Jonathan Langton

New Business Models Required

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The digital revolution has impacted heavily on the consumption, availability and distribution of music, film, television, news and literature.  These have all been the preserve of what may now be known as “old media”.  Technological advances, particularly the shrinking (physical) size and cost of digital storage, the increased connectivity afforded by the internet and the proliferation of portable personal devices mean that that “old media” content need no longer be bound to the infrastructure that served to produce it and deliver it to the public.  Naturally, the public’s attitude towards that content is being recalibrated.  New business models for creative content are essential, if the stakeholders in its creation are going to play a role in reforming of the consumer’s consciousness.

Let there be no doubt that this blog is fully in support of content creators being adequately remunerated for their work; a non-trivial amount of it is worthwhile and should be rewarded.  Society as a whole is so determined to show how much that contribution is valued that it is indiscriminately protected, for increasingly exaggerated periods of time, under the laws of copyright.  It would seem it is not so valuable that attempts to reproduce it for greater consumption would be counter to the public good, unlike those works covered by patent, which receive relatively much shorter term protection.  This issue has been dealt with previously here.

Attitudes to copyright and such things are being increasingly challenged in the digital age.  The free software movement, playing on the word “copyright”, spawned the idea of “copyleft” in the 1970s, enforcing the continued freedom of content, rather than its restriction.  Today, outside the software industry, a similar ideology is enshrined in the concept of Creative Commons licensing.  At the Online Educa conference in Berlin in December, Neelie Kroes, Vice President of the European Commission and European Digital Agenda Commissioner, spoke of her surprise at receiving the response, when suggesting to a teenage engineer at a technology gathering that perhaps he ought not share is developments with another  young engineer and would-be his competitor, “Are you that old fashioned? Nowadays sharing means a better competition position, because I am learning.”

This amusing little video, one of QuestionCopyright.org’s “minute memes“, addressing the use of language around claims that copying is stealing, indicates how the public mindset is changing, and some of the practical reasons for that.

Question Copyright is an organisation, started by free software developer, “dedicated to reframing the way artists and audiences think about copyright“.  Consulting its website reveals that it has identified many of the same issues as this blog will discuss and there are parallels between the suggested responses.  However Question Copyright’s calls for the abolition of copyright and promotion of its “Free Culture” philosophy are overly radical and idealistic, calling creators to place distribution and recognition ahead of compensation; QC arguing that remuneration will flow naturally from the work being valued by the eventual (larger) audience.  It overlooks, to paraphrase Ayn Rand‘s character Francisco d’Anconia in “Atlas Shrugged“, that men must receive money for what they are able to produce that is of value to other men; that they may then exchange that money for the products of the labour of others.

While Question Copyright’s video is semantically accurate and a cunning piece of viral marketing, but it is not really right.  However there an interesting, but subtle, point contained in it.  That is the diminishing, or vanishing, dependence on physical goods in most contexts where these problems exist.  This is where the recalibration in the mind of the consumer is taking place and where reforms are required.

Copying technology is not new.  The music industry first came up against it when cassette tapes appeared.  Photocopiers have meant that every student has “owned” at least one photocopied chapter of a text they were required to study.  The facsimiles in these cases required effort to produce, needed resources like the blank cassette or paper, had to be physically passed from one person to another and were of lower quality.  There was a price/convenience/quality evaluation to be made by the copier and user.  Compare this to attaching a file to an email, where the original remains intact and copies are produced locally in the sent mail directory, on the out-going mail server, the incoming mail server, the inbox of the recipients computer, no matter where that is, and then wherever they choose to save it.  That is considering just one recipient and five copies are produced, all of them ostensibly identical to the original.  There are overheads such as computer storage and internet access to be considered, but so ubiquitous are these today that they hardly bear considering in this analysis.

Previously the purchase of a song, film or story required the manufacture of a physical object, the distribution of that object and its storage in inventory.  Now it  can be reproduced directly from the source, in an ethereal format, that can be consumed on any number of devices, that are owned by the customer.  The virtual supply chain, of course, has its own associated costs, such as maintaining servers and ensuring security, and while the physical supply chain may have disappeared, the creative production costs have not, nor have commercial costs such as marketing.  However for the companies responsible for producing a large amount of the content in the market, their position as price-maker is being eroded to that of a price-taker now that consumers can reproduce and distribute amongst themselves identical reproductions of the product.

From the consumer perspective, the product has been boiled down to the pure creative essence, which is what they care about.  Most of them would be happy to support the creators of the content, but less to support bloated corporations that would dictate to them how they enjoy that content.  To just what extent, has been shown by some rather interesting experiments.

In 2007 Radiohead briefly pre-released their new album as a “pay-what-you-want” internet download.  On one hand the newly independent band wanted to make a point about a “decaying business model“, but it was also a response to “leaks” of previous albums and in reality was not quite as radical as it first sounds; the impact on CD sales being carefully considered and the music licensed to record companies for physical release.  Reports vary about the success of the experiment, including claims that most paid a normal retail price or that as many as a third downloaded it for free.  More reliable are reports that the average price was £4/$6 and most downloaded it for free, however the three month experiment brought in more money than the entire sales of the band’s previous album.

A similar, more recent story is that of US comedian Louis C.K., who took the option of self-producing a recording of this most recent comedy show.  He paid for the professional recording, production and the building of a website from his own pocket, then made the special available as an unrestricted, easy-to-purchase download, for the incredibly low price of $5; about a quarter of the market rate for DVDs of a similar nature.  Twelve hours after the release, the 50,000 copies sold had covered the cost of production.  A few days later, double that, and the artist had pocketed more than he would have received by selling the rights to a production company.  The story so far is remarkable, but reached a whole other level when a week later sales had topped $1 million.  A quarter of the proceeds will be donated to charity, the artist made more than expected, everyone involved got a big bonus and hundreds of thousand of consumers legally own a premium piece of creative content at a fraction of the normal price.

The only loser in these cases seems to be big production companies, and justifiably so it would seem when modern technology seems to be making them increasingly redundant.  It is import to note, as Louis C.K. points out, these are experiments.  Their sheer novelty is probably a contributing factor in their success, or the magnitude of it.  Nevertheless, the message should be loud and clear.  The consumers will pay.  They don’t necessarily begrudge paying.  However what they pay is not what the industry has been used to.  The demise of physical media manufacture and the virtualisation of the supply chain have all but eliminated the variable costs of the producer.  Consumers expect to see that reflected in the price they pay for a product that can now be sold and distributed without limit.  The fewer members of the value chain can realise greater returns, on much lower margins, through increased volume of sales.

The music industry has been fighting a rear-guard action against this for years.  Despite the success it had in convincing the world to keep re-buying its music collection with each new media format, the digital revolution caught them off-guard.  Instead of adapting to the changing landscape, they fought against it, as if it could be resisted.  They applied layers of restrictions and Digital Rights Management (DRM), which never quite kept pace with the technology,  to their products, alienating and sometimes even demonising their very customer.  In the December issue of WIRED, Amazon founder, Jeff Bezos, said,

“The music industry should be a great cautionary tale: Don’t let that happen to you.”

Somewhat ironically, Steve Jobs, the man attributed with apparently single-handedly hewing from base elements the devices that spawned the digital music revolution, has been posthumously awarded a Grammy for enabling something which the industry opposed for so long.  Perhaps it is not so strange, as Apple is the kind of closed shop the record companies would like to administer and, after all, downloading an album track by track on iTunes costs the same as buying the CD used to.  They have not recalibrated to accommodate the consumer’s new mindset and so their fight against unauthorised distribution of digital content continues.

Frustratingly, Apple have been receiving headlines and plaudits for their next assault on the status quo, something Jobs allegedly had in mind for some time; text books.  Apple’s clout has gained it access to the big names in education publishing, for example Pearson and McGraw Hill, presumably because of their reach and because the platform will still be tightly regulated, however the enterprise is likely to be far less open and altruistic as existing attempts that are not corporation driven.  Some business schools have been investigating digital text distribution, especially for their online programmes, and would very much like to go an “all digital” distribution method for course materials.  Unfortunately there are obstacles, such as digital copies of the textbooks being available, at a nominal additional cost, only as a compliment to the purchase of the physical volume, or the digital copy being protected such that the licence expires after one year.  One of the largest provider of business case studies, Harvard Business School, has for a long time prohibited digital distribution of that content to students, however as this is relaxing, although it is not clear that what they are offering really offers them much protection, registered users gaining access to a PDF document watermarked with their personal details, supposedly to offer traceability for illegal distribution.

The desperation of content publishers in resisting the unstoppable tide of progress, resorting even more draconian measures and further demonising the would be customer, and the depth of public feeling that opposes their attempts is perfectly illustrated in the SOPA and PIPA saga played out in the US.  Globally, particularly in Europe, opposition to ACTA (Anti-Counterfeiting Trade Agreement) seems to be evolving in the same manner.  Yet it would seem that this confrontation could be avoided if content producers relax their resistance to the changing status quo,”right-size” their organisations and adjust their business models to find the “sweet-spot” with respect to pricing and distribution, such that the consumers’ willingness to pay leads to the greatest number of them accessing the content through authorised channels, fairly remunerating content producers, maximising profits for publishers and diminishing the demand for unauthorised distribution.

These are not new ideas.  Something very similar was identified by Renaissance artist Albrecht Dürer.  Five hundred years ago, the talented Dürer, an early proponent of trademarking, was acutely aware of the personal benefit of his engravings, mass-produced and widely distributed at an affordable price, over more prestigious commissions, although the technology that he used, the printing press, also facilitated unauthorised duplication of his work.  The artist correspondence includes the admissions;

“My picture… is well finished and finely coloured, [but] I have got…little profit by it. I could have easily earned 200 ducats in the time.”

“I shall stick to my engraving, and if I had done so before I should today be a richer man by 1,000 florins.”

This is a very early example of the “self-publishing” business model, which is gaining greater and greater traction today.  The Radiohead and Louis CK examples given above are perfect examples, but admittedly, they both started with considerable reputations, which guarantees a certain demand for their offering.  Albeit a much preferable starting position, it need not the be case however.  Jeff Bezos and his Amazon empire have created the tools and the platform, in the form of the Kindle e-Reader, unknown amateurs can achieve the same level of success.  Amanda Hocking has sold over 1.5 million books and made $2.5 million.

One very interesting part of the entertainment industry in this regard is computer games.  To the surprise of many it has now evolved into a fully fledged member of the industry, the launch of triple-A game titles now out-stripping opening weekends of blockbuster films in terms of revenue.  Furthermore, it bring some important lessons for the traditional players in the entertainment industry, particularly with respect to piracy and pricing.  Being closer to technology, the computer games industry pioneered many anti-piracy system that presumably evolved into the DRM systems in use elsewhere today, yet the nature of their medium, the devices they rely upon and the tech savvy nature of their clientèle makes them more vulnerable to piracy.  However they have gone beyond that and the vast majority of video content today is delivered electronically and is tied to online accounts (anonymity risk!) where an entire virtual market place has evolved, such as Xbox Live and the PlayStation Network.  A platform like Steam has created many advantages, for both big and small players.  This has eliminated the costly physical supply chain and created a more manageable delivery system.  Downloaded Content (DLC) and in-game purchases are not the most popular elements of games today, but it does allow game developers to continue to exercise an element of differential pricing, continuing to monetise popular properties for minimal development cost, meeting the demand from customer who want more and tailoring the game experience according to the player’s willingness to pay.  The adoption of this business model, even going to the extreme example of “freemium”,  goes a long way to eliminate the demand for illegal, pirated content.  More customer can access the product for a lower cost, or no cost, lower the impetus for potential clients to seek illegal copies, after which players have the option to continue to enhance their experience with additional purchases, which are more easily managed by the company.

Another interesting business model comes, yet again, from an unexpected source – comic books.  Comic books, like all media, have struggled for some time against their perceived threat of digital formats, despite obvious consumer demand, and their willingness to pay.  However they are starting to embrace it with a unique, tiered pricing model.  Something similar might be employed for films, such that tickets prices for the opening weekend are higher than the second week, and cheaper again in the second month, prices gradually falling the longer the film stays in the cinema.  At some point it ceases to reach its income threshold and it’s run ends, however there is a potential for a significant “long-tail” effect for a film that does necessarily open strongly, but endures and grows in popularity through word-of-mouth.  Moreover, this model allows one to analyse the customers’ willingness to pay, giving the consumer the choice to see the film at the price they want, weighed against their urgency to see it.  It is not vastly different to the “cinema – dvd/blu-ray – television” progression.  Something similar might also be used for music releases.

One of the linked article above also hints at something else, and that is ownership.  Often in digital content distribution, as it is currently defined, the consumer has purchased a right to access the material, not necessarily a right to own copies of the material.  That requires a kind of change of mindset that many struggle with.  It fundamentally changes our concept of many things we “buy” and “consume”.  Should access carry the same price as ownership?  Probably not.  So the risk is that an access model destroys the market for tangible, “ownable” items.  That may not be something that the consumer wants, but without some kind of effort it may be inevitable.

“Comic shops are not spotted owls; it is not my job to protect them and keep them alive. It is their job to stay in business by proving they deserve it, …” – Jim Mroczkowski, “The Digital Comics Tipping Point

The solution may not be so difficult.  A very plausible, but simple, suggestion comes from comic book creator Brian Wood, to differentiate the digital content product from the tangible media product.  Something to access, something to own, different customers, larger market, differential pricing, greater choice.

These are the questions facing the media industry today and it must be aware that consumers are wise to what is happening.  It is impossible to impose a premium pricing for something for which you cannot control the supply and create scarcity.  History has shown that the industry is not able to keep pace to restrict the supply in the digital age.  Criminalisation and harsher penalties are negative and reactionary measures.  Meet expectations over willingness to pay and those “criminals” may be converted into customers, however it may necessary to realigned the business.

UPDATE 11/04

One’s respect for Amazon, as a champion of the new business models required, is reinforced by the allegations brought by the Department of Justice in an anti-trust suit against Apple over electronic book pricing.

UPDATE 19/04

Here is some more information that seems to show Apple was protecting publishers at the expense of competition and consumer benefit.  A letter from the CEO of Macmillan prompted this response from twitter user, netgarden.

UPDATE 20/04

Some great thoughts on DRM by Tim O’Reilly.

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