I have often wondered why we spend so much time wrestling with the issues related to Marketing in the 21st Century, with reframing IPR and DRM, and with “net neutrality“. Why we land up with starkly polarised views and start calling each other names. Blefuscu and Lilliput all over again.
And recently, I’ve begun to think it’s about Doc’s Because Effect. More precisely, it’s about people unable to cope with the Because Effect.
What we are seeing are people who are running scared, paralysed, sometimes not willing, often not able, to make the move from making money with something to making money because of something. So they try and build walls around whatever it is they made money with, and try and build laws that will keep those walls in place, and try and claim that anyone who disagrees is a pinko lefty criminal tree-hugging utopian no-hoping loser.
Take a look at what Peter Drucker said in the context of marketing:
- It is meaningful to say that “product A costs X dollars”. It is meaningful to say that “we have to get Y dollars for the product to cover our own costs of production and have enough left over to cover the cost of capital, and thereby to show an adequate profit.” But it makes no sense at all to conclude, “… and therefore the customer has to pay the lump sum of Y dollars in cash for each piece of product A he buys.”
What Drucker is referring to is the fallacy inherent in directly correlating what a customer pays for with what an enterprise wants, even sometimes needs,Â to receive. Drucker continues:
- Rather, the argument should go as follows: “What the customer pays for each piece of the product has to work out as Y dollars for us. But how the customer pays depends on what makes the most sense to him. It depends on what the product does for the customer. It depends on what fits his reality. It depends on what the customer sees as ‘value’ “
That’s what part of the Because Effect is about. Google doesn’t make money from search. It makes money from advertising. So Google gets their “Y dollars”, and “how the customer pays depends on what makes the most sense to him”.
You can see it as part of Christensen’s Innovator’s Dilemma. People didn’t buy encyclopaedias, they assuaged guilt to the tune of $1500. So when they could buy a PC and a disk containing an encyclopaedia for the same $1500, they “paid it, depending on what made the most sense to them”.
You can see it in the kids who pay $4.99 for a ringtone yet won’t pay $15 for a CD.
You can see it everywhere.
Back to Drucker. He said:
- Price in itself is not “pricing”, and it is not “value”. But this is nothing but elementary marketing, most readers will protest, and they are right. It is nothing but elementary marketing. To start out with the customer’s utility, with what the customer buys, with what the realities of the customer are and what the customer’s values are — this is what marketing is all about. But why, after forty years of preaching marketing, teaching marketing, professing marketing, so few suppliers are willing to follow, I cannot explain.
What Drucker cannot explain is what I have found hard to understand. And why I am Confused.
Enough about Marketing. Let’s take patents. One way of looking at patents is that they provide an inventor with an artificial monopoly rent. This monopoly rent allows the inventor to create a difference between the cost of production and the price charged to the customer. In effect, the patent allows the inventor to make money with a product rather than because of it. [For a short time, as With moved to Because].
This was reasonable, a short-term artificial basis for inventors and their firms to recoup their investments and their costs of capital. First-mover disadvantage was neutralised and everyone was happy.
In the old days, most of research was done in universities and academic institutions. They thrived on knowledge, on sharing knowledge, it was their life-blood. And, for the most part, they had no patents. Yet they shared ideas. Sometimes the ideas needed considerable capital injections before they could see the light of day as inventions, and so we had patents. In this context you could argue that the monopoly rent was used to offset the costs of research. Perfectly reasonable.
Even then, there was a considerable time delay between the issuance of a patent and the commercialisation of the invention. In many cases the commercial product came into existence around the time the patent was ending anyway. Which meant that the artificial monopoly rent disappeared at the right time.
Now cycle times have changed, the gestation period between concept and patent and commercial product is small. The capital costs have changed, much of the need is intellectual rather than land or capital. Production costs have changed in a digital borderless innovating-on-the-edge networked non-hierarchical world.
Patents are still pending while the commercial product meanders towards obsolescence. There are offensive patents, defensive patents, frivolous patents, spam patents, shyster patents trying to take public domain things private, more patents than the population of China. Patents trying to create monopoly rents in order to defray nothing at all.
And so we have high costs to do with patents. More patent lawyers than the population of India and China. An expensive meaningless discovery process. An inability to define what the thing is, an inability to prove or disprove prior art. And guess what, someone needs to recoup all these costs.
Have we reached a stage where the true reason for a patent’s monopoly rent is actually to recoup the costs of the patent process and nothing more? I wonder.
It’s back to The Because Effect. Customers will pay because they get value. It is up to them how they pay. And firms that understand that will land up recouping their costs because they have happy customers. Firms will not recoup their costs via lock-ins and artificial monopolies. Especially costs that shouldn’t exist in the first place. Costs to do with production and distribution. And patents. And windfall expectations.
The same happens when people argue about who is going to pay for Stevens’ Tubes. [By the way, talking about Senator Stevens, have you seen this? Or, in the context of IPR, this? Or, in the context of DRM, this? Laughable.]
A coda: Peter Drucker on Marketing. Again.
….That after twenty years of marketing rhetoric consumerism could become a powerful popular movement proves that not much marketing has been practiced. Consumerism is the “shame of marketing“.
Consumerism is the shame of marketing. And IPR and DRM.