Lots of debate, lately, about Big Media and their bumpy transitions from analog incumbents to digital providers. Over the past few weeks we have had debates around the proposed PIPA and SOPA legislation, Rupert Murdoch (that bastion of new media savvy) railing against Google as a “pirate” and @fredwilson chiming in on the predictable monopoly actions of his cable company, Time Warner Cable in their dispute with MSG Networks. Yesterday Fred posted his views on the weaknesses of Big Media extending their scarcity business models to the internet.

My long-time opposition to scarcity models for digital media content online is well established on this blog and before that at Apple, N2K and eMusic. One thing Fred mentioned inspired me to revisit this subject, and that is market size. Fred says,

But the studios themselves are likely to do better in a direct distribution model where they reach a broader market at lower effective prices to the end customer. This is what happens in digital distribution. Prices come down, markets expand, customers see lower prices and broader availability. Producers do better. Everyone else does worse.

A bunch of things happen when analog media markets go digital. First, prices come down. The cost of distributing digital content is far less than physical goods that used to carry that content (printed books, plastic CDs and DVDs, etc.). Consumers understand that and expect prices to fall. The music industry hated selling songs for $0.99 when CDs used to sell for $18. But almost no one bought tracks for $3.49 when digital music was first sold online. At $0.99, consumers bought a lot. Next, bundles break. Consumers expect to pay to hear or watch only the songs or episodes they want. TV shows sold as 22 episodes on a DVD for $49 will fail when you can watch any episode for $0.99. Consumers don’t like bundles when they have a cheaper alternative. And then competition increases. Because the old guard doesn’t have monopoly distribution anymore, lots of alternatives enter the market. Consumers get more choice. These are all good things.

But finally, and this is where my view diverges with Fred’s, markets shrink. I used to posit that when content is offered widely online with few restrictions, more of it will be sold. But because prices fall, bundles break, and competition increases, I think the legacy content owners end up with smaller markets. They may reach more people, but in many cases they will ultimately make less money per title.

This is not necessarily a bad thing. Since it costs almost nothing to distribute it digitally and the cost of online marketing is far less than on traditional media, content creators can still have great businesses and make lots of money. But the main reason, I think, so many legacy content companies resist the new digital markets and their new business models, is because their businesses will shrink. And that means significantly changing your cost structure. Fewer private jets and executive dining rooms with 4-star chefs (remind me to tell you about my lunch at News Corp a few months back…)

Because the new economics are scary, the incumbents resist it. But the startups embrace it. And this is why we do what we do. As digital media entrepreneurs, we are not working to preserve a legacy business model, we are hoping to create new ones.