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.

Forbes provided some hyped linkbaiting today with an article on why Apple’s iPhone could kill, not compete with, but kill the Nintendo DS. I’m taking the bait to quash Apple’s gaming might once and for now.

Tech pundits love finding that new “killer” app to quash the incumbent which, in recent memory, always seems to be something Apple related: iPod “killer”, iPhone “killer”, and even Apple TV “killer” (do you need to kill something that isn’t even selling?).

Nintendo’s DS is the powerhouse of handheld gaming, the benefit of almost 20 years and more than half-a-dozen hardware generations. Sony launched its first handheld competitor, the PSP, barely clutching to 30 percent of the market, a credit to the system’s power and Sony’s well-established Playstation brand. Apple comes to the gaming world with no experience (except the tragic Pippin), no game studio, no retail presence or expandable memory, and most importantly, no interest in killing Nintendo.

Forbes writes its article ahead of Apple’s release of 3rd-party software include, presumably, an assortment of games. When Apple announced its developer’s kit for 3rd-parties, major game publishers Sega and EA were there to show off the first games for the platform. These high-profile releases led blogs to speculate on the iPhone’s potential as an actual handheld gaming platform.

This assumes Apple wants to be a handheld platform. The recently announced $25 for games sales Apple has other priorities. Gaming platforms have relied on low priced hardware subsidized by royalties from game sales. Sony’s PSP struggled initially at its $200 price point - how can Apple’s $400 iPhone think to fare better.

The other point against Apple’s gaming interests are its lack of actual gaming. EA’s cute flOw clone, if holding to Apple’s aforementioned price, costs $8 on the PS3. A rare $20 game on the PSP, Patapon, featured dozens of hours of gameplay. The DS offers assorted casual games like those likely to dominate on the iPhone, but also offers a varied library of epic stories and varied genres. Casual gaming is big business, yes, but hard core gaming is still bigger. The Wii sells amazingly, but software beyond Nintendo (first-party) fails to sell like games on the Xbox 360 and PS3.

Games will never sell the iPhone. The iPhone sells itself because of its variety of features and solid casual gaming will appeal to that user base in ways even the Nintendo DS can’t. The result will be different markets, not competitors.

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.

Video game developer Square-Enix deserves credit for giving credit where credit’s due. The makers of the blockbuster Final Fantasy and Dragon Quest franchises, has released disappointing 2007 financials, leading the company’s president, Yoichi Wada, to say his developers need to “stop making games that only they wanted to play.”

Square-Enix’s profits dropped 20 percent and it ceded significant North American market share to competitors. Most of last years sales game from Final Fantasy spin-offs.

Square already seems to have a strategy in place involving new, innovative properties as Wada says, “We need to go beyond traditional Square-Enix.” Instead of shaking the Final Fantasy-tree to economic death, Square released The World Ends with You, an amazing, creative, and deep game that plays to Square’s longevity as the premiere RPG developer while expanding include a myriad of genres in one game. Upcoming new franchises like Infinite Undiscovery and Last Remnant could be Final Fantasy-lite or rejuvenating franchises. The company doesn’t need to do away with RPGs or even focus on other genres. Diversity and innovation in any capacity can feed the industry and be rewarded with rejuvenated fans.

While the actors unions mull their contract negotiations, one actor feels slighted by the video game industry.  Actor Michael Hollick portrayed Niko Bellic in Grand Theft Auto IV, providing voice work and motion-capture acting over a 15 month period.  Hollick earned $100,000 for his efforts, which came out to $1,050 per day he worked, almost 50 percent more than the standard $730 rate.  GTA IV earned $600 million within its first week, none of which Hollick will see.  And that’s the way it should be.

Hollick negotiated his contract for a fee he found reasonable at the time - you can’t renegotiate after the fact just because you think you didn’t get enough before.  I’ve express issues with royalties before, but Hollick’s complaint shows an lack of understand the economics of his business rather than mistreatment by evil corporations. 

As Hollick admits, he was paid a premium over acting guild rates.  He just wants a piece of that huge GTA pie.  But who bought GTA IV because of this no name actor?  Even a big name actor wouldn’t pull me into a video game I didn’t want to play anyway.   Hollick had every right when negotiating his contract to ask for royalties and GTA maker Rockstar had every right to throw him out and hire someone cheaper.  And it’s hard to believe Hollick didn’t know GTA IV would make hundreds of millions of dollars when negotiating.

The media industry has evolved itself into a corner with royalties turning into an entitlement for actors and writers rather than entertainment’s form of profit sharing.  Some companies give employees stock options to give them incentive to make the company more money.  Actors and writers argue royalties are their way of getting a fair share of the millions media companies make off their hard work, but who said business is fair?  Royalties are

I do see royalties serving a purpose with big name actors.  Major movie stars do attract large audiences and are often worth their expensive salaries.  These stars then promote their movies on talk shows and at press events, work they do months after filming finished.  With royalties the actors are encouraged to promote the film because the bigger the box office the bigger the paycheck.

But what promotion did Hollick do?  Does anyone think he did a half-assed job because he wasn’t getting royalties?  Was $1,000 a day not enough?  Or is Hollick just doing this as a publicity stunt (probably)?  Hollick was willing to do the work for $100,000 and that means the job was worth $100,000 then and now.  Hopefully the experience would net Hollick a bigger paycheck for his next job, but after this publicity stunt, video game companies might stop calling.

Next-Gen editor Collin Campbell wrote a lecture on the evils of selling and buying used video games. He claimed resellers of video games like GameStop are costing the industry $1 billion (source?) because when GameStop sells used games, the publishers receive no additional revenue. Instead of backing up his position with facts, Campbell follows the common practice of claiming that publishers have some entitlement to more money, rather than letting the market decide and recognizing that there is more money to made thanks to the second hand market.

Video game companies have been critical of used game sales for years, with Sony even attempting to build-in copy protection on PS3 games to prevent them from being resold (Sony did not include this feature). Even book publishers criticized Amazon.com, claiming selling used books would hurt the sale of new books. But no study has shown used game sales hurt the video game industry, though one study has shown sales of used books can actually help the industry. Campbell’s unsupported $1 billion cost to the industry is only attributed to how much GameStop makes selling used games, meaning Campbell is assuming every used game sale would transfer to a new game purchase. Of course, Campbell’s claim that GameStop forces used games on its customers is contradicted by reports that 17.6 percent of GameStop’s holiday sales came from used games - 43.2 percent came from new games.

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There are lots of sexy political issues, usually following whatever George Clooney is promoting that week, and sadly patent law is not one of them. Intellectual property issues and patent law is too complex to be highlighted on billboards, and from the public’s perspective, doesn’t affect our lives too much. But the more I learn about these issues, the more I realize how much America’s patent system is hurting us economically and intellectually.

But in my research and discussions with people, I found myself challenged as to describe my position. I am not specifically anti-copyright or anti-patents and wish there was a term to describe my political position so I knew what to call the Facebook group.

I would like to recommend Pro-Innovation as the term.

Pro-Innovation has that positive marketing spin, being for something rather than against something else. And innovation is good, and in truth, the intended purpose of a patent system. Unfortunately, for all the conventional wisdom, there is no evidence that more patents helps innovation, rather it hampers innovation more than helps.

The Pro-Innovation position looks to bring back American intellectual property laws to their minimalist state as dictated by the Constitution “To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” Meaning any patent or copyright is granted only to promote the development or more and better stuff and only granted for a limited time (70 years after the creator dies seems a little long).

This is an extremely complex issue that I will be tackling more on Prodigeek, but I wanted to throw my suggestion in the ring. I have already trademarked Pro-Innovation and expect a quarter every time somebody says it.

Microsoft’s Xbox brand has been facing an up Mount. Fuji battle since its launch. And while the 360 has faired better than the original Xbox, some recent numbers shown by Famitsu (translated by NeoGAF) shows the Xbox might be farther down the mountain than originally thought.

Famitsu tracks the top 50 best selling Xbox 360 games with the top game not even selling a quarter million units. As Destructoid points out, when you add the total sales of all 50 games, only 1.8 million units have sold - as much November sales of Mario Galaxy and Guitar Hero III in the U.S.

The surprise in these numbers is how even games that attracted huge headlines for first week sales dropped of. Ace Combat 6 helped the 360 console outsell the PS3 in Japan for the first time, selling 77,000 units in its first week. A month later, Ace Combat 6 has only sold 6,000 more copies.

Even games that Japan loves are having trouble expanding the 360’s user base. This will make the 360 Devil May Cry 4 sales numbers versus the PS3’s all the more interesting. Check out the full top 50 after the jump.

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