Information Week’s Mitch Wagner posts an excellent question to the internet community. Are there any examples of a company fighting piracy and launching lawsuits as a successful business strategy?

Wagner has several examples of the opposite; where lawsuits only alienate customers. He begins with Hasbro’s recent takedown of the popular Scrabulous game on Facebook to launched its own unpopular Scrabble game, coving the music industry and Garfield.  Matt Mason’s “The Pirate’s Dilemma” is a book length list of examples of lawsuits hurting businesses.

There are even examples of companies embracing piracy to improve their businesses.

So does anyone have an example of lawsuits helping companies?

[Via Techdirt]

Chris Anderson tries to tally the free economy, counting the money made from advertising, “buy one, get one free” gimmicks, and free services subsidizes by paying customers (like Flickr or MYSQL).  The numbers are huge, talking hundred of billions of dollars in each category, if not trillions.  Anderson’s point is that free has been a business tool for a long time, using infinite goods like TV shows or loss leaders to sell more valuable scares goods.  Companies used to charging large amounts for their goods, like music and movie companies, are finding it hard to understand the free economy and how much money can be made there.

Anderson is promoting his new book, “Free” about leveraging free as a business model and I’m hoping he leads by example, proving the point of his book through his own leadership.  “Free” isn’t due in stores until next year when I hope the book is sold extremely cheaply, subsidized by Anderson’s certain to follow speaking tour.  The promotion from the book would make Anderson a more sought after and thus highly paid speaker (time is a scare good).  Books have a higher marginal cost - the cost of printing, paper, binding, etc. - so some price for production might be need.

Anderson could also release digital copies of the book (and audio) for free online.  Matt Mason is doing just that (at least in book form) with his book “The Pirate’s Dilemma” about how file-sharing helps businesses make more money.

To further prove his point, Anderson could release his four year old book “The Long Tail” online for free (and lower the price on those $30 audio book copies).

This is a man trying to change the way companies think about business and the concept of free. I really hope he thinks about it himself.

Any web 2.0 business model must, by law, include five or more buzz words from user-generated content to API to social networking to get venture funding.  Companies are desperately trying to use social media like Facebook, Second Life, and even the iPhone to manufacture marketing and attention. The result is start-ups and established companies focusing resources because that’s where the hype is rather than where the smart business is.

Hype is the keyword here.  An already popular company like Facebook or Apple launch something new and obviously there’s hype.  But this hype is not contagious.  A former boss of mine said the reason we were developing an iPhone app before we had a mobile site was to “Get some attention when the app store launches.”

For start-ups limited in resources, jumping on the internet bandwagon is more often a waste and at best a distraction.  It’s best to focus on building your own features and worth to make sure once people find you, they want to stay.  Building applications for other platforms fragments your audience and time - what you build on Facebook needs to be rebuilt for the iPhone and rebuilt for Netvibes.

Second Life has become a prime example of hype overblowing marketing potential.  Last year, just as another company I worked for wanted to build a Second Life presence, Wired wrote about the marketing waste the virtual world had become. Coca-Cola, Reebok, IBM, Sears, and dozens more build huge islands with style and zazz, paying high-profile Second Life consultants and expecting the viral marketing to take off.  But no one visited.  The hype came from companies trying out Second Life, but no one ever posting resulting.  Since Second Life accounts are free, the 4 million users it boasts is misleading.  Only 1 million had logged on in the past 30 days and only a third of that in the past week.  Only 100,000 of those live in the U.S.  Those who do sign on spend most of their time in sex shops or gambling, not looking at marketing campaigns.

Facebook is likely to follow. Facebook itself is having trouble monetizing its massive user base, how do third parties expect to do better?  iPhone applications can be sold for money, which makes them less viral.  And working with any closed platform like Facebook or Apple puts the platform in control of your future.  Facebook suddenly blocked some of its most popular applications, Top Friends, Super Wall, and Social Me, with little notice and challenges to get back in the platforms good graces.

The opposite strategy of releasing your own API is more worth the time (if it makes sense for your product and not just a buzz word for investors) but has its own risks.  Twitter’s success and constant downtime are both due to their API.  Without the API, much of the sites usefulness wouldn’t have happened leading so many to join.  But because of the API’s popularity, the site can barely keep basic features operational.

So this is a lot of don’t.  The dos, unfortunately, are the hardest because it needs to be case-by-case.  Because there are so many platforms and APIs and doodads to try and sync up with, it’s impossible to say everyone should do this.  The key is when deciding how you want your product to integrate with the greater web world, think about your own strength and goals rather than bullet list features.  Everyone is pushing the same bullet lists.  You’ll stand out more by not.

There’s been a parade of newspaper layoffs from these past few weeks, big and small, with cuts upwards of 10 percent of each paper’s workforce.  What’s puzzling is how constant layoffs are going to help the industry.  The philosophy seems to be charge more for less.  They’ve been trying this for almost ten years and yet here come more layoffs.

How are these layoffs meant to help the companies and industry?  Many leaving these papers are excellent journalists.  Why not have them write for the website?

Newspapers still view their websites as supplements to the paper rather than extensions of each other.  It’s frustrating going to a newspaper’s website looking for news and only finding the top stories from this morning, without links or ways to find more information.  All these people newspapers are laying off could be generating content, from blogs to exclusive articles that keep the website fresh and connected.  I can’t understand why all columnists and journalists don’t blog.

Newspapers aren’t dying.  Just big ones that charge too much for too little.  Free dailies have been steadily growing in the United States after years of success in Europe, helping bring in new readers who don’t read regular newspapers.

Newspapers need to plan long term.  That’s hard to do with investors watching every quarter, but no one’s going to be happy with another 10 years of plummeting revenue.  They should use the staff they already have, train them, and build quality on and offline news organizations.  Try offering more than less should be the first step.

Matt Mason’s book, The Pirate’s Dilemma, goes into book-length detail about many of the copyright and file-sharing issues I so cavalierly lambaste. Mason is leading by example by releasing digital versions of his book online for a set-your-own price model.

Why would an author give away a book for free? Obviously it makes a lot of sense given the arguments in this particular book, but it’s true for all authors that piracy isn’t a threat, it’s an opportunity.

There are millions of books on amazon.com, and on average each will sell around 500 copies a year. The average American is reading just one book a year, and that number is falling. The problem (to quote Tim O’Reilly) isn’t piracy, it’s obscurity. Authors are lucky to be in a business where electronic copies aren’t considered substitutes for physical copies by most people who like reading books (for now at least).

By treating the electronic version of a book as information rather than property, and circulating it as widely as possible, many authors such as Paulo Coelho and Cory Doctorow actually end up selling more copies of the physical version. Pirate copies of The Pirate’s Dilemma are out there online anyway, and they don’t seem to have harmed sales. My guess is they are helping. To be honest, I was flattered that the book got pirated in the first place.

Media and software companies release reports that piracy costs them billions of dollars, destroying their business, funding terrorism, or hurting poor farmers. These companies lobby governments to pass laws, sue fans in court, or ask people to spy on others in order to prop up business models that are becoming obsolete. Companies should stop fighting piracy and treat it like any competitor - by competing and out innovating file-sharing services to provide a better value allowing everyone to make more money.

Matt Mason promotes this in his book, The Pirate’s Dilemma, calling piracy a sign of innovation as pirates experiment to make processes more efficient.

Some of America’s greatest innovators were thought of as pirates. When Thomas Edison invented the phonographic record player, musicians branded him a pirate out to steal their work and destroy the live music business, until a system was established so everyone could be paid royalties. Edison, in turn, went on to invent filmmaking, and demanded a licensing fee from those making movies with his technology. This caused a band of filmmaking pirates, including a man named William, to flee New York for the then still wild West, where they thrived, unlicensed, until Edison’s patents expired. These pirates continue to operate there, albeit legally now, in the town they founded: Hollywood. William’s last name? Fox.

New technology has repeatedly challenged media companies, from Edison’s phonograph to television to cassette tapes. After lawsuits attempted to quash the innovation, media companies embraced the new technology and found new revenue streams, making more money as a result. The home video market Hollywood so desperately defends now would never have existed had Universal and Disney’s lawsuit against Betamax succeeded. Instead of suing file-sharing networks, media companies need to embrace the new technology as a new way to make money.

The current state of media and software is quite good. Media companies are making more money every year. Even the music industry is making more music while more people are listening to music. The recording industry is plummeting at a rate so fast piracy cannot be the sole factor, as studies have shown.

But piracy has become an obsession for media and software companies, hurting themselves and their paying customers with DRM and restrictive policies that limit the value of their products. Microsoft, Google, and Major League Baseball have all discontinued DRM serviced, meaning people who legally paid for goods no longer get to use them while pirates continue to download DRM-free goods for nothing.

Piracy offers a compelling alternative. Piracy offers unlimited free downloads of an almost complete collection of every movie, song, TV show, book, or game ever made using a variety of easy to use programs. Pirated content has no DRM, meaning you can put your music and movies on every computer and portable device you own. On the down side, pirated content is has unreliable quality and inconsistent download speeds, but since its free, these are minor negatives.

Why should someone pay for a service with less services?

Media and software companies need to recognize piracy is not going away - it’s a competitor. No matter how many lawsuits the RIAA, MPAA, and BSA file, piracy grows. These lawsuits increase publicity for many sites and services, working against the lawsuit’s purpose - Pirate Bay, the leading BitTorrent tracker, is now one of the 100 most trafficked websites thanks to publicity from these lawsuits. And for every file-sharing service closed down, dozens more pop up. File-sharing is too useful and thus valuable.

To compete, media and software companies will need radical changes to their business models. Techdirt’s Mike Masnick constantly refers to leveraging infinite goods to sell scarce goods.

In a competitive market, the price of a good is always going to get pushed towards its marginal cost. That actually makes a lot of sense. As competition continues, it puts pressure on profits, but producers aren’t willing (or can’t for very long) keep selling goods at a direct loss. Sunk (or fixed) costs don’t matter, because they’ve already been paid — so everything gets pushed to marginal cost.

Movies, music, and software have high upfront costs but negligible reproduction costs - it’s as simple as copy and pasting a file.

This means leveraging infinite goods to sell scarce goods, like concert tickets, collectable merchandise, or advertising (people’s time and attention is very limited). $20 for DVDs and CDs worked under the old, obsolete business model. The new media economy requires new business models that offer more value to consumers. Plastic discs don’t offer $20 of value anymore, meaning new price models and revenue expectations need to be developed. Just because the recording industry used to be making $10 billion a year doesn’t mean is deserves to always $10 billion. As Masnick points out, should the automobile industry be blamed for putting horse-drawn carriages out of business? The industry has to innovate and adapt to market forces to continue making that money. That’s how capitalism works.

Several progressive artists and developers are experimenting with new business models. Radiohead’s pay-your-own price for their new album was a good start. Trent Reznor of Nine Inch Nails earned $1.6 million in one week selling special editions of his new CD, a CD that you could also download for free. Indie record label Fueled by Ramen used viral marketing to build valuable brands around its bands rather than relying on disc sales. The potential for rewarding business models exists, but will require risk and experimentation and an understanding of the evolving marketplace. Media and software companies need to recognize what their customers want and give it to them. Suing isn’t the answer. Embracing is. And that’s how both piracy and business can win.

I updated my Twitter status which, through TwitterSync, updated my Facebook status. Facebook, in turn, updated my FriendFeed with that status, but Twitter already updated FriendFeed. Suddenly I realized data portability is closer than we think.

A few weeks ago I wrote about the Info Wars brewing between the social networks on their desire to control our information. MySpace, Facebook, and Google launched their own social networking networking service, allowing users and 3rd-parties to access information inside each walled garden. Facebook quickly blocked Google’s service claiming privacy issues, an attempt to protect its users.

Facebook forgot its API already allows an immense amount of access to user information. Many leading social sites offer APIs, or application programming interfaces, that allow other sites to integrate each other’s systems. Facebook, for all the criticism of its walled garden mentality, is able to import data from many sites and external sites, like FriendFeed, can have data exported. I can’t move all my friends from one site to another…yet. But smaller social networks like Twitter are almost completely functional without ever going to Twitter.com.

The dream is control our content. Now we can just manipulate it. It’s a start. And competition, from new and old and in between social networks will force more open standards that make every site more valuable to users.

eBay’s early years capitalized on the unique strengths of the internet, building a multi-billion dollar enterprise off of auctioning everything from broken laser pointers to movie scripts. Business Week’s Catherine Holahan sees a change in eBay’s business, moving from auctions to now earning half its revenue from the Buy it Now option where the seller sets the price.

eBay’s growing reliance on fixed price sales leads to question why auctions are dying off. It seemed the internet was built for auctions, allowing a large number of people to sell and buy as they wished. Holahan writes auctions initially had novelty and excitement that has since died down due to power users gaming the system and leaving average Joe’s without empty-handed. Buy it Now is stress-free. Michael Masnick points out eBay now has more competition, where low auction prices are now competing with every discount retailer online. Nick Carr claims eBay was just a fad, but if that’s true, it was a huge $40-billion market cap fad.

I agree with Mathew Ingram’s point that auctions work for some things, not others, and eBay needs to balance the auctions with new business models. The challenge will be convincing people it’s more than an auction company.

I think eBay has more problems than that, specifically Amazon’s claimed a great deal of the retail space eBay could have dominated. eBay introduced store fronts to give small retailers online spaces without the vast expenditure, but Amazon’s service is much more developed. eBay can try competing head on with Amazon, but playing catch-up is never fun and rarely effective (good luck Microsoft). eBay’s stumbled with its expansions, acquiring Skype and StumbleUpon without effective synergies (and now rumored to be trying to sell Skype). Evolving from pure auctions to some kind of e-commerce giant will be challenging, but hopefully invigorating to the industry. Plus, it’ll be good to give Amazon some more competition.

The most talked about new web 2.0 sites, from Facebook to Twitter, are facing business model challenges. Scott Karp points out the challenge of print advertising online while Alexander van Elsas goes farther in his post “Advertisement holds web 2.0 in a death grip.”

Web 2.0 has focused on free services - free services that build virally fast and then, hopefully lead to a business model when the venture capitalists get impatient. But banner ads and tier subscriptions aren’t enough.

Advertising, as Karp and van Elsas point out, isn’t useful. Google pioneered ads that use your search terms so they are relevant and unobtrusive, whereas the only thing Facebook can sell me are gay dating sites (Google advertises better ones). The challenge isn’t simply advertising isn’t working, but that you can’t charge people for your services.

Most web services offer a paid option with valuable features. Remember the Milk charges $25 a year just to sync my tasks to my phone. Yahoo Mail wants another $20 to give my email portability. Each service doesn’t cost too much, but add them up, and suddenly the internet got expensive.

Bernard Lunn says social networking “is at a major fork in the road” (leading to web 3.0?) where they have to choose between walled gardened, open APIs, or mix. All the free on the web will need a business model, and every site from social to content providers will find charging customers harder and harder and advertising spread thinner and thinner.

Google’s strength came from reinventing advertising to its strength - search - creating a unique model that let companies and individuals advertise without upfront costs. Amazon and eBay have built retail businesses that couldn’t exist in brick and mortar stores. Most other sites have relied on 7-8 figure buyouts to make money.

Other websites will need to find new business models. Some ideas like market research and statistics, like I discussed for Facebook and other social networks, make excellent use of their large user bases, but will lead to a decrease in value when every social site starts offering this research. Further, with open source and APIs all the rage, regular pageviews will become less reliable as people use services how they want, not how the websites want them to. For example, advertising will work even less for content providers once RSS readers takeover the mainstream.

This is a lot of doomsaying without many solutions. I think sponsorships and product placement has potential, but again, it’s going to be impossible to control users. The best business models thus far have been enterprise level customer service, best seen in companies like Red Hat which provides customized Linux solutions and and MySQL’s Enterprise Unlimited. Companies will pay for customized services and research which individuals have no use for. Less than one percent of MySQL’s customers pay, but that was enough for Sun to pay $1 billion to buy the company.

The focus over the next few years needs to be on developing new and hopefully revolutionary business models that recognize the internet, software, and content want to be free (yes, even music and movies). The old business models required payment, but the future doesn’t have to be constrained by old-fashioned thinking. Think outside the tubes.

Microsoft ruled desktop computers but now can barely get people to visit its website without paying them. Tim O’Reilly effectively sums up Microsoft’s problem:

Microsoft was once motivated by its own Big Hairy Audacious Goal: “a computer on every desk and in every home.” They achieved that goal, and ever since, they’ve drifted. Now their only goal seems to be to stay on top of the heap. They need to stop focusing on eating other people’s lunch and start thinking deeply about what kind of goals might stretch the company once again.

This past month has show Microsoft’s tunnel vision when it comes to the web. The company failed to acquire Yahoo (which was probably a good thing for both companies). Then, Microsoft offered cash back to users of its product search, feebly thinking this would steal customers away from Google. Microsoft ignored the fact that its product search is inferior to Google and didn’t offer enough money to make the step down worth it.

More subtly, Microsoft announced it was ending its book scanning project, leaving the endeavor to Google. Alex Chitu explains:

In other words, the book search engine didn’t make enough money and Microsoft decided it’s better to focus on areas that are more profitable. Instead of improving their search engine with valuable content from books and offering better search results, Microsoft chose to make decisions based on the short-term profits.

But that’s not all. Microsoft also decided to remove several games from its Xbox Live store because people couldn’t find the games they wanted. Apparently, Microsoft’s never been to Amazon.com or it would realize the benefits of the Long Tail and maybe fixed its user interface instead of depriving itself of additional revenue.

This is a lot of mistakes for one company to make. None of these seem like poor ideas over the short term, but they show Microsoft can’t look past its next earning’s report. Google, in comparison, lets its ad service support a research factory of innovation where products are unleashed with the idea for monetizing a distant thought for the future. Google News, Docs, Apps, Notepad, and Reader all have no advertising.

O’Reilly suggests Microsoft needs to define its long term goal, something that doesn’t put it in direct competition with Google, even outsourcing search. I don’t agree Microsoft should give up on search, mostly because I don’t want Google to have a monopoly on search (competition good, remember). But it’s true Google’s already doing well with the “Organize all the world’s information” goal.

Microsoft needs something new, that doesn’t rely on the walled gardens that made it the powerhouse it is. The next stage in computing won’t allow Microsoft to live off overpriced software like Windows and Office; not when free, open-source and online alternatives offer compelling alternatives. Buying Yahoo or Facebook isn’t a strategy unto itself, but needs to be part of a long term goal that recognizes both short term and long term benefits. Microsoft itself needs to change, and that change will happen over the long term.