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Thursday, October 19, 2006

Hal Varian: Tom Cruise Should Worry

Hal Varian says technology reducing the cost of digital content will benefit consumers tremendously, but "old media" executives and the superstars they employ may not fare as well:

Why Old Media and Tom Cruise Should Worry About Cheaper Technology, by Hal R. Varian, Economic Scene, New York Times: I occasionally give talks to “old media” executives where I am expected to say something provocative about “new media.” Here is what I have been saying for the last few years: “You have spent a lot of time worrying about piracy, but the biggest threat you face is the falling cost of producing and distributing digital content.”

None of the executives took this claim seriously years ago, but since blogs and video posting sites have become popular, media executives are starting to look worried. A few months ago, one of them offered a rebuttal: “The cost of making movies isn’t going down; stars’ salaries are exploding.”

The next time I was being provocative, I was careful to add, “It’s true that Tom Cruise’s salary keeps going up, but that’s just an economic rent, not a real cost.” Boy, was that a bad idea. The conversation subsequently degenerated into a discussion of whether it was actually possible to rent Mr. Cruise’s services...

I had committed the cardinal sin of using economics jargon. But economic rent is such a useful and important concept that it is sometimes hard to avoid.

David Ricardo, who lived from 1772 to 1823, developed the theory of economic rent in his essays opposing the 19th-century English Corn Laws. These were tariffs ostensibly intended to protect British farmers from cheap foreign grain. Ricardo observed that the tariffs had two effects: the obvious effect of raising the price of grain and the more subtle effect of pushing up the rent of land suitable for growing grain.

From the viewpoint of an individual tenant farmer, the rent he paid to the aristocratic landlord was a cost of production. But for the system as a whole, the land rent did not really determine the price of grain. It was the other way around: the price of grain determined land rent. So the real beneficiaries of the Corn Laws were not the tenant farmers, but the aristocrats who owned the land.

And so it is with Mr. Cruise. His salary, as that of other Hollywood stars, depends on the fact that large numbers of people will pay to see his movies. If, in the future, these people spend more time on YouTube and less time going to movies, Mr. Cruise’s compensation will probably fall. ...

From the viewpoint of the media executive, Mr. Cruise’s salary was definitely a cost: it was the stars’ salaries that contributed to making movies expensive. So what if software for editing video has been getting a lot cheaper? That’s a trivial part of production costs.

But amateur filmmakers don’t pay star salaries. From their point of view, cheaper editing software and cheaper broadband means that it is much easier to produce “garage video.”

So as technology advances and costs go down, a lot more amateur video will be produced. Economic rent comes from scarcity. It is true that there is only one Tom Cruise, but it is equally true that there are only 24 hours in a day. The more time young people spend watching Lonelygirl15, the less time they will have to watch Mr. Cruise.

I don’t think that the age of the megastar is over. Quite the contrary, there will still be big-budget movies, and stars with drawing power will still command high salaries.

But, at the same time, I believe that there will be a flowering of creative, inexpensive and compelling semiprofessional content available via the Internet. This content will occupy more and more of people’s attention, particularly young people.

What gets squeezed is the middle. Those actors, writers and directors who do not command the big audiences may well find it hard to compete for attention with the video blogs. True, the videos available there are often sophomoric. But there will always be sophomores to watch them. ...

Advances in printing and binding technology led to cheaper books, which, in turn, meant more demand for authors. Only a small fraction of these authors became rich and successful, but readers benefited tremendously from the increased variety of books. Today, we are seeing the same story play out for digital content. It is a great time to be a video fan.

    Posted by on Thursday, October 19, 2006 at 12:33 AM in Economics, Technology, Weblogs | Permalink  TrackBack (0)  Comments (5)


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