The demand for books, music, news, TV, phone calls is constrained by the time that people have.  In a mature market (e.g., the US) that time is growing at best at the rate of population growth (low single digits), but in reality is likely to be shrinking as other online activities (e.g., social networking) take up time.  The supply for all of the above, however, is increasing by one or more orders of magnitude, as anyone can be a publisher and as the cost of bandwidth has plummeted.

The basic mechanisms of economics are not broken (yet) and when rapidly growing supply meets with steady or shrinking demand, price drops – in many cases all the way to free.  That is exactly what is happening in a number of industries.  But now we are getting into the next round.  Demand is so inelastic (again because time and attention to consume are essentially fixed), that as price drops the total industry size starts to decrease. And industries with declining market sizes have many interesting aspects that we now all seeing themselves play out.

When the pie is getting smaller the only way to have more is to take it away from others.  That is at the root of the fights over cable fees (Fox vs TimeWarner), paywalls (newspapers vs Google), rights to scan (book publishers vs Google), net neutrality (web vs telcos), music (artist vs labels), and so on.  These are all fights over how to distribute shrinking pies.  Along with these fights we will also see more mergers and more calls for government regulation.  I predict that things will get a lot uglier before they get better!

The demand for books, music, news, TV, phone calls is constrained by the time that people have.  In a mature market (e.g., the US) that time is growing at best at the rate of population growth (low single digits), but in reality is likely to be shrinking as other online activities (e.g., social networking) take up time.  The supply for all of the above, however, is increasing by one or more orders of magnitude, as anyone can be a publisher and as the cost of bandwidth has plummeted.

The basic mechanisms of economics are not broken (yet) and when rapidly growing supply meets with steady or shrinking demand, price drops – in many cases all the way to free.  That is exactly what is happening in a number of industries.  But now we are getting into the next round.  Demand is so inelastic (again because time and attention to consume are essentially fixed), that as price drops the total industry size starts to decrease. And industries with declining market sizes have many interesting aspects that we now all seeing themselves play out.

When the pie is getting smaller the only way to have more is to take it away from others.  That is at the root of the fights over cable fees (Fox vs TimeWarner), paywalls (newspapers vs Google), rights to scan (book publishers vs Google), net neutrality (web vs telcos), music (artist vs labels), and so on.  These are all fights over how to distribute shrinking pies.  Along with these fights we will also see more mergers and more calls for government regulation.  I predict that things will get a lot uglier before they get better!