Scott Kirsner

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Digital Media at a Crossroad

San Jose Mercury News, July 3, 2005

- Scott Kirsner

Storekeepers generally don't believe they have much to learn from shoplifters. When merchandise disappears from the shelf, their response is to hire a security guard, affix an inventory control tag or start keeping certain items behind the counter.

Record labels, Hollywood studios and other media concerns, similarly, don't seem to feel that there's much to learn from the shoplifters of the entertainment marketplace -- the millions around the world who illegally download music, movies and TV shows. And last week's unanimous Supreme Court decision in the case of MGM vs. Grokster, an Internet file-sharing service, may reinforce that sentiment.

Despite the ruling that Grokster and another file-sharing network can be held liable if they are found to have intentionally encouraged their users to swap copyrighted material, the entertainment industry acknowledges that piracy probably will persist. But the question that will shape the industry's future is whether it can look beyond that: Will the next few years be dominated by a law-and-order strategy that seeks to protect today's revenue sources from digital threats, or instead by a creative exploration of new business opportunities?

Its audience is changing fast: 6 million Americans swapped files (both legally and illegally) over the Internet every month this year, according to BigChampagne LLC. To survive, entertainment companies will need to listen and learn from the people they now regard as thieves: their audience, and especially the younger members of that audience.

When the Web went mainstream in the mid-1990s, it started a shift to what might be thought of as the ``request and respond'' economy. Users clicked, and a request was sent to a Web server, somewhere in the world, that responded instantly. The ease and speed of those transactions changed the way we shop, communicate, gather news and entertain ourselves.

Still, entertainment companies were universally surprised when the request-and-respond economy began surging down their street like a flash flood. How could people possibly want to watch video or listen to audio downloaded from the Net, when the quality looked like a 1950s TV broadcast, or sounded like a record purchased at a yard sale on a particularly hot afternoon? Who on Earth would be willing to wait for daylong movie downloads?

So the industry initially ignored the small numbers of people swapping copyrighted music and video on the Net, instead concentrating entirely on their existing, highly profitable distribution channels.

Attracting notice

But the volume of illegal file-sharing, on networks such as Napster, Grokster, Kazaa and Limewire, quickly grew too large to ignore. Entertainment companies began to feel as though they were a bank whose every branch was being looted daily. In tandem, compact disc sales fell by 30 percent from 2000 to 2004. (This summer, illegal movie downloads have taken off, while movie box-office revenues have tanked.) The entertainment establishment decided to release the hounds, with suits against Napster and MP3.com in 1999 and 2000. Since then, the Motion Picture Association of America and the Recording Industry Association of America have filed thousands of lawsuits against file-sharing networks and individual users. They even got $2,000 in a settlement with a 12-year-old.

At times it seems as if the only message that movie studios, TV producers and record labels have gotten from young consumers is that they believe that the Internet ought to render all entertainment products free. (Just as the shoplifter believes that a 10-pack of razors ought to be free.) And last week's court decision indirectly rapped those scofflaws on the knuckles, at least as far as Mitch Bainwol, head of the recording industry group, was concerned. ``The court spoke to the culture as well as the law,'' Bainwol said. ``Thou shalt not steal.''

But unlike pirates who sell bootlegged DVDs on the streets of Manhattan, most media swapping on the Net isn't about making a profit. It's about getting a copy of a new (or out-of-circulation) song or movie at the moment the consumer wants it, in a format the consumer finds convenient. To compete in the request-and-respond economy, as companies like Amazon.com understand, you've got to be comprehensive, convenient and cheap.

``The best way to limit or eliminate piracy is to understand why consumers are doing it and provide them with a legitimate alternative,'' venture capitalist and musician Roger McNamee wrote on his Weblog, in advance of the Grokster decision. ``It is no stretch to imagine that with today's peer-to-peer file-sharing, consumers are giving the media industry a message of hope: a new distribution model is emerging that could spur renewed growth for the industry.''

Catching on?

Amid the gloating in Hollywood over the Grokster ruling were scattered signs that entertainment companies may in fact be starting to grasp that message. In a document posted to the MPAA's Web site, the association predicted that consumers ``will be the ultimate winners as they will have more access to the high-quality content they desire, and it will be available across a wider array of devices and platforms.''

Already, the recording industry supports legal music services such as Apple's iTunes, Real Rhapsody and Yahoo Music, which sell music either by song or album, or on a subscription basis. That strategy is having a growing impact on piracy; three of the 10 most popular music download services now operate within the bounds of the law, according to research firm NPD Group.

With hindsight, the Grokster ruling may be viewed as important brush-clearing that will allow legal content marketplaces to thrive. In the wake of last week's decision, Sony BMG unveiled a deal with Mashboxx, a Virginia company planning to launch a paid file-sharing service, for example. (The RIAA also announced lawsuits against 784 individual alleged file-sharers.)

But movie and television rights-holders have been slower to experiment than the record labels. Popular TV shows aren't yet readily available as legal downloads, and the selection at many movie sites is sparse. MovieLink, the legal download site run by a group of Hollywood studios, offers about 1,000 movies; the selection at a decent neighborhood video store is 10 or 20 times that.

New opportunities

It's not just the distribution of entertainment that is changing. So is the way it is produced. Most entertainment companies still aim to sign the biggest stars (or those with the most star potential), give them big budgets and hope for big hits. Churning out a few expensive products rather than lots of inexpensive ones may be the wrong strategy at a time when technology makes it increasingly cheap to produce music and movies.

Piracy, and the impulse to defend existing businesses, is distracting the entertainment establishment from chasing exciting opportunities. What if studios viewed their role as helping to provide tools and guidance to anyone who wanted to make a movie (for a fee, or in exchange for equity in the end product), and helping the audience discover films and filmmakers that best matched their tastes?

The alternative is to let others seize those opportunities. Already, many video producers, musicians and filmmakers are scraping together their own funding, setting up their own basement studios and finding platforms on the Internet that allow them to sell directly to their audiences. Using sites like MP3Tunes.com, Google Video, Open Media Network and TotalVid.com, creators can make an end run around traditional sales channels. Nowadays, even seemingly niche, non-commercial projects from unknown artists are becoming hits.

Up close with audience

A closer link between artist and audience allows for interesting alchemy. Artists can more easily market to people who have purchased their earlier work, and even respond to feedback, perhaps by offering alternate versions or remixes of a piece. Audiences might also serve as Medici-like patrons of particular artists, commissioning new music or movies as a group, and helping to fund them.

The entertainment establishment could take the Grokster verdict as a license to sue. Or it could embrace the possibilities presented by new technologies.

By doing the former, it risks not only losing the loyalty of its audience, but its artists as well. And that would present a much more fundamental problem for the industry than the spate of shoplifting we've seen so far.

SCOTT KIRSNER (skirsner@fastcompany.com), a contributing writer at Fast Company and a columnist for the Boston Globe, is working on a book about how technology is changing the movies. He wrote this article for Perspective.