Piracy is a Hydra

I went to a workshop on copyright the other night. It was extremely informative, but even the lawyer giving the lecture acknowledged that something major needed to be done to address the current situation of massive pirated downloads. Having worked as counsel for Tower Records, she represented them in that famous lawsuit against Napster because Napster had been dumb enough to specify in their business plan, "We're going to put companies like Tower Records out of business." Well, Napster went under, but then so did Tower Records. Ironically, Napster was reincarnated under a subscription-based model.

One attendee mentioned The Pirate Bay, which is an anti-copyright organization run out of Stockholm, Sweden. The Pirate Bay hosts a server indexing all BitTorrent files currently available, which means that if you go to their web site, you can find an "index" link to any film, movie, or song they have. When you use BitTorrent on that index link, it finds all the people who have a small fraction of that song on their computers and assembles all those parts into a complete file for you to watch or listen to. This is called, "hyperdistribution". As an American, by using BitTorrent, you have almost certainly infringed the copyright of the artists and their producers... but that doesn't seem to stop anyone from doing it. The Pirate Bay has gotten a lot of heat from the MPAA and record companies, and their offices were even raided by Swedish police in 2006. After that raid, however, The Pirate Bay was up and running again only three days later.

A few months ago, I discovered a site that goes a step farther—Watch-Movies.net. You don't even need BitTorrent to use this site. All you do is go to their site, type in the movie you want to see, and find the file that works the best for you. Invariably, these files are made from illegal camcorders in movie theatres, so you can see films still in general release. The quality is not always high, but if you're willing to sacrifice quality, then you can see practically any movie you want, for free, as long as you have access to the internet. Even though watch-movies.net stopped working quite suddenly (due to someone complaining, no doubt), Watch-movies-links.net Watch-Movies-online.tv Watchmovieslinksonline.com was started up not long thereafter.

A Whois lookup on Watch-movies-links.net returned this:

Registrant:
Name: Private Protection Co.LTD
Organization: Private Protection Co.LTD.
Address: NO.1111 Chaoyang Road, Beijing
City: Beijing
Province/state: BJ
Country: CN
Postal Code: 100000

Administrative Contact:
Name: Private Protection Co.LTD. Zhuhai Branch
Organization: Private Protection Co.LTD.
Address: NO.1 Meihua Road
City: Zhuhai
Province/state: GD
Country: CN
Postal Code: 519000
Email: ad9ad10c6983b7ffe00bb2a6fac1fdf4@domain-private.com

Dispute Contact:
Name: Todaynic.com,Inc.
Organization: Todaynic.com,Inc.
Address: 6B XIHAI Building, No.221 Renmin E Road, Xiangzhou District,
City: Zhuhai
Province/state: GD
Country: CN
Postal Code: 519000
Phone: +86.756-2281763
Nameserver Information:
ns3.01isp.com
ns4.01isp.net

As expected, Watch-Movies-Links.net is based in China, one of the largest violators of copyright. In doing research for my movie business plan, I learned China permits only 20 foreign movies to be shown annually in their country. If the tables were turned, and the best movies were always made in China, and the American government said I could only see 20 foreign movies per year—of which only a fraction were Chinese—I'm sure that I, too, would be a pirate without any ethical reservations. Since China is still under the yolk of communism, an ideology which divorces the individual from private property, I'm unsurprised when I hear Chinese citizens (proudly) call their country, "The nation of fake."

The ability for companies to brazenly violate copyright reminds me of the Hydra from Ancient Greek mythology. Hercules' Second Labor was to kill the Hydra, but "upon cutting off each of its heads, he found two grew back, an expression of the hopelessness of such a struggle". In this case, the MPAA, music companies, and the world's police are Hercules, and the Hydra is both the Pirates and the consumers who use BitTorrent. Try as they might, authorities can't seem to kill hyperdistribution. Shut down Napster? Here's BitTorrent. Shut down The Pirate Bay? They're up three days later. Shut down Watch-Movies.net? They switch domains. Sue consumers? You get a consumer backlash.

Why does piracy continue to flourish despite the continued assault from authorities? Because piracy at its core isn't a legal or technical matter, and thus cannot be solved with legal or technical tools. Piracy is in its essence a social problem only catalyzed by an unenforceable (and thus unrealistic) legal code and an astonishingly efficient delivery system. Rampant piracy is really just a symptom of users who want to consume content, and who aren't particularly interested in the hassle of paying for it. Sure, if it's easier to find content and pay for it than to download it over BitTorrent, they'll pay (thus the success of iTunes). But here's the bitter pill nobody wants to swallow: if a user goes out of their way to watch a pirated copy, they probably weren't a paying customer to begin with. Far from being a curse, users who watch pirated shows and movies and listen to pirated songs possess one unique benefit—a user who watches or listens to a pirated copy might like it enough to buy it on CD or DVD and/or recommend it to others... which is impossible if they never even watched or listened to it.

Sites like Hulu.com and ABC.com with its own media viewer show how the entertainment industry is evolving to come to viewers. Instead of not showing content online and "forcing" viewers into downloading episodes illegally, they're creating user-friendly parameters to make it easier for people to get the content they want, whenever they want it. The theory goes something like, if they're going to dally about with a mistress, at least we want to control who and where that mistress is... because we can make money off of that.

Lawrence Lessig makes an excellent point about copyright. The way the law is currently set up makes it too hard for providers to let users share, remix or use content. In an internet digital culture where sharing is the norm, copyright law is so restrictive that it's now stifling creativity. That's why I've become a fan of the Lessig's Creative Commons License.

My friend Nik said it best when talking about the pervasiveness of spam: "As long as you have a backwater country that doesn't crack down on spammers, you're always going to have spam. The only way to really fight spam is to manage it." Maybe one day, every country in the world will indeed have a police authority able and willing to protect the rights of every content producer around the world. I fear, though, that such a day will be long after my children have already grown up... and during that time, our culture will have since become accustomed to violating copyright as the norm.

LECTURE: Redefining Digital Content Distribution

Below is the complete text of the lecture I presented at The Conversation in Berkeley on October 18th.

Redefining Digital Content Distribution, or
Why Apple is About To Get Its Ass Kicked
by Ross L. Pruden

I’m a filmmaker myself, and I’ve spent a long time studying movie distribution so I’m excited to share my predictions here at The Conversation. By the way, I should add that I’m a two decade Mac user so I share no joy at the prospect of Apple’s possible demise.

HOW WILL IT END?
I’m currently writing a business plan for my own film company, yet when I get to the Marketing & Sales section for my plan, all I see is a US-Letter Sized question mark. Movie piracy is more pervasive than ever before—not necessarily a bad thing—and newer distribution models are still competing for dominance. How is this all going to end?

On my blog, I discuss how digital content is being distributed, and a recent post called iTunes’ Death Knell describes how iTunes in its current incarnation faces some potentially fatal challenges from its competitors.

THE OLD MODEL
Our dominant model for digital content distribution of music, movies, and software has been historically rooted in physical ownership, i.e., movies are sold on DVDs, games come on CDs, and music comes on a CD or on MP3s. As broadband becomes more pervasive, we see that dominant model shift from a physical product-based ownership to a virtual license-based ownership.

Let’s say I buy a new movie at a store for $25. I buy it on DVD, take it home, and get ready to play it. Then my precocious daughter smears her cheese snack all over my new DVD. I’m out $25. Or maybe I buy a CD for $15. Or a new PC game or application for $50-$300. And then my house burns down. Once the physical product is destroyed, you have to repurchase it. In a digital age, where copies can be made instantly and without degradation, this is unacceptable.

THE NEW MODEL
And we already see a slow exodus to the online world. More people are using online applications like Google's Docs & Spreadsheets instead of Microsoft's Word & Excel. Netflix offers an online movie service called Watch Instantly. Users even create their own radio stations on Last.fm, Pandora. The trend is slowly moving towards constantly accessible streamed content.

Right now, iTunes lets me buy a complete season of 24, but at half a gigabyte per episode, I need 12 gigabytes to store an entire season. Storing three seasons on my laptop starts to become unmanageable. Or maybe I have my entire music library on my desktop, but my laptop only carries a fraction of that. As a user, I want to have access, anywhere, to all the content I’ve ever purchased—forever. The only way to accomplish that is to sell content licenses to stream content whenever users want it.

STEAM
The Valve Corporation, responsible for the famous Half Life games on PC, maintains a gaming network called Steam. Steam is a license-based platform offering over 250 games and boasting 15 million users. If you visit someone’s house, all you have to do is log into your Steam account and you can download and play any game you own that you’ve purchased through Steam. If you need hard drive space, you can delete games from your hard drive and download them again later. If your house burns down, there's no scrambling with customer service to prove you bought your content—you only your Steam account username and password to have access to any of your games.

For the consumer, license-based distribution also makes upgrading very attractive: for example, if I bought a $20 DVD and later on I want to buy a $35 Blu-Ray DVD, I can “upgrade” my DVD license with that $15 difference and then download the newer hi-def version. Customers would never need to worry about being gouged for purchasing a newer version reissued every few years.

ITUNES, MEET DECE
Although iTunes is popular now, it only sells product, not product licenses. You buy MP3s and if your hard drive crashes, those MP3s are gone. Worse, each company's proprietary DRM means MP3s purchased on other platforms like Zune cannot be played on your iPod.

DECE—which stands for Digital Entertainment Content Ecosystem—is a new license-based platform for movie content. Its financial investors are Warner Bros., Fox Entertainment, NBC Universal, Sony, Paramount, Comcast, Best Buy, Microsoft, Hewlett-Packard, Cisco, Philips, Toshiba and Verisign. Disney and Apple are not on this list.

DECE will allow:

1. a TV episode to be just as easily accessed on Microsoft's Zune as it would a Philips broadband-enabled TV set;
   
2. an unlimited number of copies of a video to be created or burned onto a disc;
   
3. the consumer does not even need to store a copy at all, but stream it from a server-based "rights locker" that can be tapped from any location.

HOW IT WILL END
Okay, so how will it end? What might license-based distribution actually look like in the real world? It would probably interact seamlessly with the internet and use corporate sponsorship for those unwilling to pay a monthly subscription. One such scenario could go like this:

You're over at a friend's house and you're talking about a movie you just rented online through a web site. You want your friend to watch it, too, so you sign on to that web site and the film starts to download immediately.

While you're online, another friend—in a different location—sees you're about to watch a movie and sends you a text or video message, via the web site: do you want to all watch it at the same time? You send him a virtual invite or "guest pass"—which would be limited to only 5 or 6 per movie—and now your remote friend has joined your virtual “audience”.

After the film is over, one of your friends is so impressed with the film (which he’s essentially seen for free) that he decides to buy it himself. Another of your friends recommends the movie to his friends. The remote friend might be by himself and perhaps he likes to surf the web while watching films, and so he clicks on some of the sponsored links related to the film's topic matter, e.g., clothing choices, charities the movie's actors have started, other movies the director or producers have made, other movies you're recently watched and rated, etc. Or, if the remote friend is watching your rented movie, he could pay—at any time—to watch the rental himself so as to remove all the embedded advertising links and overlays.

We’ve only spoken about music, movies, and software, but how about books? Wouldn’t it useful to remotely access the contents of any book you've ever bought? No reason why children need to lug around heavy book bags if they can instantly view or print any chapter they want to read.

TWO THINGS
Two things are clear about the current state of digital content distribution for movies:

1. iTunes has the dominant model for physical product-based distribution—you buy a movie or TV show through iTunes and you can be watching it within minutes.
   
2. iTunes no longer has the competitive edge on providing the distribution model consumers will ulimately want and if iTunes doesn’t work out an arrangement soon with the founders of DECE to sell movies through iTunes with DECE’s “rights locker” features... well, Apple is about to get their ass kicked.

Thank you very much. Please come find me on Facebook or visit my blog!

***
UPDATE: Since the writing of this lecture, news has been reported of a new music streaming web site Lala.com. Lala.com lets users listen to any song without limitation, for free, in the hope that some users decide to buy the songs. Much like Steam has done for games, Lala.com allows iTunes users to upload their library and listen to their music from any location.

MORE UPDATES: Apple acquires Lala.com. Just keeps getting better, doesn't it?

Lala, lala, I can't hear you...

Too bad I didn't post my lecture I gave at The Conversation this weekend about license-based distribution, because the article below about Lala.com only reinforces it.

Lala.com is now offering licence-based ownership of music... a model that directly competes with the iTunes. In fact, if you own an Mp3 on iTunes, you can upload your library to Lala.com and stream it from their site if you log into Lala from any computer. That model blows iTunes out of the water where you own Mp3s locally and can't stream anything. Hell, even I'm tempted to use Lala.

This is probably related in some way to the new DECE (Digital Entertainment Content Ecosystem) that the big movie studios recently rolled out, but Lala.com distributes music, not movies. Apple's dominant iTunes model is severely in jeopardy if they don't act fast to sell all their MP3s without any DRM, and offer users the option to stream their music from anywhere. Unfortunately, Apple is only a content distributor and not a content producer like Sony, so Apple still needs permission from content producers to offer non-DRM Mp3s (Apple used to offer non-DRM Mp3s for $1.29, but caved in April 2007 when they realized consumers would rather purchase a CDs to snag those non-DRM Mp3s. Now Lala.com is offering non-DRM Mp3s, too.)... and the producers have realized they can cut the distributor out of the equation and sell straight to the consumer.

Lala.com Gives Digital Music Another Try
By RYAN NAKASHIMA
Tuesday, Oct. 21, 2008

(LOS ANGELES) — First a CD-trading site, then a free Web-based music browser, lala.com is being born again. The site is relaunching Tuesday as a hybrid, offering the digital download functionality of iTunes and the free music streaming of MySpace Music without the ads.

The Palo Alto, Calif.-based private company, backed by $35 million in venture capital from Bain Capital LLC, Ignition Partners and Warner Music Group Corp., first launched in July 2006.

Its first version lacked scale and the second was met by numerous me-too players from MySpace and iMeem to Last.FM, said co-founder Bill Nguyen.

This time around, listening to any of the 6 million tracks at lala.com will be free. It will cost 10 cents to put a song in a Web locker for unending access on any computer where the user logs in.

Another 79 or 89 cents allows the user to download an MP3 track, with no digital rights management coding.

Because the site is ad-free, the business relies on selling Web tracks and MP3s.

"Where we get into trouble is if we do a lot of streaming and we don't sell music," Nguyen said.

Users of lala.com's test site — who number nearly 300,000 — are buying enough music to put the site on the path to profitability.

In the testing period, for every 1,000 free streams, the site sold about 60 Web songs and 60 MP3s. It needs to sell 15 to 20 of each per thousand free streams to be profitable, said spokesman John Kuch.

Users can upload their own music from CDs and iTunes into their digital locker for free. This gives lala.com enough knowledge of an individual's tastes to be able to market similar songs to him or her, a technique that boosts the sell-through rate about fivefold, Nguyen said.

The site has the participation of all four major record labels — Universal, Sony, Warner and EMI — and 170,000 independents.

Thomas Hesse, president of global digital business for Sony Music Entertainment Inc., said a key reason for licensing music to lala.com and other sites like it was the ability to sell music downloads.

"We do streaming deals that also have an upsell opportunity," Hesse said. "To us, that is an important side-by-side concept."

Sony's digital music sales represent more than a third of its U.S. revenue and are on pace to exceed revenue from physical CDs "fairly soon," Hesse said.

To compete or not to compete?

Here is Matt Mason's keynote speech at The Medici Summit last month in Scottsdale, Arizona, and one of the best videos I've ever seen on piracy. It's a good primer on his book, The Pirate's Dilemma, which deals with how to compete with and/or fight a swiftly emerging business model.

Highlights:

• If the average person were sued for the maximum amount they were liable every day for copyright infringment—meaning photocopying, backing up CDs to your computer, remixing tapes, etc.—they would be liable for $12.4 million. Every day.


• American foreign policy during the Industrial Revolution was to completely ignore international copyright and patent laws... which allowed America to industrialize quickly and cheaply.
  
• Initially, innovators are branded pirates by their peers—Thomas Edison created the phonograph, which musicians hated because they thought it jeopardized their income. Since then, musicians have made more money off the record industry they could have ever made by only playing live.
  
• When Thomas Edison first created his film projector, he charged a license fee to use it. Many filmmakers thought Edison's licence fee was too high, so they ignored the law and set up their own film community far away from Edison's lawyers on the West Coast... that film community we now know as Hollywood. (The leader of these rogue filmmakers was William Fox, of 20th Century Fox.)
  
• To compete with Chinese software pirates, Microsoft offers their software for only $3.
  
• When pirates encroach on your market, the question is: do they add value? If they do, then you must then ask yourself, what business are you really in? What is your product? For example, Apple doesn't sell music or movies—they sell convenience.

iTunes U

Apple has done it again... they have a new service called iTunes U, which offers hundreds of university-level lectures via streaming audio, for free.

Thought you'd want to know.

The Company in the White Suit

In The Man in the White Suit, Alec Guiness plays a scientist who invents a highly durable fabric that never gets dirty. You can imagine the cascading reactions to this incredible invention... first, "This is great! We'll only have to make one suit for everyone!" and then, "This is horrible! Everyone in the clothing business will be out of a job!" Guiness' character goes from hero to villain in a heartbeat.

This is the conundrum of our modern world: with each new technological invention, significant social and economic changes are sure to follow and how you react to these changes will place you in one of two camps: the Industrial Age camp, which favors stable and steady-paying jobs, or the Information Age camp, which favors innovation and efficiency. Eventually, the Industrial Age camp will become extinct and the transition to the Information Age will be extremely painful for everyone still holding an Industrial Age mindset... people always fight nail and tooth to protect their lifestyle because change and growth hurts.

The cultural and economic differences of these two camps are stark: Industrial Age countries like France, where the unions are all powerful, have static economies and higher unemployment. It's tougher to be fired there, so inefficient workers are able to stay with a company longer. Information Age countries like America have companies not loyal to particular employees and thus can fire workers whenever they have to. Information Age companies are more dynamic and can compete better because they save more money.

America isn't totally an Information Age country, but it's getting there. American title companies outsource their online title research to the Philippines because they can get 10 queries per dollar spent vs. 1 query per dollar using America workers. More money saved = more profitable business = more wealth = better economy = more information age jobs.

When desktop computers were introduced to help design British newspapers in the 80s, the British typesetters' union went on strike for weeks... but today all British newspapers are laid out with desktop computers. And now newspapers aren't really in the publishing business—they're in the news providing business. Focus too much on how many newspapers you're selling and you'll be out on the street in a couple of years. Focus instead on how to make money from the content on your news website and you'll keep pace with the winds of change.

The other day, a friend was saying that iPods weren't the best product on the market, that he listens to music on a competing product (which I won't mention because I'm a mean and venom-spewing reptile). Here was my response:

While Apple may not have the best product, they're like McDonald's in they they don't make the best hamburgers, but they have the best system to deliver it. Well, maybe not the best, but Apple has managed to convert, and retain, people like me into cultists.

It's no secret Steve Jobs was at the center of that innovation. And when he left Apple, everything went corporate again. It lost its flair. But when Jobs came back in from the cold, he did it again: Jobs envisioned Apple as being at the center of the digital lifestyle. iPods are only one piece of his grand plan; if you snap digital photos, create graphic novels, listen to or create digital music or movies... you name it—if it's digital, Apple now has sleekly designed software and hardware to do it. Best of all, the software and hardware all talk to each other seamlessly. That's the power of the Apple brand—interoperability. Apple's cool parts make one head-shakingly cool whole.

The iPod was only Apple's first strategic lure for PC users into Apple-ness. It worked like butter, and the iPod's various incarnations have consistently tricked more PC users into using a minimalist version of Apple's snazzy OS X. This led to more and more buzz... by the time Apple's iPhone came out this month, my PC user friends were practically salivating over it. Even I, the perennial Mac user, didn't care that much for it... but they're going crazy! I knew Apple had been planning this for many years, but it's the first time I'd seen tangible results of their branding campaign. You can get a glimpse of Apple's marketing strategy by looking at this:

(CLICK TO ENLARGE)


Actor Brian Dennehy was explaining in an interview that he wasn't more famous because he "hadn't created a need for Brian Dennehy". You can be the best actor or writer or businessman in the world, but if nobody knows about you and nobody knows why they need your product over the competition's product, you might as well hang up the spurs. As you illustrated with Apple, you need not even have the best product, either—the loudest person shouting always gets the most attention.

A musician on the street plays his guitar—if you like it, you give him money, but you're not obligated to. This is called busking and the rules of Darwinism dictate that if the musician doesn't get enough money dropped in his hat, he eventually starves and chooses a different job. At least with his hat out there, he still has a chance of making enough money to keep making music. Napster elevated busking into a highly efficient system of thievery by letting anyone hear the best musicians in the world while also throwing away the artists' hats. So if everything that musicians and movie producers produce can be copied onto a CD or DVD for free, how (and why) would they ever make more content? There's no incentive.

Then along came iTunes. Want to see the entire first season of 24 for only $35? Why not? It's easier and faster than downloading them all off eDonkey or Limewire. Want to listen to a particular recording of Gilbert & Sullivan's "A British Tar"? Download it for only 99¢. Apple had finally found a healthy business model to generate revenue from distributing digital entertainment. It was secure. It worked. The catch? You have to watch all your downloaded movies with iTunes and listen to all the music either on iTunes or with your iPod. Apple created the business model—so they set the rules. You don't like the rules? Don't use their system.

Apple's overt strategy has been to switch PC users to the Mac platform so more consumers buy Mac computers and the iPod was thought to be the best bait to accomplish that goal. Thus, Apple mandated that no iTunes purchases can be played on anything other than Apple's hardware. That's kind of harsh if you prefer other hardware, but it's all part of Apple's plan to get people hooked on Macs. France has already passed a law to break that stranglehold and today a growing number of European countries are joining that fight:

European drive against iTunes builds support
10:44 a.m. EST, January 23, 2007

OSLO, Norway (AP) -- German and French consumer groups have joined a Nordic-led drive to force Apple Inc. to make its iTunes online store compatible with digital music players made by rival companies, a Norwegian official said Monday.

Currently, songs purchased and downloaded through iTunes are designed to work with Apple's market-leading iPod players but not competitors' models, including those using Microsoft Corp.'s Windows Media system. Likewise, iPods generally can't play copy-protected music sold through non-Apple stores.

Last June, consumer agencies in Norway, Denmark and Sweden claimed that Apple was violating contract and copyright laws in their countries.

Norwegian Consumer Ombudsman Bjoern Erik Thon said French consumer lobby UFC-Que Choisir and its German counterpart, Ferbraucherzentralen, joined the effort late last year, and other European countries are considering it. Finland's Kuluttajavirasto consumer group is also part of the effort.

"This is important because Germany and France are European giants," Thon said. "Germany, in particular, is a big market for digital music."

The Nordic regulators have met Apple officials at least twice on the complaints.

"Apple is aware of the concerns we've heard from several agencies in Europe and we're looking forward to resolving these issues as quickly as possible," Apple spokesman Tom Neumayr said Monday.

"Apple hopes that European governments will encourage a competitive environment that lets innovation thrive, protects intellectual property and allows consumers to decide which products are successful."

Thon said Norway gave Apple until September to change its polices, or face possible legal action and fines in the country.

"It cannot be good for the music industry for them to lock music into one system," he said.

A French law that allows regulators to force Apple to make its iPod player and iTunes store compatible with rival offerings went into effect in August.

Apple has been working to expand its iPod sales in Europe and said during its quarterly report last week its advertising and sales efforts were paying off.

Company officials say the iPod gained market share in France, Germany, Italy, Spain, Belgium, Sweden, Austria and Denmark during the holiday period.

Governments, not shareholders, are telling businesses what to do??? Apple has created a business model that works—and now Europeans want to change it. Instead of voting with their wallet by giving their money to one of Apple's competitors, they've chosen to walk into a Rolls Royce car lot and scream until they get a hybrid. Has anyone ever wondered why there are no other significant competitors in the digital entertainment distribution market? Nobody else has found a profitable business model! It's not like all potential competitors are being discouraged from creating products that distribute digital entertainment—it's just that Apple is the only company that's created a viable format for producers and consumers.

What makes this story even more interesting is that Apple makes its bread and butter from selling hardware, which is an Industrial Age commodity... whereas iTunes is a multi-platform software that sells content—an Information Age commodity. Apple is obviously migrating its revenue stream from one camp to the other, but until that migration is complete, Apple still needs those iPod sales, which means keeping a lock (for now) on their proprietary iTunes format for as long as they can.

Who will adapt to whom—Apple or Europe? Either way, it's going to hurt. Change always does.