Is Redbox the next parasitic technology?

Stan Liebowitz has written an insightful and brief article about parasitic technologies, which provide consumers with content created by some other company, but in a way that chokes off the creator company's revenue stream. File-sharing is a clear example: such software provides listeners of music with permanent copies of songs they like, even though those songs were brought into being by the music industry (artists, sound engineers, marketers, etc.). The original revenue came from listeners buying CDs or tapes or albums at music stores, which those stores had to pay the music industry for.

In the extreme, the industry doesn't bring in enough money to cover the minimum costs, thus no more music is made, and so consumers will have nothing new to listen to. Note that this extreme is not even the world where 100% of songs are illegally downloaded -- the extent of file-sharing only has to be great enough for the music industry to cease being a profitable industry long-term. Things probably won't get that bad, but we shouldn't want to go even one step in that direction -- with less revenue, record labels will have to cut costs like crazy to try to stay profitable.

The overpaid studio executives can only have their pay cut so much -- after that it will be the quality of the sound engineering, the number of artists they support, the promotion budgets for the artists, and especially the amount of risk they'd be willing to take on new artists. When you're trying to stay afloat, you can't take huge risks on new artists; rather, you have to appeal to the lowest common denominator. So you can forget about hearing anything remotely novel. Notice how pop music goes to shit during recessions, and only picks up again in quality when we're back into a euphoric spending boom. The simple reason for that is the heightened risk aversion of music companies when consumers' income is pinched.

While the case of file-sharing is completely clear, other technologies are worth at least keeping our eye on. Liebowitz mentions digital radio, which pays little to nothing for the music it provides, thus depriving the music industry of potential revenue. I think it's worth adding Redbox to the list -- those DVD rental kiosks that charge $1 per night and offer movies right when they come out on DVD. (They've been in the news a lot lately as Hollywood tries to keep them from draining their revenue; just search the NYT, WSJ, or Lexis-Nexis for "Redbox".)

Redbox drives down prices for consumers, which is usually good, but it does this not by making better movies or by making movies of typical quality but just more efficiently, and then passing some of the resulting profits on to consumers. After all, they don't create any of the content that they provide. So, it's not similar to a case where Disney produces such great movies and is run so efficiently that they can pass on the savings to consumers by striking deals with retailers for $1 DVD rentals, whereas their competitors in the movie-making industry produce worse quality movies or movies of the same quality but in a more inefficient way.

But Blockbuster and other rental stores don't produce content either -- so why haven't they killed off Hollywood? For one thing, they charge $5 per rental, not $1. And for another, the movie studios get a cut of Blockbuster's revenues, somewhat like the studios getting a cut of the box office revenues from the theaters that show their movies. Aside from a recent deal with Paramount, Redbox in general does not send a portion of their revenue back to the movie studios. Thus, by both draining the market for new DVD copies and yet not funneling funds back to the content creators (as other rental stores do), Redbox poses a new, non-trivial threat to Hollywood's revenues. (Their revenues from the box office are already low and declining further.)

Where else is revenue going to come from to make up for this drain? You can see it now -- five-minute ads interrupting the movie every 10 minutes.

As with music studios, so with the movies: they'd have to start slashing costs to keep their heads above water. Again, overpaid studio heads can only lose so much in salaries -- after that, it's the number and quality of actors they can put in the movie, the editing quality, the sound, cinematography, special effects, screenplay, etc. They could not make a low-budget art film, which could work under such constraints, since the audience for those films is minuscule and could never repay the movie's costs. Even more so than now, studios would pander to the lowest common denominator. And with so little revenue coming in, they'd make far fewer movies.

Redbox would die off soon after, with practically no new movies to rent out, but not after having made a fortune. The fattened executives would fold up Redbox and move on to founding some other parasitic technology, while Hollywood and movie-watchers would be left with nothing.

Make no mistake -- entertainment providers need gigantic revenues in order to make good stuff, and to make it widely available. Most songs and movies are garbage or mediocre at best, so that finding the great ones requires making a huge number in all. If you think it's easy to make only two movies and have them both be superstars, go ahead and try for yourself. Before a movie is made, no one knows how it will turn out, so each one is basically a crap shoot. And to get a single win -- let alone several of them -- you need to throw the dice many, many times.

This is true of most intellectual property, by the way. Look at how many trailblazing inventions came out of Bell Labs and the DoD when both had stratospheric budgets. Many of their ideas went nowhere, but unless you pump out a bunch of inventions, you'll never find the rare gems like transistors, the internet, lasers, cell phones, and so on. Now there are so few ivory towers -- none, really -- which explains why essentially no more cool stuff has been invented for the past quarter of a century.

So how do we keep from heading toward that dystopia? The best solution is to allow movie studios to vertically integrate with distributors and rental / purchase stores, along with movie theaters. Then all of the revenue from DVD rentals / purchases at such stores would go back to the studios and allow them to put out more movies and of greater quality. They could still sell their studio's DVDs to another studio's store, or to other retailers like Wal-Mart, but they would have the option to not pursue that and to only rent out or sell their DVDs in their own kiosks or stores.

This could not allow monopolistic behavior because if you thought Fox's DVD store was restricting output to raise prices, you could always go to Universal's store instead. It would be no different than McDonalds making its own food and selling it in its own stores, and ditto for Burger King and Wendy's. You may have a slight preference for one of their hamburgers, just as you might want to see one of Fox's new movies more than one of Universal's, but if McDonalds or Fox tried to jack up prices, you'd happily defect to Burger King or Universal. In reality, movie studios bitterly compete against each other over scarce dollars that consumers spend on movies. With this added source of revenue, lack of parasitism from Redbox (or whoever), and less wasteful antagonism between studios and stores / kiosks (resulting from common ownership), studios would be more profitable and could put out greater products, more of them, and more efficiently -- and pass along some of the savings to consumers.

Of course, this would all probably be illegal, given that the studios have not been allowed to even own theaters after the completely bogus antitrust case brought against them in the 1950s. But that just means we need to work on voiding the antitrust decision. (See the relevant chapter in Arthur De Vany's Hollywood Economics, featured in the Amazon box above.)

In the meantime, any deals with Redbox should be like those with movie theaters -- the studios should get a certain percentage of Redbox's revenues from a given movie title, in return for discounted DVDs. If Redbox doesn't agree, the studios would simply cut off their supply for the first month after a DVD's release -- Redbox can always get DVDs from commercial outlets like everyone else. (And they have at times.) This would make Redbox much less profitable, hopefully enough so that they'd decide they had bigger fish to fry.

Consumers should obviously patronize places that are sending part of their revenue back to the studios, such as movie theaters or Blockbuster, but they have little incentive to do so when Redbox rents movies for just $1. They might agree with the logic of substantially lower revenues to Hollywood = far fewer movies / lower-quality movies in the future, but the temptation of cheap stuff is pretty strong.

Propaganda notwithstanding, the only group that stands to gain from the way things currently are headed is Redbox executives. Hollywood studios will have to start slashing costs -- and remember, if you can't make 100 movies, don't expect to find a one-in-a-hundred type of a movie. These increasingly mediocre movies will of course draw even fewer dollars from increasingly dissatisfied consumers (at the box office or wherever else), which will only force the studios to cut costs even more, and so on.

That is the heaven that the technological parasites wish to lead us toward -- one with few new things, and they all suck. More, those consumers who loudly insist on cheapness, even when they've had the consequences explained, will get what they deserve -- having only Police Academy 6 to rent every weekend for the rest of their lives.