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).

Just after I posted about a tiered model for fan supported video games, Techdirt has unveiled a tiered model of its own.  In order to prove that this tiered model can work, Techdirt is offering a variety of options, selling books, t-shirts, music, and at higher prices, the opportunity to have your business plan reviewed and even have Michael Masnick work for you. For $100,000,000, you can shut down Techdirt for a year. I wonder if there are any copyright maximists pooling their resources. Which tier do you like best?

Value has revealed a great understanding for the way technology is changing the video game industry. Instead of getting mad about piracy and used game sales, the company recognizes it needs to give fans a reason to pay and support their products. Valve launched one of the first digital distribution systems for the PC and supports a thriving modding community and has played with a variety of game prices including special free weekends (which led to higher retail sales).

Valve managing director Gabe Newell thinks another future business model for video games can be fan-funded games:

One of the areas that I am super interested in right now is how we can do financing from the community. So right now, what typically happens is you have this budget - it needs to be huge, it has to be $10m - $30m, and it has to be all available at the beginning of the project. There’s a huge amount of risk associated with those dollars and decisions have to be incredibly conservative.

What I think would be much better would be if the community could finance the games. In other words, ‘Hey, I really like this idea you have. I’ll be an early investor in that and, as a result, at a later point I may make a return on that product, but I’ll also get a copy of that game.’

So move financing from something that occurs between a publisher and a developer… Instead have it be something where funding is coming out of community for games and game concepts they really like.

Several musicians and labels are showing this fan supported model can be quite successful, providing a business model that ensures the creators get paid and fans get something worth paying for.

Musicians like Jill Sobule found great success offering a tiered system of fan support where fans paid different amounts for different rewards including $10,000 to sing on the album (which someone paid). Game developers can offer many useful and scarce products to entice fan support from test early builds of the game, add their voice or likeness to a character, create a monster, access to design documents, art books, and creator Q&As.  All of these are already offered by many game developers after development.

The numbers are more than scalable, even for blockbuster games.  $50, less than the price of most console games, from 100,000 fans would raise $5,000,000, more than enough for a quality game.  More popular developers could easily raise more.  And developers might even keep costs down by getting rid of their retail marketing costs and allowing fans to contribute to the game’s development.  Valve itself released Counter-Strike, a fan-modification of Half-Life, at retail.  That fan modification, released for free online has sold more than 9 million copies.

A blockbuster game budgeted at $20 million could be built off $20 from 1 million fans.

The best part – since the game development is already paid for, piracy is no longer an issue.  The fans who paid received extra benefits and the ability to support the game’s creation. Anyone who downloads the game for free has the chance of becoming a fan and supporting the next game. This model encourages the game to be spread to as many people as possible. Not everyone will pay, but the more that play it, the more people who might contribute.

After my IP class last week, a classmate and I continued our debate.  He said something that stuck with me: “Companies won’t leave money on the table.”  But in many cases, companies do leave money on the table. Sometimes the risk isn’t worth the reward, but sometimes it’s sheer stubbornness.

I mentioned Farhad Manjoo’s article about why there is no iTunes for a movies a few weeks ago.  The reason, according to Manjoo, is there are too many contracts to renegotiate and too many people to get permission from to make an all-you-can-download movie service cost effective.  This is not because it’s actually expensive to make (all those BitTorrent sites seem to manage). It’s because the variety of rights holders demand too much money.  Rights holders over value their copyright (or patent other cases).  They demand more money than someone can make selling another product (like a download service).  Instead of getting paid, nothing gets done or sold, meaning everyone leaves money on the table.

Want a nice, clean consumer example? iTunes introduced variable pricing for music at the demand of the record companies.  Record companies could choose a lower 69 cent price, the regular 99 cent price, and a $1.29. Few chose the lower price, pushing popular and new songs to the higher $1.29.  Early results show the labels are losing money from the decrease in sales – unit sales have dropped to the point where actual revenue is lower than when prices were 99 cents. Don’t say they weren’t warned.

The examples are numerous, from newspapers threatening Google even though its sends them tons of free traffic to monetize to Warner Music demanding more money from YouTube and music games like Guitar Hero, ignoring the huge promotional benefit they get from both.  TV shows like the Wonder Years can’t appear on DVD or TV because of the over-priced music. Other shows have changed the music, from Dawson’s Creek to WKRP in Cincinnati.

In the patent world, having too many patents in one area is called a patent thicket and can make it hard for research because it requires so many different licenses (and too many companies over valuing their intellectual property) that it becomes cost-prohibitive to research either from licensing or lawsuits.  Some companies collect their patents to allow products to be made, but these patent pools often do more harm than good. This is even hampering drug research:

Peter Ringrose, chief scientific officer at Bristol-Myers, has said there are more than 50 proteins possibly involved in cancer that the company was not working on because the patent holders either would not allow it or were demanding unreasonable royalties.

Yes, I went there. You might die because greedy companies refuse to take money.

In all seriousness, intellectual property not only gives monopoly rights to a single entity, but it also comes a sense of entitlement that seems to hurt the rights holder and everyone down the supply chain, including consumers.  This is because rights holders significant over-value their own intellectual property.  Much of the value from content comes from how it reaches the consumer, whether on DVD, TV, or some innovative package.  Pricing yourself out of these products does not make your content more valuable – it devalues it because consumers don’t experience it.  Companies are leaving money on the table, not just from the initial royalties, but from the future revenue made by future sales of products based on new fans or new innovations.

A few weeks ago I wrote about how companies need to understand the difference between customers being willing to pay and companies saying they should pay.  This is basic economics, and it’s the reason many industries, like newspapers and music, are struggling.

But let’s think of this another way.  There’s been a popular marketing saying that the customer’s always right.  This is a great gimmick, but not necessarily true.  Instead, let’s think in terms of the market.  The market, otherwise considered large groups of customers, are always right.

Think of it this way. If one customer gives you a bad review, you can probably ignore it. If two customers give you a bad review, maybe pay some attention, but no need for immediate action. If three customers give you a bad review, there’s something you need to fix.

When large groups of customers make the same decision, they are the market acting. In a free market economy, the market always decides what works and what doesn’t. This is not a moral statement. It is economics.  If people do not buy your product, it is because the market does not want it. There are many reasons why that might be, but the market as spoken and nothing except accommodating the market with help sell your product.

This is where the disconnect happens.  Music and movie companies blame file-sharing services for stealing their content and costing them money.  But file-sharing sites are the market showing customers want to consume entertainment differently.  Saying it’s immoral or illegal does nothing to change the market’s mind because you cannot change the market’s mind.  The market is never wrong. Companies succeed when they listen to and serve the market.

Slate’s Farhad Manjoo laments the near impossibility of an online movie rental service with real selection because of all the complex licensing required.  So instead of going to Hollywood’s own service, people go to file-sharing services because they serve the market demand for on demand, free entertainment with massive selection.

Many products floundered until the right combination of features, price, and demand met for the product to actually serve the market.  Michael Masnick points to netbooks as a perfect example of a product that floundered for years until companies found the right combination of specs and lower price to build a substantial marketplace.

Markets can change the other way, making products and business models obsolete.  The entertainment and newspaper industries are just examples of wide spread changes in these business models.  Once, single songs and news articles were easily commoditized because of limited distribution channels. But with uncontrollable distribution, the market has more control over how they can consume these products. It the cat’s out of the bag version of economics. No amount of legislation or educational campaigns will return the market back to the sweet days of the 1980s when people would pay because that is what the market would do.

The customers, as a group, are never to blame for a product not working because they just didn’t get it, like Time Warner’s metered broadband.  The market decided they don’t like this service. It could be possible to launch successful metered broadband. Doubtful, but possible with the right combination.  Time Warner’s plan had no market. End of story. It’s not a flawed PR campaign – the market did not like your product.

When launching your next product, always consider how your product serves a market need.  You always want to increase consumer value, not your own value. You increase your own, and your company’s, value only after you’ve increase the consumer’s value.  Scolding the market for just not getting you is not an effective business strategy.

This, I did not expect. I’ve been following the crisis of the newspaper industry closely and have many suggestions, which I’ve discussed here.  A new suggestion has come to my attention from a 1918 Atlantic Monthly article claiming the death of newspapers. As history shows, this was a little premature.

Oswald Villard found daily newspapers had rising costs and rarely, if ever, any profit.  He writes:

It is a fact, too, that there are few other fields of enterprise in which so many unprofitable enterprises are maintained. There is one penny daily in New York which has not paid a cent to its owners in twenty years; during that time its income has met its expenses only once. Another of our New York dailies loses between four and five hundred thousand dollars a year, if well-founded report is correct, but the deficit is cheerfully met each year. It may be safely stated that scarcely half of our New York morning and evening newspapers return an adequate profit.

That $500,000 loss compared to $7 million in today’s dollars (according to Slate), which pales in comparison to the $85 million the Boston Globe expects to lose this year alone. But Villard highlights the unique business model many newspapers used to support.  He claims owners were willing to accept losses in their newspapers because of the prestige of owning one.  Slate puts it: “A newspaper owner gets a place at every table, access to all the top politicians’ ears, and the power to impose his worldview on his readers—or, at least, the illusion of such influence.”

Few businessmen are willing to make such expensive vanity purchases (Slate makes some notable exceptions, like Rupert Murdoch’s New York Post or Mortimer Zuckerman’s New York Daily News).  Of course, stock markets, quarterly reporters, and multi-billion dollar sales turned the newspaper business into a profit boon for the 80s and 90s with few expecting the bubble to burst.

For naysayers predicting the demise of democracy should newspapers all disappear (unlikely), the vanity business model represents only one of many, many options to develop news and other businesses. I doubt this trend will take the business world by storm, but the history lesson is worth noting – business isn’t always about money. There’s power and influence too. I’ve been a proponent of the value of self-promotion (like this blog), but maybe even multi-billion dollar corporations have a place in a vanity portfolio.