Even as DVD sales plummet, DVD rentals rose 4.1 percent to $6.5 billion in 2009.  This rise happened even though 3.2 percent fewer rentals happened in video stores. Rather, the increase is most likely attributed to the 94 percent increase at rental kiosks like Redbox, which has been under attack by movie companies for siphoning their business with cheap $1 rentals. Those $1 rentals (and low-priced used DVD sales) added up to $1 billion in revenue for Redbox. So lower price, more money. Maybe movie companies will recognize the basic economics at work and stop fighting successful business models for people willing to spend money on their movies.

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.

Not content to learn from the 10 plus years of mistakes by the recording industry, the movie industry is stampeding its way to obsolescence.

First, Fox and Warner Bros. have joined Universal in its battle with Redbox, the successful rental kiosks found outside supermarkets and fast food joints. Redbox rents movies for $1 a day, legally purchasing the movies from wholesalers. Redbox will even sell used DVDs for about $7.

Fox, Warner Bros. and Universal have sued claiming Redbox is infringing on their copyrights and are ordering wholesalers to refuse to sell their movies to Redbox before several weeks. The studios are demanding revenue sharing from the kiosks.

Redbox is countersuing for antitrust and abuse of their copyrights.

Redbox, while relying on the movie studios, is in a stronger position. Sony and Lions Gate are backing the kiosks with their movies, recognizing that movie fans love the price and convenience. DVD sales are down 13 percent while rentals are up 8 percent.

Next, the movie studios recently won two important court cases, both likely to cause more damage to the industry rather than help.  The first was the studio’s win over Real’s DVD copying software.  This copier circumvented the DVD’s DRM, which is illegal under the DMCA, but then put new DRM in its place so users couldn’t share their movies.

Now, copying for personal use or backup is considered legal and a fair use of a copyrighted work. But because of the DMCA’s anti-circumvention laws, you can’t backup the DVD you legally purchased.

What’s silly, is Real’s copier cost $20 and used DRM making it a somewhat worthless copier, especially when there are dozens of free DVD copiers without any DRM. So by suing, the movie studios 1) promoted that people could copy movies and 2) sent them to free, DRM-less alternatives.

For their other lawsuit, movie studios won their appeal against Kaleidescape, which is basically an iPod for movies (or a DVD jukebox, if you will), but costs $10,000.  Movie studios of course feared this system would be a haven for piracy, but again, it’s $10,000. It’s for high-end movie fans with lots of DVDs who don’t want to keep switching discs. They backup their discs on Kaleidescape and then watch them on their TV. But because of the DMCA’s anti-circumvention laws, users can’t do what they are otherwise legally allowed to do. And the movie industry gets to stamp out innovation and technology that is trying to help make DVDs and movies more valuable.

How are legal remedies helping here? The movie studios are trying to crush three different companies who are trying to help make DVDs more valuable at a time when consumers are showing DVDs are less worth purchasing.