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>.

Prison Break attracted more than six million TV viewers for its season premiere. Another two million downloaded the episode over the next week even though the episode was available for free on Fox.com.

Fox believes most of those downloads came from Europe where Prison Break isn’t available on TV or online.  TorrentFreak found only 4 percent of downloads came from the U.S.

TorrentFreak concludes availability is a key factor when people download from BitTorrent.  Price is not the only consideration.  Joss Whedon’s recent Dr. Horrible web series was streamed free on the web but became a top seller on iTunes for a price because people wanted a convenient, downloadable version to watch when and where they wanted.

This is why media companies should view file-sharing networks as competitors feeding a market need.  Other countries want to watch popular TV shows, but networks delay them for weeks if not months. Even websites Fox.com and Hulu only allow North American viewers, sending millions of international users to file-sharing networks.

The market wants easily available, convenient TV shows, movies, and music.  They keep showing this with their time and dollars. Media companies should pay attention to what the market wants.

Congress has passed the Higher Education Act with special provisions requiring universities to push the content industry’s agenda on its students.  In order to get funding for students, universities will have to advertise commercial downloading services to students and educate them on a one-sided view of file-sharing and piracy.

The controversial provisions were added partly on the basis of the MPAA’s admittedly flawed research that claimed 44 percent of piracy occurred on college campuses - the number the MPAA later admitted was 15 percent.

So why are universities suddenly mouthpieces for a specific industry?  Even with flawed research, what makes universities responsible for the content industry’s obsolete business models.  The fact that these companies can’t track all the file-sharing makes me wonder how universities are expected to do better? Some artists want their content shared, others don’t, so leaving filtering up to a third parties will lead to overzealous blocking and can also affect educational uses for file-sharing tools.

Universities and consumer groups were able to block this bill last year when the MPAA included requiring filtering technology in its wishlist. William Patry points out that the content industry likely postponed filtering technology - doing it all at once caused too much backlash.

What concerns me is the silence among academic, from administrations and students.  College campus are the front line in the content industry’s Save Our Obsolete Business Model campaign simply because it’s easy to pick on students. There’s a reason the RIAA avoids suing students at Harvard.  Unfortunately, most universities are letting a lone industry and the government turn places of education into propaganda mouthpieces with a rare few standing up for their student’s rights.  Regardless of your position on file-sharing, universities should not be responsible for doing what the content industry already can’t do itself.

And universities need to stand up for themselves and student’s rights. What better way to educate than to lead by example.

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.

After Google Video and Microsoft’s PlayForSure showed what not to do, Yahoo Music decided it wanted to be an example for what not to do in digital media.  Yahoo announced it will discontinue support for its DRM at the end of September, locking DRMed tracks to a single computer.

Microsoft tried to discontinue its PlayForSure DRM a few months ago, but has agreed to leave it up for a few more years.  Google Video discontinued its DRM, offering refunds for all purchases.  Only after some outcry did Yahoo agree to refund customers or provide DRM-free tracks.

All this ends up being expensive for everyone involved, whether its maintaining servers or refunding every customer you’ve ever had. Soon consumers will realize DRM deprives them of value they expect, like owning the music tracks they paid for.  Of course, consumers can always go to file-sharing networks which are free and DRM-free. That’s the competition, remember.

Shameless plug: I’ll be at the Flow Conference Oct. 9th in Austin, Tex. speaking on a roundtable about music and DRM in case anyone’s in the area.

The Dark Knight hit theaters two weeks ago to monumental hype, an unmatched marketing budget, and rave reviews from critics and fans. But according to Warner Bros., the Dark Knight’s record $158 million opening weekend came all thanks to the movie company’s anti-piracy efforts.

The LA Times decided to regurgitate corporate spin profiling Warner Bros. “painstaking care to thwart pirates” preventing the movie from hitting file-sharing networks.  The six month anti-piracy bonanza kept camcorder versions of the film off the web for a whole 38 hours, by Friday night.

Warner Bros. is once again missing the point.  Dark Knight did this well because it’s an amazing movie people wanted to see.  That’s why IMAX theaters were sold out into August before the movie opened.  A theater experience, especially IMAX, is a different experience than a person can get at home, whether its a social outing or better quality facilities with surround sound and bigger screens. Word-of-mouth likely helped Dark Knight break the record for second weekend gross, a week after pirated copies surfaced.

The LA Times tries to support Warner Bros. theory, but ends up proving otherwise.  It cites Ang Lee’s 2003 Hulk got leaked two weeks before the movie opened leading to terrible reviews from fans.  The movie wasn’t that good, though it still made $62 million its opening weekend, even with pirated DVDs having a two week head start.

The LA Times also points out Star Wars: Episode III Revenge of the Sith had DVD-quality screeners leaked online days before the movie opened.  But good reviews and word of mouth led the movie to gross $380 million domestically.

What the LA Times left out was how much money and man power Warner Bros. wasted on its anti-piracy efforts and how much of that could have been shifted to marketing or merchandising or just saved.  Pirates will get copies of movies and they will share them.  Movies succeed when they are quality pictures offered in compelling ways so people want to see them.  Maybe Warner Bros. should lessen its six month anti-piracy efforts and think up ways to make the movie experience even more compelling.

The Economist has two articles showing the lighter side of piracy, reveal how media and software companies are using file-sharing systems to help their businesses.

Music companies find out which bands are popular using file-sharing statistics tracked by companies like BigChampagne.  These statistics help decide tour locations and target advertising dollars.

Movie and TV companies are using file-sharing statistics from BigChampagne to set advertising rates for online video sites like Hulu.

Software also benefits, as Bill Gates says “It’s easier for our software to compete with Linux when there’s piracy than when there’s not.”  90 percent of PCs in China use Windows from mostly pirated sources. Gates recognizes long term revenue increases from loyal Microsoft users than if the company fought piracy, pushing companies to free alternatives.

While admitting piracy helps their businesses, these companies continue to fight file-sharing in every possible way.  Piracy needs to stop being scapegoated, but rather embraced as a competitor - something to learn from and beat at its own game.

[Via Against Monopoly]

The upcoming G8 summit has many important issues to discuss - climate change, world poverty, and file-sharing. That’s about it. Everything else is fixed.

On topic for the G8 is the secret (yes, secret) Anti-Counterfeiting Trade Agreement (ACTA) that only became public knowledge after details were posted on WikiLeaks.  The ACTA is a new treaty being written completely in secret for the purpose of restricting international piracy, allegedly allowing border security to check your iPod for illegal downloads, bring criminal charges against file-sharers, and require ISPs to police their networks.  While the public and consumer groups have not been privy to the treaty negotiations, a RIAA got a chance to submit its wishlist.

Aside from the improprieties of privately writing legislation, why is the G8 taking the time to prop up one industry’s unwillingness to adapt to the internet.  As I’ve written before, the entertainment industry does not have a right to revenue.  It’s their job to find business models that work, not the government’s.

The entertainment industry has pushed many copyright requirements into trade agreements with other countries (often falsely referred to as free trade).  The argument is these laws are needed to encourage innovation and content creation when in reality, these laws only help current copyright holders, hampering development in other countries who now have to spend money policing their citizens.

While several countries around the world waste time spoon feeding copyright holders, I’d have hoped the G8 wanted to at least pretend it cared about helping solve the world’s important crisis, of which their are many. It’s even listed first on the official website, “protection of intellectual property rights.” Piracy is not a world issue, even if the revenue losses the entertainment industry makes up were true.  That’s because it’s not the government’s job make you money - that’s your job through innovation and competition.  The G8 should try dealing with the food crisis, climate control, oil prices, genocide, poverty, human rights, and terrorism to name a few.  Of course, the U.S. attorney general says piracy funds terrorism.  Yeah, that’s convincing.

[Via CustomPC]

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.