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August 08, 2003

Fudging P2P

Several weeks ago I had an excellent discussion about the principles of music sharing with an adversary who kept bringing me back to matters of theft. I wish he had done it in the blog. I think I was right in arguing that the pro RIAA side are bigger thieves, but I have changed my behavior.

I reconfigured off my file sharing mechanisms to avoid the subpoenas now being served by the legal henchmen of the recording industry. It was clear to me that they were going after suppliers of substance. I am no longer a supplier at all. If somebody hacks my system and takes what I have, I wonder if that makes me a supplier? I have mixed feelings about changing.

Yesterday, I did a bit of thinking about how the economics of distribution are factored into the creation of recorded content. I have satisfied myself that type of distribution not only affects the curve of the revenue stream and therefore the type of consumption patterns expected, but changes what kind of intellectual property it is. There is a material difference between a film which is created to be a summer blockbuster and one that is supposed to be an arthouse release. Certain kinds of content are to be consumed certain ways, which means that different kinds of controls can be applied to their use which are not unilaterally the same. What prompted this thinking was a Life & Times spot on Dianne Watson who is putting together a new legislative agenda.

A few years back, my boss sent me to Century City to cover the now defunct Webnoize Conference. My task was to meet up with the Digital Rights Management (DRM) guys at IBM and Bertelsmann and show them how analytical software could help them create realistic business models. You know, for that little thing called profit. I was so excited about a group of guys called Reciprocal that I almost made a dog's breakfast of everything else. Unfortunately, they were pretty broke at the time, but they are still alive. Note that they are intent on creating end-to-end control. This is what the industry wants.

If I get my new gig, I will be in a firsthand position to speak with some authority on how entertainment content revenue streams work based on calculations the industry calls 'ultimate valuation'. What the big content distributors hate and fear is 'superdistribution' which is essentially that area when their content hits the internet and peer networks, markets which are now completely beyond their control. They view superdistribution essentially as a bootleggers paradise. In some ways they are right.

The industry claims lost revenue due to all of the unauthorized use of their products, and they assert intellectual property claims on all superdistributed product. Part of the problem I see is that they have refused to come up with a model that prices appropriately for this market. They have had to contend with free, and this is what burns them up, causing them to go for their legal guns. There is clearly is a way the music industry to run a profitable business buy selling music digitally online as Apple and BuyMusic are proving. But the entertainment giants don't want a price war, they want a legal war. As far as we can tell, their business models tell them that a CD's content is worth $19, period, no matter where it goes. Which is why they seek to employ DRM technology to enforce control of distribution and set prices independently of superdistribution enablers like Kazaa, et al.

I believe most people would not mind indelible digital watermarks, for example, to guarantee that it was indeed a particular artist they were listening to. If the recording industry were not bent on control of superdistribution, such matters would not be controversial. It's all in the difference between building a music player that plays digitally certified music and one that does so only with the permission of the recording company. It's the difference between a passive player and one that reports the number of times you play a song to the recording company. In its search for control of superdistribution, the recording industry has shown that it is willing to flex its legal muscles to make any DRM enabled playing devices illegal if they do not report usage to the industry.

In film, this is probably more pronounced since it is the industry which grew up simply on theatrical release only. Today it is finding the subsequent releases in the home video and rental markets more profitable. But inherent in the way certain film titles are marketed and managed are the seeds for defeating the basis of their current legal battle. This is my point. There are movies that are created today with the express knowledge that they will bring in more revenue in certain distributions than in others. Finessing the timing of such things and determining how much to spend marketing to which distribution channel, I would imagine to be the genius of Hollywood.

The Hollywood argument is at its strongest now because all of the bootlegging that exists is at its peak. There are few offererings aside from eMusic, Apple and BuyMusic (does anyone use PressPlay?) that are not free. Free has the biggest superdistribution market share. Anything that cuts into that market is a revenue stream for the industry. The industry thus must offer, choice, quality, price. This is how they compete.

Posted by mbowen at August 8, 2003 01:31 PM

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