Scarcity by Design: Artificial Constraints in Digital Goods
Many people think that the creation of online content, ranging from video clips to artwork to documents to music, is unlimited. However, there are increasing constraints on this production. As the tools to create digital content become more widespread, restrictions will emerge to protect tech companies and existing content creators from unwanted competition from amateurs. For example, services that are currently free for all Internet users to enjoy, such as many AI platforms, will become subscription-based.
Loss of Free Tier Programs to Create Digital Goods
At first, some companies offer their programs and software to users for free online. However, instead of this being pure generosity, it can be more of beta testing and free marketing. If the product proves popular, the free use status can be eliminated and users are required to purchase a subscription. By this point, the company has ample user data to fine-tune its products, as well as user-generated content that shows the effectiveness of the software. Initial free users may have created digital goods for free, but also advertising for the tech company.
Beta to Paywall Pipeline
Some Internet theorists call the evolution of free software and websites into paid subscriptions the “beta-to-paywall pipeline,” lamenting that anything popular and useful will inevitably be monetized. A classic example is the AI image generator Midjourney, which went from free use to subscription in 2023 due to high consumer demand. Other software has remained free for basic users, but put more advanced features behind paywalls for paying subscribers only. Thus, in terms of creating digital goods, the goods that might be sellable (documents, artwork, entertainment) require features that are increasingly only for paying subscribers.
Economics of Paywall Constraints in Digital Good Creation
Why are constraints being imposed on Internet users’ ability to create digital goods? Simply, websites and tech companies need revenue to stay in business. While few consumers would begrudge brick-and-mortar businesses for not offering services for free, it sometimes seems like an affront for a website to now charge subscription fees for features that were previously cost-free. This likely stems from many online services being free-use during previous decades. Unlike brick-and-mortar businesses, which typically need to make revenue immediately, websites are often able to operate for a considerable period on start-up investment funds due to their low marginal costs.
Maturity Leads to Monetization (Company Incentive to Constrain)
Just like new brick-and-mortar businesses may run promotions, give steep discounts, and even offer free samples to quickly capture market share, online businesses may similarly allow Internet users to access features for free. Once enough users are frequenting the site and using features that could be monetized, however, the “free” ride ends. The imposition of constraints on creating digital goods is simply a sign that these websites have reached maturity and have a stable user base. Websites can analyze user data to determine how likely it is that users will accept having to purchase a subscription, making the decision to put features behind a paywall data-driven and intentional rather than retaliatory or reckless.
Copy-and-Paste Leads to Demands for Uniqueness (Buyer Incentive to Constrain)
Another economic incentive for artificial constraints in digital goods is the theoretically unlimited nature of copy-and-paste removing the value from digital goods. Online, images and files can be copied infinitely. While tech companies want to monetize their software to make revenue, many Internet users may want constraints on digital goods to protect the value of what they have. This desire to possess unique digital products led to the NFT (non-fungible token) boom between 2017 and 2021, with individuals paying thousands of dollars for digital artwork whose ownership was immutably registered on the blockchain.
Blockchain technology is popular because it creates a digital ledger that is public and records all transactions, making ownership of any digital asset like NFTs or cryptocurrency un-erasable. Its popularity both reveals the maturity of the Internet and economic value of owning digital assets and the public’s desire for individual ownership of digital assets. Nowadays, Internet users want individual ownership respected instead of a copy-and-paste free-for-all, which helps explain why artificial constraints on digital good creation are increasingly tolerated.
Intellectual Property Rights Incentivize Skills Content Creators (Producer Incentive to Constrain)
Not all digital goods are created equal. Unfortunately, those who are more skilled and talented at creating digital goods have less incentive to continue doing so if their work can easily be appropriated by other creators. After all, why invest time and resources into creating high-quality documents, artwork, and entertainment if less dedicated content creators can simply right-click-and-copy your masterpiece? Thus, content creators themselves have an incentive to want popular creator features moved behind paywalls.
Skilled and dedicated content creators will find paying for quality software tools worth it to practice their craft, while amateur hobbyists will not. This imposition of artificial constraints on the creation of digital goods, therefore, helps “weed out” copy-and-paste amateurists from the market. This reduces the supply of digital goods and drives up the price, keeping full-time and dedicated content creators in business.
Welfare Effects From Higher Prices
Critics of imposing artificial constraints like paywalls and subscriptions on consumers argue that this reduces consumer surplus and harms low-income individuals. However, when prices were previously zero, it is difficult to determine how much those individuals truly value the digital products. In theory, when prices are zero, everyone will attempt to utilize the resource, creating a Tragedy of the Commons situation. Overuse of free digital services kept the value of digital goods extremely low, harming many of the same users who wanted to create these goods for sale.
Artificial constraints in digital goods helps the market by allowing the rationing function of prices to work and allocate goods to those who value them most. It sends signals to the creators of digital goods considered more useful and desirable to produce more of these goods, and less of goods that are not paid for. Quickly, this will reorient the Internet toward goods and services that are more valuable for consumers and firms. Currently, with lots of zero-cost but low quality goods and services, the Internet may not be giving users much value for their time and resources.
