This is one of the weird things about the information economy. So if you make a gizmo in the goods economy, and price it outside of the demand line, they sit on the shelf and you go broke.
Of course in the goods economy you had a cost of making the item, sure there was R&D and advertising Etc. but each good also has some raw materials so you really can't sell them below a certain price or you lose your shirt.
In the information economy you get this weird artifact. Your 'good' gets copied and distributed without remuneration. This appears to be lost sales, but in fact it is simply that your good is priced outside the demand curve for those buyers. What is even stranger is that you can lower your price all the way to zero if you choose because the marginal cost to make a new one is zero. This gives you tremendous pricing leverage in the info economy and people who use it well typically price high for novelty value early, then lower to capture the larger market, and then lower still to pick up the remnant market. The cost of R&D, marketing, etc can be amortized over all of these and if you look at it as an integral value function you can actually make reasonable pricing decisions.
Of course old school media doesn't get the 'info' economy any more than telling a teenager that the 'fair' price is one that someone will pay even if they think it is too high.
Over time these concepts are making themselves known in the mainstream but it does take waaaay more time than it does to innovate so it seems like its not changing at all.
There's two sides of this. There's the side where the seller's price is above the demand curve, so the buyer pirates the movie. But there's also the side where the seller's price is below the demand curve, but the buyer pirates it anyway to capture more consumer surplus.
What's really happening is that, the easier piracy becomes, the closer the supply curve comes to turning into a very flat line at price 0. Now, the actual cost to the consumer in time, energy, bandwidth, and guilt is higher than 0, and it's possible to reduce those costs by trading off some actual money cost to get the permission of copyright holders the way Apple or Rdio are doing, but it's not clear that this will last forever.
The idea of selling copies of information is very basically broken. Half the time stuff is made but undersells copies because the producer did not find out no-one wanted it, and the other half, people are prevented from realising value that could actually be freely available.
Such a structure consumes a scarce resource -- creative effort -- wastefully, and restricts an abundant resource -- communicability of information -- unnecessarily. That seems very much the opposite of economically efficient.
Information goods should be more like better kinds of software production. But the current copyright-based system makes it all more like a 'waterfall economy'
What if someone makes a better-designed iTunes that happens to work using piracy instead of legitimate sales? Or comes close enough that $0.99 isn't worth it?
They've tried. For legitimate competitors, Apple has them outgunned in terms of selection due to all their deals with the labels and such. For illegitimate competitors, Apple has a comparatively huge budget for design/UX.
The "isn't worth it" actually goes the other way at this point: it's isn't worth pirating anything you can get from iTunes. Most of their customers are perfectly capable of pirating stuff, but it isn't worth their time compared to grabbing it from iTunes.
I'm not saying nobody will ever compete with them or that people don't still pirate anyhow, just that they're more than capable of competing with free. They've been successfully doing that the entire time, in fact.
I agree that's the status quo, but Apple's a rather unique organization in terms of their mix of negotiation ability, closeness to Hollywood, and design ability. And there's already cracks showing when it comes to their software quality. Those advantages can't last forever.
Of course in the goods economy you had a cost of making the item, sure there was R&D and advertising Etc. but each good also has some raw materials so you really can't sell them below a certain price or you lose your shirt.
In the information economy you get this weird artifact. Your 'good' gets copied and distributed without remuneration. This appears to be lost sales, but in fact it is simply that your good is priced outside the demand curve for those buyers. What is even stranger is that you can lower your price all the way to zero if you choose because the marginal cost to make a new one is zero. This gives you tremendous pricing leverage in the info economy and people who use it well typically price high for novelty value early, then lower to capture the larger market, and then lower still to pick up the remnant market. The cost of R&D, marketing, etc can be amortized over all of these and if you look at it as an integral value function you can actually make reasonable pricing decisions.
Of course old school media doesn't get the 'info' economy any more than telling a teenager that the 'fair' price is one that someone will pay even if they think it is too high.
Over time these concepts are making themselves known in the mainstream but it does take waaaay more time than it does to innovate so it seems like its not changing at all.