The Future of the Entertainment Industries: Archive Entry From Brad DeLong's Webjournal

December 03, 2002

The Future of the Entertainment Industries

Robert X. Cringely foresees the ends of the newspaper, magazine, and music industries as we know them, but the continued survival of the movie industry.

I, Cringely | The Pulpit: ...Forgetting for the moment that some of these media people are greedy pond dwellers, let's ask the important question -- how are peer-to-peer file sharing systems going to replace $100 million movies? Peer-to-peer systems can share such movies, but since there is no real peer-to-peer business model that can generate enough zeroes, such systems are unlikely to finance any epic films....
But the same is not true for records. This is simply because technology has reached the point where amateurs can make as good a recording as the professionals. The next Christina Aguilera CD could be as easily recorded at her house (or mine) as at some big recording complex out on Abbey Road.
And text, well, text is even worse because it is easiest of all to steal. My columns are published in newspapers and web sites and handed-in as college essays all over the world, and there is almost nothing I can do about it because tracking down the perps costs me more than does their crime. From the perspective of the established publishers, there is also the horrible possibility that people might actually come to prefer material they find for free on the Internet -- not just pirated material, but even original material. This column, after all, is free, and my Mother claims to find some value in it from time to time.
So movies, while they may be hurt by peer-to-peer, won't be killed by it. But print publishing and music recording could be seriously hurt. Maybe this is good, maybe it is bad, but probably, it is inevitable...

How Peer-to-Peer File Sharing Is Likely to Change Big Media

By Robert X. Cringely

Maybe you saw the story this week about a paper from Microsoft Research analyzing peer-to-peer file sharing networks with the conclusion that they can't be stopped -- not by the law, not by the movie studios and record companies, not even by mighty Microsoft and its Palladium initiative for trusted computing. Swapping songs and maybe movies is about to reach some critical mass beyond which it simply can't be stopped, or so the kids in Redmond think. The story is interesting, that it came from Microsoft is even more interesting, though the authors carefully disassociated themselves from their employer in the paper.

But this all pales in comparison to the implications of their conclusions. These are smart folks, taking a stand that is surely not popular with their company, so I think there is a pretty strong reason to believe they are correct. If so, then what does it mean? Are record companies and movie studios doomed? Am I doomed, as a guy whose work is regularly ripped-off, too? And will the print publishers go away, leaving us with only weblogs to keep us warm? I don't think so, but the world is likely to change some as a result.

Maybe it would help to deconstruct what publishers and broadcasters and movie moguls do that makes them significant contributors to our culture. They take financial risks by backing talented people in the hope of making money. Publishers and broadcasters and filmmakers and record executives have taken the time and spent the money to build both a commercial infrastructure and a brand identity. The most extreme version of such financial risk-taking is spending tens of millions -- sometimes hundreds of millions -- to make a movie.

Forgetting for the moment that some of these media people are greedy pond dwellers, let's ask the important question -- how are peer-to-peer file sharing systems going to replace $100 million movies? Peer-to-peer systems can share such movies, but since there is no real peer-to-peer business model that can generate enough zeroes, such systems are unlikely to finance any epic films.

Well, right there we have a problem. People LIKE epic films, but even with the best editing and animation software, there is no way some kid with a hopped-up Mac or PC is going to make "Terminator 4." One can only guess, then, that people will continue to go to movies and eat popcorn and watch on the big screen despite how many copies of DivX there are in the world.

Peer-to-peer movie piracy is practical only in the manner that any organized crime is practical: It works only as long as the host remains strong enough to support the parasite. Tony Soprano can't run New Jersey because then everyone would be a crook, and there would be nobody to steal from except other crooks. No more innocent victims. Same with movie piracy, which needs a strong movie industry from which to steal. If the industry is weakened too much by piracy, the pirates begin to hurt themselves by drying up their source of material. It is very doubtful that this will happen simply because the pirates, too, want to go to movies.

But the same is not true for records. This is simply because technology has reached the point where amateurs can make as good a recording as the professionals. The next Christina Aguilera CD could be as easily recorded at her house (or mine) as at some big recording complex out on Abbey Road.

And text, well, text is even worse because it is easiest of all to steal. My columns are published in newspapers and web sites and handed-in as college essays all over the world, and there is almost nothing I can do about it because tracking down the perps costs me more than does their crime. From the perspective of the established publishers, there is also the horrible possibility that people might actually come to prefer material they find for free on the Internet -- not just pirated material, but even original material. This column, after all, is free, and my Mother claims to find some value in it from time to time.

So movies, while they may be hurt by peer-to-peer, won't be killed by it. But print publishing and music recording could be seriously hurt. Maybe this is good, maybe it is bad, but probably, it is inevitable.

Of course, the recording and publishing executives, who often work for the same parent company, aren't going to go without a fight. We are approaching the end of the first stage of that fight, the stage where they try to have their enemy made illegal. But the folks at Microsoft Research now say quite definitively that legal action probably won't be enough. That's when we enter stage two, which begins with guerrilla tactics in which copyright owners use the very hacking techniques they rail against to hurt the peer-to-peer systems. This too shall pass when bad PR gets to the guerrillas. The trick to guerrilla or terrorist campaigns is to not care what people think, but in the end, Sony (just one example) cares what people think.

That's when the record companies and publishers will appear to actually embrace peer-to-peer and try to make it their own.

This will be a ruse, of course, the next step in the death of a corrupt and abusive cultural monopoly. They'll say they will do it for us. They'll say they are building the best peer-to-peer system of all, only this one will cost money and it won't even work that well. There is plenty of precedent for this behavior in other industries.

My favorite historical example of this phenomenon comes from the oil business. In the 1920s, the Anglo-Persian Oil Company had a monopoly on oil production in the Middle East, which they generally protected through the use of diplomatic -- and occasionally military -- force against the local monarchies. Then the Gulf Oil Company of Pittsburgh, Pennsylvania, literally sneaked into Kuwait and obtained from the Al-Sabah family (who still run the place) a license to search for oil.

The Anglo-Persian Oil Company did not like Gulf's actions, but they were even more dismayed to learn that Gulf couldn't be told to just go to hell. Andrew Mellon, of the Pittsburgh Mellons, was the U.S. Secretary of the Treasury, and he wasn't about to let his oil company be pushed around by the British Foreign Office. So Anglo-Persian and the Foreign Office did their best to delay Gulf, which worked for several years. They lied a little, lost a few maps, failed to read a telegram or two, and when Gulf still didn't go away, they turned to acting stupid. As the absolute regional experts on oil exploration, they offered to do Gulf's job, to save the Americans the bother of searching for oil in Kuwait by searching for them.

The Anglo-Persian Oil Company searched for oil in Kuwait for 22 years without finding a single drop.

Remember that Kuwait is smaller than Rhode Island, and not only is it sitting atop more than 60 billion barrels of oil, it has places where, for more than 3,000 years, oil has seeped all the way to the surface. Yet Anglo-Persian was able to fulfill its contract with Gulf and keep two oil rigs continually drilling in Kuwait for 22 years without finding oil. To drill this many dry wells required intense concentration on the part of the British drillers. They had to not only be NOT looking for oil, they had to very actively be NOT LOOKING for oil, which is even harder.

Back to music and text publishing. Expect both industries to offer peer-to-peer systems that won't work very well, and will cost us something instead of nothing. In the long run, though, these systems will probably die, too, at which point, the music and the print folks will have to find another way to make their livings. This will not be because of piracy, but because of the origination of material within the peer-to-peer culture, itself. We're not that far from a time when artists and writers can distribute their own work and make a living doing so, which makes the current literary and music establishments a lot less necessary.

But they won't die altogether because of the record company back lists of music, because peer-to-peer doesn't do a very good job of self-organizing and indicating what is important, and because people won't take tablet computers with them to the bathroom.

So we will have little movies and little records and little magazines on the Internet because the Internet is made up of so many different interest groups. For the larger population, there will still be Brittany Spears and Stephen King singing and writing for big labels. And that will only start to change when the first really big artists jump from old media to new, trading 15 percent of $30 times 100,000 copies for 100 percent of $0.50 times 1 million copies.

The Grateful Dead showed that it is possible to make a great living even in competition with some of their audience. This is a lesson all old media must learn in time.

Either that, or die. Posted by DeLong at December 03, 2002 06:10 AM | Trackback

"...and there is almost nothing I can do about it because tracking down the perps costs me more than does their crime."

Trust is the nonnegotiable value underpinning a viable society. No community can survive unless the majority of the citizens act morally without a police officer standing over them. Criminal violations must be rare or the system is not sustainable.

Posted by: David Thomson on December 3, 2002 06:27 AM

The recording industry and Congress should take another look at Richard Stallman's essay The Right Way to Tax DAT.

This was written in 1992, responding to a proposal (which has since become law) that digital audiotape recorders have copy protection built in, and that taxes on blank digital audiotapes be imposed to reimburse recording companies for the cost of piracy. Stallman proposed that reimbursements should go directly to the musicians, based on surveys of what consumers had copies of, and that the copy-protection mandate be scrapped.

The DAT tax was instituted when the Internet was not a mass-market phenomenon and recording companies were most concerned with "sneakernet" peer-to-peer copying. Updating Stallman's proposal to account for the Internet is left as an exercise for the reader.

Brad, I'd be interested in knowing what you think of the idea.

Posted by: Seth Gordon on December 3, 2002 07:01 AM

There are two issues here. One is the diminishing role of the entertainment distribution industry, ie the ability of content creators to directly engage the end user. This reduction in transaction costs is beneficial to both parties, and has the potential to do all sorts of wonderful things. Second is the stealing issue. The ease of distrubution by the creators is also possesed by the consumer. I will assume that any attempts at technological controls are in vain. However I don't think that all is lost for the producers. They should have followed the model of MS et al and created something akin to the Business Software Alliance(BSA). The BSA is the piracy police for software. With most P2P software such as Kazaa it is trivial to determine who is downloading. Given that most music thieves have hundreds of stolen songs the penalties could concieveably put them away for life. What would happen on your campus if the FBI came in and arrested 2000 students from the dorms? My guess is that swapping would end rather quickly. The RIAA should also adopt the BSA snitch program. Paying reward money for reporting serious abusers makes potential thieves think twice before copying. Agressively persuing both strategies, thereby signaling the RIAA's willingness to ruin lives, would signifigantly reduce the expected utility of swapping and therefore the quantity.

Posted by: Brian on December 3, 2002 10:13 AM

Until a greater PoC (say, ultra-pox) comes along, this looks like the Problem of the Century ... how to transact in goods of invention and replication. Marginal production cost is essentially a quantum impulse at the origin and a flatline out to infinity. Consumers are satiable (most at quantity zero, the rest at quantity one in most app's) ... and a rogue copy is as good as a legit copy.

It's the same problem in different cover for securities analysis ... news ... web content ... pharmaceuticals ... even financial services, books, broadcast entertainment (as audiences fragment and the protective coating of transaction cost "load" evaporates).

The problem has already bit us in the macroeconomic assumptions. [The dotcom crash would not have occurred, the bandwidth glut would have been greatly mitigated, fewer frauds would have run amok, and the recovery would be blazing if we knew how to transact in such goods.]

Advertising is one classic solution. Can the global economy sustain itself on advertising alone? Advertising what, then?

BTW, there are missing links in Cringely's case for survival of big-budget films ... but the piece is worth reading in full, if only for the anecdote on oil exploration in Kuwait.

Posted by: RonK, Seattle on December 3, 2002 10:59 AM

For once I agree with Thomson, (a little). Brian's recipe for a BSA style enforcement racket will decidedly not have a salutory effect on content industries. Punishing corporations for software piracy and ruining the lives of music fans are not at all analogous. Businesses need software, people have to want music. The RIAA is already unpopular. This strategy would drive artists away from major labels and into independent distribution even faster than is already occurring.

There has to be a system that will offer the consumer the chance to choose to behave virtuously, sure in the knowledge that they are not being royally screwed. CD's have been always been priced significantly above their value point. The royal living the record companies make out of screwing artists and consumers alike is ending. Their racket is nearly over. What is needed now is a system that can reliably deliver payments in very small increments. New artists could then price their work appropriatly, even asking for purely voluntary payments. Established artists could persuede their fans to buy their records directly.

Posted by: Biz on December 3, 2002 11:59 AM

If two thousand college students were arrested today for copyright violations, then the laws would be changed to make file sharing legal tomorrow.

Posted by: Neel Krishnaswami on December 3, 2002 01:03 PM

Yet another opportunity for me to recommend Stan Liebowitz's, Re-Thinking the Network Economy, where these issues are presented much more cogently (and rigorously), in chapter 7.

http://www.amazon.com/exec/obidos/tg/detail/-/0814406491/qid=1038961983/sr=1-1/ref=sr_1_1/104-2343402-4280766?v=glance&s=books

Stan also has a working paper on his website that brings a lot of information to bear on what is usually a strictly emotional debate:

http://wwwpub.utdallas.edu/~liebowit/knowledge_goods/records.pdf

Posted by: Patrick R. Sullivan on December 3, 2002 04:34 PM

And yet in today's NY Times, there is an article about China's very successfuly filtering of the internet.

"The study offers fresh evidence that the Internet may be proving easier to control than older forms of communication like telephones, facsimile machines or even letters."

http://www.nytimes.com/2002/12/04/international/asia/04CHIN.html

Posted by: cg on December 4, 2002 12:07 PM

"If two thousand college students were arrested today for copyright violations, then the laws would be changed to make file sharing legal tomorrow."

By whom? You'll notice that it's still illegal for most college students to drink alcohol, for instance. It's not as if any level of government is actively scrambling to please college students...

At any rate, arresting people (or suing them) for pirating copyrighted material certainly strikes me as a more just solution than requiring or encouraging computer and equipment manufacturers to lock down their equipment and hassle their own paying customers. After all, we are talking about people who are breaking the law, and a law that is explicitly allowed by the Constitution at that.

(Although it would be interesting to see if 100+ years fits the Founders' idea of "limited times". I would definitely like to see copyrights limited to something like 20 years or so.)

Posted by: on December 7, 2002 10:35 AM