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.

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.

What does it lead to?

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

WHY DVR TECHNOLOGY ENCOURAGES PIRACY... BUT NOT REALLY
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."

"Okay."

"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.

GREAT TECH, BIZARRE LOGIC
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.

BACK FROM HELL... BUT WITH CASH TO BLOW
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.

ROCK LOGIC & WATER LOGIC
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?

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.

Anatomy of a Sale (or Lack Thereof), part 2

I just wanted to watch a movie, that's all. No big deal. I was willing to pay good money for it, too.

But here's the thing—there's no DVD of it. Not in America, at least.

Rewind. Someone told me about a movie. It's research for another movie I'm writing. The movie came out in 1991. It starts two A-List actors (1 is still A-List).

Step 1. I'm willing to rent it. I check Netflix. Not listed.

Step 2. I'm willing to buy it. I check Amazon. The first listing is VHS. For $35. No way am I paying that amount for a VHS cassette. Seriously? If I'm going to buy this movie, I want to keep it for a long time. So I check to see if it's on DVD.

Step 3. Amazon has it on DVD but it says, "Region 2.0 encoding (This DVD will not play on most DVD players sold in the US or Canada [Region 1]. This item requires a region specific or multi-region DVD player and compatible TV." Fail.

Step 4. I check Half.com to see if it's listed there on DVD. Nope, only VHS. I could buy it for $18.00, but if I'm going to own a copy, I absolutely won't buy it on VHS. Does anyone even have a VHS anymore? Isn't the whole point of owning something to let you share the experience with your friends?

Step 5. I check Wikipedia to find out more about it. I find that the movie was released on VHS, and then a DVD was released in Europe, but the studio hasn't yet announced plans for a region 1 release, i.e., in the U.S.

So, now I come to the conclusion that a movie I'm willing to pay for isn't available to me. At all. I haven't even bothered to check iTunes because if it's not on Netflix, there's no way it will be on iTunes.

The clincher is that I would be willing to pay up to $10 or even $15 for a DVD. I guess I could scour the library for a copy (and the odds of an older film being at the library are about even), but if I'm going to get it at the library, that's essentially free to me... which leads us to...

Step 6. Watch Movies. Where I found the entire film posted on Youtube.

And we wonder why movie piracy is so commonplace?

An Ode Before Dying

You think you sell a movie—you do not.
You think you sell a book—you do not.
You think you sell a song—you do not.

You sell an experience, something communicated, something elusive and ephemeral. Something mystical and transformative and inspiring. All these abstract things simply come in the shape of a movie, a book, or a song.

Never before has it been possible to strip away these experiences from the product... until now, the Digital Age.

The Digital Age lets us duplicate products infinitely. And, for the first time in human history, creators are not deprived of their original copy.

So how do creators sustain? What do they sell?

It's simple, if creators are willing to accept one simple fact:

Creators don't sell products, they sell experiences.

In fact, creators never sold products, although it must have always seemed that way. They just never saw it before because products and experiences have been so deeply entwined.

The Digital Age has changed all that...

...now we can read a novel without buying a book.
...now we can watch a movie without buying a movie ticket.
...now we can listen to a song without buying a record.

So how do creators sustain? What do they sell?

They sell the experience.
They sell access to themselves.
They sell uniqueness.
They sell convenience.
They sell membership.
They sell customization.
They sell exclusivity.
They sell benefits.
They sell patronage.
They sell magic.
They sell the experience.

They sell that which cannot be felt, something that transports their customers to another place for a brief time. When customers buy a $500 shirt, they aren't being sold a simple shirt, they are being sold self-confidence.

Creators will sell the same thing they've always sold—intangibles—though some will stubbornly claim they (should) only sell the product. Those kinds of creators have never seen the distinction between experience and product because, before the Digital Age, intangibles have been inseparable from books, movie tickets and records.

The key to the Digital Age is to recognize that many existing products already embed intangibles, which is why those products are still being bought. However, once those intangibles stop being offered, or a competitor offers better intangibles, the customer will go elsewhere.

Creators can sustain. They will sustain. The market wants to sustain creators. Yet only the ones who realize that they don't sell products, but experiences. Only those creators are the ones worthy of survival in the Digital Age.

The rest will whine and commiserate as they slowly fade into obscurity.

And to them, we offer a fond, and sad, adieu.

Ask The Right Questions

Justin Timberlake has over 120 revenue streams—only one of them is selling recorded music.—Matt Mason (link)

Jackie Barbosa wrote an excellent blog post yesterday which kicked off a flurry of Tweets between us about piracy in the entertainment industry. Jackie is smart enough to get that the publishing industry's claim that ebook piracy is costing the publishing industry "as much as $3 billion" is a bunch of hooey. An illegal ebook download is not equal to a lost sale—readers simply downloaded the ebook. Who knows if they would have actually paid for that download if they had been offered no other choice?

While Jackie ultimately concludes that she doesn't get too concerned when she sees her ebooks on a torrent site, she lays a harsh judgment on ebook pirates:

...these people are thieves, plain and simple. And just like a thief won’t buy the diamond bracelet because he can’t knock over the jewelry store, the ebook pirate won’t go and buy a legitimate copy if she can’t get it for free.

I get where she's coming from. It can be frustrating when you put a lot of work into something, put it up online... and then watch it get taken out of your control and given to the world in perpetuity.

And that's exactly where I think Jackie is seeing everything from the wrong perspective. She's seeing the world through a pre-digital lens. In a digital world, things get copied and with P2P networks, nothing can be effectively done to stop it. You can commiserate about it, reproach, bemoan, and even try to legislate... but you cannot enforce laws against it. For every P2P network you shut down, two more rise in its place. It is a losing battle. Do you want to go the rest of your life living in resentment and bitterness? Or do you want to accept that the world is changing around you, that your presumptions about how things ought to be might have to change accordingly, and upgrade your business model to leverage the internet's unique properties of infinite distribution to work for you rather than against you?

Jackie and I had the following conversation over Twitter:

Ross: Piracy is a market force saying, "the price for content is too high." When the price comes down, pirates turn into consumers.

Jackie: So bank robbery says bank fees are too high? Sorry, no.

Ross: The difference is whether piracy adds value—robbing banks removes value, pirating books increases their popularity.

Jackie: I'm sure piracy does increase some book's popularity. But unless that popularity leads to more $ sales, it's not adding value. Even the music industry hasn't given up the notion of charging for music in favor of ONLY other revenue streams.

Ross: ...which begs the question, what are you really selling—books or stories?

Jackie: That's like asking whether you're selling music or songs, in my opinion. The "book" is just how the story is delivered. A novel cannot be delivered by a live reading via the author (or anyone else). At best, only PORTIONS can be delivered that way.
Jackie: What I'm asking is where the viable revenue streams are if not from sales of books themselves? Show me the money.
Jackie: Even in the industry you cite as "proof" sharing is good (music), publishers still put a PRICE on their product. Books are the same as movies: they're entertainment. But I don't see how that relates to the discussion (unrestricted sharing).
Jackie: If all books are free, where is the revenue stream? WHEN/HOW does the author/publisher get paid for creating the entertainment?

Jackie's asking some well-intentioned questions, but they're mostly the wrong ones. She's still focused on the selling of a tangible—her books—rather than the intangible—her stories. When Jackie finally gets that she is a storyteller and not a bookseller, she'll start to mold a more sustainable business model around that concept.

Her question, "WHEN/HOW does the author/publisher get paid for creating the entertainment?" is foremost on the minds of all producers in the entertainment industry. How is what we're doing sustainable? How do we make money at this? How do we survive and thrive?

Counter-intuitively, when content is allowed to be free in the digital realm, it seems to bolster sales. Why? That doesn't make sense, does it? Consider the story of Matt Mason who wanted to release his book online for free alongside the hard copy version, but Matt's publisher denied his request. When Matt saw his ebook was being pirated, he again approached his publisher and said, "Look, it's already out there. At least if we release our own ebook, we can control it a little more. Maybe we can even find out something about our readership." His publisher agreed and released the book as a free PDF. A while later, a music bigwig heard about Matt's book, went to Matt's site and downloaded the PDF... and he was so impressed with the ebook, he went down to a brick and mortar bookseller and not only bought a hard copy for himself, but for everyone he knew. Without the free ebook available, Matt would have missed out on those sales.

So the questions Jackie should be asking herself is, what is she actually providing her readership? Is it the book, or is it the story in the book? What are the infinite goods and scarce goods in her business, and how can she leverage those infinite goods (the ones that can be copied infinitely on the internet) to increase the value of her scarce goods (the ones that cannot be copied on the internet) so that revenue streams flow to her and/or her publisher? How can she employ generatives to her maximum possible advantage?

Perhaps the hardest question of all: if Jackie can't find a sustainable business model for being an author, what does she do next? This is an extremely volatile question which I hate asking because so few people are willing to examine with unflinching honesty whether their business as it currently exists deserves to survive. Nobody wants to hear their business is slowly dying, but history is littered with businesses who were too stubborn to accept the decline of consumer demand for tangibles that no longer met the market's needs:

1. The need for personal transportation is perennial, but the method shifted from horses and carriages to automobiles.
   
2. The need to watch audiovisual arts is perennial, but the method shifted from film to VHS to DVD to P2P & streaming.
   
3. The need for listening to music is perennial, but the method shifted from live performance to records to eight track tapes to tape cassettes to CDs to MP3s.
   
4. The need to share news is perennial, but the method shifted from town criers to the printing press to desktop publishing to the internet.
   
5. The need to read stories is perennial, but the method shifted from illuminating manuscripts to book printing to ebooks.

If you had built your business on any of those shifting methods, and only provided a tangible product or service ["tangible service" is an oxymoron] to the market, then your business was in danger of extinction (manuscript illuminators, town criers, horse and carriage drivers, typesetters, record makers, tape cassette makers, VHS makers, etc.). Yet if you build your business on a perennial market need and shift with current methods to fulfill the market need, then your business will be around as long as that need is around.

The good news for Jackie is that authors are in the business with the lowest possible fixed costs of any entertainment sector—compared to movies which have to employ up to hundreds of people to create that first unit, authors are the definition of svelte: 1 person, 1 room, 1 laptop. It can't get much easier, or cheaper, than that.

So I do think a sustainable business model for authors in the digital age exists, although those models may be so radically different from the current model that authors may not feel like they are "purely" authors anymore. Authors like Jackie complain that their primary revenue stream is being "stolen" by pirates, but look at Justin Timberlake: the guy is a musician who has secured over a hundred revenue streams which do not involve selling recorded music. Instead of resting his entire livelihood on one revenue stream, Timberlake is almost certainly hoping his fans pirate his music because the increased exposure will only make his other 100+ revenue streams increase in value. Can authors do likewise? More to the point, can they afford to not do likewise?

I've already done the broad sketches for a filmmaking model. I'd like to flesh that out more before speculating on other models so I won't offer my thoughts (yet) on what new revenue streams for authors might be. Nevertheless, I'd like to see somebody take a stab at coming up with new models for authors because the digital age isn't going away—in fact, the next generation will likely make that logical leap which we, fettered to our pre-internet analog childhood, are unable to stomach: that file sharing is easy, unstoppable, and commonplace. As long as artists find ways to thrive in the digital age, will it really matter to their fans how immoral file sharing might be?

Biracy & Crowdfunding—Peril or Paradise?

While researching possible avenues of funding for a feature film, I've heard about crowdfunding over the years. Crowdfunding is fundraising from a large group of small donations instead of a small group of large donations. Several companies do crowdfunding now, and a few specialize for filmmaking. Here is an excellent collection of short videos of the top 15 crowdfunding companies in their own words.

I was recently contacted by David Geertz from The Biracy Project (@biracy) in my role as moderator for the Infinite Distribution Panel to help generate questions for a Biracy video Q&A. The panel had several great questions and Geertz personally responded to them. It was so helpful, Geertz said, that they might even do it on a weekly basis.


Crowdfunding has obvious advantages over traditional film financing, chiefly among them that filmmakers are able to find and connect directly with their fans even before they roll film. Whenever others are invited to come on board to have a say in which direction the ship is heading, it bestows ownership to them... which in turn sparks the sort of emotional investment to a project that advertisers salivate over. People who join crowdfunding projects want to see that project succeed—they have a natural incentive to participate in and promote their project. Anyone who understands the power of networks realizes that as the size of a network grows, its reach and influence increases geometrically. Crowdfunding locks in your funding and your audience at the same time. You can't really ask for a better scenario.

The question is—is it legal?

NOTHING BUT BLUE SKY
I'm not addressing the question of whether crowdfunding should be legal—I already feel strongly that it ought to be. Fans want to invest in films like buying stock in the stock market, and reap the same benefits as multimillion dollar film financiers, so why shouldn't fans be allowed that option? Unfortunately, America has a formidable legal obstacle—state laws called blue sky laws which "regulate the offering and sale of securities to protect the public from fraud." These laws were designed to protect unsophisticated investors from scam artists trying to swindle grandma out of her life's savings. For crowdfunding, the law seems not to fit anymore, but that's irrelevant—if the SEC decides you're violating their regulations, then it really doesn't matter how outdated the laws are. Are you able and willing to afford a proper legal defense to keep yourself out of orange overalls?

So the central issue to consider is whether crowdfunding is, in its current incarnation, legal under today's laws. If I join a crowdfunding operation, could I be involved in a class action lawsuit one day and/or criminal charges? Are all current crowdfunding operations simply a ticking time bomb? Whenever a new business model first emerges, existing legal codes often don't understand how to interpret legal code to accommodate the shifting market. Is this the case for crowdfunding?

THE CAUSE FOR CONCERN
I posed those questions to Biracy's Geertz on Twitter and I feel he answered them to my satisfaction. Before you see Geertz's reply, you ought to have a proper context of my own concerns because these kinds of articles made me extremely paranoid about crowdfunding. From Mark Litwak's site:

Question: We have a project and are interested in soliciting investors without violating SEC rules. What can we say that's legal but still gets the point across, and what is illegal?

Answer: The most important thing to say is that you are not making an offer. You are simply having a preliminary discussion with people. In order to take money from investors, you need to either register your company with the SEC, which costs a considerable sum, or fall into one of the limited offering exemptions. A major restriction on these limited offerings exemptions is that you cannot do any public solicitations like mass mailings and cold-callings. And you'll be limited to thirty-five unaccredited investors. An accredited investor is essentially a wealthy, sophisticated investor. Everyone else is an unaccredited investor. If you can live with those restrictions, the cost of complying with securities laws is considerably less but still significant. If you violate the securities laws, you can be subject to civil and criminal penalties. Link.

Another article:

In general, under the Securities Act of 1933, entrepreneurs who seek to sell stock in a business should register the securities with the Securities Exchange Commission plus comply with other often complex federal and state regulations. While this may seem daunting to a startup company like yours, the SEC provides some exceptions. One of the ways to bypass some regulatory requirements is by soliciting wealthy accredited investors, also known as "qualified investors."

Regulation D of the 1933 Securities Exchange Act defines accredited investors as individuals who have a net worth of $1 million or income of at least $200,000 in the two years prior to investment. For couples, the prior income requirement is $300,000. The SEC notes that income requirements are met only if there is a reasonable expectation that income levels will be maintained in the future.

Accredited investors can also include banks, insurance companies, small business investment companies and corporations, charitable organizations or partnerships with assets exceeding $5 million.

The thinking behind the financial means test is the presumption that wealthy investors are sophisticated about the risks associated with privately-held company investments and can "afford" to lose the entire investment.

Granted, families of more modest means invest in startup restaurants, retail establishments and service companies all the time without meeting accredited investor tests. They can without attracting regulatory attention because companies are generally permitted to raise money from up to 35 non-accredited investors, plus an unlimited number of accredited investors. Still the SEC does require that companies reject non-accredited investors who are not financially sophisticated and understand the risks associated with the investment. Link.

...and another article:

If a small contribution obtained via crowdfunding is actually an equity investment or even a loan, then crowdfunding companies may soon run afoul of securities laws. I forget the details but if you raise money from over a certain number of investors, you start being subject to all sorts of securities laws that are a pain.

If you ask me, those laws should be completely recrafted to allow crowdfunding and kick it into high gear. To me, crowdfunding is fuel for human capital and great projects that is currently untapped but has enormous potential to change the world as we know it. I'm sure there are some advocated at the SEC, the SBA, the Federal Reserve but, no doubt, bureaucracy is frustrating the heck out of them right now. Hopefully, we'll figure out how to tap into the power of crowdfunding soon.

The thing is, it does have to be regulated. I mean crowdfunding scams will be huge, once crowdfunding grows in popularity. When there's money involved, scammers will come.

There also needs to be some liquidity to crowdfunding shares. If people are going to make microinvestments, they will want to be able to profit from their investment. It will be a great day when a firm that raised $100,000 from 20,000 $5 investors sells out for a few million and everybody gets a tidy, albeit little, return on their investment. Link.

And a super recent article from Boing Boing:

Donors can get a little something in return through these sites if the projects they fund come to fruition, like a signed copy of a book that's produced (Kickstarter), or reimbursement in credit if a news organization buys the story (Spot.Us). But what if a crowdfunding site could offer donors a piece of the action, not just some thank-you goodies? That's what I would want, and I don't think I'm alone. I want investors for my schemes, not patrons, and if people support me to do something that flies, it would only please me to give them a cut.

But then I started talking about the scheme with lawyers, including Boingboing counsel Rob Rader, who has been extremely helpful. The legal terminology for my notion, it turns out, is "patronage-plus ex ante crowdfunding," at least in a recent article by Tim Kappel in the Loyola of Los Angeles Entertainment Law Review The short answer is, such a site would probably be illegal under U.S. federal securities law. "Securities" are defined as any investment whose return is dependent upon the effort of others. It's a one paragraph definition, very broad, hard to get around, and there's no de minimis dollar cutoff below which the regulations stop. A lemonade stand venture could be subject to SEC regulation.

Securities regulations don't apply if the investors are genuinely active in the day-to-day management of the venture-- but it isn't enough to just give them access to a project wiki and consider their suggestions; you must demonstrate that they are all critical to the venture's success. So much for that loophole.

Another possibility is the SEC's "Private Placement Exemption" under Regulation D, which allows unregulated investments if the number of investors is limited. Specifically, you can sell shares to at most 35 regular individuals (and an unlimited number of accredited investors, i.e. various institutions, plus people who have a net worth exceeding $1 million, an annual income over $200K, or a personal trust exceeding $5 million).

But Regulation D also prohibits any "general solicitation or general advertising" to let people know about the venture. The only published announcements of such investments are the cryptic "tombstone ads" that you sometimes see in the print versions of the Wall Street Journal or New York Times business section. These ads, which AFAIK have never been published online-only (although this might be possible) must be very limited in their disclosure. It might be OK to say "Paul Spinrad offers shares in a graphic novel based on the life of Elliot Smith" but that's about it. The announcement can't include anything that makes Kickstarter and Spot.Us so fun to browse through-- no details of the project, no wish lists, no video clips of people saying, "I'm so excited about this project-- it's got great indie film potential-- all I need is 4 months time and a round-trip ticket to Portland!"Link.

If you aren't a little nervous by now, then you have a heart of stone. Violating SEC regulations is serious business and could land you a princely fine and/or time in jail.

BIRACY: "IT'S NOT AN INVESTMENT"
Geertz provided two Q&A videos and kicks it off by saying clearly that Biracy is not an investment, and thus should not be confused with a security—money given to Biracy is a donation, a membership fee, and a pre-ordering of a product. There is no financial remuneration as you would receive with an equity investment, be it stocks, company shares, or real estate. Thus, you don't fund films like multimillion film financiers for a jackpot if the film is a hit... instead, you get something called Kaps, a virtual currency. This is the key distinction—you don't get real money in return for your donation, just benefits with the company, like store credit. You can, however, earn money from commissions by referring others to Biracy, like a multilevel marketing company. It's clever.

If Biracy proves itself to be a sustainable crowdfunding model, then its founders will soon launch SoKap.com to let other producers benefit from Biracy's model. As I understand it, the only danger in violating SEC regulations is to the company, not its donors, so I think I'll invest in donate to Biracy today. However, were I to use Sokap as a Producer, I'd feel obliged to run all this through my own lawyer before committing any resources to it. Why? Because you never really know how governments react to radical new business models. Once crowdfunding begins to become popular, all it takes is one egregious crowdfunding scandal to push the SEC towards clamping down on "risky new businesses using securities law loopholes to rip off unsuspecting victims". Then it all turns into a make or break acid test on how clear the law is about crowdfunding. Bunch of hooey if you ask me, but it wouldn't surprise me in the slightest. If I were a crowdfunding company, I'd probably approach other crowdfunding companies and pool our resources to get a lobbyist in Washington to update SEC blue sky laws so crowdfunding isn't just legal, but actually fulfills the promise of film investing—to make real money on films like multimillion dollar film financiers... but on a micro level.

Here are Biracy's two Q&A videos by David Geertz:
Q&A: Is it an investment? Part 1
Q&A: Is it an investment? Part 2

Take off your glasses

In 1994, I sat in the office of a New York City typesetter. This guy was one of the old saws who'd been around when typesetters were laying out type with cold lead. He was running a small imagesetting shop in midtown Manhattan and was offering me leads on where I could find work.

The desktop publishing revolution had been kind to me. I had been taught the rudimentary aspects of QuarkXPress to lay out our college newspaper and soon went on to master every aspect it, nearly devouring Quark's manual back to back. I loved typesetting. It was fun.

As sat in this guy's office, I remember getting caught up in how useful DTP was, how much more efficient its workflow was to what had come before it. No need to set physical type anymore—you just typed it into a computer. Wasn't that cool? This guy's take was quite the opposite: "I hate what desktop publishing has done to this industry." I can't remember his exact wording, but the gist was, I remember the old way. I liked the old way. But the old way doesn't make money anymore and I hate being forced to change.

I wasn't unsympathetic—everything he had known and loved about his industry had shifted underneath his feet. I felt sad for him, but... wasn't he able he see how much easier his life could be? Did he really want to return to a less efficient system simply because he wasn't as comfortable with newer methods? Instead of doing half as much work under the old system, he could do three times more work with the new system. As with any new tool, there was a learning curve, but wasn't there an intrinsic value from having access to better tools?

This resistance is typical across any profession undergoing change. The digital age affected typesetting in the '90s, the music industry in the '00s, and now it's hitting the movie industry. Unsurprisingly, my last article on how to make money even if you give your films away for free hit some resistance some filmmakers. Miles Maker had the most eloquent response:

To steer the focus away from making memorable movies and toward merchandising sickens me. Indies are already struggling to complete their beautiful little films to pay people and achieve higher production values. Where does the manufacturing revenue come from? And yes products are replaced by better products, but a film is a unique visual journey; an original experience all to itself... my body of work must hold value to sustain growth, or I will be forced to churn out lower quality FREE content at a hellish pace to support my life's endeavors.

I don't disagree on any particular point. Merchandising has taken a more prominent role, perhaps even in competition with a movie's unique visual experience, and that also sickens me. It's already hard enough to pay cast and crew to make movies, and now the possibility of offering up our films for free doesn't seem to make any sense at all. We all want consumers to pay for the experience of the film, and it feels like long-term growth is unsustainable under a FREE model.

In this whole debate, my own feelings on the matter have been drowned out: if I could wave a wand, I would never make films free. I think piracy has been enormously disruptive to the entertainment industry... however, despite my strong personal convictions, I also realize that stopping piracy is a Sisyphus-tic pursuit and the only way forward is learning how best to adapt to the changing market, i.e., how to compete.

I also feel strongly that anyone refusing to acknowledge the direction of the wind will be blown out to sea, and rightfully so. Pay American workers too much and American companies will outsource to cheaper foreign workers. Yes, it's tragic, it affects lives, it's awful. But it's also how a free market economy functions—those who don't adapt quickly enough perish.

To address Miles' point, long-term growth might very well be unsustainable under a free model... if we assume a very narrow definition of what is trying to be sustained, i.e., producing and selling feature films at their current budgets for current prices. That may very well be unsustainable (though a free model might be more profitable if we figure out the right formula). The variables, however, can be changed—cheaper movies can be produced and movies can be sold for less. Yes, American filmmaking might be unsustainable, but the ludicrously inexpensive filmmaking industry in India will thrive unabated. If America's film industry cannot sustain itself in its current form, it will either adapt by lowering its costs, by dropping prices, or it will stop.

The way things are going, I suspect the American film industry in its current state is indeed slouching toward unsustainability. This is why I feel the definition of what is sustainable is too narrow—regardless of what we want our role to be as filmmakers, the market is telling us all that it doesn't just want films, it wants stories. The market wants storytellers. Feature films are but one product fulfilling that market need.

Many average filmmakers will be too obstinate or unwilling to see the glaring truth: the traditional role of filmmaker is expanding beyond its current skillsets to pave the way for a hybrid filmmaker/producer/publicist/storyteller. Only the most astute among that group will flourish in the coming years... and we'll hear Old Guard filmmakers whine more frequently about how they can't seem to compete with free (a red herring—the bottled water industry does quite well competing with free). The period of vetting is already upon us as some big studios close up shop. Independent filmmakers, already pushing their fixed costs as low to zero as they can, will migrate toward wikinomics-style filmmaking where many cast and crew volunteer their time for its own sake, perhaps preferring to take percentages on the back end instead of a basic salary. Yes, that will devastate the industry as we know it now, but it seems to me that the writing is on the wall.

No matter what my own personal feelings are about piracy or how the entertainment industry has changed for the worse, nobody can legitimately condemn a future they don't yet know: horse and buggy drivers would have been astonished at how much more efficient (and "better") transportation is today. Likewise, the next generation will likely one day say to us, "You used to PAY for movies?!?" and then laugh themselves silly. We'll all pine about a childhood as alien to them as living without electricity is to us now. The future of entertainment will not always be as it currently is, but its next iteration—perhaps weaving interactive narratives across multiple media to create fascinating stories—could be far richer, more engaging and even more meaningful than a feature film could ever do by itself. That might mean feature films become less ubiquitous in the entertainment spectrum, but that's not really up to filmmakers. Only the market can decide something like that.

Free is about price. AND availability. AND service...

This is the best article I've ever read about the enigma of free content on the internet. I wish I could email it to all filmmakers, musicians, software developers, movie studios, and record labels.

You think 'Free' is Only About Price? It's not.
by Stan Schroeder

Time and time again I see the discussion about free content, free services, free products, and how they’re going to liberate/destroy/change the current economy, especially when it comes to the Internet. Often, one important point is neglected. When it comes to free, it’s not the price that’s crucial.

It defies logic: after all, if you offer someone a free donut, he/she is going to take it because the price is zero, right? Well, not exactly. In the online world, there’s another equally important currency: availability. It can be defined by the number of steps it takes to do something or download some content. The bigger the number of steps, the bigger the cost of the product/service.

Free Donuts, But With a Catch

Let’s go back to the donut analogy. Many opponents of the economy of free say: if you give donuts for free, and the guy next to you tries to sell them at any price, he will inevitably lose because no one will buy them. But this criticism doesn’t take into account the number of steps required to retrieve the donut (which is a very important part of every online experience.) So, the real analogy would be this: if you offer donuts for free, but anyone who wants them has to run three circles around the nearby building to get one, many people will simply pay, for example, $1 for the donut if it means they can just take it immediately.

Recently, we’ve written about research which shows that kids in the UK pirate music less due to the rise of music streaming services. This is because music streaming is so easy, that it makes it cheaper (time is money, remember) than to search for a song on a torrent site, although the price of both services is zero.

Competing With Free

So, how do you compete with free? Let’s say that your product is a music album, which can be digitally duplicated at zero cost, and therefore it’s all over torrent sites, P2P networks and blogs. Sounds like a disaster, but it’s actually not that hard to compete with that. You can create a fantastic web site which offers all of the albums of that particular band, as well as many other albums, neatly organized and easy to search. Then, you can offer additional perks to people who download the album (I’m not talking about buying it yet, I’ll get to that bit later), such as free concert tickets, merch, access to rarities, singles, unreleased materials, live recordings, bootlegs, lyrics, guitar tabs, etc. Then, there’s the technical side: you can offer very fast downloads. You can have ads that are less annoying than those on torrent sites. In short, you can create a great user experience. I’ve covered this part of the story in an earlier article on piracy and the reasons why it works.

But I’ll take it a step forward. Here’s a bold theory: free will not last forever. No one has to be afraid of free, because it’s just a transitional phase in the history of the Internet. The current trend, where everything seems to lose value, and the price of all digital content seems to inevitably spiral towards zero, will reverse – at least for some types of content.

The Price is Not Only Money; It’s Also the Time it Takes to Pay

And here’s the reason: currently, paying for something online is, in most cases, too complicated. How hard can it be to just punch in your credit card number, one might ask? It’s very hard. It’s unbelievably hard in an environment where people are used to getting everything with a couple of mouse clicks. You have to own a credit card; if you do, you have to find it; you have to punch in a long number, then you have to punch in another, and a date. And on many sites, if you haven’t shopped there before, you have to register first, which adds to the annoyance.

If you think that telling people that getting the same content for free, with a couple of clicks, is evil, will make them go through this process, then you do not understand how the Internet has changed our collective mind. One click – one single click – can make the difference between yes, please, and no, thank you. Any blog owner who has added a RSS subscription button knows that it works infinitely better if it only takes one click. Add just another click – a landing page where you explain what RSS is, for example – and you’ll get a lot less subscribers.

An example that defies the notion that all digital content is going to be valued at zero dollars is Steam. You know why? You pay once, subscribe once, and then you just download games (*Update: this bit requires some explanation. When I say “pay once, subscribe once” I mean set up your payment details once, and they’re remembered between sessions; games are automatically updated; plus, Steam (Steam) lets you purchase multiple games at once. But most importantly, the entire process is so easy, and the Steam content distribution system offers so many perks, that it beats downloading games illegally. For more about Steam, go here). For a lot of people, that fact that it actually costs money is overshadowed by the simplicity of the experience. Many gamers have told me: look, I used to pirate games and spend days looking for cracks and serials, but now I just use Steam. It’s so much better.

This works for all content. Lately, we hear newspaper owners huff and puff about their demise, blaming it on anyone but themselves. I feel for them; it’s a complicated issue, but they have to figure the best way to resolve it. If I click a link on the Wall Street Journal and I get the notice “sorry, this is for subscribers only,” I’m just gonna go away. If I were to click the same link, and someone, somewhere, took 20 cents from me, without the need for my intervention, I’d be OK with it. But if what you offer behind that link is already available on 20 other free sites, then I won’t be OK with it. If I’m a stock broker and need to have that news the second it’s out, then I’ll be willing to pay even more. Are there enough stock brokers out there to justify a pay wall which annoys all other readers? It’s up to WSJ to find out.
The Wrong Way

Unfortunately, there’s a problem here that goes beyond the survival of an industry and threatens to change the way we use and perceive the Internet, as well as our online privacy and freedom. The entertainment industry and the media industry know that getting people to pull out their wallet is the hardest thing, so they’re trying to shove it down our throats. They think that they can charge their content in the same way a country collects tax from the people. It’ll never work. First of all, not all content can be charged for. Some content – news is a good example – will always have a tendency to be free. Video games, music and movies may not be worth more than zero if we’re talking about a digital file on your hard disk, but if you add the user experience and the extra value you can tie to them, there will always be a business model for selling them.

So instead of putting pressure on governments to adopt stupid laws and on ISPs to act like policemen, judge and jury, the industries mentioned should work to figure out which model works best for them. Some companies will fail, and go bankrupt. That’s OK: when the car came, not all horse carriage manufacturers successfully transitioned to a new business model. Some will have a hard time. Some will do as well as they did before, and some will do better than they did before.

But all of them need to understand that the key issue is not the price. It’s one piece of the puzzle; but there is also ease of use, the quality of the user experience, availability, the time it takes to do something. In the end, free is price like any other; every day I get free newspapers, handed to me by a boy on the corner. Obviously, it pays off to do that, otherwise that company wouldn’t give them for free. I don’t get cars for free, though: the fact that I drive a Ford, and thus advertise it to the world, is not valuable enough to Ford to give me the car for free. But if I were a very popular actor, they’d be very glad to give me the car for free. How did these companies learn what works and what doesn’t? They experimented, they tried different things, and those who were good at predicting what works, survived. I don’t see why, when it comes to digital content, this should be any different. Link.

Selling Digital Content in The 21st Century (Fans are key)

Below is one of the most astute lectures I've ever seen on how content providers can make money in the changing economy. It's a keynote speech by Mike Masnick on Trent Raznor's (from Nine Inch Nails) creative approaches to making money by simply connecting with his fans... and then giving them a damned good reason to buy from him.

As I've said before, piracy is not a technological problem, and thus cannot be stopped in the long-term by making it illegal. Pirates will always outnumber policing agencies and the swiftness of digital transfers will always favor pirates over content providers. No amount of locks will keep someone from breaking into your house if they want to. Piracy is really a social problem—people pirate because they're frustrated with being gouged by $30 DVDs or $20 CDs (just to buy 1 song), or the content can't be seen or heard yet because the movie or song is (pick one: still in theatres, still on pay-per-view, not being broadcast locally, too old to find on DVD, only on a non-US region DVD, being sold for outrageous prices on Amazon due to it not being a US region DVD, not something you would usually see or listen to but are curious to sample it, etc.) Ultimately, piracy is simply a free market force in the hands of pro-active consumers. Consumers want the content and if it's easier to get that content from a pirated copy, they'll do it.

However, if you give consumers a true reason to buy your product (e.g., DVDs specifically made to glow when they spin, treasure hunts & Alternative Reality Games found on T-shirts sold at your concerts), piracy quickly becomes moot. Consumers want to experience creativity from their artists and they'll gladly reward the most creative artists with cashey money if given a chance.

Embedded here is the 15 minute (trust me, it goes by quickly) presentation I did at MidemNet on January 17th in Cannes, France. If you're reading via RSS or another site like iGoogle, click through to see the full presentation. Sorry it took so long to get the video up. There were a few minor technical difficulties. Anyway, the presentation garnered an interesting reaction and a whole series of fascinating discussions over email, in person and over the phone since I presented it, and while I don't want to repeat what's in the video, I did want to discuss a few points raised by the presentation. The core of the presentation is the following simple "formula" that is the basis for making money in the music business (and, I'd argue, many other businesses) in the digital era:

Connect With Fans (CwF) + Reason To Buy (RtB) = The Business Model ($$$$)

There are many artists—famous and not so famous—who have been making use (on purpose, or not) of this formula to create successful strategies for building up a stronger fan base, creating wonderful new works of art, distributing them out to the community and getting paid for it at the same time. What made Reznor so interesting as a case study was the fact that he's done it so many times in so many different ways that he, by himself, represents a great example of how you can approach this simple formula in an infinite variety of creative ways.

One of the issues I've had in discussing recording industry business models is that we always hear excuses for why a, b or c won't work. "Well, that guy can make money selling t-shirts, but this guy's fans aren't t-shirt types." "That guy will sell concert tickets, but this guy doesn't like to perform." "Maybe some fans will pay upfront, but people are so greedy that most will just free-ride." It's all excuses. They all want a simple model that everyone can follow, but the point here is that while the model itself is simple, executing on any business model is difficult.

It's about applying that "simple model" in a variety of different creative ways—which Reznor has done time and time and time again. Hell, I couldn't even include all of the examples of Reznor's successes in this single presentation, let alone successes by other musicians who have executed differently—but all of whom connected with fans (CwF) and then gave them a real reason to buy (RtB).

A second point that needs to be discussed is that a true reason to buy (RtB) is a voluntary transaction. Too often we've seen musicians or other content creators think that there is some sort of obligation to buy. And, so they put something out with a price tag, but without doing a very good job convincing fans why they should buy. There was no real reason—and then they seem to lash out at their fans for hurting them. The fault, however, lies with the musician (like any business) who failed to give a proper reason to buy, and falsely assumed that fans had some sort of obligation to buy. If an artist believes there's an obligation to buy, fans will often educate the artist very quickly.

One final point on this is the last question that people often raise: why should the musician be involved in any of this? Shouldn't they just be creating music. There are two answers to this. First, this is exactly where a smart record label, agent or manager can come in and be quite helpful. Let the musician create the music and let the "business guys" focus on applying this business model. Second, however, is that due to the way the industry is these days, the musician does need to be somewhat involved. You cannot connect with fans if you're in seclusion. If you don't want to make the effort to connect with fans, then that's fine: you won't have that many fans. It's a choice you make.

That said, there are tremendous opportunities allowed by new technologies, new communities and new methods of communicating today. They all enable better ways to connect with fans, and better ways to offer real reasons to buy. Those who look at the past and complain about what's been lost need to turn around and look at the vast open fields of opportunity in front of them. There's a lot more music to be made, a ton of new fans to make very, very happy—and, yes, through it all, an awful lot of money that can be made as well. You just need to stop worrying about what was lost and recognize all there is to be gained. Link.

A Life Without Spam

Below is an article I wrote years ago on how to fight spam, which I've updated with new tricks. The best trick I've learned so far is using Boxtrapper to create whitelists (it's the last trick at the bottom). For example, before installing my own whitelist with Boxtrapper, I had 38 emails yesterday morning, and 95% of them were spam. This morning, I had 2 emails, and neither of them was spam.

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"Imagine if you could bum one cigarette off of each person in the world?" Will said. "You could have a billion cigarettes!"

"True," I said, "but what if each person in the world bummed one cigarette off of you?”

“Yeah," he said with a frown, "that would suck.”

Spammers are ‘bumming cigarettes’ off of all of us. For them, it’s “just one more cigarette”, but for us, they're the 10,000th person asking for a cigarette.

I’ve made all the mistakes that got me spammed. So I did the only reasonable thing I could have done—I changed my email. And for four years, I lived a blissful spam-free existence. And yet, one day, I started getting spam... on an email I wasn’t willing to change. What now?

Many battles wage throughout history, e.g., cryptography vs. cryptanalysis, freedom vs. security, and the battle against spam falls within that context: business rights vs. consumer rights. Though some spam does come from legitimate businesses selling their products, it's the years of door-to-door salesmen, Jehovah's Witnesses, Mormons, and unrelenting telemarketers than have forced our governments to approve legislation to keep people away from our home. Emails should be no different. So why do we still succumb to a daily barrage of worthless emails? We shouldn't succumb, of course, but the power of email lies in its global reach... which also means national legislation can't stop international spammers. Microsoft says 97% of all email is spam, so if you can't kill the beast, how do you contain it?

HOW TO STOP SPAM

A Quick Glossary

• ISP Internet Service Provider, the company whom you pay every month to have access to the web, i.e., sbcglobal.net, aol.com, earthlink.net, though not necessarily the company in charge of your email if you use manage a domain.
  
• IP Address An IP number is a unique number for a server, always listed as four paired numbers separated by three periods, i.e., 64.116.1.244

The best cure of all is prevention—the basic tricks listed here can be applied by anyone, but the advanced tricks are mainly for webmasters or for those willing to spend sometime talking with their ISP.

Basic Tricks: SETTING UP EMAIL

1. Create a new personal email. Tell only friends and family about it. Though obviously drastic, this one trick will eliminate all your spam immediately. Tell everyone not to bandy about your email with impunity.
   
2. Use a long and/or complicated email address. Even new emails will eventually get spammed because spam programs systematically guess until they find a valid email. So use a long email address, with more than one word, with numbers and/or underscores to throw them off the trail.
   
3. Choose a reputable ISP, like SBCGLOBAL.NET, to retrieve your email. Cheaper ISPs are often lax about their anti-spam policies, meaning they may not use spam filters and also complaints to these ISPs will likely go unheeded. Most ISPs, like AOL, give you both net access and manage your email, However, they don’t have to be the same, so be clear who manages your email.
   
4. Create a web-based email (Yahoo or Gmail, not Hotmail). If you already have a personal email, then use this web-based email for promotions and “proof of working email” when creating usernames and passwords for new websites. The big companies are pretty good about weeding out spam for you.

Basic Tricks: RECEIVING SPAM

1. Don’t even open spam. Do you recognize the sender? Does the subject line start with “ADV:”? Is there an attachment with an extension of “.pif”, “.scr”, or “.vbs” (these attachments are usually viruses)? HTML spam use an image link that, when the HTML emails are opened, track which images are viewed and that in turn tells spammers which emails are “live”. In some email programs, you can actually disable the “auto load images”, which solves the spam issue, but not for viruses: on PCs, if an email attachment has a “.vbs” extention (Visual Basic Script), you can infect your computer simply by opening the email.
   
2. Never reply to spam. Some spammers are hoping you reply because that tells them your email is “live” and then they can sell your email to email marketing companies. Virus-writers will always put a bogus email in the “Reply-to” field (which can be different from the “From” field), so your irate reply will either go nowhere or befall some innocent bystander.
   
3. Never try to unsubscribe from spam. Same as above.
   
4. Never buy anything through spam. One paying customer out of 10,000 bulk emails is enough to pay for 20,000 more spam emails. Don’t do it.

Basic Tricks: EMAIL USAGE

1. Don’t put your personal email in your browser’s email section. If you use cookies, and most people have to if they buy anything on the web, an email address typed into the browser’s preferences (Explorer—> Preferences —> Email) could be grabbed by a spammer’s cookie. Not to pass up an opportunity to amuse myself, I put “look@mybutt_on.tv” as my email.
   
2. Never post on Newsgroups with your home email, only with your Yahoo! Mail account. Spammers use “spiders” to collect emails on the net and newsgroups. Post on Newsgroups with phony text in the email itself: jake@DELETETHIShotmail.com. Because spiders search for the @ symbol, nother common shorthand is jakeAThotmailDOTcom.
   
3. Uncheck those “newsletter” checkboxes. When signing up for something online, look carefully for the small check boxes at the bottom—these are for promotional “newsletters” that you will almost certainly not want. Don’t complain to ISPs about these emails—if you left these boxes checked, you asked for those emails!
   
4. Ask others to BCC: your email on mass forwarded emails. A friend forwards you a joke—or a chain letter or the infamous Disney/Microsoft hoax “asking” for emails—and 100 other people, then you do the same, and so on; each time the email is forwarded, all the previously forwarded emails are included in the body of the email by default. The moment that email falls into the hands of a spammer, every email on the list will get spam, forever. Forwarded jokes aren’t inherently evil, but including someone’s email without their permission is evil. You wouldn't hand over your phonebook to thousands of strangers, would you? If someone must forward you jokes and chain letters, politely ask them to start putting your email in the BCC: field (“Blind Carbon Copy”)—you’ll still receive their jokes but no one will have any trace of your email. Likewise, as a courtesy to others, don’t forward jokes without 1) removing all emails in the body of the email and 2) putting everyone’s emails in the BCC: field; the only TO: recipient to the email should be you.
   
5. Google your own email. A lot of emails are already out there for spammers to find; if your email is in the public domain, track it down by doing a search for it at www.google.com. Then, contact the webmaster for the webpage where your email is listed and ask to have it removed. Finally, contact Google and do the same. Otherwise, you’ll just have to accept that your email will be bombarded with spam forever.

Advanced Tricks: FILTERS, ALIASES & WHITELISTS

1. Use Spam Assassin. This app is loaded on your ISP's server and identifies spam before it even gets into your in box. Depending on how vigilant you want to be, you can even enable "Auto delete spam", but that might accidentally delete real emails.
   
2. Use your ISP’s Spam Filters. Good ISPs have good spam filters, so ask your ISP how to use their filters. Though this approach is somewhat effective if you can’t or won’t change your email address, it still only blocks spam coming from one IP address and it doesn’t stop spammers from emailing you from other IP addresses or selling your email to other spammers.
   
3. Use a local spam filter. My Mac's email client is Eudora, so I installed Spam Sieve which screens all my incoming mail and puts all spam into its own folder. Most of the time, I never even know I've even received any spam there.
   
4. Use multiple aliases and discontinue the offending aliases. If you're using your own domain, you can create emails like spammy@rosspruden.com, temp@rosspruden.com, and bbcnews@rosspruden.com, which can be forwarded to one email address because they are an “alias”. At the first sign of trouble, any of these aliases can be instantly discontinued.
   
5. Use a Whitelist & Blacklist. Some ISPs offer killer applications like Boxtrapper, which lets you list all friendly emails on a "whitelist" so that only those emails are forwarded to your local email client's in box. As you meet new friends, you simply add their emails to your whitelist (sometimes it's as simple as sending them an email, which Boxtrapper interprets as implicit approval to communicate with that email) and none of the other junk email gets through.

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.