Friday, July 23, 2010

Judgement Trumps Experience

Unless you've made a commercially successful film, you have no place in the debate over movie piracy.
This isn't the first time this argument has come up in debates over movie piracy. Truthfully, it must be one of the most ignorant things I've ever heard. Do you have to be designer to spot bad design? Do you have to be a writer to recognize bad writing? Do you have to spend time making and selling horse whips to realize that the horse whip business model is becoming obsolete with the invention of the automobile?

There is no school for presidents, yet new presidents seem to do just fine. You can have tons of experience and still make poor judgement calls, as we have seen with the record industry's gradual nose dive over the last decade.

The whole reason I haven't made a commercially successful feature film is mostly because of circumstance—I have two daughters who monopolize most of my time. But even then, I have had the chance to produce feature movies numerous times and on each occasion, I've chosen not to because all my research pointed at one ugly conclusion: the current business model for making films is intrinsically flawed. A shift has happened in the last five years that has radically changed how films are getting their money recouped, or not. Piracy plays an increasingly larger role in that landscape, and that scares the shit out of me. I absolutely am not going to look an investor in the eye and tell him he's going to make his money back if I haven't done my own due diligence to prove it.

So I vowed to myself that I should make it my life's mission to completely master how film distribution worked before making my own movie. After all, doesn't it make sense that you must know how much your product will sell for before you draw up your budget? If the product doesn't sell for what you expect, then you're saving yourself a whole lot of anguish by not gathering money to create that product. Right?

After two years of research, I finally figured out what was going in the film business. At the root of problem were two key factors:
  1. there was a complete misunderstanding of the new economics in play;
  2. there was an industry-wide denial from anyone with skin in the game.
As for #1, the internet has introduced the concept of abundance into economics. For thousands of years, economics has been dominated by an understanding of how best to allocate scarce resources, but when you can copy things digitally—when each copy is an exact replica of the original—those things aren't scarce at all, but abundant. In the grand scheme of history, the internet is brand new and we're only now starting to get our head around what it is, and what it means. Sure, we try to graft Analog Age concepts onto it like Intellectual Property (as if anyone can own an idea), but the way we consume and share ideas is unlike anything we have known about how we use scarce resources. Once you get that concept (and I was militantly resistant to the idea for almost a decade), you see that business models that have been around for almost a century are becoming obsolete and new business models will inevitably replace them. The artists who have based their business models on an understanding of the new economics in play have done famously well, like Amanda Palmer who got kicked off her label (at her request) and then made $15,000 in only 3 minutes.

As for #2, I can't say I blame people in the film industry for being in denial about how things are changing. Nobody with $15 million riding on the line is seriously willing to contemplate that their business model is becoming, or has become, obsolete. What they want or don't to be true is moot—the car replaced horse & buggy drivers, the printing press replaced manuscript illuminators, and the internet will have similar effects on legacy delivery systems like records, CDs, DVDs, and books. Deny that change if you wish, but it doesn't stop the wave from destroying your sand castle.

The changes in the market are now so clear to me that it would be suicide to enter the marketplace in the traditional way to make a commercially successful movie. And if that is the only price of admission I must pay to get my message through to those in denial, then I pray for their survival as I watch their car tragically head for the cliff.

Thursday, June 03, 2010

Why They Hate Free

I hear a lot of anger from content creators whenever they hear me say "free" and "content" in the same sentence. They seem to think I want everything to be free, that "information wants to be free", etc. Their main point of contention, it seems, is they feel their hard work is devalued by offering it to consumers for free.

But free is just another price.

Say a book publisher offers a book for $15, and I offer a similar book for $10—all things being equal, my cheaper book will attract more buyers. To regain readership, my competitor might lower their price from $15 to $9. Then some jackass comes along and offers a similar book... but for free.

That's insane! That's so stupid! That's retarded! Readers will obviously choose this new free book over our book! We must loudly and unequivocally denounce this moronic behavior, and tout this interloper as a purveyer of dangerous ideas that will surely kill the publishing industry. Above all, we must insist that everyone will lose, especially the consumers. So get on our bandwagon, consumers! Stop all this free stuff if you want to save the publishing industry!

But free is just another price.

When I arrived at that conclusion, I realized that—from the perspective of most Old Dogs in the industry—they hate when I talk about offering product for free because they see no way to compete with it. Not only am I "devaluing" their work by giving away product which they must still charge for, which must feel pretty offensive to them, but I'm also offering up content for a price far lower than they can afford to offer... if they want to stay in business. In short, I'm advocating a strategy that represents their single most lethal business threat. Of course they're going to hate me for that.

But free is just another price.

If I discover a new and more innovative business model which allows me a chance to give away a product for free and still make a profit (by selling other scarce and valuable things), should it be my moral responsibility to help keep all those Old Guard competitors in business even though they continue to reject and openly deride my new business model? Of course not. My responsibility is to compete and if I don't compete better, then I'll be beat by those who do compete better than I. If my business model means I've found a way to give product away at a price lower than my competitors can afford, too bad for them. That's how it goes. But offering content for free is not anathama in itself.

Free is just another price.

Sunday, May 30, 2010

What does it lead to?

The following piece is an unabridged version of an article first published in Microfilmmaker Magazine, issue #53.

Hypothetical situation. You're in a movie store trying to return a DVD set of a TV series. The dude at the counter looks at the DVDs you've just handed him. "What's wrong with it?" he says.

"The episodes have been shuffled around," you say. "Every episode in the series is out of order so I have no idea which episode needs to be played first."


"It's usually pretty important to see a TV series in the right order."

Shrugging, "Nobody else seems to care."

"Look, I care—and I'm a paying customer."

"What can I say? Don't buy it, then."

At this point in the conversation, most people might walk out of this movie store in disgust. This is probably what they'd be thinking:

Are you seriously telling me, a paying customer, not to pay you $50-$100 for an entire season's worth of DVDs—which could end up leading to a larger purchase of the entire series if I like it enough—simply because you won't sell a DVD set with each episode in its correct order??? That's lame, bro. I hope you go out of business. In fact, although I know there are more important things in life to worry about, I'm going to make it my mission to see you go down. I'll start by finding a competitor of yours who cares enough about earning my money that they'll give me what I want. And if I can, I'll even go so far as finding that TV show online somewhere illegally, and then I'll happily download it because I know by downloading it, I didn't reward your short-sighted cavalier attitude with my money.
We've all encountered lame customer service, but in a competitive economy, companies with wretched customer service eventually lose their customers and go out of business because another company would have successfully spotted their competitor's shortcomings and filled the market need. As customers, we'd never accept this kind of flippancy coming from a company we're giving money to, especially if the amount of money dips into the triple digits.

My wife and I swore off cable TV in 2003 for two reasons: 1) the current quality of American TV had always seemed so low to us that it's hard to find anything we want to watch that we can't already rent on DVD, and 2) commercials suck.

Seven years later, TV has changed a lot. The selection of quality isn't that much better, but networks like ABC have begun to offer their shows online, and DVR technology like U-Verse and TiVo have become ubiquitous. So my wife and I tried out cable with DVR and chose to keep it for a while, just to experiment.

Despite my reluctance, I must admit that AT&T's U-Verse DVR system is awesome. If I like a TV show, I just tap a few buttons and know I'll never miss any show in a series again, even if that show gets pushed to a different time due to unforeseen circumstances. Whenever I sit down to watch TV, I know I'll always have the most recently broadcast episode queued up waiting for me. And AT&T's U-Verse remote has a killer 30 second skip feature to allow me to blaze past commercials whenever they intrude upon my viewing experience.

When I watch a TV show, I prefer to watch the series in its original order. Not all TV series are written with a specific order in mind, but you never really know from one show to the next how rigid a season's story arc is going to be. The show might be extremely episodic in nature, i.e., you can watch each episode in sequence with no problem, or the show might be highly dependent upon sequence, where watching one episode out of sequence would throw you off completely. I remember watching a marathon of The West Wing in its original order and saw the season's timeline unfold over the course of a single day... events were causal and cumulative, and there was immense satisfaction knowing the contextual signficance of each subsequent plot development based on all the plot points that had come before it. You wouldn't watch a movie on DVD with the DVD player's chapter shuffle setting on, would you? And you wouldn't buy a DVD set of a TV series with its episodes out of order, would you?

So it really irks me when station programmers broadcast old TV series episodes out of their original order, flipping back and forth from one season to the next with no clear reasoning behind their decision. They have their own bizarre logic in doing so, and it's irritating if you're trying to really invest in that TV show's world. For instance, the geniuses at FOX opted to bump Firefly's original pilot episode, and insisted another episode be created because they felt the pilot wasn't good enough at introducing the series to new audiences. Dude, trust the writers. Trust the audiences. We're not dumb. Let us see the content the way it was intended to be seen.

...and that's where piracy comes in. Here I am, I'm looking at my U-Verse DVR screen, scanning over a long list of episodes my DVR has dutifully recorded for me. As far as I can tell, I can have at least 24 episodes in a series to choose from at any time—a season's worth of episodes. Given enough time, my DVR will eventually soak up every episode ever broadcast from that series. Which means my DVR is, ultimately, going to deliver to me exactly what I want—the series—but not in the order I want it. And because I may be watching a series where that's kind of important, that irritates me quite a bit. So if I have access to BitTorrent or an online site where I have that choice to watch pirated versions of those same TV episodes but in the order I want to watch them, even if it means sacrificing some quality... I could easily see myself doing it. Broadcast TV has failed to deliver what I really want, and now I'm going to get what I want without broadcast TV.

The clincher is that the experiences of using DVR technology and using BitTorrent are strikingly similar. With both U-Verse DVR and BitTorrent, I would:
  1. Find a program and get it recording/downloading;
  2. Wait for it to be finished and come back whenever I want to watch it.
  3. For U-Verse, I skip over commercials in 30 second leaps. For BitTorrent, the commercials have been conveniently removed—effectively, these are the same experience, though BitTorrent is slightly more convenient and time-saving.
Thus, if both experiences are effectively the same, but my BitTorrent copy deletes commercials that would have been skipped over anyway (and saves users the time of reaching for the remote and finding the exact spot where the commercials stop) and offers more content choice than using my DVR... well, it's pretty obvious why users are willing to sacrifice a little image quality to pirate content.

I could stop there and say broadcast TV's myopia has effectively forced me into BitTorrent piracy once and forevermore... but that would be a lie. The fact is, contrary to what most people might think, an act of copyright infringement of a TV series is actually a huge win for the TV series' creators. Yes, a fan has resorted to piracy to seek out episodes to play in the original order they were intended... but that fan is still watching their TV series. Meaning, they still have a person's attention. Thus, it doesn't follow that a person will continue to pirate every episode of the TV series just because they can. On the contrary, the more a person pirates a series, the more of a fan that person becomes (if the series is good, of course)... and the more likely that person is to keep watching the series on DVR. Right now, the best quality image is still on TV so, when given a choice to view content on a TV set or through BitTorrent/web streaming, I know that I would still prefer to watch stuff on my TV. Why? If I can get all my content for free, why wouldn't I? Because BitTorrent and web streaming piracy is still way too much effort (i.e., it takes too much time and it's too inconvenient) and pirated web streaming is typically of far poorer image quality (it has poor embodiment).

This is the single most irritating myth I hear invoked about piracy, that "piracy is a lost sale". Rubbish. Maybe that's true in some cases, but piracy is never as clear cut as always equating to a lost sale. In my case, piracy actually leads to sustained and increased fandom because the more attention I give that content, the more time I have to become a fan of it... and the more I think about buying DVDs on Amazon for myself and/or my friends. Perhaps this is why rumors persist that allowing copyable content (music, movies, books) roam free on the internet without copyright enforcement actually increases the sales of non-copyable content (merchandise, concert tickets, lunch with the content creator, watching in IMAX 3D).

Of course, people resort to piracy for many reasons, but I still believe that casual users—which likely represents the bulk of pirates out there—don't resort to piracy merely because they can get something for free. If I could get anything I wanted for free online without fear of negative consequence, why do I still pay for cable? Why do I still pay for Netflix? Why do I still buy off of Amazon? Piracy, at its juicy inner core, is really about control. Consumers of digital content want what they want and if producers can't figure out how to make money by giving consumers what they want, consumers will get it regardless. The mortal sin for producers is that if they remain obstinate enough to allow consumers to venture into piracy (and yes, piracy is the producers' fault for not fulfilling a market need quickly enough), producers have not only lost an opportunity to get their consumers' money, but they've also lost a chance to get their consumers' attention. As anyone in marketing knows, it takes seven touches to a sale, so the more attention your customers give your product or service, the more your sales should increase overall. Pirates are also fans, and fans buy stuff. As long as producers are clear that fans don't buy the actual product, but the intangibles embedded in the product, producers should be fine with letting their content be freely available online. Content only gets buyers in the door, but intangibles are what get money changing hands.

Another mental eddy I run into is people seeing red when they hear the word 'piracy'. People's brains shut down. Their knee-jerk reactions seem to be steered by moral judgments they've made months, or even years ago, about theft: It's wrong, it's theft, they're pirates, and they should go to jail. Theft is actually an Analog Age concept—taking an apple from you which deprives you of its use—and if we apply the rules of the Analog Age to the Digital Age, this would certainly be true... but the Digital Age has new rules. Never before has it been possible to infinitely copy a product with zero cost to the producer. If I could go back in time 600 years and tell someone a book could be copied and sent to every person on the planet in less than a day, they'd laugh in my face. A book, they'd say, is a scarce object, something venerable because of its inability to be copied. (Even if a book were copied back then, it would still be so original that it would remain unique.) But then they'd see the invention of the Guttenberg press and be both amazed and horrified about its ability to duplicate books with ease. As printing presses increased the supply of books, their price per unit dropped and what had previously been scarce was now suddenly far more abundant and accessible. The Digital Age is merely the latest evolutionary chapter: instead of having a low cost of reproduction, we now have a zero cost of reproduction. And when something can be handed from one person to the next without any cost to the producer, it cannot be defined as theft under any definition. Even the law recognizes there is a difference—illicit digital copying isn't called theft, it's called infringement.

Here is it useful to look at piracy in a different light. Rather than define the act of piracy for what it is—i.e., illegal and immoral—let's look at the act of piracy as what it leads to. You can look at the world in static terms or in fluid terms, and the latter yields more useful conclusions. Author Edward de Bono draws a distinction between the two forms of thinking:
de Bono contends that traditional logic is static, based on the solid foundations of 'is' and identity. In contrast to the traditional 'rock logic', he proposes 'water logic' which is based on 'to' and the flow of the mind: 'What does this lead to?' as opposed to 'What is...?'
How does this pertain to piracy? de Bono explains further:
Pragmatism is very much based on the 'leads to' of water logic. There is a justified fear of pragmatism because it seems to seek to operate without principles. This is nonsense because the principles can be just as much part of the pragmatism as are the circumstances. One strong reason for a dislike of pragmatism is the fear that 'the end may come to justify the means'. In other words if the end is worthwhile then the means of achieving that end are justified. Since different people and different bodies will have different notions of worthwhile ends, the result would be chaos and barbarity. Interestingly the very reason we reject this notion of the end justifying the means, is a pure example of pragmatism and water logic. We are concerned with what it 'will lead to'. So pragmatism can police pragmatism just as well as rock logic policies rock logic.
To cite another de Bono example, if a customer goes to a store without a receipt to return an object they bought, the store can point to their sign that says, "No receipt, no refund." According to Rock Logic, the store would be in the right and the customer would be in the wrong. According to Water Logic, though, that sort of rigid decision leads to a dissatisfied customer unlikely to buy from that store again. Would you rather be right... or breed lifelong customer loyalty?

In Rock Logic terms, piracy is bad/wrong/evil, etc. and always will be until the end of time. Fine. But what does it lead to? What does having a film leaked on BitTorrent lead to?

Piracy leads to attention... and attention leads to more sales.

It sounds so simple, doesn't it? John August had his film The Nines leaked onto BitTorrent and he had this to say about it:
IMDb searches for The Nines peaked at #11 on January 20th, 2008 — two weeks before the DVD was released. That’s because it finally got leaked on BitTorrent. Suddenly, that college student in Iowa and that programmer in Arles could finally see the movie.

Let’s try a thought experiment: what if The Nines had leaked shortly before the theatrical release, say, August 19th? At that point, we were number 836 on IMDb, and that was during a concerted publicity campaign which would ultimately get us as high as 47 on the chart.

Would the leak have helped us or hurt us?

Given we were only playing in two cities in the world, I can’t think it would have hurt us much. And if there had been a legal and easy way to let people watch the movie — say, through iTunes — I think we could have capitalized on the attention. The pirated version was going to be available on or before the release of the DVD regardless, so one might as well benefit from it as much as possible.

To my thinking, leaking a decent-quality, watermarked version would have greatly increased the awareness and discussion of the movie, which could have paid off if the DVD and/or iTunes version were available shortly thereafter.
Piracy is the only explanation for why a film like the massively pirated Wolverine—which received awful reviews—actually did better at the box office on its opening weekend than the other equally popular franchise film Star Trek, which received rave reviews. For every case of a pirated film where the producers claim they lost everything, it feels like I can point to just as many films which seem to have done very well because of piracy and/or because the film was free. My hunch is that the pirated movies that don't make money aren't good enough to demand repeat viewings... so we only hear complaints from the producers who are getting their asses tanned for making product the market doesn't want badly enough.

In a digital age where a decade of enforcing copyright has yielded nothing but a pyrrhic victory, does it make sense anymore to keep throwing money at a pointless battle... and then feel bitter about its lackluster results? Or do you think it's maybe time to bite the bullet, embrace the market's new rules and get on with making money the new way?

Thursday, April 08, 2010

The Cliff

Bad news for you. You're asleep at the wheel—you can't see what's coming. We're not in the car ourselves, but we can see passengers with you; if you crash, they will surely be injured.

But you might also hurt us, or people we know. People look up to you, they're counting on you. What you decide will sway countless others... and you're asleep at the wheel.

We feel we see the world for as it is, and we're well aware the path is foggy. You probably fell asleep because you felt the path would never, and should never, change. Yet the path has changed, and massively. Looking ahead, we think we know—at least in broad terms—where the path will take us all. We can tell a few things for sure and we can see the cliff you're coasting towards. You're smarter than that. You should be awake. You need to be awake. Lives are at stake.

And we try. We try hard every day to get you to see the world as it is despite how you wish it might otherwise be. We also desperately wish the path weren't so foggy... but it is. If you were awake, and lucid, you'd see things as they actually are, not through the lens of how things have been or should be.

If you want to drive off that cliff, asleep at the wheel, we've given you fair warning. Still, we can't stop pestering you because our very humanity does not permit us to stand idly by and watch others needlessly spiral into oblivion.

The path has changed. It's not going back and will never go back to how it used to be. Accept it. Wake up and veer away from disaster.

As for us, we're also going off the cliff... but we're not going in a car.

We're going on a hang glider.

Friday, March 26, 2010

One Million Screwdrivers: The Bassinet Story (Part 5 of 5)

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here.

My wife and I had a bassinet given to us when our first child was born. It was decent enough for a piece of furniture that would only be around for a few months. After our daughter grew out of it, we passed it over to one of our friends with a newborn, and then recouped it again when we had our second child. With our second child finally growing out of that bassinet, and with no plans on having another baby, the bassinet had no use to us anymore. With a house of four, our space had diminished further... so, not knowing anyone with a newborn to give it to, we needed to get rid of it fast.

A comparable bassinet would have sold for $200 to $300, but we didn't want to wait that long. We could arrange a time for someone to come by and pay us $50 or something, but that might involve an investment of time on our part, a scarcity we did not have. We could take it to Goodwill and drop it off as a donation for the tax write-off, but that would also require an investment of time... same problem. Despite the logic pointing us to post it on Craigslist, my wife had attached a huge amount of sentimental value to it—after all, it had protected both our newborn daughters in the most fragile and beautiful moments of their lives. My wife didn't want to just give away this bassinet to some random stranger who might snatch it up and resell it for a profit.

But, in the end, she gave in. I took the bassinet downstairs, placed it outside our closed garage door, and posted an ad on Craigslist saying, "Free bassinet. Great condition. First come, first served!" It was gone before sundown.

That evening, my wife was searching Craigslist for my original ad and found this post completely by accident:

A big, big thank you to the couple who gave this stuff away. I picked up the bassinet with the sheets, etc. in it a little while ago. Our bassinet had been damaged beyond repair in an accident, so we were really needing another. Many thanks!! I am just thrilled with the bassinet!

Our intent was not really charitable, but pragmatic. Still, it felt good. We gave up our control, let our bassinet go out into the world, and it found a good home. Letting the bassinet go was worth the risk.

Here's a little known fact about Woodstock—it was one massive act of piracy. Originally, the organizers had intended to charge for tickets but their three foot wooden fences were immediately pushed over by a wall of hippies. Following a tense moment of pondering legal action, the Woodstock organizers considered how many people were ignoring their legal rights, i.e., everyone, and deduced that any attempt to enforce their legal rights would lead to riots. Of course, nobody knows whether Woodstock would have retained its place in music history as the concert of all time if its organizers had been able to successfully charge for tickets, but it's safe to say that many people still talk about Woodstock because it was a free concert with the greatest musicians of their generation. Today, it's still possible to cash in on vintage Woodstock T-shirts. Think about that. Woodstock happened 40 years ago last year... and they're still selling T-Shirts. If that isn't the power of free, I don't know what is.

Many in entertainment sectors have an unhealthy fixation with the word, "free". They consider putting a free price on their content, or giving away copyable versions of their content, as synonymous with calling their content worthless. Price and value are distinct ideas, but they hear "free" and further arguments start to fall on deaf ears.

I've tried to use air and water as examples of how even "free" goods can still be enormously valuable, but the counter-arguments are that air and water aren't free because we still pay taxes to keep the air and water clean. Okay... there's some truth in that, I guess. Anyone in Los Angeles knows that water from the tap is expensive, even it feels free. However, this completely misses the point about abundance: you can go into any restaurant in America and ask for a glass of water and not be charged for it because it is so abundant. Water priced at $0.00 does not demean its value. Without water, we would die. Yet it is abundant, so its price is zero.

But fine, let's dance. I have the ultimate trump card—the outer core 3,200 miles below the Earth's surface. The outer core is an ocean of 4400°C nickel iron with insufficient pressure to be converted into a solid state. Because iron is electrically conducting, its swirling eddies produce a massive magnetic field extending beyond Earth by several thousand miles... a magnetic field which shields us all from lethal doses of radioactive solar winds. More than air, water, or even sunlight, Earth's swirling outer core of liquid metal frequently keeps us from burning to a crisp. Thus, the outer core is indisputably one of the most valuable things sustaining life on this planet. However, despite this incredible value, we pay nothing to sustain it. Years go by and we hardly even give it a thought, but without that liquid metal constantly churning thousands of miles beneath our feet, we would all die from solar radiation. Abundant means free, not worthless.

The hypothetical example of one million screwdrivers was to show that when you lower costs, you gain more buyers... and buyers become fans... and fans come back to buy more. Yet when you lower your costs to "free", you stop making money and start getting something else entirely, something potentially far more valuable than money—attention. Why is it more important? Because attention brings discovery, fans, opportunity and influence. The more fans, the more leverage you have to make money from other outlets.

That's where a lot of people in the Analog Age need to take a leap of faith. They're still making money off $25 DVDs. They control the distribution paradigms and it's worked very well for them, thank you very much. Why should they give that up? They'll just push for tighter Digital Rights Management and pay high-priced lawyers to send out cease-and-desist letters.

Here's how I see the two different approaches:

  1. Retain control and spend money on DRM, lawyers and marketing.
  2. Make money selling infinite goods. (MP3, MPEG, JPG, PDF)
  3. Have limited/niche attention, small fan base.
  4. Hope enough fans remain faithful.
  5. Be resentful about piracy.

  1. Cede control and save money on DRM, lawyers, and marketing.
  2. Don't make money with infinite goods by themselves.
  3. Get massive attention from freely distributed infinite goods.
  4. Leverage that massive attention to discover and nurture new fans.
  5. Make money selling scarce goods. (time-saving, convenience, authenticity, exclusivity, etc.)
  6. Hope your infinite goods get pirated more!

The ones who refuse to acknowledge any or all of these arguments seem to have a vested interest clouding their judgement, or they've never thought too much about the issues, or they have a monochromatic morality forged in a Analog Age. They think pirates are evil, so they push for increasingly stricter DRM. So I have to wonder: is the source of this conflict merely two incongruous ways of looking at the world? Media futurist Gerd Leonhard put it this way, and we'll use this eloquent piece to conclude this blog series:
After countless conversations and debates over the past 8 years, I have come to think that the DRM issue is largely a question of which reality one believes to be true—and we must address the solution as such, too. No research, no statistics, no hard facts, and no futurists will tell us conclusively whether the record companies should or should not use DRM when selling digital music. To make this decision will not be science but an art!

Do you believe that the sharing of music—and therefore its consumption, in general—needs to be controlled, that a certain amount of friction is required to extract any meaningful payments for music in a digital environment, that the average consumer will always try to avoid paying anything, if given any opportunity to do so, that it is impossible to sell something that is, to a large degree, also obtainable for free, and that the monetary value of music really is in 'the copy' of a song? Then you would indeed need to be a strong advocate of technical protection measures and digital rights management software—in your mind the control of those 0s & 1s would be a definitive prerequisite for any monetization. No control equals no income; a ‘free for all’ is the result of having too little control.

Or do you believe that a consumer will always pay for something that is easy, enjoyable and trouble-free to acquire and that has demonstrated, tangible and trusted value, that it’s not just the copy of a file or a piece of plastic that represents the real and inherent value of music, that friction can not be successfully re-inserted into our increasingly frictionless commerce environments, that our business problems cannot be solved with technological measures? Then you would be against DRM or TPMs, unless they could be 100% device-compatible, unobtrusive and behind-the-scenes, and indeed offer actual benefits to the end user—this certainly looks an exceedingly tall order that is, imho, beyond reach as far as digital music commerce is concerned.

Do you believe that music can be sold 'like water', i.e., as an ubiquitous asset that can both feel-like-free (like tap water), as well as be paid-for (like premium priced bottled water, a $100 billion business), or should music commerce remain strictly in the realm of units, copies and their various controlled physical or digital embodiments?

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here, or the other articles here:
  1. Introduction
  2. The Experiment
  3. Ripple Effects
  4. Lessons Learned
  5. The Bassinet Story

Thursday, March 25, 2010

One Million Screwdrivers: Lessons Learned (Part 4 of 5)

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here.

Is this story far-fetched? Perhaps. The hypothetical is conveniently divorced from actual economic concerns, like cost of production as determining market price. If a good costs more to produce than it can be sold for, it's pointless to keep producing that item... unless that item is a loss leader to sell another product or service, e.g., access to your expertise.

The Ebay thing might be a bit much, yet stranger things have happened. Even so, I hope it drives the point home that none of this would have happened if the screwdrivers not been given away for free. Before putting things out into the world, you never know what's going to come of them—the only way to know is to do it. In the above scenario, the story happened to capture the public's imagination and go viral. Not planned, of course, but still possible.

Of course, the math is simplified and exagerated to illustrate the basic principles in play, i.e., reducing unit price by a factor of ten does not mean buyers will also increase by a factor of ten to net the same revenue, at least not indefinitely. However, in the real world, evidence suggests that does happen for narrow windows: Valve co-founder Gabe Newell revealed that dropping the zombie game Left 4 Dead to half-price resulted in a 3,000% increase in sales which outsold the game's launch sales. Valve's weekend deep discount sales—reducing prices as much as 75%—resulted in a 1470% increase in sales. That is, if you were to sell a $10 game to 1,000 customers for $10,000 revenue, and temporarily drop the game's price to only $2.50, you'd gain an extra 14,700 customers—15,700 in all. At $2.50/game, that equals a revenue of $39,250 instead of only $10,000. Almost four times the revenue from dropping your price three quarters below what the market typically expects.

The actual numbers might be closer to this:

$49 retail price @ 10,000 customers = $490,000 revenue
$12.5 (75% retail) x 147,000 customers = $1.9 million revenue

Not only do you make more money this way, but you explode your fan base in one fell swoop. Of course, only a fraction of your new customers will be the kind of "true fan" that will buy anything you produce, but more consumers means more chances to sell them accessories and other similar products. More attention means more opportunities to convert neophytes into casual fans, and casual fans into true fans.

The most important question you should be asking is: If you can get more attention to convert more fans and make more money by drastically reducing the price of your product, why aren't you doing it? Is it because you still believe your product's true value is inextricably tied to its price? If so, then you quite literally pay a high price for that belief—you make less money and you get fewer fans.

The crucial difference between the above real-life software/game example and my hypothetical sucess story of one million screwdrivers is that one story is about an infinite good (a software game, which can be copied infinitely), and the other is a scarce good (the screwdriver, a physical object, which cannot be copied infinitely). Valve can make money from selling infinite goods (which can be easily pirated) because they're actually selling the convenience of their Steam platform, rather than the content by itself. For screwdrivers, there is true scarcity: over time, every screwdrivers will have been obtained and only the holders of those screwdrivers will have possession of the good. By contrast, a software game can be copied over and over and over again. The intrinsic nature of digital data is infinite abundance, and when supply is infinite, like water or air, its price is forced down to zero. This has nothing to do with the object's value, only its price. That's why Valve is selling the content's intangibles (i.e., convenience and time, which are scarce, and thus costly) bundled with the content (i.e., the software game, which can be abundantly found, and thus free).

Authors in particular worry about the devaluing their content if they let their content go for free. But take a work like the Bible: it is freely available online, in every hotel room, in any library... it is the very definition of abundant. It is, in effect, free. Yet, strangely, people keep buying it. So if people can get the Bible for free anywhere, why do they keep paying for it? Because they aren't buying the content, they're buying the stuff around the content. In the case of the Bible, they're buying the embodiment (a really nice leather bound edition with snazzy typesetting), personalization (a name emblazoned on the front), interpretation (historical context explanations), patronage (buying it from a specific organization as a form of donation), etc.

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here, or the other articles here:
  1. Introduction
  2. The Experiment
  3. Ripple Effects
  4. Lessons Learned
  5. The Bassinet Story (Friday 3/26 9:00 AM PST)

Wednesday, March 24, 2010

One Million Screwdrivers: Ripple Effects (Part 3 of 5)

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here.

Year Eight. Of course, you're now public enemy #1 to all screwdriver manufacturers. As predicted, some of those screwdriver manufacturers have indeed gone out of business, while others immediately stopped making screwdrivers and switched over to making other tools. The market adapted—some companies became extinct, some companies struggled, and other companies thrived by completely refocusing their business model on selling complimentary products... like screws.

But your seven year experiment has yielded unanticipated benefits. Your massive giveaway captured the attention of a local newspaper reporter who interviews you about this "seven year pricing experiment". The 1,000 word article—entitled "1 Million Screwdrivers"—is aggregated into sister newspapers, re-run in a national newspaper, goes online and gets indexed by Google.

Of the tens of thousands of people who read the widely distributed article, one is an influential Fortune 500 company executive. He tracks you down and asks you if you'd be willing to give a short presentation about your pricing experiments at his company's upcoming think tank retreat. Flattered, you accept and suddenly find yourself addressing a room of very wealthy people. After your presentation, one of the wealthy people in the audience approaches you and asks if you'll be a consultant for his fledging pet startup.

Word gets around town fast—you're quickly approached by many more people to be their consultants, too. Not long after that, someone in the media refers to you as a "resident expert on product pricing". Calls start coming in with offers for you to speak at more blue chip luncheons, and most people who call assume you charge a speaker's fee for your presentations. And a good thing, too—your time is so scarce now that you have to give priority to only the paid speaking engagements.

And then something really bizarre happens. A few geeky (but talented) no-name musicians read your story and write a hilarious song called "1 Million Screwdrivers" and post it on their blog. A few days go by and the song gets posted on I Am Bored. From there, it gets posted to Digg, then Myspace, Facebook, and Twitter. Some Lucasarts movie animators in between movie gigs create a jaw-dropping machinima video to accompany the song and they post it on YouTube. A month goes by and then—wham!—the song gets a million plays around the world. Someone on Facebook feels compelled to create a Facebook fan page called, "1 Million Fans for 1 Million Screwdrivers" and it charges ahead gathering fans like crazy. Like all things that go viral, you have—quite unintentionally—hit a tipping point. None of this has been done with your permission, but you make no move to stop the fervor, either. There seems to be no stopping the public's fixation about your story—or for your overtly banal screwdrivers—but all the unexpected publicity has put you increasingly in demand on the lecture circuit.

Eventually, someone realizes the screwdriver they own is actually one of these famous "1 Million Screwdrivers in that weird YouTube song", so they sell it on Ebay. Though they got the original screwdriver for free, that same screwdriver fetches an auction price of $10, far beyond the price of any comparable screwdriver on the market. Then, more people start selling their screwdrivers on Ebay, and this Ebay trading craze becomes a sub-culture thing. Someone creates their own T-shirts on Cafe Press with pictures of your screwdrivers on them. A software programmer writes a game mod for a popular first person shooter with your screwdriver as a weapon. Fan films sprout up with your screwdriver as their main plot element. Finally, a Hollywood producer sniffs around to see if you're open to having your story made into a movie... on and on it goes.

You return to your old warehouse. It's empty. Every last screwdriver has been sold or given away. You're about to turn out the lights...

...when you see one lonely screwdriver nestled in a crack between the floor and the wall.

As a final test, you tweet to your 100,000 followers (which you didn't have seven years ago) that you've found your last authentic screwdriver and you'd like to sell it for $1,000. The last time you sold these screwdrivers for $1,000—seven years ago—nobody bought them. This time, people scramble over themselves to buy it.

And then you get a phone call. It's that first wealthy executive who invited you to his think tank retreat which started this whole thing. You reminisce about the crazy rollercoaster ride it's been. He tells you he's setting up his own company based on your concept of giving away product for free—he'd very much like to buy your last screwdriver because of its sentimental to him and its historical value to his company. What's the name of his company? 1 Million Screwdrivers. Given the company's name, and this unique circumstance, he's prepared to make the purchase a massive publicity stunt to help launch his company... he offers you $1 million for that screwdriver.

You hold the screwdriver in your hand. The more you look at it, you realize this single screwdriver is the last object you have to remind you of your deceased uncle. It took you seven years and hundreds of thousands of screwdrivers but you finally understand that this screwdriver—the very last one of its kind—isn't even worth $1 million, or even $10 million.

This 50¢ screwdriver is, quite literally, priceless.

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here, or the other articles here:

  1. Introduction
  2. The Experiment
  3. Ripple Effects
  4. Lessons Learned (Thursday 3/25 9:00 AM PST)
  5. The Bassinet Story (Friday 3/26 9:00 AM PST)