Record labels continue to flounder in the face of basic economics and 10 years of failed strategies. As part of their latest flip off to customers, Warner Music Group announced they will stop free streaming of music. While they haven’t clarified whether this means removing all current streaming deals, the idea is likely meant to remove a large portion of music from popular streaming sites like Spotify and Last.FM.

Warner Music claims there isn’t enough money being made from streaming, but once again, Warner Music is ignoring basic economics here and worse, ignoring a large market of customers who they can make money on selling true scarce goods.

First, if customers can’t find your music, then they’ll find someone else who’s willing to stream, share, and use all the marketing tools at their disposal. And for those who want Warner music, well, there are more than enough unauthorized sources that offer no direct revenue back to the labels. So Warner Music’s artists get less exposure and file-sharing still runs rampant. How is this suppose to increase revenue?

Warner Music could use streaming as a marketing tool to increase the value of scarce goods (not music files) like concert tickets, merchandise, or the many other new music business models we’ve seen.  And if they were really smart, they’d stop strangling music streaming services with onerous service charges that make it impossible to innovate and run a business.

Amazon has been selling eBooks at a loss in order to increase sales of the Kindle.  Amazon would buy the eBooks whole from publishers at about $12 and then sell the eBooks for $9.99.  But book publishers, who have been used to more than a decade of high profit hard covers, view these eBooks as a threat to their business rather than an opportunity (seeing a pattern here recording industry?).

Macmillan demanded Amazon change its pricing, focusing on more expensive $12.99-$14.99 charges for new books. Because of Macmillan’s demands, Amazon removed all digital and hard copy versions of Macmillan’s books.  The books and digital versions have since returned with the Amazon agreeing to taking a 30 percent commission from eBook sales rather than buying them wholesale. The result means Amazon will actually make money now on eBook sales and ironically, book publishers make less (30 percent of $15 is still less than the old wholesale price of $12.99-$14.99).

You have to wonder whether Macmillian and book publishers have paid any attention to the past 10 years, watching the recording industry shrivel up as it fought tooth and law brief against digital media (and still hasn’t given up on its road to irrelevance).  First, my belief is that book publishers know increasing eBook prices will hurt sales. This is made apparent by several publishers’ urging to delay eBook releases for weeks after the hard cover. Much like movie companies delaying Netflix rentals a month after the DVD is released, book publishers don’t want to siphon readers away from their high margin hard cover books.

Of course, this only annoys customers. If customers want the eBook but one is not available, there are more than enough unauthorized versions on file-sharing networks on the day of release. You can’t compete with free by staying home and sulking.

But then book publishers want to charge higher prices. Well, let’s see how well that done for the recording industry on iTunes. iTunes allowed higher and lower prices on music beginning last year and the results have shown such a large drop in unit sales that overall revenue is down.  Growth in digital sales slowed from 20 percent in 2008 to 8 percent in 2009. While yes there was still growth, that is a massive drop in a still infant industry. The price elasticity of digital goods is extremely sensitive to increases in prices (and seems even more sensitive to drops, as video game download service Steam has successfully proven with its sales).

As I and others will say over and over again, digital goods are infinite goods. Basic economics says their price should be zero. And there are several examples of free eBooks actually increasing the sales of the actual book. But economics and real-life examples don’t matter when you have a former monopoly on distribution to protect. But business evolves and like the recording industry, book publishers may be in for a difficult decade.

Newsday made the bold (and some, like me, might say, silly choice) to lock its online content up behind a $5 per week paywall. Cablevision, who purchased the newspaper for $650 million in 2008, offers its website to Optimum Cable subscribers and Newsday subscribers for free, but charges anyone else $5 per week, and three months in, the numbers are starting to leak out.

First, how many people have signed up for $175 per month Newsday website? 35. Yes, 35 people. So that extra $9,000 a year must really make up for the estimated 50 percent drop in web traffic. At least they don’t have to pay famous columnists who want people to actually be able to read and share their work.

Now I look at these numbers and see evidence that paywalls might not be a great idea to make money. Even assuming the vast majority of Long Island (which Newsday targets) have free access as Optimum Online users, erecting the paywall means more costs like paying for more customer service and accountants, while even print newspapers find going free both saves tons of money and increases circulation (because they don’t have to pay for as many customer service agents or accountants).

Less traffic, tiny amount of money after spending tons (even to buy the paper). Maybe they’ll eventually learn their lesson that paywalls don’t work and end it like the New York Times did. And then forget and bring it back years after.

Game developers have frequently lamented the drive for lower cost games on the iPhone.  “The push to 99 cents is the single most frustrating and terrible thing about App Store pricing,” says Nathan Vella, co-founder of Capybara, makers of Critter Crunch. “Since it became ‘expected’ by consumers, it forces a lot of developers, specifically indies, to devalue their game and significantly increase the number of sales needed for developers to get back their investment.”

But what Vella thinks as devaluing is really basic economics. Competition, the healthy and rewarding heart of capitalism, encourages makers of goods to try to one-up each other, whether by lowering prices or offering a more compelling product.

The App Store, with more than 100,000 applications, 13,000 of which are games, competition is pretty fierce. It is to be expected that price will be pushed down. Most game makers have stayed around 99 cents, so if someone really wanted to stand out, maybe they should sell at 98 cents. Or there’s lots of free games and that soon might become “expected”. Not even including truly free apps, estimates (which I strongly question) claim 75 percent of apps are pirated meaning Vella and game developers have more to fear from free than 99 cents. If Vella thinks 99 cents devalues his games, how will he feel when he’s forced to sell it for free?

iPhone developers, like many in the media industry, forget that price and value are two different things. Value is subjective. I, as a consumer, value a game a $10. As long as the price is less than $10, I will buy the game, even if it is $2. The developer chooses the price that will make them the most money, specifically by setting the price low enough as to attract the largest number of buyers. The $2 price in no way devalues the game. While I might have paid more, 10 other people might not have. Meaning the developer attracted more purchases and made more money over all. This is known as price elasticity.

We see evidence of this in many digital services. The PC game Left4Dead took 50 percent off its price and jumped 3,000 percent in sales. Variable pricing on iTunes led to lots of $1.29 songs and very few 69 cent songs. Those higher priced songs have seen enough of a drop in unit sales that overall revenue is lower. Maybe at 69 cents, they’d actually make more money.

For game developers, it seems the App Store just has too much competition to make it easy for anyone. There are so many games vying for attention, thanks to the low cost of entry (until traditional gaming consoles), that its a major challenge to get the attention of enough consumers willing to pay the 99 cents (or even pirate it). The benefits of the Long Tail in the App Store necessitates better search and organization to help people find the apps they want (the App Store does lack this robust a function). But game developers can look for their own solutions to stand out by using social media, pricing, and excellent games to build the buzz. It’s not Apple’s fault, it’s not consumers fault, piracy’s fault, or other developers faults. It is up to each developer to give consumers a reason to buy their game.  If consumers don’t pay, then change what you’re doing. That’s innovation and competition makes sure it happens.

The internet is successfully ravaging almost every industry from music to real estate. Technology has, throughout history, caused the end of many industries, removing millions of jobs from the economy. What looks scary in the short term ends up being a long-term boon, with technology often replacing those jobs with better jobs, larger markets, and more efficient allocation of resources.

This weekend, Thomas Friedman wrote about the “Do-It-Yourself” economy where, even in this Great Recession, companies with fewer dollars and less manpower are finding ways to do more. He highlights marketing firm Greer & Associates whose budget has been cut 20 percent. Using online collaborative tools, cheap stock photography, and crowd sourced voiceover work, they have been able to produce far more than they could with a full budget.

Greer paid far less for these services. Voice talent that once cost up to $500 was 10 percent its original cost. Thousands of dollars of stock photography could be had for a few dollars.

Friedman sadly doesn’t go far enough highlighting how amazing this ultra-efficiency is. While people will pay less for stock photography, more people can afford it now. It’s feasible for someone making a birthday card or personal website to spend a few dollars for really professional photography. The market is far larger – elastic pricing at work.

But what about the poor photographer you say? Focus only true scarce goods. Stock photography, especially in the age of cheap digital cameras and photo editing software, is a glutted market pushing the price down to zero. That’s competition and it’s a good thing. All this stock photography makes commissioned photography, long the bread and butter of any photographer, more valuable, especially when they can show samples of their work in active use.

With more efficiency and less costs, Greer can put more resources into creativity and making actual marketing products. It’s so cheap and easy to distribute music, musicians can save those resources to engage with fans and sell scarce goods (like time, concert tickets, etc.) to those fans. Greer’s clients and a musicians fans save money they once spent on high-priced voice-overs or CDs can put that money to other areas of the economy, creating other jobs.

Look at 15-20 years ago how many jobs didn’t exist before the internet and computers become ubiquitous. There are search engines, SEO specialists, social media sites, online gaming, life streaming, GPS, cell phone data plans, and more. All of these provide more jobs even if they replace others. It’s like the automobile industry replacing horses and buggies or phones replacing the telegraph. Agriculture is my favorite example, as the majority of the U.S.’s jobs used to be in agriculture, replaced by manufacturing because agriculture became so efficient. Now manufacturing is more efficient, those jobs are disappearing. They will be replaced by new jobs, whether online or in other areas not yet discovered.

Companies need to stop fearing the changing marketplace and embrace the new opportunities, even if it means radically changing your business model. The market makes the decisions and companies just come along for the ride.

CDs are dying, but the music industry is growing. Newspapers are dying, but journalism is thriving. DVD sales are dropping, but movie attendance is rising. Yet for all this, article after article says the music, news, and movie industry is dead or dying.

These industries are only dying if you classify them in ultra-specific and limiting businesses. CDs drop, but the music industry is selling more concert tickets and merchandise. The U.K. music industry’s own study (pdf) shows the music business overall has increased even though sales of record music has plummeted.  Even as newspapers suffer, hundreds of new journalism organizations are popping up producing original news, commentary, and fact-checking, all for a fraction of the cost, manpower, and time it takes traditional newspapers. And does everyone forget television news continues to grow in audience and revenue (well, at least cable news). And movies, well, attendance is up even in a down economy.

Technology and societal changes often causes radical shifts in how businesses do business. The death of selling plastic discs and packets of paper is, yes, dying, and for the time, these were the most effective ways to make money. With better computers and distribution channels, it is incredibly cheaper to make and distribute movies, music, and news articles.  This means more money to do other things. Or better, cheaper costs to consumers leading to a larger market – and then more fans to sell more stuff to.

The movie and music industries particularly have enjoyed monopoly pricing on their products, and without competition, fans paid the high prices. But competition from technology, even when used illegally, is forcing prices down. Originally, plastic discs were a scarce good the content industry could control, but the digital files on the discs are infinite goods now available free online no matter what.

Let’s remember, selling plastic discs (or records) for music is really only about 60-70 years old. Movies only entered home collections in the 1980s (and followed a significant legal battle where the movie industry claimed home video would destroy them). These industries made tons of money before and they can make even more money now by evolving their business models – recognizing they are in the music or movie or news industry, not just in the sell-discs-and-paper industry.

Today I continue my feature on universities, crediting them as a key part of the United States’ economic future. But that future will likely look different from the present.

As we are seeing the price of information plummeting for news organizations, information from universities is seeing a similar albeit slower disruption to their century’s old business model.

Higher education costs have skyrocketed over the past few decades, jumping almost 10-fold since 1978, far more than the 3-fold increase in cost of living and the 6-fold increase in the cost of healthcare. What’s more surprising in recent years is technology is pushing the cost of providing education down while the costs of receive the education continue to skyrocket.

The Washington Post published a analysis of the business model turmoil in store for universities. Online universities still possess a stigma of being inferior to brick-and-mortar colleges, but as more and more students attend, that stigma will decrease (see online dating or online retail).

Thus far online courses have remained as expensive as their terrestrial counterparts, sometimes more expensive with additional “technology fees” added on even though these classes cost a tiny amount to offer. But a new company profiled by the article called StraigherLine aims to toss the higher education model for a whirl.  The company offers all-you-can-study for $99. If you can take four classes in two months like a woman did, it will only cost you $200 compared to thousands upon thousands for the same education at a regular university.

This is not good or bad – it is basic economics. Just like the newspaper or music industry, technology is making it cheaper and easier to spread and share information. Professors and experts are offering open source, free, or cheap textbooks online in addition to blogs and interactive teaching materials that work in and outside of the classroom. Collaboration tools allow students and teachers to be fully engaged even without being in the same room or even state, saving money and time.

Universities (and certainly textbook publishers) have been timid to adapt amid growing demand for cheaper education. While several universities offer free online courses, these are not for actual credit. Other universities that offer online courses in addition to their regular offerings do so with similar or more expensive pricing (the technology fee). But these classes cost the university less and can lead to more, not less, efficiency. There is no limit to the student space and professors have more time to respond to student’s questions, allowing for more students and more questions. These online courses can easily handle introductory classes or  even small writing seminars (just email other students your essays) and in-person classes can focus on more complex, discussion or debate heavy classes (as wonderful as Twitter and Skype are, a rousing round table is still best in person).

Top universities offer something more than knowledge. Much of their value comes from reputation and the quality of their student body, a key scarce good that allows them to now and for a long time charge a premium for their service.  State and middle-tier schools face the most threat as competition from online universities convince more and more students (and employers) that their education is as good but significantly less costly. And as society requires more and more students to complete higher education degrees, the need for affordable education will become more in demand – and more affordable because of the greater supply.

I began working at Leslie Hindman Auctioneers a few months ago (hence my sparse blogging) and have watched basic economics at work. Two or more people bid against each other, offering more and more money until no one is willing to spend more. In traditional commerce, the goal is not to sell to the highest bidder, but set your price to attract the largest number of buyers. This is the difference between value and price. Value equals what each person is willing to pay while price is what the actual cost is.  A few months ago, I wrote about customers, or individuals, can be wrong in the marketplace, but as a whole, the market is always right.  The market is a greater indicator of what’s valuable and for how much. Auctions are a microcosm of these market effects. In auctions, we get to see how value, price, and markets can work for and sometimes against each other within very small sets.

Within our capitalist society, our goal is to make money.  For many, this means selling goods. So in any auction, the goal is to sell each good, or lot, for the largest amount of money.

Let me walk you through an auction example where I explain how value and price differ. I really want a painting.  Another person, Jack, also wants this same painting. I am willing to spend $15,000 maximum on this painting, meaning, I value this painting up to $15,000. Jack is only willing to spend $10,000, meaning he values the painting at up to $10,000. We both bid on the painting until Jack bids $10,000. I bid $11,000. Jack only values the painting up to $10,000, so anything higher would be a perceived loss for him. The price is too high compared to the perceived value he receives. I buy the painting for the price of $11,000, $4,000 less than my perceived value.  This is a net gain for me because the price was lower than my perceived value. The painter owner still gets $11,000, the auction house gets its commission, and I get a painting I really wanted. Everyone wins, even Jack who keeps his $10,000 to spend on something else. Because the painting sold for more than he valued it at, he did not loose anything, whereas had he spent more than his maximum, he might have felt like he lost something.

Now some may not agree this was a win-win-win-win. Because I was willing to pay $4,000 more, the owner and auction house lost out on more money. But according to auction (and marketplace) rules, I only have to pay more than the last bidder. So if I were asked to then pay more than the $11,000, I might feel cheated or like I lost something because the market, comprised of Jack and me, deemed the painting should be priced at $11,000.

This is where auctions show the ignorance of the individual and the wisdom of the market. People selling their goods through the auction house, called consigners, can place reserves on their goods. Reserves are the minimum price a consigner is willing to sell the good for. If the auction price is less than the reserve, the item goes unsold. Auction houses often provide low and high estimates appraising the value of the good and the reserve cannot be higher than the low estimate.

So let’s apply a reserve to my previous example. Let’s say the consigner has a $15,000 reserve on the painting.  This is the consigner placing a price on their good based on what they believe other people’s perceived value will be. This is why problems in commerce occur – when the seller and the buyer’s views of value fail to meet.

But I was willing to pay $15,000, you say. True, but that was based on the understanding that someone else was willing to pay $14,000. Because I now understand what the market values the painting at, $11,000, I may change my own perceived value of the good. Think of it as competition pushing the price (not value) down, because I know no one will pay more than $11,000.

So the auction house may try to arrange a private sale between myself and the consigner where I may raise the payment price and the consigner may lower their reserve – the price they are willing to sell for.  If the consigner sticks with $15,000 and I am unwilling to pay it, we both lose. I don’t get the painting, and they get no money. Maybe they’ll make more at a later date, but they might also make less. During that time, I might buy another painting and no longer want this one.

How can we apply this to the price of free and all the industries challenged by it? First, the price of free is not representative of value as so many content producers confuse. The painting, and many auction items, are sought after because of scarcity and unique qualities that give them high value. Since buyers cannot find this same value in other goods, they are willing to spend money to buy the goods. Newspapers, music, and entertainment programs are no similarly scarce and unique, rather, they are quite ubiquitous and easy to find. If I can watch one TV, I have 500 other channels to pick from, plus on demand, plus online sources, play other media like video games to spend my time.

Auctions, as I said, are a microcosm where only two people are needed to bid up the price of a good. This is attributed to the aforementioned scarcity of the goods – if you only have one or two to sell, you only need one or two buyers. For general consumer goods, auctions would not be effective since companies need to sell hundreds if not millions to meet their desired profit goals. So companies have to balance price with their assumption of the market’s average perceived value of their product in order to sell the largest of number of goods at the highest possible price.

As we are seeing, many industries are setting higher reserves on their goods than the market is willing to pay. Music companies want licensing fees so high that TV shows can’t be released; gene patent holders charge to much for researchers to license. Movie companies are trying to force more money from Redbox and newspapers think consumers will give up free blogs to pay for online news.  All these industries ignore what the market is saying, instead trying to say they are smarter or more attune to the value of their own products. But value is not about what it cost to make or how much time was spent making it. Value only matters for how much people are willing to pay. If consumers are not willing to pay anything, then no amount of government intervention or PR manipulation will change that. The market wants what the market wants and the market is still always right. Instead of fighting the market, recognize their wisdom and find a way to make money in the new market. It’s a lot easier, cheaper, and more profitable than trying to change how the market, and basic economics, works.

I love having all my media in one place: on my iPod, media center, or gaming console. Disc switching is so 2004. And slowly entertainment companies are getting it – we want digital downloads of our movies, games, and music. But they don’t understand how we want them priced.

I’m going to skip, for this article, the true economics of digital goods (they’re infinite in supply, they should be free). Instead, let’s start with making them cheaper than their tangible alternatives. Why? There’s a win-win situation here.

First, digital goods save the creator money. The is no packaging, processing, stocking, or shipping. A little hard drive and some bandwidth are all you need. This should all cut substantial costs out of the creator’s bottom line, and that’s savings worth passing along to the customer.

Consumers, while adding the convenience of fewer discs and more content, lack the ability to resell their digital goods, which research shows increases the initial value of tangible goods (you spend more on a car knowing you can resell it for some money, and the same applies to video games and DVDs).

So why are digital goods still priced so high (and by high, I mean, the same price as their tangible counterparts)?

Part of the reason is retail chains are eager to keep customers coming into stores and want DVDs and video games as weekly incentives. Creators might want this traffic for impulse (or non-technical savvy) purchases, but in truth, they are the losers in this arrangement. Creators fight for shelf space often paying premium dollars for ideal placement when digital stores allow for better navigation and unlimited shelf space.

Yes I believe digital goods will eventually all be free (it’s inevitable) and new business models will support their creation. For now, let’s just make the prices fair. Remember, BitTorrent has all this content available for free anyway.

I don’t know what will happen tomorrow, but I know it will be different than yesterday. Obvious, right? Even more obvious, the way we live today is different than 5, 10, and 25 years ago. This is how life works. So why do so many smart people want everything to stay the same.

Richard Corliss for Time Magazine, which alone is having trouble understanding the future of the news business, has several criticisms for Netflix and why it stinks, yet makes certain to contradict himself with his own article. Corliss, a successful movie critic for more than 30 years, has gone blind as to the future and why Netflix is not something to fight, but to embrace. Corliss laments the traditions internet features – no human interaction or leaving the house. Netflix is causing obesity.  It’s also why his local video store closes. Corliss also criticizes Netflix’s wait times (sometimes a whole day) and the dreaded “mail delays and the botched orders.”

Of course, all this is invalidated by Corliss’ own admission that Netflix “has the No. 1 customer-satisfaction rating among online retailers.”  Meaning for all these problems, people really like Netflix and the service it provides (which includes instantly streamed movies to your computer and TV, something he failed to mention).

Corliss, of course, is just about 10 years too late to criticizing Netflix. Does anyone really believe they’ll be renting discs from a store in the next 10 years?

Most of the criticisms against Netflix, Google, YouTube, blogs, and other “new” businesses trends toward the better than/worse now argument from people who were better than/worse now, such as news papers, recording companies, and brick and mortar retailers (and video rentals). But consumers are happy. They have more choice, more convenience, and lower prices leaving them with more time and money to do other things (that’s how an economy grows).