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.

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.

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.

The popular audio format of the 1960s, 8-tracks were one of the major alternatives to large records, giving music fans some portability.  Ford Motor Company was the first to include an 8-track player in its cars, freeing people from the confines of radio and commercials.  But as one of the earliest format wars, 8-tracks were quickly usurped by the smaller and cheaper compact cassettes, leaving thousands of music fans with obsolete technology.  But for all the wasted money, 8-tracks have developed an avid collectors market, with many present day audiophiles or, ironically, collectors, still pursuing 8-tracks.  A few independent artists even release 8-track tapes.  I’m seeing resurgence…

Most geeks might not have cared about ABBA’s The Visitors, but this album marked the first audio CD, a media that might be on the way out now, but has given us more than 25 years of optical-disc based joy.  No more 20 floppy discs just to install a word processor.  A CD could hold almost 500 floppy discs word of content, making for higher quality music, better graphics for video games, and simpler installations for…installing stuff.  The CD not only revolutionized the recording industry, but likely encouraged the development of piracy since CDs became a standard for computers as well as portable music players. 

And don’t forget video games.  To compete with the Nintendo juggernaut, Sony released its Playstation system using CDs as the medium rather than the standard cartridge.  Other systems used optical media, but the cinematics seen in Final Fantasy VII proved how superior CDs were to cartridges, if you don’t care about loading times, of course.

As Gizmodo reveals, there’s this unique new band (can we really call them that?) called iBand with a creative new YouTube video featuring the original sounds of two iPhones and a Nintendo DS with Electroplankton.  I only fear when Philip Glass creates a 150-person iPhone orchestra.  The future is now people.

During high school, one of your friends showed off some new CD he got for free.  How you ask?  He had something called Napster.  This spyware riddled program allowed anyone to download music for free over the internet.  Several programs came before and competed to give out free music, but Napster was one of the first file-sharing programs to attract a mainstream audience.  Even though you had to wait days in line just to start downloading a song, Napster awakened a capitalist culture to the new culture of free.  And all has worked out nicely since then…

The entertainment industry has manufactured and made-up musical groups pretending they’re successful as a way to lure unsuspecting fans (I’m looking at you *N Sync).  But some bands actually are made-up - they first appeared in fictional worlds, sometimes even crossing over to our reality to make an extra buck.  These are the most entertaining and talented fictional bands.

7. Fingerbang

The classic boy band from South Park triumphed at the South Park Mall with their self-titled mega hit.  This edgy band when farther over the edge than any edgy band before by putting a girl, dressed as a boy, into the boy band.  Now that’s guts.

6. Josie and the Pussycats

Speaking of girls dressed as dudes, this 1970’s pop sensation exploded out of their popular Archie comic book and cartoon series, the main source for new musical acts in December 1970.  The bubblegummy, sometimes crime fighting team have even appeared in 2001 blockbuster that made very little money.  Still, being comic book characters, they barely aged and have hauntingly remained relevant in the time world of Archie Comics.

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College students have lived in fear not of failing grades and STD’s, but of the real monster in the closet, the RIAA.  With always-on broadband and no parents, college students threw caution to the wind, surfing P2P sites and software without the proper protection, leaving themselves and their music folders open to be browsed by friends and enemies alike.  The RIAA is the trade group representing the music industry in legal and political matters.  The organization, in an attempt to stop online piracy, began suing people in 2002 and 2003, offering small settlements to avoid trials.  Many of the targets of these lawsuits were and still are college students.  The group has sued tens of thousands of file-sharers using questionable legal tactics. 

The RIAA isn’t alone.  Software and movie companies have joined the lawsuit bandwagon, or at least pressuring colleges to police their own students.  Getting one of these legal threats is a terrifying moment for any geek or luddite - and it one we remember just long enough that we hope our guidance counselor forgets so we can start file-sharing again.

One of the many debates spurned by technology has been the morality of file-sharing and piracy. David Pogue of the New York Times wrote last week about his talks to various groups where he discovered a surprising reaction to these ethical questions. First he spoke with groups of varying ages and asked which of many hypothetical situations were wrong, like borrowing a CD from the library or making a backup copy of a DVD, or replacing your 2,000 vinyl records with copies of CDs from the library. Pogue says as he went through scenarios, more and more hands went up showing a lot of gray areas to the debate.

Then Pogue spoke to a college audience. He went through the same list and says no more than two hands ever went up out of 500 people. Even when he went for the extreme “You want a movie or an album. You don’t want to pay for it. So you download it.” Only two hands.

Pogue’s unscientific but nevertheless revealing social study shows not only is the file-sharing debate more complicated than media companies claim, but there’s a generational gap in how people view the moral debate. Simply, young people don’t think file-sharing is wrong.

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