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Music Industry Under Fire for Exploring EFF Suggestion

April 2, 2008 by

Jim Griffin, a music industry consultant who is in the unusual position of being recognized as smart and reasonable by participants across a broad swath of positions in the copyright debate, revealed last week that he’s working to start a new music industry organization that will urge ISPs to bundle a music licensing fee into their monthly service costs, in exchange for which the major labels will agree not to sue (and, presumably, not to threaten suit against) the ISP’s customers for copyright infringement of the music whose rights they own. The goal, Griffin says, is to “monetize the anarchy of the Internet.”

This idea has a long history and has at various times been propounded by some on the “copyleft.” The Electronic Frontier Foundation, for example, issued in April 2004 a report entitled “A Better Way Forward: Voluntary Collective Licensing of Music File Sharing“. This report even suggested the $5 per user per month ($60 per user per year) that Griffin apparently has in mind.

According to the OECD, there were roughly 60 million broadband subscriptions in the United States as of the end of 2006. If each of these were to pay $60 a year, the total would be $3.6 billion a year. I know that broadband uptake is increasing, but I remain unsure how Griffin figures that the proposed system “could create a pool as large as $20 billion a year.” Perhaps this imagines global, rather than national, uptake of the plan? If so, it seems to embody some optimistic assumptions about how widely any such agreement could plausibly be extended.

Some prominent blogs have reacted with ire—Michael Arrington at TechCrunch, for example, characterizes the move as an “extortion scheme.” Arrington argues that a licensing system will hinder innovation because the revenues from it will be constant irrespective of the amount or quality of music published by the labels, and will flow to an infrastructure that, once it begins to be subsidized, will have little structural incentive to innovate. He also argues in a later post that since the core of the system is a covenant not to sue, it represents a “protection racket.”

I think this kind of skepticism is poorly justified at this point. If the labels can turn their statutory right to sue for damages after copyright infringement into a voluntary system where they get paid and nobody gets sued, it strikes me as a case of the system working. And the numbers matter: The idea of a $20 billion payoff that would triple the industry’s current $10 billion in annual revenue does not seem reasonable, but unless I am missing something it also does not seem probable.

There are two core questions for the plan. First, what will it cover? The idea is that it will let the industry stop suing, and thereby end the antagonism between labels and customers. But unless a critical mass of the labels agree to the plan, users whose ISPs are paying in will still face the risk of suit from non-participating copyright holders. In fact, if the plan takes off, individual rights holders may face an incentive to defect, since consumers are equally likely to infringe all popular music regardless of which music happens to be covered by the plan (since they aren’t likely to track which music is covered).

Second, how will the revenue be shared? Filesharing metrics, provided by analysts like BigChampagne, are at best approximate, and they only track downloads that occur via the public, unencrypted Internet–presumably a large share of the relevant copying, but not all of it, especially in the context of University and other networks. The squabbles will be challenging, and if past is prologue, then the labels may not prove themselves an amicable bunch in negotiating with each other.

Finally, it’s important to remember that the labels’ power depends, in the very long run, on their ability to sign the best new talent. If the licensing system proposed by Griffin takes off, it may preserve the status quo for now. But if the industry continues to give artists themselves a raw deal, as it is so often accused of doing, artists will still have the growing power that digital technology gives them to share their music without a label’s help.

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Three Down, One to Go: Warner Music to Sell MP3s

December 31, 2007 by

Warner Music will sell music through Amazon’s online store without DRM (copy protection) technology, according to a New York Times story by Jeff Leeds. This is a big step for Warner, given that earlier this year Warner CEO Edgar Bronfman said that selling MP3s would be “completely without logic or merit.”

The next question is whether Warner will make a deal with Apple to sell MP3s on iTunes too. The NYT article says Warner plans to do so, but the LA Times implies the opposite. The two other majors that sell MP3s are split on this point, with EMI selling MP3s through multiple stores including iTunes, and Universal Music selling MP3s through other online stores but refusing to do so through iTunes. Is Warner willing to inconvenience its customers in order to undercut Apple?

By the way, the Times article makes a simple but common mistake, in saying that “the industry faces increasing pressure to bolster digital music sales as its traditional business — selling CDs — suffers a sharp decline.” CDs are digital too, and they lack DRM (attempts to add DRM to CDs failed disastrously), but news stories and commentary often ignore these facts. I guess “Warner to adopt another DRM-free digital format” wouldn’t seem quite so newsworthy.

Three of the four majors (all but SonyBMG) now sell MP3s. It’s only a matter of time before the last domino falls, and the industry can move on to the next stage in its evolution.

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The Return of 3-D Movies

December 27, 2007 by

[Today’s guest post is by longtime reader and commenter Mitch Golden. Thanks, Mitch! If you’re a Freedom to Tinker reader and have a great idea for a guest post, please let me know. – Ed]

Last Friday I was at a movie preview for a concert movie called U23D, which, as you will correctly surmise, was a U2 concert filmed in digital 3D.

A few weeks ago I saw the new film Beowulf, also in 3D.

As I look out the office window to the AMC Loews on 84th St, I see that the marquee is already pitching Hannah Montana 3d, not due out until February.

And outside that same theater is a 3d movie poster for the upcoming Speed Racer movie.

Suddenly everything is floating in space, after decades of flatness. What gives?

Those of us who frequent Freedom To Tinker know that there are two approaches for producers operating in our world of nearly-zero-cost copying. The option most often pursued thus far by the content industries has been to pin hope on a technological fix – DRM – and then use political muscle to get governments around the world to mandate its use. Thus far this strategy can only be said to have been pretty much a total train wreck for all the parties involved – from the record industry to Microsoft – and it has had the disastrous side effect (from their point of view) of persuading an entire generation – and then some – that the media companies are “the man” and so file sharing is not immoral.

Of course the other option – thus far being resisted strenuously by the record labels – is to try a new business model. Sell the customers something better than what they can get for free. Maybe – just maybe – that’s what’s going on here.

As you doubtless know, there’s nothing new about 3d movie or photos. In fact, they go back nearly to the very beginning of photography. To make the 3d effect work, you just need to present different images, shot from slightly different perspectives, to the two eyes. While various systems have been invented over the years to do this (see the wikipedia page on the subject for a bit of the history of the technology), they all to a greater or lesser extent shared the common faults that (a) the theater had to install special equipment (including a more expensive screen that reflects polarized light without depolarizing it), (b) the film was bigger and more difficult to handle, and (c) splicing the film print when it broke required careful treatment to avoid getting the two eyes out of sync. So it just wasn’t quite worth it.

So why are we seeing these movies again now? One possibility is that the explanation for the renaissance of 3d is just that digital technology solves some of these problems (especially b and c), and so filmmakers are interested in trying again.

However, I think it’s possible there’s something else going on. Could it have something to do with the fact that a 3d movie cannot be pirated?

According to IMDB, the LA premier of Beowulf was on November 5, 2007 and the film was officially released in the US on November 16. On the other hand, according to vcdquality (a news site that announces the “releases” of films into various darknets) it was already available for file sharing by November 15.

Isn’t it just possible that the studios were thinking: Hey guys, I know you could just download this fantasy flick and see it on your widescreen monitor. But unless you give us $11 and sit in a dark theater with the polarized glasses, you won’t be seeing the half-naked Angelina Jolie literally popping off the screen!

Maybe the studios have learned something after all.

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Radiohead's Low Price Might Mean Higher Profit

November 15, 2007 by

Radiohead’s name-your-own-price sale of its new In Rainbows album has generated lots of commentary, especially since comscore released data claiming that 62% of customers set their price at zero, with the remaining 38% setting an average price of $6, which comes to an average price of $2.28 per customer. (There are reasons to question these numbers, but let’s take them as roughly accurate for the sake of argument.)

Bill Rosenblatt bemoaned the low price, calling it a race to the bottom. Tim Lee responded by pointing out that Rosenblatt’s “race to the bottom” is just another name for price competition, which is hardly a sign of an unhealthy market. The music market is more competitive than before, and production costs are lower, so naturally prices will go down.

But there’s another basic economic point missing in this debate: Lower average price does not imply lower profit. Radiohead may well be making more money because the price is lower.

To see why this might be true, imagine that there are 10 customers willing to pay $10 for your album, 100 customers willing to pay only $2, and 1000 customers who will only listen if the price is zero. (For simplicity assume the cost of producing an extra copy is zero.) If you price the album at $10, you get ten buyers and make $100. If you price it at $2, you get 110 buyers and make $220. Lowering the price makes you more money.

Or you can ask each customer to name their own price, with a minimum of $2. If all customers pay their own valuation, then you get $10 from 10 customers and $2 from 100 customers, for a total of $300. You get perfect price discrimination – each customer pays his own valuation – which extracts the maximum possible revenue from these 110 customers.

Of course, in real life some customers who value the album at $10 will name a price of $2, so your revenue won’t reach the full $300. But if even one customer pays more than $2, you’re still better off than you’d be with any fixed price. Your price discrimination is imperfect, but it’s still better than not discriminating at all.

Now imagine that you can extract some nonzero amount of revenue from the customers who aren’t willing to pay at all, perhaps because because listening will make them more likely to buy your next album or recommend it to their friends. If you keep the name-your-own-price deal, and remove the $2 minimum, then you’ll capture this value because customers can name a price of zero. Some of the $10-value or $2-value people might also name a price of zero, but if not too many do so you might be better off removing the minimum and capturing some value from every customer.

If customers are honest about their valuation, this last scenario is the most profitable – you make $300 immediately plus the indirect benefit from the zero-price listeners. Some pundits will be shocked and saddened that your revenue is only 27 cents per customer, and 90% of your customers paid nothing at all. But you won’t care – you’ll be too busy counting your money.

Finally, note that none of this analysis depends on any assumptions about customers’ infringement options. Even if it were physically impossible to make infringing copies of the album, the analysis would still hold because it depends only on how badly customers want to hear your music and how likely they are to name a price close to their true valuation. Indeed, factoring in the possibility of infringement only strengthens the argument for lowering the average price.

By all accounts, Radiohead’s album is a musical and financial success. Sure, it’s a gimmick, but it could very well be a smart pricing strategy.

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Radiohead Album Available for Free, But Fileshared Anyway

October 18, 2007 by

The band Radiohead is trying an interesting experiment, offering its new album In Rainbows for download and letting each customer decide how much to pay. You can name a price of zero and download the album for free, if you want, or you can pay whatever price you think is fair.

Now Andy Greenberg at Forbes is reporting that despite Radiohead’s free-if-you-choose offer, many users are downloading the album from P2P systems rather than getting it from the band’s site. Some commentators find this surprising, but in fact it should have been predictable.

Why are some people getting In Rainbows from P2P rather than the band’s site? Probably because they find P2P easier to use.

Radiohead’s site makes you click and click to get the music. First you have to click through a nearly content-free splash screen. Then you click through another splash screen telling you things you probably already knew. Then you click an “ORDER” button, and click away a dialog box telling you something you already knew. Then after some headscratching, you realize you need to click the “VIEW BASKET” button, which takes you to a form asking you to name your price, in U.K. currency. (They link you to a third-party site, offering a large collection of currency-conversion tools – several more clicks to find the one you want.) After choosing your price, you click “PAY NOW”, at which point you get to stare at a “You are currently in a queue” screen for a while, after which you set up an daccount enter some personal information (including your email address and mobile phone number) and agree to some terms of service (which are benign, but it’s more time and more clicks to verify that). Finally, you get to download the music.

It’s easy to see why somebody might prefer a P2P download. Leaving aside legal issues – and let’s face it, many people do – the moral argument against unauthorized P2P downloading seems pretty weak in this case, where downloaders aren’t depriving the band (or anyone else) of revenue.

This is an interesting natural experiment that tells us something about why people use P2P. If people normally choose P2P over authorized channels because P2P is cheaper, we would expect customers to shift toward the authorized channel when it offers a zero price. But if people choose P2P for convenience, then we’d expect a shift toward more P2P use for this album, because people have fewer moral qualms about P2P downloading this album than they would for a normal album. The clunkiness of Radiohead’s site improves the experiment by sharpening the ease-of-use factor.

It’s too early to tell how the experiment will come out, but news reports so far indicate that the ease-of-use factor is probably more important than some pundits think. This is yet more evidence that had the record industry embraced easy-to-use Internet music technologies early on, things would be very different now.

[UPDATE (Oct 21, 2007): Bill Zeller documents how technical issues completely prevent a large number of users from legally downloading In Rainbows from Radiohead’s site.]

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