econlife - A Closer Look at the Digitization in Our Lives by Elaine Schwartz

Recorded music used to start with a label and an artist. The production process was expensive because of the skilled technicians and the sophisticated equipment. Add to that a music video, the physical album, the distribution process, and what do you get? For a new artist, the tab is $1 million and the success, unlikely.

But then came digitization…and The Piano Guys:

 For this one video, so far, there have been 62.5 million views.

And a considerable shift in market behavior.

The Digital Impact

Looking at music, movies and books, we can see a seismic shift because of digitization.

McKinsey concluded that the media were the digitization leaders:

Summarizing a huge body of digitization research, we can say that supply side costs are down–with marginal costs as low as zero. And on the consumer side, we have an increase in welfare as choice and potential quality skyrocket.

Some of the changes relate to sinking production costs. As a musician, an artist or a writer, you once needed an agent just to sign a contract. No more. Now, do-it-yourself lets you bypass the gatekeepers.

We have also seen the distribution revolution as online media supply what we used to buy exclusively from record and book stores, and movie theaters. In 2012, there were 550 films released through movie theaters. By the next year, Netflix alone had 1058.

For the media, you can see the whopping increase:

Our Bottom Line: Market Structures

Let’s just conclude with a look at our market structure continuum. On the left, we have smaller less powerful firms that can easily enter and exit markets. Meanwhile, moving rightward, pricing power and firm size increase.

Digitization is upsetting our traditional market structure order. In some markets we have more competitors. Because of easy entry and exit, digitization is adding more of the characteristics of monopolistic competition. Also though, thinking of Amazon, some firms have much more pricing power, taking us to the right side of the scale.

Maybe though we should remove our economic lenses and simply enjoy the Piano Guys.

My sources and more: Always selecting interesting topics, economist Joel Waldfogel now has a paper on digitization in the Journal of Economic Perspectives. Also, I discovered  this NBER paper that complemented his analysis. Finally, you might enjoy looking at McKinsey (as did I) here and here, with its real life examples.

Ideal for the classroom, econlife.com reflects Elaine Schwartz's work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.