The other portion of the cost that both of these types of items have is the cost of actual manpower to create.  There’s someone designing the underpants, just like there’s someone writing and performing the music. This even includes if a waffle was made by some sort of automatic waffle maker – that automatic waffle maker was created by manpower (or the robots that created it were created by people who programmed the robots). Or, if the music is completely computer-generated, someone created the computer program that allowed the music to be created. If a person’s time or talent has value, then creation has a cost.

The point I’m trying to make here is that everything has some sort of cost involved in creating it. Nothing is free to create.

With this cost come questions for creators. Do I pass any of that cost on to the consumer? What is my purpose for creating?  What is the price of my creation?

If any of the reason for the creator is monetary, then there must be some price to be paid by someone for some aspect (no matter how vaguely connected) to your creation.  If it’s not monetary, then what did you create it for?  Was it simply to better the human race?  Perhaps it was to strengthen the acceptance of a cause you feel strongly about. In both of those cases you’re at least charging the cost of a person’s time to consume your creation. There are plenty of creations out there that fall into all of these camps, and a lot more.  As such, there’s a lot of competition out there.

The easiest way to compete in business is by offering a lower price. If you are okay with assuming your time, knowledge, talent and effort are worth nothing monetarily, then it’s easy to offer your content for free.  With millions of people creating content today, a percentage of them are willing to offer their creations for free, and that percentage of a lot of people turns out to still be a lot of people. So what we have is a lot of content for free, competing with some content with a price. How does one compete with free?

Again, the easiest way to compete is by offering a lower price – and there’s no lower price than free – so instead, many individuals compete with free by offering free, plus something else for free (in an example of an e-book, think of an e-book but with a free bonus podcast).  So what ends up happening is that free competes with free in an effort to increase consumption. To what end that consumption is encouraged is up to the creator or distributor, but the battle right now lies ultimately in consumption.

If we back up to the cost of a creative work, however, the vast majority of that cost really is in time, effort, talent, skill and knowledge. Costs exist, but in our previous world where bits and bytes were not free (or nearly free), they cost raw materials to reproduce.  People actually paid for a physical object.  The fact is, however, that what they paid for was much more than the cost of the raw materials – it was the cost of the raw materials, plus all those skills, efforts, hours and smarts (put into an equation of expected sales volume, marketing costs, etc) that made up the price the consumer paid.  The consumer, however, placed their value on the physical product that they paid for, rather than the information or aesthetics that were portrayed via those physical media. When someone paid $15 for a CD, they said they paid $15 for a CD … not $15 for the music that Nirvana recorded and distributed to individual listeners for a cost that was below the actual cost of recording the music but was hopefully made up for (with little left over to pay for food) via volume.

Due to this idea of paying for the physical product rather than the creation within, it was easy for us to start viewing the actual media itself as the item with a price.  Therefore, when the media was no longer required and the new distribution options had little cost (I’m already paying for Internet access, why should I pay to access things via my Internet access) it was also easy for us to feel that the creations really weren’t something we should start having to pay for.  We didn’t pay for books before; we paid for the paper they were printed on and the shipping and the store shelf space.

The price was nothing. In the world of music, the new digital price actually started as nothing. The music industry wasn’t first to start offering their music online, but instead it was people – people who had been trained to think that the music itself really wasn’t what one paid for. After all, one doesn’t pay for the radio. So what happened was that by distributing music for free from the beginning, an anchor point was set for music to be worth nothing.  The fact that the music industry was very slow to respond with any sort of model on their own only reemphasized this idea.  The price at which music was available online was zero. There was no alternative – or if there was, people didn’t know about it.

A really simple explanation of the way pricing works is as follows: Costs are determined and volume is estimated. A profit goal is set. The minimum price should be equal to your total cost + your total profit goal, divided by volume (or units). Or, as a mathematical equation:

(Total Cost + Total Profit Goal) / Units = Price Per Unit

In today’s world of a digital economy, however, one can easily be led to believe that volume is potentially unlimited. Since the costs are only up-front for a creation that is distributed digitally (that is, the only costs are those costs to create the work in the first place – replication has no cost), and volume is unlimited, price can be set almost to zero and the profit goal can still be met, even as the profit goal reaches infinity. But if the profit goal is zero, and a lot of people have no profit goal (or if they do, they are assuming they can make a profit through another channel, perhaps through speaking engagements, branded automatic waffle makers, etc.), they can easily set their price to zero.

So when the monetary costs of raw materials are virtually zero, and one is willing to value their own time and work monetarily at zero, we end up with creations that are priced at zero. With a small percentage of a lot of people doing this, we end up with a lot of people pricing their content at zero.  There are also a lot of people pricing their content at prices much higher than zero. But regular people (consumers) are seeing a lot of stuff priced at zero. They then ask, “what’s with these people asking for monetary compensation?”

What happens is a product or service is set at a price, and if enough items are priced at that level for a long enough time, people accept that price as the price of the item. For example, if a pair of pants typically costs $70 at Banana Republic, one then assumes that a pair of pants at Banana Republic is worth $70. When the pants are on clearance for just $40, it’s a great deal – even though a pair of pants at JC Penny might only cost $40 normally.  By JC Penny setting their price at $40 normally they’ve set the value of their pants at $40 – so for their pants to be a great deal, even if they’re exactly the same as the ones at Banana Republic (in this example let’s just pretend they’re the same), they need to drop the price considerably.  The same was the case with CDs – when they cost $18 at Sam Goody and Best Buy started offering them for $12, Best Buy had the better deal. Suddenly $12 was a great deal – but over time, $12 started to become normal (the anchor point) and $18 seemed overpriced.

When music was offered for free online, an anchor was set. Other media, such as books or movies, was also susceptible, but didn’t catch on at the speed music did.  By the time the music industry was ready to compete they had to deal with this anchor, as well as the anchors they had set via the physical model.  A digital download of a song had some value, they argued, but that value was also less than the cost of a CD divided by the number of songs on it, since a CD also had physical raw material costs involved. As such, $.99 sounded like a fair price.

Still, more and more music is being offered for free – but this time it’s being offered for free by the bands, labels, etc. This is because, as I stated earlier, the easiest way to compete is by setting your price to free. By doing so you have set no barrier to entry other than the time it takes the user to download, the time it takes the user to listen (if they even do is another question) and the tiny bit of space it might take up on their hard drive if they save the song (which nowadays they don’t, since streaming is ubiquitous).

Of course, this phenomenon is not unique to music, but has expanded into all realms of content that can be recreated and distributed digitally. What’s happening though is that with more and more creations being set to a price of zero, the anchors are moving as well. Over time, the expected price for most creations will be zero.  This is the issue that the newspaper industry is battling now – and it’s the reason that Rupert Murdoch is setting up a pay wall for the Wall Street Journal. He has decided that his content has value – the work his journalists do has a cost – and their knowledge and expertise is actually worth something. This is why he’s charging – he’s attempting to reset the placement of the anchor.

Where anchors are set is purely subjective. Anchors are a battle of what creators want to be compensated versus what other creators are willing to sacrifice for their work. They’re a battle of what goals the creators are attempting to accomplish – is it to make money or to make a difference? Where they end up being set is ultimately a choice left to those who create, and what their goals are.

Whether consumers are willing to pay the prices asked is really a question of whether or not they have a cheaper alternative with a perceived value higher than the cost they paid.

But remember: the easiest way to compete is by offering a lower price. It doesn’t mean you’ll win the competition.

For further reading on the topic, check out this article by Monica Valentinelli.

What I want to discuss here, however, is from one single paragraph of the book.  It’s found at the bottom of page 102 (of the hardcover) and is part of Chapter Two, “What Will Money Be?” in a section labeled, “Pick Your Poison.”  In it, Lanier says the following:

“It is a common assertion that if you copy a digital music file, you haven’t destroyed the original, so nothing was stolen.  The same thing could be said if you hacked into a bank and just added money to your online account. … The problem in each case is not that you stole from a specific person, but that you undermined the artificial scarcities that allow the economy to function.  In the same way, creative expression on the internet will benefit from a social contract that imposes a modest degree of artificial scarcity of information.”

The reason I’ve deemed this specific quote worthy of its own write-up is this: it’s one of the most eloquent and comprehensible explanations of why everything on the Internet should not be free.

When something is free ad infinitum, whether or not it is free by the decision of the owner or simply by those people who don’t care and take it for free by their own volition, it immediately reduces the item or idea’s value by no longer being scarce.  One of the basic tenets of economic theory, and why things have value, is that scarcity, combined with demand, can cause the value and price of an item to rise.  Therefore, by creating something that individuals want, but by enforcing scarcity (even artificially), one can create something that has value.

In Lanier’s example above, money that is simply added to a bank account through hacking the system does not actually take money from anyone.  Instead, it has added additional money to the pool of already existing money, thereby reducing the value of money in general. If people did this enough, it would cause inflation, causing society as a whole to suffer, and could even lead to economic collapse. Even when the money is transferred digitally between accounts and individuals, it is money that has appeared out of thin air, and no one actually loses this money. It never existed in the first place, and will continue to never exist so long as it continues to exist in an intangible, digital form. What happens instead is money, in general, loses value due to lower scarcity, causing everyone to lose some by making the money they already had worth less than it was worth before.

By trading music or other creative works online, even though a physical copy of the work is not actually taken, from anyone, the value of that work is reduced through every duplication.  Of course, one could choose to allow people to copy and share their works, should the creator have another goal in mind other than monetary gain – such as to spread knowledge or joy, to promote their work with the plans to later charge for it or a related product, or simply to build ego by knowing others are accessing their work (whether or not people actually read or listen to all the free stuff they download online, or if those downloads are just a padding of numbers through potential audience, is another topic altogether). But, in those instances, the creator is still in control of his or her own work and will hopefully be aware of how reduced scarcity will affect the perceived value of their work.

It’s in Lanier’s last sentence above that he speaks the most truth when he says, “creative expression on the internet will benefit from a social contract that imposes a modest degree of artificial scarcity on information.”  This, however, will only happen when people begin to agree once again that creative works and information have value in the first place. It will only happen when people grow to respect that value and the work creators and intellectuals put into making their works and thoughts worthwhile.

It’s been over a decade since Napster first launched, and although there have been steps forward in policing of intellectual property, new distribution deals and other major changes to the Internet, the fact remains that people steal a lot of stuff online.  Some may argue that sharing files or piracy isn’t stealing, but really, it is (of course with the exception fo file sharing of material that is approved for sharing). The simple fact is there are a lot more people online now, and it’s still easy to access unlicensed copies of copyright-protected material.

The point is to keep this truth in mind as you decide how you’re running your business.  Until there’s some sort of serious crack down by the government, or people suddenly have a major change of heart, they’re going to be taking your stuff without your permission – not everyone, of course, but a lot of people.

Some people who “steal” online do it knowingly, and maliciously – but that’s not the case for everyone (and I’m willing to bet those “thieves” are actually a very small minority).  The bigger reason behind this is that you, as a copyright holder, probably aren’t giving them another option.  The Internet generation has been trained to expect things instantly – and when they don’t get it instantly, they’re going to figure out a way to do it.  They’re an ingenious bunch – just take a look at most of the more notorious examples of services that have been scrutinized for distributing copyright materials without a license.  Names like Napster, YouTube, Scribd, Docstoc, Grooveshark, and even The Pirate Bay.

The thing that all of these services have in common, what really drove their popularity, was not simply that what they had to offer was free, but rather what they had to offer.  They had content available that people actually wanted to be able to access.  Not only this, but they had pretty much everything people would want to access.

Hulu has been successful so far, in terms of visitors and in terms of monetization, but only to a point.  Their ultimate weakness is in not having all content available from all the television networks.  Not only this, but the content they do have is still somewhat limited (for instance, FOX only allows a few episodes of Glee to be broadcast).   For the rest of that content, what are people supposed to do?  Not everyone wants to buy the entire series of Glee on DVD or wait to have it delivered via Netflix (it’s on “Very Long Wait” right now, by the way) – but FOX isn’t giving any other option.  Hulu has shown there are ways to monetize the content – and based on the successes of services like iTunes, we know people are willing to pay for content they want to access.

The problem here is that the copyright holders are unwilling to license the channels that allow people to access the content they want to in a way they prefer.  If you’re a musician and you don’t want to license your music to online services, you need to accept the fact that people are going to find other ways to access it that might not match with the way you’re trying to force them. If you’re a publisher and don’t want to license eBooks, people are going to start looking for the places where they can get the books they want anyway.  People want immediate access, and they’re willing to pay for it – but the second you start telling them “you’ll have to buy the physical copy” is the second you’ve very likely turned a customer into a potential pirate.

Don’t let ideologies or past behavior guide your future. People’s buying behaviors are changing, but if people value what you have to offer they’re likely to pay for it.  You just need to let them access it through methods they prefer.

People are probably going to steal your stuff online. Remember that, and try to give them a better alternative.

This is because, on February 12, 2010, the Department of Justice announced a “New Intellectual Property Task Force as Part of Broad IP Enforcement Initiative.” (Read the press release)

As a firm supporter of intellectual property rights, this is great news – especially in our current economy.  As it becomes more and more clear that the old economy based on the industrial revolution (read: factories) is dying, it’s becoming increasingly important for our citizens and government to understand that the biggest and most valuable export from the United States is not any physical product we create, but rather Intellectual Property.

According to a recent report from the International Intellectual Property Alliance (IIPA), core copyright industries accounted for $889 billion (6.44% of GDP) between 2006-2007. Foreign sales and exports from core copyright industries were also higher than other industry sectors. As of 2007, foreign sales were about $126 billion.  Expanding out from just the core copyright industries (theatrical films, TV, DVDs, business and entertainment software, books, music and sound recordings), the value of total copyright industries in 2007 was $1.52 trillion, or 11.05% of U.S. GDP.

“Americans produce more technologies, more brands, more creative works and more innovation than any other nation on Earth,” said Victoria Espinel, the U.S. intellectual property enforcement coordinator in the official DoJ release. “President Obama is committed to ensuring that the value created by American workers and enjoyed by communities around the world is protected. The Justice Department’s new task force will play a critical role in supporting the Administration’s ongoing efforts to protect American intellectual property and the millions of jobs that depend on it.”

The basic truth here is this: our economy depends on Intellectual Property.  We’re a country filled wth brilliant and creative individuals, and this is where we are going to continue to grow.  Without enforcement of Intellectual Property rights, we’re at risk of a much larger economic collapse than we’ve ever imagined – as we’d be destroying our own future.

“Theft of intellectual property does significant harm to our economy and endangers the health and safety of our citizens,” said Vice President Biden. “This administration is committed to stronger and stricter enforcement of intellectual property rights, and this new task force is a step in the right direction.”

I agree completely.  Please take the time to think about this yourself, rather than just have a knee-jerk reaction about how much you might dislike “big content.”

The government is actually doing something to protect our future here, and that’s commendable.

To be honest, at first I really wasn’t very interested in reading his book. The cover art definitely screamed indie, and the premise seemed a bit cliche (man’s life sucks, is presented with chance to change), and I am also usually pretty wary of author’s soliciting their works to me to read.  (I already have quite a few books on my to-read list.)  But Rogers and I emailed back and forth a few times (full disclosure here) and I told him that if he put it up on Kindle I’d maybe read it.  He did, he emailed me, and I went ahead and read it.

The thing is, this really isn’t my kind of book.  From some of the reviews out there he supposedly has some similarities to Bukowski, who I’ve never really cared enough about to read (and therefore can’t comment as to if he really is like Bukowski).  I will say this though: Celluloid Cowboy is really damn weird.

I hated the main character. I would absolutely never want to know someone like him (actually I have known people somewhat like him, and make it a point to avoid knowing them now). He has no purpose to life, he gets caught up in violence and murder and sex and disgustingness far too often – and yet somehow he’s supposed to have some resonance with the reader as someone who really does have a chance at redemption. He’s a bad person and pretty much everyone he comes into contact with in this book is a bad person… but I kept on reading.  Something here pulled me in, and Rogers made me really want to see how everything would play out in the end.

The thing with Celluloid Cowboy is that I could really never see this being published by any respectable publisher. It’s just too plain whacked out to fall into anything I could see a publisher feeling safe distributing – which is why I give a lot of credit to Rogers for putting it out on his own imprint, Black Coffee Press. This is exactly what independent publishing is for: to take chances and write something daring and original – avoiding that attempt to appeal to a specific target demographic that some major publisher is trying to sell to.

Celluloid Cowboy is destined to find an audience, so long as those who read it share the word – and that’s what I’m doing. It’s not going to change your world, but if you’re down for a quick gritty read, I absolutely recommend it.

By the way, if you own a Kindle you can get your copy for just $1.59 (at least that’s the price right now).  Go get it.

If you’ve taken this step, you’re a business – and you need to start acting like one.

To be a creator doesn’t mean you have to be creating a tangible item either. You could be running your own blog, review website, etc. – and if you are doing it with the intent to make money – and even if you’re not currently making a profit or doing it full-time – you need to treat it as a business.  And, during this time of the year, that means claiming all of your expenses in your tax return.

During my college days I launched and ran Music-Critic.com (I sold it years ago now) – and I ran it as a business. The fact of the matter is that if you’re going to make any money from a venture, you have to pay income tax on that money. This is why you are required to supply your tax ID or Social Security number when you sign up for affiliate programs, Google AdSense, publishing through sites like Lulu.com, and any other instance where an entity is going to be sending you a check.  At the end of the year, if they’ve sent you any money, they’re also going to send you your tax information – which you are required to include in your tax filing.

But whether or not you actually did make any money in the first year or two doesn’t mean you’re not running a business. If you honestly are attempting to make a profit from whatever you are doing (in my current instance, writing a book), then you need to start treating this venture as a business now. Beyond the mindest that running a business requires (seriousness, professionalism, etc.), you also need to run it right financially. And again, at this time of the year, it means writing off any expenses you put into it in the previous year.

The following are some examples of things that you should be deducting. Keep in mind that in all instances the primary use must be for your business though. Also, it is highly recommended that you keep any and all receipts and documentation you can, should you ever be audited.

• New Computer
• Software (Photoshop, Microsoft Office, etc.)
• Mileage Driven for Business
• Postage and Shipping Materials
• Review Copies
• Advertising Costs
• Real Estate for Home Office
• Internet Access Fees
• Stock Photography or Videos
• Web Hosting
• Travel
• Conference Fees
• Consulting Fees

Of course there are many more items you can claim – basically, if you spent money for your project, claim it. Eventually you need to be making a profit on the business, but like any business, the first few years are likely to cost you more than you earn. Over time, if you’re doing things right, you’ll start to make a profit. If not, then you’re going to have to stop filing the expenses for it in your taxes though, as it will be questionable as to whether it really is a business or a hobby.

For all of this, if you have questions, definitely talk to a tax professional.  They can help you out, and are well worth the cost. This year I went from owing several thousand dollars to getting  a refund of several thousand dollars – all due to the fact that I claimed my deductions where they were due.

One final tip: do not cheat on your taxes. There are plenty of absolutely legitimate ways you can save on taxes at the end of the year simply by doing what you are supposed to do.