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The sky isn’t falling after all

The sky isn't falling after all

My recent comments in relation to rights holders like the Australian Federation Against Copyright Theft (AFACT) generated some interesting discussion and emails.

Many agreed with iiNet’s call for the entertainment industry to develop new business models to allow consumers to access digital content legally and at a time and in a format that meets their needs.

Others, however, suggested that peer-to-peer file sharing and piracy made any alternative distribution models economically unviable for the entertainment industry – especially when being forced to compete with ‘free’ models.

A quick online search reveals that this argument was also aired back in the 1920s – apparently gramophone record sales couldn’t possibly compete with free radio broadcasts!

“If radio is allowed, the argument went, pirate radio will destroy the music industry because who would buy music with real money when they could just listen to it on the radio for free?” – Mark A. Lemley, William H. Neukom Professor of Law at Stanford Law School, extract from a transcript of a speech delivered in 2011.

Change the tune!

It seems that rights holders have been hanging on to this ‘can’t compete with free’ ideology for almost a hundred years now. The truths is though, that many creative talents have disconnected themselves from traditional distribution models, they have moved on and are successfully tackling the ‘competing with free’ challenge on their own terms, in 2012 – just as others have done since the 1920s.

Much of the content industry’s negative commentary on the issue of content sharing focuses on a tale of doom and gloom – falling revenues, diminished funding for creativity and reduced job security – all of which is then used to forecast a drop-off in the quality output we’ve come to expect and enjoy.

Now the entertainment industry again claims the sky is falling, and that it’s all to blame on Internet piracy, such complaints are usually supported by selective (some would say apocryphal) research.

Research, which is regularly refuted by commentators like Bob Lefsetz who bluntly says “The music and movie business has been consistently wrong in its claims that new platforms and channels would be the end of its businesses.”

 

Electronic Frontiers Australia also leaves us with a cautionary comment “The copyright industry is well known for offering up gargantuan figures that don’t hold up under real scrutiny.

In fact – The sky is rising

Apart from my attempted dismissal of claims that ‘we can’t compete with free’ – using a clumsy analogy about selling bottled water when tap water is freely available – there are many contemporary and uplifting case studies available for consideration.  These case studies are generally easy to locate, but are often ignored by those who would paint a different picture.

At iiNet we are big fans of on-line gaming and have had a long relationship with Valve Software and their ‘Steam’ gaming platform. Steam continues to comfortably out-compete, not only traditional commercial competition, but also competition resulting from unauthorized copying.

As Valve CEO, Gabe Newell observes,Our goal is to create greater service value than pirates, and this has been successful enough for us, that piracy is basically a non-issue for our company.”

Part of Valve Software’s success comes from their innovative approach. An extract from a case study on Valve illustrates Gabe’s attitude:

Valve has been quite active in experimenting with price. This has made the company realize that bad pricing is often a direct cause of infringement as well.

In one famous experiment, Valve kept reducing the price of a game, and found that the total revenue they made increased significantly as the price decreased.

A 10% [price] decrease increased income by 35% — which is a good start. But then Valve tried decreasing the price an astounding 75%, and saw revenue increase an amazing 1,470%

Of course, Valve’s model is more sophisticated than simply tweaking prices – market intelligence, simplicity, service and great communication with their consumers are also essential to their success.

This online digital distribution model is a salutary lesson for other content distributors. Instead of insisting their non-paying players were pirates and thieves, Valve took the behavior as a marketing failure and addressed it head-on it by adding value.

I really enjoyed reading Mike Masnick and Michael Ho’s The Sky is Rising report, which explains a thriving entertainment industry, where artists are richly rewarded, more people are producing content and consumers are spending more than ever.

As well as providing factual data on the true state of the entertainment industry, the report provides helpful real-life case studies, like Valve, for alternative business and distribution models. These case studies illustrate the sort of thinking that iiNet has called for – both before and after the High Court’s decision in iiTrial.

It’s not too late

The entertainment industry can learn from the case studies in this report. The sky is not falling; the facts outlined in the report clearly show that things have never been better for rights holders.

Of course, what may be in short supply is the imagination and creativity required by business leaders to exploit the most efficient and cost effective distribution channel the world has ever seen.

It is ironic that a lack of imagination and creativity conceivably contributes more to the woes of the film and video industry, than piracy does.

You don’t need to be Einstein…

For years the entertainment industry has suggested that the Internet is instrumental in destroying creativity, profitability and choice – this report illustrates how far off the mark this thinking is.

Video didn’t kill the radio star; radio didn’t reduce the life span of songs; record players didn’t destroy our love of live music and the Internet certainly hasn’t ruined the entertainment industry for performers and artists.

Rights holders can still embrace change and exploit new distribution platforms, but they can’t do that without modifying their thinking – as Albert Einstein said, “We cannot solve our problems with the same thinking we used when we created them.”

Just as the case studies show many wonderful examples of experimentation, supply chain simplification and recognition of customers’ wishes – it is clear that the need for change is fundamental.

Far from heralding the apocalypse, technological developments are offering to bring the entertainment industry to a new level.

Perhaps it’s time the entertainment industry became a little more customer focused and acknowledged that the internet can play a fundamental role in serving both their own interests and those of their customers.

For more on the current state of the entertainment industry, check out the full report: ‘The Sky is Rising’ on Techdirt.com or see the recent article on the topic by John Stanton, CEO of the Communications Alliance on www.voiceanddata.com.au.

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20 comments

  1. Outstanding article Steve. When talking to friends about the problems in both the video and e-book industry my first response has always been, “reduce the barrier for people to access the content legitimately and you’ll reduce the piracy”. In addition, if they spent a fraction of the amount they spend on litigation on providing a solution they’d make a fortune.

  2. xBeanie says:

    Yes, unfortunately most of our business leaders are firmly stuck in an increase profit by reducing value to the customer mindset. The Internet in many ways gives consumers a better understanding of value and empowers them to get a better deal one way or another. We will see many big names fall with new companies with younger management taking their place.

  3. Jack Dee says:

    Siunds like yet more IT and Telecom industry rhetoric to hide the BIG lie that your business model does not benefit from illegal doenloading . The actual truth, Steve, is that many many creative talents have been disconnected from a workable business model that generated financial returns for their talent and effort They did not ask for or fight for that ivery appealing business model called “free”. They were forced to find another job, or work two jobs or work merely for their arts sake as a result of people prepared to pay for an Internet connection but not prepared to pay for music etc. Unfortunately the entertainment industry is playing (and has played) a fundamental role in fast tracking the financial interests of IT and Telecommunication industries.

    And who benefits? ISPs if course. 

    • Louise Moran says:

      Hi Jack,

      Thanks for sharing your thoughts in the comment section.

      iiNet feel it’s important to spark debate around potential business models for sharing content as it’s clear that current models are not working for consumers, artists or for the rights holders.

      A lot of the research statistics in The Sky Is Rising report referenced in this blog highlight the fact that the entertainment industry is continuing to grow at a healthy rate, consumer choice is at an all time high and that for the vast majority of artists, opening up the market is a positive step.

      Everyone benefits from finding new business models for the entertainment industry, not just ISPs.

      Thanks again for your comments on this very interesting subject.

      Kind regards,

      Louise Moran
      Blog Editor

  4. Steve dalby says:

    >>And who benefits? ISPs if course.

    This is a misconception. ISPs do not benefit from infringers.

    We don’t sell data by the BIT. We’d rather people didn’t use their quota up. We profit more from folks that don’t use their quota because we provide the data at a price based on average usage across a large number of customers. Those that use less than average are profitable, those that use more than the average are not.

    But back to the subject at hand – The failure is with the middle-men – the people that have created a distribution model that removes the artist from the sale and distribution of their creations. Instead extracting profit from the product during distribution. It is these middle men who are locked into 1920s thinking.

    The artists in the case studies provided in the report, have seen the opportunity to divorce themselves from the middle men and done their own thing.

    They have taken back control and manage their own distribution, generating less overall revenue, but keeping a larger share of the profits.

    The ‘workable business model’ you describe isn’t working anymore.

    Isn’t that the whole point of this debate?

  5. Percy says:

    Sounds to me ‘the actual truth’, Jack Dee, is that you just got told! Please make sure you check your spelling before you engage in an intellectual conversation again.

  6. Shane says:

    I’ve been saying all of this since the dawn of time. Every time someone says it’s not fair that people pirate software and multimedia, I remind them the only reason they do is because the market is free in both we can purchase who we want to purchase from, or, we can acquire it via other means. In reality, nothing but someone’s conscience is going to stop them from downloading something they didn’t pay for.

    Valve’s experiment and results show that if you generate quality content at a reasonable price, you make a lot more money. It makes perfect sense. Their only argument would then be it costs more to develop than it does to sell, which is why their retail prices are so high. But then they conveniently ignore such right-management tools as region-locking, region pricing, and Blizzard’s recent trick of removing non-region languages (that is, if you purchased a cheaper russian version of Diablo 3 which shipped with multilanguage, you can now only play with russian language ingame) does nothing to instill trust in us, the consumer, the very same people who just paid $80 for the software just because we live in Australia.

    Make the content available cheaply, easily and reasonably and we will buy. If you choose not to, we’ll go elsewhere. It’s that simple. Just seems like good business to me?

  7. RogerRamjet says:

    The actual truth is that many creative talents have been forcibly disconnected from traditional and workable distribution models. They did not fight for the right to leave those pesky labels and take up the “free challenge”. Their disconnection from a business model that provided financial returns for their hard work was a result of others being given open slather to connect with their work without having to pay for it. Of course these downloader’s didn’t get their music or films for free. They paid IT companies for their laptops and tablets and smart phones and they paid the ISPs for their monthly internet connection.

    It must be reassuring for iiNet’s share holders to know that iiNet’s COO has such an eye for detail and found the ‘The Sky is Rising’ report to be full “of factual data on the true state of the entertainment industry”. Had you (or the reports authors for that matter) actually read the US Department of Labor Consumer Expenditure 2000 report they would have realized that the definition of the “entertainment industry” also includes consumer spend on TV’s, computers, DVD players as well as “pets, toys and playground equipment”. It even went as far as to include expenditure on “recreational cars and boats”.

    Contrary to your chest beating conclusion, this report certainly does not dispute “the argument that the Internet is instrumental in destroying creativity, profitability and choice “. The report does however allow us to extrapolate how much Americans spend on toys, pets and boats’.

  8. Steve Dalby says:

    @RogerRamjet
    Interesting to see someone quote a study from 2000 to refute a report from 2012. I am sure that the report’s authors read much more recent and relevant information.

    Ignoring the glaringly obvious contextual information and (strangely) suggesting that the report had more to do with ‘toys, pets and boats’ says a lot for the other side of this debate.

    Creative talents weren’t forcibly disconnected, they handed over their commercial rights to middle men who have feathered their own nests while wholesale content ‘piracy’ has become mainstream. The so-called ‘workable’ model may have had a time and a place, but it seems the market is saying that it doesn’t work anymore.

    Those middle men are now trying to deflect attention from their decades-long and continuing failure to exploit new, more efficient, distribution techniques for their clients. Instead they are pointing the finger at governments, ISPs and consumers and saying “It’s all their fault!”.

    It’s not me or ISPs in general that suggest pirates get their content for free, it’s the middle men who are hanging on to their 1920s business practices that trot out those re-warmed lines.

  9. Sick Of Trolls says:

    Notice how the 2 most critical comments on this happened to use almost the EXACT same sentence

    “many creative talents have been disconnected from a workable business model”

    “many creative talents have been forcibly disconnected from traditional and workable distribution models … Their disconnection from a business model…”

    It’s almost like they are the same person /sarcasm

    Mr. Rojer Ramjet / Jack Dee can you please take your poorly worded astroturfing elsewhere, and leave the rational argument to someone not being paid to drivel nonsense?

  10. Km says:

    I can only speak for myself, but for twenty plus years, I had not purchased any songs on cd. Since iTunes and an iPhone, I have purchased numerous songs, a couple of albums, and some movies / tv shows..

    Ease of use, convenience, versatility, and pricing. Thank goodness for a legal, digital alternative.

  11. RogerRamjet says:

    @Steve, Your comments would suggest that you have not read ‘The Sky is Rising’ report, nor the reports that are referenced within it.

    The premise of the argument is that “for all the reports that people just want stuff for free and are not willing to spend on entertainment the actual data shows they’re spending noticeably more on entertainment today”. The “researchers” than compared a Bureau of Labor Statistics report in 2000 onwards. Per my previous comment – the broad definition in these Labor reports had consumer entertainment spend include 4 categories:
    Fees and admissions;
    televisions, radios, and sound equipment;
    pets, toys, and playground equipment;
    and other entertainment supplies, equipment, and services.

    http://www.bls.gov/cex/anthology/csxanth10.pdf – you’ll notice this actual reference is conveniently left out of the “Sky is Rising” report.

    These broad definitions and multiple categories from Boats to Veterinary fees have been conveniently conflated into ‘content’ for the purposes of the researchers argument.

    Pray tell how are ‘middle-men’ business models and wholesale content piracy related? Isn’t this more to do with the advent of the Internet and ease of sharing digital content.

    As I previously commented, pirates are not getting their illegal content for free – they still have to pay for the hardware ie. computers, tablets, smart phones, etc (which all happen to fall under the broad definition of ‘entertainment’ in the BLS report used in this research) as well as the bandwidth. So some industries are financially benefiting from this wholesale content piracy – but not the creative talents.

    @SickOfTrolls: It is unfortunate you are not prepared to consider two sides of a debate.

  12. Peter Richardson says:

    tl;dr version: The creative talents which you are worried about get the scraps, the real money is made by the middle men.

    Wall of text version:

    “Pray tell how are ‘middle-men’ business models and wholesale content piracy related? Isn’t this more to do with the advent of the Internet and ease of sharing digital content.”

    Re-read his post, Steve outlined how they are related in the paragraph that followed the original claim. It is exactly the advent of the Internet and the ease of sharing digital content which makes the ‘middle-men’ business at least partially redundant.

    In the days of Vinyl/CDs, these middle-men were the only game in town, were paying out big sums of money to market talent, press records etc and consequently had artists over a barrel. Why should artists now have to pay middle-men a similar cost to organise packaging and distribution (and in some cases, have partial royalties held back for things like ‘breakage’, something which hasn’t been applicable since the days of vinyl) for a product which now costs dramatically less for middle-men to distribute?

    This was and still is the big labels game to lose, you cant litigate the genie back into the bottle, you have to adapt. You only have to look at companies like Hulu in the states to see that when given the choice, consumers will flock to legal content AS LONG AS it is priced appropriately. Who wants to trawl through torrent sites and download something which may or may not be the actual movie, might be a low quality version, might be bundled with malware etc when you can download a guaranteed HQ version faster and easier for a buck?

    The big labels have had (and still have) the opportunity to offer an easy to use digital service selling a higher volume of tracks at lower margins. Unfortunately they chose to lock down content and litigate while trying to increase their profit margins. Consumers realise that creating and distributing a digital download is a lot cheaper than pressing and distributing a CD, and they responded by closing their wallets (Yes, distributing a CD is not the only cost involved in making a record however with the advent of software like pro-tools, it now costs a lot less to create that recording in the first place).

    re: the benefit to ISPs, surely you can’t think that the sole reason people buy tablets and internet connections is to pirate media? As outlined by Steve earlier, it actually benefits ISPs MORE if their users download less, as ISPs pay their wholesalers for data per MB/GB used. Pirates are more likely to be the ones who blow through their data in 10 days and spend the rest of the month still torrenting while they are shaped (speed limited by the ISP) meaning that the ISP actually loses money on that customer.

  13. Steve Dalby says:

    >> Your comments would suggest that you have not read ‘The Sky is Rising’ report, nor the reports that are referenced within it.
    @RogerRamjet

    Your perception is dysfunctional. Sorry. I read them and enjoyed them all.
    I don’t use a ghost writer or a team of researchers. I’m just a bloke that writes what I think about stuff that interests me.

    It’s good that you have an opinion and come on here and make it known, but suggesting that I haven’t read what I’m writing about is just plain funny. It doesn’t help your argument, that’s for sure.

  14. RogerRamjet says:

    @Steve

    Thanks for your reply – but you have yet to even attempt to address the serious issues that I have with the underlying assumptions made by the original report.

    Saying you enjoyed them and presenting no credible retort is laughable.

    For someone who is pushing research as gospel, you should be prepared to stand behind it and back it up (considering you have read it and the reports it is based on having enjoyed them so).

    Merely ignoring its criticisms and blindly pushing on through anyway – hats off to you. Good for you Steve, good for you.

  15. Chris Whitten says:

    I’m not a ghost writer, I’m not a middle man either.
    I’m very sad that you’ve chosen to support an already widely criticized report funded by the tech industry lobby.
    I’m an ordinary musician and creative worker. I’d love to tell you how it is in reality, away from your negotiations in high places over smoked salmon sandwiches.
    But for now I’ll link you to one of the many reasonable replies to The Sky Is Rising bolony:
    https://thetrichordist.wordpress.com/2012/05/17/the-sky-is-rising-magic-beaver-edition/

  16. Chris Whitten says:

    Steve,
    I haven’t held on to my 1920;s business model. I HAVE adapted.
    I moved into music software production.
    Selling music software is an extremely competitive business.
    Most of the music software companies are young, tech savvy people. They are the people who make the product, not middlemen or dinosaurs.
    Our products are as good as they can be, have been improved after customer feedback, are as cheap as we can sell them while recouping our costs, are available as immediate downloads, 24/7/365, and are often able to be demoed free, in advance.
    But these products are heavily pirated.
    Your insistence that out of date business people are not giving the customer what they want is extremely simplistic, and not reflective of many products that are illegally downloaded.

    • Louise Moran says:

      Hi Chris,

      Thanks for your comments.

      iiNet has been vocal about the fact that current business models for content distribution do not work for artists, rights holders or consumers and has been at every stage of iiTrial.

      What do you feel would work as a viable business model for content distribution?

      Kind regards,

      Louise Moran
      Blog Editor

  17. Just because a product is pirated does not mean it is a lost sale. Some people pirate to try and never had any intention on purchasing it in the first place.

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