Pirates are Customers, too

Media companies are reluctant to embrace electronic distribution of music, movies, and television. The entertainment industry tends to view the Internet as a threat to traditional sales rather than as a new way to reach customers. The RIAA and MPAA have been addressing the “problem” by suing P2P users into submission, and these efforts have left a wake of diminished privacy, innocent victims, and reduced freedoms.

The industry refuses to recognize that each pirate is a potential customer. Sure, the P2P user base has it’s share of freeloaders, but there are numerous users who would likely pay for a similarly convenient legitimate service. Three announcements made today illustrate three potential models to turn pirates into customers.

  1. Apple renews $0.99 contracts — Click-and-mortar
  2. ABC offers streaming television — Embedded advertising
  3. Napster offers free music — Voluntary Collective Licensing (sort of)

Click-and-Mortar

This basic online store model — paying individually for each media downloaded — is the natural evolution of driving to the store and doing the same. iTunes popularized this model with $0.99 songs and $1.99 television programs, and it now accounts for 80% of the US digital music market. So why don’t the big labels offer their own downloads? points out that such a middle man may be a necessary, because “‘the consumer buys based on the artists, not the labels…. Each label will have a severely limited catalog of its own artists…'” –redherring.com

The dependence on such a middle-man reduces labels’ abilities to set their own prices. The flat $0.99 contracts were renewed today, despite the fact that Warner Music, EMI, and Sony BMG have all expressed interest in a more flexible price scheme. I fear that these big labels will eventually force the issue, in which case downloaded music might actually cost more than a CD. The same public who buys $2.99 ringtones will probably be happy to pay more than $0.99 for an entire song. I am also skeptical of the long-term viability of $1.99 television shows at a time when viewers can legitimately watch the same shows in HD for free.

Bottom line: The simple and familiar Click-and-Mortar model is here to stay, despite minor setbacks.

Embedded Advertising

Mandatory ads are well-suited for television, because this has long been the accepted paradigm. AOL’s In2TV offers classic TV shows for free. This is an all-out win: content owners can make money with old properties, advertisers have more ad space, and consumers have convenient access to the content.

For a two-month period beginning today, ABC is offering free streaming of Desperate Housewives, Lost, Alias, and Commander in Chief. The episodes are available after a show airs, and are funded by sponsors’ mandatory ads. This may actually encourage viewership of these serial programs because users can more easily catch missed episodes. In a time where DVR’s make easy to skip commercials, this could be a potential benefit for consumers and advertisers alike.

Bottom line: Embedded Advertising funds the web, and has funded television for even longer. It will continue to be applicable for online television.

Voluntary Collective Licensing

The EFF supports collective licensing, wherein the music industry provides licensed use via collecting society. Users would pay a nominal monthly fee ($5) directly, or as part of an ISP price, for unlimited access to the works owned by that society. The collecting society would then distribute funds to copyright owners based on metered popularity. While this may sound impractical, the EFF counters that this exact model is still in use by broadcast radio, and was adopted after the industry was unable to “sue radio out of existence”. ASCAP and SoundExchange are the preeminant collecting societies in the radio world.

In this model, labels and artists pay absolutely nothing to distribute their works, relying instead on the existing P2P infrastructures. This presents logistical problems for enforcing licensed use, but those problems are not insurmountable. The restructure announced by Napster.com today comes resembles VCL from the user perspective — five free previews, $9.95 for unlimited play, and $14.95 for Napster to Go, which allows transfer to portable players (see gizmodo.com, napster.com).

To further endorse VCL, the EFF has a petition in support of collective licensing, and for itself to act in the public interest in any copyright hearings. Their petition summarizes their position:

We oppose the recording industry’s decision to attack the public, bankrupt its customers and offer false amnesty to those who would impugn themselves. We call instead for a real amnesty: the development of a legal alternative that preserves file-sharing technology while ensuring that artists are fairly compensated.

Bottom line: VCF, the most radical approach of the three, offers a huge untapped market. Assume that 10 million users are willing to shell out $5/month, and that’s $600 million/year.

Conclusion

Some distribution methods are better suited to certain media, and the above strategies will likely coexist. Hopefully the industry will realize that embracing potential customers rather than suing the public will yield greater profits.

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2 Responses to “Pirates are Customers, too”

  1. JonnyRo says:

    I drop $50 a month for high speed internet access without blinking. I pay a Tivo subscription for two units without blinking. What’s different about these services from lets say a DVD.

    I tend to classify movies into three groups
    1. Essential – These are movies usually related to a book series i’ve read as a child or a TV series of exceptionally high quality. Serenity,Hackers, and The Matrix (not the sequels) are in this category.
    The Essential Movies I will go see in the theater, buy the DVD release, and if there’s a book, i’ll probably get that too.
    2. Entertaining – These are movies that are good, but have little repeat value for me in a meaningful sense. A History of Violence, Antitrust, Resident Evil. I will watch these, but I will only rent through netflix and I will probably not go to the theater to see
    3. Comedies – comedies are fine sometimes, and there are breakaway hits in here that might sometimes be called essential, but still i’m not likely to go out of my way to see them. These are the movies that I borrow. Kelli however might buy them.

    In the case of two or three I will only pay for the convenience of accessing it, not for the title itself. and in #2 I’m only paying money to the person renting the movie to me, not the original authors.

    I am itching to remove the movie theater, the rental, and to a lesser degree the borrowing option from my list, in a way that increases the funds payed to the content owners.

    Give me compulsory licensing. I will happily pay $50 a month for unmetered content. The crap about pay per view shit on cable is useless. It’s a waste of time, and i pity the poor bastards that take advantage of it. they are making it worse for the rest of us consumers.

  2. […] Warner Bros. announced yesterday that it will sell movies and TV shows online, and distribute them using BitTorrent. In the same vein as my editorial Pirates are customers too, Warner Bros. realises “If we can convert, 5, 10 or 15 percent of the illegal downloaders into consumers of our product, that is significant.” […]

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