The History and Economics of Information: Part I
Why it’s hard to monetize information, and the state of society until the Printing Press
This is part one of a multi-part series to understand the economics and societal impact of information and media. It is going to be an evolving work that starts with a framework for understanding text. We’ll then try and understand how audio, video, and software (including games) fit into this framework. Hopefully, by the end of it, we come up with something approaching a unifying theory.
The control of energy and information by fire and language is at the foundation of civilization. But while energy has turned out to be one of the most lucrative businesses known to man, information has always been hard to monetize. Why the dichotomy?
The answer to that question gives us vital clues about the structure of society itself. But let us begin by introducing what I call the Infinite Replicability Problem.
The Infinite Replicability Problem
All else being equal, an increase in demand increases the price of an object. This is both common sense and the very foundation of economics. However, it relies on one, very reasonable assumption- scarcity. After all, the world of atoms is finite and inherently scarce.
Information, on the other hand, is not tied to the real world. Once a piece of information exists, it can be infinitely replicated. Unlike everything else, information is inherently abundant.
When an economic good or service is sold in the world of atoms for the first time in the market, it attracts competition. This competition brings down the price. But the inherent scarcity of the world of atoms puts a practical limit on the number of competitors of a business. Some equilibrium is inevitable.
Before we used coal and oil, we used firewood. But where coal and especially oil are so valuable that it drives the foreign policy of nations, no one in history ever made much money selling firewood. The reason is simple- oil and coal are scarce, while firewood is abundantly available.
If anabundantly available good is sold in the market, substitutes are incentivized to enter the market at a lower cost. This drives down the price of the good until some sort of equilibrium is reached in the market.
Almost all economic goods are tied to the real world, which means there is some inherent form of scarcity. The only exception is information.
Another feature of economic goods and services is the non-zero marginal cost of distribution. This offers another point of friction where businesses can make money, for. eg by reducing distribution costs through scale and profiting off each transaction. This also offers a natural limit to the size of corporations, as at some point, the marginal cost tends to increase beyond the selling price.
Information is unique in that it exists independently of the real world. Theoretically, there is no limit to the replication and distribution of information. This makes information limitless in both abundance and accessibility.
In practice, the technology and medium affect how easy it is to replicate and distribute, which has an effect on how it can be monetized. To understand this, let’s look at the music industry.
Before the digital era, music was sold on vinyl records which had a high cost of replication and thus low availability. Further, even if some enterprising bootlegger arranged access to a pressing factory to pirate records, they had no access to the primary distribution channels of large retailers. Record companies took advantage of this to charge high margins. The industry enjoyed impressive year-on-year growth up until the 2000s.
The unraveling began with the introduction of the Compact Disc and the mp3 file format. Replication was now much easier. Distribution, however, was still a problem. This changed with the internet, culminating in Napster. As music completed its transformation from scarce to abundant, its economic value collapsed.
It’s important to recall that nothing really had changed about the music itself. What had changed was that infinite replicability met zero marginal cost of distribution.
Defining the Infinite Replicability Problem
It makes intuitive sense that for a normal good or service, the combination of high demand and scarcity will lead to high prices. For information, infinite replicability means that high demand has the opposite effect.
For information, demand acts as a driver for lower cost substitutes to enter the market and reduce profit. The economic value of information thereby tends to reduce with increase in demand.
The Infinite Replicability Problem has been the central issue facing purveyors of information throughout his history. Potential solutions have depended upon the technology and the medium.
Information Mediums
Initially, we shall look at three different eras of technology- the manuscript and oral era, the printing press, and the internet. The effect of each technology was straightforward- drastic reductions in cost and time of creation, replication and distribution of information. The impact on society was anything but.
Economics of Information Before Printing Press
Before the printing press, the only way to transmit information was to use human beings as carriers (as scribes and heralds). This was economically unsustainable at scale.
Thus, the purveyors of information had two challenges to overcome. This resulted in the following monetization strategies:
Specific Information (Scarce Demand)
High demand causes the infinite replicability problem by drawing the attention of substitutes and pirates. One way to avoid the problem is to focus on a small audience.
A man charged with a crime needs information about a specific part of the legal code. Since most people didn’t need that information, it isn’t replicated, thus remaining scarce. This scarcity means that it can and was monetized. Individual consultants- Lawyers, Guides, Spies and Fortune-tellers are some of the oldest professions known to humanity.
As society grew complex, specific information became more and more valuable. Today, business consultants can charge tens of millions of dollars to their clients for essentially an informational product. Again, I believe that the key part that makes consultancy services valuable is not the value of the product itself, but the fact that it is private. Consider the following tweet by Matthew Ball:
Much of the best business insights are already available out there- just ask the Disney management about Matthew Ball or any technology executive about Ben Thompson. However, it’s economic value is immediately eroded because it’s availability opens the door to the infinite replicability problem.
This effect can be broadened for niche information providers, which are generally more profitable than those targeting the mass market. Even before the internet, the operating profit for mass-market book was between 10-15%. This was much lower than niche segments, on the other hand, such as education and the university presses. Music, Newspapers and Video enjoyed high margins for a time due to reasons we will explore later, but these margins have fallen off a cliff in the era of the internet (here is an analysis of the video’s profitability in the internet age.)
One might argue that this niches, in general, are more profitable than the mass-market. But what makes information truly unique is that it might well be impossible to make a premium mass-market information product in the internet age. We can point to the declining price for all mass-market products- music, television, news, books and so on. But perhaps the most illustrative example is the fate of Encyclopedia in the internet age.
Encyclopedia’s were perhaps the only expensive mass-market products. Britannica sold 100,000 copies at $1200 apiece in 1990. However, expensive doesn’t translate to high margins- the cost of the team of editors and door to door sales team was extremely high. Encyclopedias actually dependant upon revenue from yearbook subscriptions for updates. Still, selling a mass-market information product for $1200 is unique, and was only possible before the internet. Undoubtedly, Britannica’s door-to-door sales team played a major role. But arguably more important was the Britannica Brand. Each family would buy only one encyclopedia- it made sense to buy the one that was the most expensive.
As computers and CD-Roms became popular, once again, infinite replication met low marginal costs. In a text-book example of disruption, a majority of customers were now overserved by Britannica. Many good enough substitutes began operating at a fraction of Britannica’s price. To adapt, the Encyclopedia had to lower its CD-ROM prices by over 90% to $100. The internet completed the transition to abundance, and even a $100 price was now untenable. Britannica has virtually exited the mass-market business (although it still sells premium subscription at <$75) and now operates a healthy business in the niche education segment.
Niche services continue to charge premium prices even in the internet age. A research report from Gartner and Forrester cost thousands of dollars, whereas Gilmott Magazine charges $350 for an annual subscription for content that accessible to a very narrow section of financial professionals.
Performance Art
In about 100 BC, Romans began telling each other about a man who could weave magic with his words. This was Cicero, the most famous orator who ever lived.
When Cicero delivered a speech, the words themselves were quickly (and probably incorrectly) replicated. But what was lost was Cicero's oratorical ability. This ability was scarce and thus economically valuable.
Thousands of individuals throughout history have made their living through performance art. Performance art utilises melody, oratorical ability, theatre, and later, multimedia to enforce a temporal and physical scarcity on the information. You had to be at a certain place at a certain time, which was easy to monetize.
At some point, someone figured out if they could consistently recreate that temporal and physical scarcity by finding performance artists, they had a sustainable business model. Thus the first information distributors emerged around a promise of delivering a scarce information product at a certain time and a place each day. These were the world’s first theatres. The basis of this business model would eventually form the lynchpin of the media and entertainment business- as behind both live and to an extent, subscriptions.
Patronage
Put simply, patronage is financial support for something that one hopes to see in this world. This had multiple reasons ranging from an emotional connect to propaganda to prestige.
Controlling the Memes
“Those who control the memes control the world.”
The pre-modern European world was a highly unequal society. An overwhelming majority of all the wealth was concentrated in the monarchy, the nobility and the church. The majority of the population had little disposable income. For the best information talent, patronage was a far more attractive and lucrative channel than the others. Further, live performances were held at prominent locations and could be easily monitored and controlled.
Thus, the church and the monarchy held a monopoly on information and an iron grip on society. This was arguably more important than the monopoly on violence. After all, the potential for violence for the state has only grown since the 15th century, but despite that, we have a lot more say in our governance than we have ever had.
These institutions secured their information monopoly via controlling all the .informational talent. Ever wondered why the word “King” has such reverence attached to it? It’s the outcome of thousands of years of manipulation of information across every corner of the globe by mankind’s most talented storytellers. For instance, Alexander used to travel with the ancients world equivalent of a PR company on all his conquests.
This explains a lot about the location of two of the most important events in 16th Century Europe.
Two of the most important and earliest ‘information’ movements in Europe- the Renaissance and the Reformation, happened in Italy and Germany- where the monopoly was the weakest.
The region of modern-day Italy had no centralized, powerful ruler like France and England. Italy also had a thriving merchant class that funded the creation of art, leading to the Renaissance. Germany was a patchwork of semi-autonomous territories under the Holy Roman Empire. But even in these places, there was no method to distribute information at scale.
That changed when a German named Johannes Guttenberg entered the history books in 1450. By the end of his lifetime, the world would never be the same again.
Thank you for reading. This was the first part of the five-part series outlined below. I recommend reading in order, but feel free to skip ahead to any part you find more interesting.
Part I explains the basics economics of information and the state of society before the printing press
Part II explains the story of the early print industry and its impact on society
Part III covers the birth of the newspaper industry, and why the news was profitable in a way that books weren’t.
Part IV covers the growth of both the newspaper and the book publishing industry until the 2000s
Part V explains the impact of a world of abundant information on books and newspapers