[wordup] Piracy is Progressive Taxation, and Other Thoughts on the Evolution of Online Distribution

[Adam Shand]

From: http://www.openp2p.com/pub/a/p2p/2002/12/11/piracy.html

Piracy is Progressive Taxation, and Other Thoughts on the Evolution of 
Online Distribution

by Tim O'Reilly
12/11/2002

Lesson 1: Obscurity is a far greater threat to authors and creative 
artists than piracy.

Let me start with book publishing. More than 100,000 books are published 
each year, with several million books in print, yet fewer than 10,000 of 
those new books have any significant sales, and only a hundred thousand 
or so of all the books in print are carried in even the largest stores. 
Most books have a few months on the shelves of the major chains, and 
then wait in the darkness of warehouses from which they will move only 
to the recycling bin. Authors think that getting a publisher will be the 
realization of their dreams, but for so many, it's just the start of a 
long disappointment.

Sites like Amazon that create a virtual storefront for all the books in 
print cast a ray of light into the gloom of those warehouses, and so 
books that would otherwise have no outlet at all can be discovered and 
bought. Authors who are fortunate enough to get the rights to their book 
back from the publisher often put them up freely online, in hopes of 
finding readers. The web has been a boon for readers, since it makes it 
easier to spread book recommendations and to purchase the books once you 
hear about them. But even then, few books survive their first year or 
two in print. Empty the warehouses and you couldn't give many of them away.

Many works linger in deserved obscurity, but so many more suffer simply 
from the vast differential between supply and demand.

I don't know the exact size of the entire CD catalog, but I imagine that 
it is similar in scope. Tens of thousands of musicians self-publish 
their own CDs; a happy few get a recording contract. Of those, fewer 
still have their records sell in appreciable numbers. The deep backlist 
of music publishers is lost to consumers because the music just isn't 
available in stores.

There are fewer films, to be sure, because of the cost of film making, 
but even there, obscurity is a constant enemy. Thousands of independent 
film makers are desperate for distribution. A few independent films, 
like Denmark's Dogme films, get visibility. But for most, visibility is 
limited to occasional showings at local film festivals. The rise of 
digital video also promises that film making will soon be as much a 
garage opportunity as starting a rock band, and as much of a garret 
opportunity as the great American novel.

Lesson 2: Piracy is progressive taxation

For all of these creative artists, most laboring in obscurity, being 
well-enough known to be pirated would be a crowning achievement. Piracy 
is a kind of progressive taxation, which may shave a few percentage 
points off the sales of well-known artists (and I say "may" because even 
that point is not proven), in exchange for massive benefits to the far 
greater number for whom exposure may lead to increased revenues.

Our current distribution systems for books, music, and movies are skewed 
heavily in favor of the "haves" against the "have nots." A few 
high-profile products receive the bulk of the promotional budget and are 
distributed in large quantities; the majority depend, in the words of 
Tennessee Williams' character Blanche DuBois, "on the kindness of 
strangers."

Lowering the barriers to entry in distribution, and the continuous 
availability of the entire catalog rather than just the most popular 
works, is good for artists, since it gives them a chance to build their 
own reputation and visibility, working with entrepreneurs of the new 
medium who will be the publishers and distributors of tomorrow.

I have watched my 19 year-old daughter and her friends sample countless 
bands on Napster and Kazaa and, enthusiastic for their music, go out to 
purchase CDs. My daughter now owns more CDs than I have collected in a 
lifetime of less exploratory listening. What's more, she has introduced 
me to her favorite music, and I too have bought CDs as a result. And no, 
she isn't downloading Britney Spears, but forgotten bands from the 60s, 
70s, 80s, and 90s, as well as their musical forebears in other genres. 
This is music that is difficult to find -- except online -- but, once 
found, leads to a focused search for CDs, records, and other artifacts. 
eBay is doing a nice business with much of this material, even if the 
RIAA fails to see the opportunity.

Lesson 3: Customers want to do the right thing, if they can.
O'Reilly Emerging Technology Conference.

Piracy is a loaded word, which we used to reserve for wholesale copying 
and resale of illegitimate product. The music and film industry usage, 
applying it to peer-to-peer file sharing, is a disservice to honest 
discussion.

Online file sharing is the work of enthusiasts who are trading their 
music because there is no legitimate alternative. Piracy is an illegal 
commercial activity that is typically a substantial problem only in 
countries without strong enforcement of existing copyright law.

At O'Reilly, we publish many of our books in online form. There are 
people who take advantage of that fact to redistribute unpaid copies. 
(The biggest problem, incidentally, is not on file sharing networks, but 
from copies of our CD Bookshelf product line being put up on public Web 
servers, or copied wholesale and offered for sale on eBay.) While these 
pirated copies are annoying, they hardly destroy our business. We've 
found little or no abatement of sales of printed books that are also 
available for sale online.

What's more, many of those who do infringe respond to little more than a 
polite letter asking them to take the materials down. Those servers that 
ignore our requests are typically in countries where the books are not 
available for sale or are far too expensive for local consumers to buy.

What's even more interesting, though, is that our enforcement activities 
are customer-driven. We receive thousands of emails from customers 
letting us know about infringing copies and sites. Why? They value our 
company and our authors, and they want to see our work continue. They 
know that there is a legitimate way to pay for online access--our Safari 
Books Online subscription service (safari.oreilly.com) can be had for as 
little as $9.95 a month--and accordingly recognize free copies as 
illegitimate.

A similar data point comes from Jon Schull, the former CTO of Softlock, 
the company that worked with Stephen King on his eBook experiment, 
"Riding the Bullet". Softlock, which used a strong DRM scheme, was 
relying on "superdistribution" to reduce the costs of hosting the 
content--the idea that customers would redistribute their copies to 
friends, who would then simply need to download a key to unlock said 
copy. But most of the copies were downloaded anyway and very few were 
passed along. Softlock ran a customer survey to find out why there was 
so little "pass-along" activity. The answer, surprisingly, was that 
customers didn't understand that redistribution was desired. They didn't 
do it because they "thought it was wrong."

The simplest way to get customers to stop trading illicit digital copies 
of music and movies is to give those customers a legitimate alternative, 
at a fair price.

Lesson 4: Shoplifting is a bigger threat than piracy.

While few of the people putting books on public web servers seek to 
profit from the activity, those who are putting up CDs for sale on eBay 
containing PDF or HTML copies of dozens of books are in fact practicing 
piracy--organized copying of content for resale.

But even so, we see no need for stronger copyright laws, or strong 
Digital Rights Management software, because existing law allows us to 
prosecute the few deliberate pirates.

We don't have a substantial piracy problem in the US and Europe. The 
fact that its software products have been available for years on warez 
sites (and now on file trading networks) has not kept Microsoft from 
becoming one of the world's largest and most successful companies. 
Estimates of "lost" revenue assume that illicit copies would have been 
paid for; meanwhile, there is no credit on the other side of the ledger 
for copies that are sold because of "upgrades" from familiarity bred by 
illicit copies.

What we have is a problem that is analogous, at best, to shoplifting, an 
annoying cost of doing business.

And overall, as a book publisher who also makes many of our books 
available in electronic form, we rate the piracy problem as somewhere 
below shoplifting as a tax on our revenues. Consistent with my 
observation that obscurity is a greater danger than piracy, shoplifting 
of a single copy can lead to lost sales of many more. If a bookstore has 
only one copy of your book, or a music store one copy of your CD, a 
shoplifted copy essentially makes it disappear from the next potential 
buyer's field of possibility. Because the store's inventory control 
system says the product hasn't been sold, it may not be reordered for 
weeks or months, perhaps not at all.

I have many times asked a bookstore why they didn't have copies of one 
of my books, only to be told, after a quick look at the inventory 
control system: "But we do. It says we still have one copy in stock, and 
it hasn't sold in months, so we see no need to reorder." It takes some 
prodding to force the point that perhaps it hasn't sold because it is no 
longer on the shelf.

Because an online copy is never out of stock, we at least have a chance 
at a sale, rather than being subject to the enormous inefficiencies and 
arbitrary choke points in the distribution system.

Lesson 5: File sharing networks don't threaten book, music, or film 
publishing. They threaten existing publishers.

The music and film industries like to suggest that file sharing networks 
will destroy their industries.

Those who make this argument completely fail to understand the nature of 
publishing. Publishing is not a role that will be undone by any new 
technology, since its existence is mandated by mathematics. Millions of 
buyers and millions of sellers cannot find one another without one or 
more middlemen who, like a kind of step-down transformer, segment the 
market into more manageable pieces. In fact, there is usually a rich 
ecology of middlemen. Publishers aggregate authors for retailers. 
Retailers aggregate customers for publishers. Wholesalers aggregate 
small publishers for retailers and small retailers for publishers. 
Specialty distributors find ways into non-standard channels.

Those of us who watched the rise of the Web as a new medium for 
publishing have seen this ecology evolve within less than a decade. In 
the Web's early days, rhetoric claimed that we faced an age of 
disintermediation, that everyone could be his or her own publisher. But 
before long, individual web site owners were paying others to help them 
increase their visibility in Yahoo!, Google, and other search engines 
(the equivalent of Barnes & Noble and Borders for the Web), and Web 
authors were happily writing for sites like AOL and MSN, or on the 
technology side, Cnet, Slashdot, O'Reilly Network, and other Web 
publishers. Meanwhile, authors from Matt Drudge to Dave Winer and Cory 
Doctorow made their names by publishing for the new medium.

As Jared Diamond points out in his book Guns, Germs, and Steel, 
mathematics is behind the rise of all complex social organization.

There is nothing in technology that changes the fundamental dynamic by 
which millions of potentially fungible products reach millions of 
potential consumers. The means by which aggregation and selection are 
made may change with technology, but the need for aggregation and 
selection will not. Google's use of implicit peer recommendation in its 
page rankings plays much the same role as the large retailers' use of 
detailed sell-through data to help them select their offerings.

The question before us is not whether technologies such as peer-to-peer 
file sharing will undermine the role of the creative artist or the 
publisher, but how creative artists can leverage new technologies to 
increase the visibility of their work. For publishers, the question is 
whether they will understand how to perform their role in the new medium 
before someone else does. Publishing is an ecological niche; new 
publishers will rush in to fill it if the old ones fail to do so.

If we take the discussion back to first principles, we understand that 
publishing isn't just about physical aggregation of product but also 
requires an intangible aggregation and management of "reputation." 
People go to Google or Yahoo!, Barnes & Noble or Borders, HMV, or 
MediaPlay, because they believe that they will find what they want 
there. And they seek out particular publishers, like Knopf or O'Reilly, 
because we have built a track-record of trust in our ability to find 
interesting topics and skilled authors.

Now, let's take this discussion over to music file sharing. How do 
people find songs on Kazaa or any of the other post-Napster file sharing 
services? First, they may be looking for a song they already know. But 
such searches for a known artist or song title are fundamentally 
self-limiting, since they depend on the marketing of a "name space" 
(artist/song pairs) that is extrinsic to the file sharing service. To 
truly supplant the existing music distribution system, any replacement 
must develop its own mechanisms for marketing and recommendation of new 
music.

And in fact, we already see those mechanisms emerging. File sharing 
services rely heavily on that most effective of marketing techniques: 
word of mouth. But over time, anyone who has studied the evolution of 
previous media will see that searches based on either pre-existing 
knowledge or word of mouth represent only the low-hanging fruit. As the 
market matures, paid marketing is added, and step by step, we build up 
the same rich ecology of middlemen that characterizes existing media 
marketplaces.

New media have historically not replaced but rather augmented and 
expanded existing media marketplaces, at least in the short term. 
Opportunities exist to arbitrage between the new distribution medium and 
the old, as, for instance, the rise of file sharing networks has helped 
to fuel the trading of records and CDs (unavailable through normal 
recording industry channels) on eBay.

Over time, it may be that online music publishing services will replace 
CDs and other physical distribution media, much as recorded music 
relegated sheet music publishers to a niche and, for many, made 
household pianos a nostalgic affectation rather than the home 
entertainment center. But the role of the artist and the music publisher 
will remain. The question then, is not the death of book publishing, 
music publishing, or film production, but rather one of who will be the 
publishers.

Lesson 6: "Free" is eventually replaced by a higher-quality paid service

A question for my readers: How many of you still get your email via 
peer-to-peer UUCP dialups or the old "free" Internet, and how many of 
you pay $19.95 a month or more to an ISP? How many of you watch "free" 
television over the airwaves, and how many of you pay $20-$60 a month 
for cable or satellite television? (Not to mention continue to rent 
movies on videotape and DVD, and purchasing physical copies of your 
favorites.)

Services like Kazaa flourish in the absence of competitive alternatives. 
I confidently predict that once the music industry provides a service 
that provides access to all the same songs, freedom from onerous 
copy-restriction, more accurate metadata and other added value, there 
will be hundreds of millions of paying subscribers. That is, unless they 
wait too long, in which case, Kazaa itself will start to offer (and 
charge for) these advantages. (Or would, in the absence of legal 
challenges.) Much as AOL, MSN, Yahoo!, Cnet, and many others have 
collectively built a multi-billion dollar media business on the "free" 
web, "publishers" will evolve on file sharing networks.

Why would you pay for a song that you could get for free? For the same 
reason that you will buy a book that you could borrow from the public 
library or buy a DVD of a movie that you could watch on television or 
rent for the weekend. Convenience, ease-of-use, selection, ability to 
find what you want, and for enthusiasts, the sheer pleasure of owning 
something you treasure.

The current experience of online file sharing services is mediocre at 
best. Students and others with time on their hands may find them 
adequate. But they leave much to be desired, with redundant copies of 
uneven quality, intermittent availability of some works, incorrect 
identification of artist or song, and many other quality problems.

Opponents may argue that the Web demonstrates precisely what they are 
afraid of, that content on the Web is "free", that advertising is an 
insufficient revenue model for content providers, and that subscription 
models have not been successful. However, I will argue that the story is 
still unfinished.

Subscription sites are on the rise. Computer industry professionals can 
be seen as the "early adopters" in this market. For example, O'Reilly's 
Safari Books Online is growing at 30 percent a month, and now represents 
a multi-million dollar revenue stream for us and other participating 
publishers.

Most observers also seem to miss the point that the internet is already 
sold as a subscription service. All we're working on is the development 
of added-value premium services. What's more, there are already a few 
vertically-integrated ISPs (notably AOL Time Warner) that provide 
"basic" connectivity but own vast libraries of premium content.

In looking at online content subscription services, analogies with 
television are instructive. Free, advertiser-supported television has 
largely been supplanted--or should I say supplemented (because the 
advertising remains)--by paid subscriptions to cable TV. What's more, 
revenue from "basic cable" has been supplemented by various aggregated 
premium channels. HBO, one of those channels, is now television's most 
profitable network. Meanwhile, over on the internet, people pay their 
ISP $19.95/month for the equivalent of "basic cable", and an ideal 
opportunity for a premium channel, a music download service, has gone 
begging for lack of vision on the part of existing music publishers.

Another lesson from television is that people prefer subscriptions to 
pay-per-view, except for very special events. What's more, they prefer 
subscriptions to larger collections of content, rather than single 
channels. So, people subscribe to "the movie package," "the sports 
package" and so on. The recording industry's "per song" trial balloons 
may work, but I predict that in the long term, an "all-you-can-eat" 
monthly subscription service (perhaps segmented by musical genre) will 
prevail in the marketplace.

Lesson 7: There's more than one way to do it.

A study of other media marketplaces shows, though, that there is no 
single silver-bullet solution. A smart company maximizes revenue through 
all its channels, realizing that its real opportunity comes when it 
serves the customer who ultimately pays its bills.

At O'Reilly, we've been experimenting with online distribution of our 
books for years. We know that we must offer a compelling online 
alternative before someone else does. As the Hawaiian proverb says, "No 
one promised us tomorrow." Competition with free alternatives forces us 
to explore new distribution media and new forms of publishing.

In addition to the Safari subscription service mentioned above, we 
publish an extensive network of advertising-supported "free" information 
sites as the O'Reilly Network (www.oreillynet.com). We have published a 
number of books under "open publication licenses" where free 
redistribution is explicitly allowed (oreilly.com/openbook). We do this 
for several reasons: to build awareness of products that might otherwise 
be ignored, to build brand loyalty among online communities, or, 
sometimes, because a product can no longer be economically sold in 
traditional channels, and we'd rather make it available for free than 
have it completely disappear from the market.

We have also published many of our books on CD ROM, in a format referred 
to as the CD Bookshelf, typically a collection of a half dozen or so 
related books.

And of course, we continue to publish print books. The availability of 
free online copies is sometimes used to promote a topic or author (as 
books such as The Cathedral and the Bazaar or The Cluetrain Manifesto 
became bestsellers in print as a result of the wide exposure it received 
online). We make available substantial portions of all of our books 
online, as a way for potential readers to sample what they contain. 
We've even found ways to integrate our books into the online help system 
for software products, including Dreamweaver and Microsoft's Visual Studio.

Interestingly, some of our most successful print/online hybrids have 
come about where we present the same material in different ways for the 
print and online contexts. For example, much of the content of our 
bestselling book Programming Perl (more than 600,000 copies in print) is 
available online as part of the standard Perl documentation. But the 
entire package--not to mention the convenience of a paper copy, and the 
aesthetic pleasure of the strongly branded packaging--is only available 
in print. Multiple ways to present the same information and the same 
product increase the overall size and richness of the market.

And that's the ultimate lesson. "Give the wookie what he wants!" as Han 
Solo said so memorably in the first Star Wars movie. Give it to him in 
as many ways as you can find, at a fair price, and let him choose which 
works best for him.

Tim O'Reilly will be participating in the upcoming Emerging Technology 
Conference, April 22-25, in Santa Clara, CA.