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

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

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

So does anyone have an example of lawsuits helping companies?

[Via Techdirt]

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

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

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

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

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

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.