assembly).

In the US we are seeing the developement of new kind of economy. We have moved from the manufacturing oriented Industrial age to the technology driven Information Age. However, the same economic principles will still apply. Reguardless of how much you 'marginalize scarcity' (a rather dubious concept) it will still exist. If you keep taking a small portion away from something, you still have most of it left (see Zeno's paradox's for more on that).

We are left a poor attempt at an economic analysis of a gift culture. The author is correct that with the case of free software, you can give away as much as you want, and still have the same amount of free software. This is because what is being distributed is neither a good or a service, it is intellectual capital. Its only depreciation occurs as the the intellectual capital becomes more widely used/known. Even then, the inheirent value of the intellectual capital is not changed.

Think about it this way, do the works of Shakespear gain their worth from their scarcity? Of course not! Their worth is determined by their quality. Their lack of scarity is a result of their quality, not other other way around.

Such is the case of any idea. Its worth is determined by its merite. The primary reason that Linux has gained any ground on proprietary Operating Systems is not because it is free, but because it has greater merit. The free price has allowed it to overcome the FUD propigated by those with a vested interest in the the longer established Operating Systems.

There are costs to Linux, and other free software for that matter. If you chose to use linux, you are chosing not to use another Operating System, and that is an opportunity cost.

I believe that intellectual property economics is a good model to start with when dealing with the economics of the free software (or open source, or copyleft...) market. What must be kept in mind are the fundamental laws of economics. They are tried and tested rules that have shown to explain human behavior in many circumstances.

We are all acting in our own rational self interest, reguardless of how irrational that may appear to everyone else. Begin here and you start on a strong foundation.


-Josh
"In all things, moderation"