The Economics of Disaggregation

Peter Brantley pointed on a private email list to "a nice article in slate on the disaggregation of content in newspapers, with several nice insights, including a remark on the lack of novelty of some of the problems facing the industry." He quoted:

"Fresh thinking about what ails newspapers arrived in yesterday's Wall Street Journal, where staffer William M. Bulkeley contributed a column titled "The Internet Allows Consumers to Trim Wasteful Purchases." Bulkeley explains how the photographic film industry, encyclopedia publishers, the music industry, and the advertising industry feasted on buyers by forcing them to purchase things they didn't want - prints of all 24 shots from their camera or a whole album to secure one favorite song, for example. "The business models required customers to pay for detritus to get the good stuff," Bulkeley writes. But digital cameras, the Web, iTunes, and search-related advertising have stripped those industries of their power to charge for detritus.
 

" ...[G]iven a choice, and the economic means to make a choice, many buyers prefer to make an unbundled purchase. Unbundling the news they want from the news they don't want is what the Web allows readers to do now."

This is a very good point, and one whose benefits many of us enjoy. But thought-provokingly, Joe Esposito riposted:

I have been studying this for some time in the context of academic research journals. A journal might cost $1,000 and publish 100 articles a year. Someone might want to buy one article for $10. Of course the price of one article is $1,000, unless you re-create the business model from the ground up. What those new business models will look like is anyone's guest, but they won't provide a free ride to the customer. Indeed, quite the opposite: businesses exist precisely to make sure no one gets a free ride. Apple and iTunes is instructive: the disaggregated $1 song requires you to purchase a $300 iPod every couple years.

This comment is related to the idea that long tail businesses disproportionately benefit the aggregator. While they create new opportunities for content providers "down the tail" who might not otherwise have been noticed, they create even greater collective benefits for the Amazon, the Google, the Netflix, who hosts the entire collection, the dog who wags the tail.

It's always easy to look at business changes in isolation. But there is, as Clayton Christensen notes, a "law of conservation of attractive profits," and when outsized profits disappear from one place in an economic system, they usually reappear somewhere else.

This isn't to say that there isn't benefit to the end user, but that benefit isn't necessarily the primary goal of the aggregator (or in this case, the disaggregator.) Joe concluded:

The fundamental error in most discussions of disaggregation is that they assume that the goal is to provide more value to the end-user. It's exactly the opposite: the goal is to provide a greater return to the producer. How could it be otherwise? If that greater return also provides a superior experience to the end-user, all the better; but that is epiphenomenal, not essential.

I'm not quite sure I agree with the sentiment "How could it be otherwise?" but Joe makes a strong point. Idealism does exist even among economic actors. But for the most part, businesses introduce new consumer benefits not just for the benefit of the consumer, but because they expect that benefit to redound to themselves as well. So Deep Throat's now classic injunction to "Follow the money!" is always instructive. When one party loses, some other party typically wins, and it's not always who you think.

In addition to getting you to buy a new iPod every few years, Apple also now has a huge force for market lock-in, with 1.5 billion songs in their proprietary format.