The Costs of Free: Commodification, Bundling and Concentration

Abstract

Digital markets offer abundant free content but exhibit extreme concentration among content aggregation intermediaries. These characteristics are linked. In commoditized weak-IP markets, firms earn revenues by bundling free content for users with positively priced advertising services for firms. Intermediaries promote content commoditization, and the resulting reallocation of market rents from content producers to content aggregators, through free content distribution and political-influence activities that weaken copyright protections. The expected welfare effects raise concern. Scale economies, network effects, “infinite inventory”, ecosystem effects, and learning effects promote winner-take-all outcomes in the intermediary market while weak IP rights skew investment toward low-cost, short-lived projects in the content market.