CDs are dying, but the music industry is growing. Newspapers are dying, but journalism is thriving. DVD sales are dropping, but movie attendance is rising. Yet for all this, article after article says the music, news, and movie industry is dead or dying.

These industries are only dying if you classify them in ultra-specific and limiting businesses. CDs drop, but the music industry is selling more concert tickets and merchandise. The U.K. music industry’s own study (pdf) shows the music business overall has increased even though sales of record music has plummeted.  Even as newspapers suffer, hundreds of new journalism organizations are popping up producing original news, commentary, and fact-checking, all for a fraction of the cost, manpower, and time it takes traditional newspapers. And does everyone forget television news continues to grow in audience and revenue (well, at least cable news). And movies, well, attendance is up even in a down economy.

Technology and societal changes often causes radical shifts in how businesses do business. The death of selling plastic discs and packets of paper is, yes, dying, and for the time, these were the most effective ways to make money. With better computers and distribution channels, it is incredibly cheaper to make and distribute movies, music, and news articles.  This means more money to do other things. Or better, cheaper costs to consumers leading to a larger market – and then more fans to sell more stuff to.

The movie and music industries particularly have enjoyed monopoly pricing on their products, and without competition, fans paid the high prices. But competition from technology, even when used illegally, is forcing prices down. Originally, plastic discs were a scarce good the content industry could control, but the digital files on the discs are infinite goods now available free online no matter what.

Let’s remember, selling plastic discs (or records) for music is really only about 60-70 years old. Movies only entered home collections in the 1980s (and followed a significant legal battle where the movie industry claimed home video would destroy them). These industries made tons of money before and they can make even more money now by evolving their business models – recognizing they are in the music or movie or news industry, not just in the sell-discs-and-paper industry.

I love having all my media in one place: on my iPod, media center, or gaming console. Disc switching is so 2004. And slowly entertainment companies are getting it – we want digital downloads of our movies, games, and music. But they don’t understand how we want them priced.

I’m going to skip, for this article, the true economics of digital goods (they’re infinite in supply, they should be free). Instead, let’s start with making them cheaper than their tangible alternatives. Why? There’s a win-win situation here.

First, digital goods save the creator money. The is no packaging, processing, stocking, or shipping. A little hard drive and some bandwidth are all you need. This should all cut substantial costs out of the creator’s bottom line, and that’s savings worth passing along to the customer.

Consumers, while adding the convenience of fewer discs and more content, lack the ability to resell their digital goods, which research shows increases the initial value of tangible goods (you spend more on a car knowing you can resell it for some money, and the same applies to video games and DVDs).

So why are digital goods still priced so high (and by high, I mean, the same price as their tangible counterparts)?

Part of the reason is retail chains are eager to keep customers coming into stores and want DVDs and video games as weekly incentives. Creators might want this traffic for impulse (or non-technical savvy) purchases, but in truth, they are the losers in this arrangement. Creators fight for shelf space often paying premium dollars for ideal placement when digital stores allow for better navigation and unlimited shelf space.

Yes I believe digital goods will eventually all be free (it’s inevitable) and new business models will support their creation. For now, let’s just make the prices fair. Remember, BitTorrent has all this content available for free anyway.

I don’t know what will happen tomorrow, but I know it will be different than yesterday. Obvious, right? Even more obvious, the way we live today is different than 5, 10, and 25 years ago. This is how life works. So why do so many smart people want everything to stay the same.

Richard Corliss for Time Magazine, which alone is having trouble understanding the future of the news business, has several criticisms for Netflix and why it stinks, yet makes certain to contradict himself with his own article. Corliss, a successful movie critic for more than 30 years, has gone blind as to the future and why Netflix is not something to fight, but to embrace. Corliss laments the traditions internet features – no human interaction or leaving the house. Netflix is causing obesity.  It’s also why his local video store closes. Corliss also criticizes Netflix’s wait times (sometimes a whole day) and the dreaded “mail delays and the botched orders.”

Of course, all this is invalidated by Corliss’ own admission that Netflix “has the No. 1 customer-satisfaction rating among online retailers.”  Meaning for all these problems, people really like Netflix and the service it provides (which includes instantly streamed movies to your computer and TV, something he failed to mention).

Corliss, of course, is just about 10 years too late to criticizing Netflix. Does anyone really believe they’ll be renting discs from a store in the next 10 years?

Most of the criticisms against Netflix, Google, YouTube, blogs, and other “new” businesses trends toward the better than/worse now argument from people who were better than/worse now, such as news papers, recording companies, and brick and mortar retailers (and video rentals). But consumers are happy. They have more choice, more convenience, and lower prices leaving them with more time and money to do other things (that’s how an economy grows).

Just after I posted about a tiered model for fan supported video games, Techdirt has unveiled a tiered model of its own.  In order to prove that this tiered model can work, Techdirt is offering a variety of options, selling books, t-shirts, music, and at higher prices, the opportunity to have your business plan reviewed and even have Michael Masnick work for you. For $100,000,000, you can shut down Techdirt for a year. I wonder if there are any copyright maximists pooling their resources. Which tier do you like best?

I often get into arguments about why I don’t think piracy is wrong, but actually helpful to businesses.  The crux of many arguments, from newspapers to music to software, revolves around how people should be paid for their work rather than will people pay for that work.  This is a serious disconnect that explains much of the frustration many feel regarding new business models and free content.

Content creators argue they should be paid for their work. If they aren’t paid for their work, no one will make music, movies, investigative journalism, or video games. We’ll live in a silent, non-fun, corrupt world of animals on skateboards.

But this is not the economic reality.  In capitalism, people can try to make money, but there is no right to it.  600,000 small businesses are started each year and more than 50 percent will fail within the first five years.  No one should have to support these businesses. It’s up to each business to find a market need and fill that need.  While making money is obviously the goal, it is a side effect of effectively meeting a market need.

The content industry (I’m including newspapers and software) certainly filled important market needs – entertainment, productivity products, information and education, etc.  But they got used to a business model based on little competition and monopolies on distribution. The market has changed, but the market need is still there.  People will always want all these products.  But without the monopoly on distribution, consumers have more choice to market products.  More competition drives prices down, and this means for the content industry, the price of content is zero.  The value is still high, but there’s so much of it, you can’t price it higher.  It doesn’t matter if you should be paid for your content.  No one will pay you because another company will fill the market need at the lower price.  This is why you have to treat piracy like a competitor, not a threat, because it’s the market demanding change.

When a company says people should pay, it’s claiming a right and entitlement to compensation.  Obviously, if someone works hard, it’s good to be rewarded, but often hard work comes with the risk you won’t be properly compensated. That is business. It’s competition. It’s healthy for the economy overall.  If companies are guaranteed money, they don’t have to try as hard to earn consumer’s money by creating valuable products that feed market needs.

This is why Google chairman and CEO Eric Schmidt was so right when he told newspaper executives they shouldn’t piss off consumers.  Consumers decide how they want to consume news, not news executives.  If consumers won’t pay for newspapers, then newspapers will go out of business.  Nothing can change that.  You might think they should or even have to pay, but the economic reality is, they won’t.  Even if piracy is stealing, it’s the economic reality. It’s what the market wants. Nothing can change that.  The successful businesses of the future will learn how to capitalize on this market demand and find new, innovative ways to make money.  Everyone else will get left behind.

Clay Shirky has an excellent article about how the newspaper industry and how technology affects business models. Shocking to many newspaper and music executives, this is not the first time technology has upended business models. Just like before,  the old systems break before new systems are put in place because it takes so much experimentation to find new business models.  Shirky summarizes “If the old model is broken, what will work in its place? The answer is: Nothing will work, but everything might.”

Shirky opens with a great quote putting the newspaper predicament in perspective. He quotes Gordy Thompson talking about Usenet piracy of Dave Barry columns. “When a 14 year old kid can blow up your business in his spare time, not because he hates you but because he loves you, then you got a problem.”  The problem for newspapers is not a loss of interest in news, but a loss of interest in paper. Do we save newspapers or do we just redefine how get our news?

Shirky states wonderfully how newspapers seem to dwell on how we’ll replace newspapers – that without newspapers, there will be no watchdog for government or business (cause of the bang up job they’ve been doing). But with the fall of one business models leaves open experimentation for a new business model.  Automobiles make horse and buggies obsolete before we have an widespread, paved roads. Or as Shirky highlights, the printing press made for chaotic business models back in the day.

The Bible was translated into local languages; was this an educational boon or the work of the devil? Erotic novels appeared, prompting the same set of questions. Copies of Aristotle and Galen circulated widely, but direct encounter with the relevant texts revealed that the two sources clashed, tarnishing faith in the Ancients. As novelty spread, old institutions seemed exhausted while new ones seemed untrustworthy; as a result, people almost literally didn’t know what to think. If you can’t trust Aristotle, who can you trust?

During the wrenching transition to print, experiments were only revealed in retrospect to be turning points. Aldus Manutius, the Venetian printer and publisher, invented the smaller octavo volume along with italic type. What seemed like a minor change — take a book and shrink it — was in retrospect a key innovation in the democratization of the printed word. As books became cheaper, more portable, and therefore more desirable, they expanded the market for all publishers, heightening the value of literacy still further.

That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place.

While it seems we’re giving up newspapers for the hope something new will come along, the truth is newspapers need to fail for the new thing to be worth trying.  And as past transitions have shown, the new model is often more efficient and profitable and better for all parties.

The newspaper industry has been buzzing about building their own iTunes, offering a pay-per-article model with everyone’s favorite buzz word, micropayments.  After a cover article in Time Magazine promoting the model, the idea has joined a larger debate of people who just don’t understand the new economics of news.

Walter Isaacson’s article for Time builds on this misconception that newspapers made the mistake of posting their content online for free, making customers get used to the idea and now unwilling to pay. Alan Mutter even calls this the Original Sin.  So all newspapers have to do to save their ailing industry is agree to charge for every article.

The crux of the micropayment argument is people should pay for news simply because that’s the way it’s been. But economics change. The internet makes sharing news articles incredibly cheap.  With hundreds of thousands of online news sites and blogs spreading news for free, no amount of conglomeration will convince the market to pay for news again.

Let’s look at what happened already. The New York Times tried to charge online subscriptions to its archives. Instead of paying for subscriptions (or per article), customers went to the Huffington Post and blogs to get the same information for free.  Isaacson says newspapers need to prevent others from sharing the content they read, but how does he think this will happen? Mind wipe after reading? Information and news can’t be copyrighted. Once you read a news article, you can tell anyone and everyone what you read.  The value is in being the source material, but if people can’t read the source material, they’re happy to find a secondary source.  Marshall W. Van Alstyne, associate professor at Boston University, likened iTunes for news as putting toll booths in the ocean.  Any barrier to user entry online is easily avoided.

The further problem with iTunes for news is news is not music.  Alstyne elaborates:

News is not like an iTunes song; it’s perishable. Today’s front page is tomorrow’s fish wrap, and we don’t need to replay it. If anything, a reader benefits more from a second source than repetition from the first. Facts are delivered; songs and movies are created. Facts also can’t be owned, so when the Internet places geographically dispersed media in direct competition, the price of facts falls to marginal cost. In digital markets, that’s zero.

With micropayments, suddenly users have to question is each article worth reading.  This is the problem with micropayments in any industry.  Customer willingness to jump from free to $0.01 is much larger than $0.01 to $1. For every article, I have to decide, is it worth $0.01 to me; is it worth taking out my credit card; is it worth typing it in.  And how will article pricing be decided? Will the more important articles be more expensive?  Customers do not want to guess which articles are worth paying for.

News is free now. It has been free for a while – how much do you pay for TV news? Most arguing for pay models for news articles just want things as they were, pretending the economics haven’t changed.   Saving the newspaper industry relies on giving customers more value, not charging more for less (the most popular trend in newspapers has been reducing size but raising prices – less for more).  The key is to recognize the business’ main value – providing news – rather than the method – paper.

50 percent of most newspapers’ budget goes to printing and distribution costs.  With the internet, those expenses disappear. To be profitable, an online newspaper can make half the money it made offline because distribution is so cheap. MediaView posted a list of 14 models being tested for journalism, many with quantifiable success.  Each successful model (not micropayments, included on the list) looks to raise the value for customers.  Micropayments offer nothing valuable for the customer.

For all newspapers’ grandstanding, there are several viable models already working.  Several big cities have free, tabloid dailies handed out to people on their morning commute.  These quick reads offer the greatest hits of the day’s news, focusing on the need to know and leaving you to fill in the blanks online when you get to work. Online news providers are already offering original reporting, from Slate to Salon supported by advertising.

News reporting won’t disappear because there’s always a market demand for good journalism.  But the old guard isn’t offering the market what it wants – the market wants free, up-to-date news. Many want a community to discuss the respond to the news, asking questions or sharing opinions.  The old guard doesn’t understand how this changes their old mentality.  Newspapers are no longer the only purveyors of news, controlling what we see and when.  They need to be part of the communication process. That requires giving customers what they want, not making things like they once were.

A paper written by Haim Mendelson from Stanford Graduate School of Business and Deishin Lee from Harvard Business School guides students and businesses on how to fight open source business models and technology.

The two professors say being first to market, improving product features, and keeping the product closed are needed to combat the open source market - the way to make money against competitors who sell their products for free.  By keeping the product closed, open source networks can’t use the product to improve their own.

It’s sad to see such misguided lessons coming from two smart people and worse, teachers in a business school.  While it’s fine for commercial companies to compete with open source initiatives, Mendelson and Lee seem to recommend commercial as superior to open source even though several business models show free can be very profitable (e.g. Linux, Mozilla, MySQL, Wordpress).  Their example of a good commercial release, Microsoft Office, ignores how Office didn’t compete with open source upon release and further ignores how Microsoft is adapting to compete now with Open Office, Google Docs, and Zoho (all are free, only Open Office is fully open source).  Microsoft has released new specifications on its format types for anyone to include in software and is considering a subscription-based model for future releases.

Mendelson and Lee’s emphasis on being first to market is always good, no matter your business model, and improving product features is likewise necessity.  The problem commercial software has and will continue to have is open source, or at least open platforms, just offer more for less. Apple’s iPhone, another example of Mendelson and Lee’s, began by refusing developers any access to the system, telling them build for the web browser. A year later developers get to build applications with harsh restrictions, sometimes issued after applications are finished being built.  Google Android is coming out, fully open source and free for phone manufactures, has already attracted sour iPhone developers and has a huge software library waiting for its clientele - the first Android phone is still three weeks away from release.

Closed systems are a dying breed. It’s a slow death.  Trade secrets will always exist and there’s nothing wrong with that. What business students and professors should recognize is the landscape is evolving. Free and open aren’t bad words, but should be embraced by the next generation of business leaders.  Encouraging more of the same closed, walled garden thinking only slows innovation (see Microsoft) while free and open are winning the market and the profits (see Google).

I will be speaking at the Flow Conference in Austin, Texas on October 9th at a round table about music and copy protection.  I’m posting here my position paper, though regular readers should be familiar with my opinion on the subject.  If anyone’s heading to the conference, please contact me in the comments, email or Twitter.

The other panelists will be (links go to panelist’s position papers).

Patrick Burkart, Texas A&M University (convener)

Danny Kimball, University of Wisconsin-Madison

Ali McMillan, University of Western Ontario

Moderators: Marnie Binfield and David Uskovich

This is the question the roundtable will be discussing:

More and more music fans, artists, and labels are rejecting DRMed file formats in favor of more lenient digital music sharing policies than what are available through most commercial music service providers. Under what conditions do music fans resist copy protections? When have music labels dropped copy protections? What is the disposition of digital music distributors towards DRMed formats?

My response

Thanks to technology, more people are creating and listening to music than ever before. With computers and the internet, it is cheaper and easier to produce and distribute music. Instead of embracing technology, music companies are using technology like DRM to stifle innovation and user value, trying to control their evolving industry.

DRM gives record companies the feeling of control over their music – control they no longer have. But the economics of music are changing. The cost of distributing music has dropped to almost nothing, making music infinitely reproducible by anyone. Music companies used to decades of controlling distribution need to adjust to a new marketplace where plastic discs don’t matter. This means radically changing music’s business models.

Musicians and publishers feared the first digital music device, the player piano, more than a century ago. In 1906, John Phillips Sousa and music publishers asked Congress to ban the player. Instead, Congress instituted the compulsory license system still used today. This took away control from publishers, but helped everyone make more money by embracing the benefits of the technology, selling piano rolls to make songs more popular and performers more valuable.

Computers and the internet can be just as profitable when embraced. Musicians like Trent Reznor, Radiohead, Jill Sobule, Kristin Hersh, and Maria Schneider are experimenting with new business models using infinite goods to sell scarce goods. Reznor posted his own music on file-sharing networks while selling premium editions of his album with a Blu-Ray slideshow, vinyl version, and signature. Reznor grossed $1.6 million in the first week even though his music was freely available online. Sobule and Hersh let fans support the creation of their albums by selling private performances, chances to sing on the album, or executive producer credits. Music companies study file-sharing networks to target advertising and decide tour locations based on the popularity of artists.

Most music companies treat new technology like the enemy, using DRM to limit what technology can do. DRM aims to prevent file-sharing, helping music companies control distribution of an infinite good, while taking away value from paying customers. Music companies expect customers to pay more dollars for less value.

But DRM does not stop file-sharing. Only one MP3 file is needed to spread to thousands of freeloading fans. Almost every form of DRM gets circumvented within days meaning one file always makes it onto file-sharing networks. EMI began selling DRM-free files on iTunes partly because DRM has no effect on piracy.

While DRM fails at its only purpose, it succeeds in making music less valuable, treating paying customers like criminals, and causing technical and public relations nightmares from installing malware (Sony rootkit) to failing devices (Blu-Ray players that don’t play all Blu-Ray discs). DRM-free stores like Amazon and Wal-Mart evolved out of necessity. Music companies forced Apple to lock iTunes with DRM limiting files to only play on iPods. As Apple sold more music, it sold more iPods. When Amazon and Wal-Mart launched their music stores, they had to offer them DRM-free so songs could play on iPods. The music industry handed Apple control over its digital future, from pricing to marketing, because of DRM.

Some DRM validation services get canceled, leaving companies with expensive public embarrassments and unhappy customers with useless music. Yahoo, Google, and Microsoft all canceled support for their DRM. Yahoo and Google offered refunds or DRM-free alternatives to all customers while Microsoft, due to public outcry, reinstated its DRM.

It’s up to the music industry to develop business models that embrace the promotional value of its music to sell more valuable scarce goods. Entertainment has used this model for decades: Television provides free shows supported by advertising and music uses the promotion of radio to increase album sales. There is more money to be made embracing technology rather than fighting it. People can listen to and share music, becoming bigger music fans, and increasing demand for scarce goods like concert tickets and collectibles. Thanks to computers and the internet, every MP3 is a promotional tool.

The music industry needs to adapt to the changing marketplace. Use technology to give customers more value: give people a reason to spend their money. DRM takes away value from customers, causes public relations nightmares, and provides no benefit except a false sense of control. Instead of fighting file-sharing, embrace it as a competitor and offer a more valuable customer experience, not try to control the experience. More value means more money. And that’s good business.

Work Cited

Doctorow, Cory. “Microsoft Research DRM talk.” Microsoft offices, Redmond. 17 June 2004. 1 Sept. 2008 <http://www.craphound.com/msftdrm.txt>.

Masnick, Mike. Techdirt. 1 Sept. 2008 <http://www.techdirt.com>.

Movie companies seem to think if they make it, we will come. Unfortunately, they’re making too many movies with too few ways to see them.  The Wall Street Journal writes how movie companies are flooding theaters with more new releases than audiences can handle. Almost every weekend this summer from April through July features a major blockbuster, leaving many with disappointing and embarrassing box office returns.

The Wall Street Journal ignores, however, the potential movie companies are squandering.  There are more avenues to release content and make money than ever before, but movie companies are focused on obsolete business models built around weekend box offices and distance DVD releases.  Not every movie has to be released in movie theaters. There’s online downloads, streaming services, direct-to-DVD, etc. giving any movie maker a huge audience to market to.

Digital distribution allows for more content to reach more people. You’re not taking up limited number of theaters or shelf space in a DVD store, so more content can be offered.  Unfortunately, Hollywood remains focused on a box office mentality, meaning it would rather lose money a $60 million George Clooney film rather than use technology to make more money.