New Media and Free Market Choice

The Online Music and Media Rental Myth introduced the two extremes in viewpoint on intellectual property rights: the media producers who think their content is worth any price they can ask, and the peanut gallery that thinks anything in the digital medium should be free.

Here in part two, I’ll consider five examples that prove that intellectual property, while offering some new challenges, still obeys the same market laws of supply and demand. Along the way, I'll also prove why the market has rejected digital media rentals.

The Market Meets Media Part I: the Atari Supply Nightmare

Real market factors still apply for intellectual property, even if production costs are no longer a factor in creating scarcity. This is particularly the case when intellectual property is tied to a physical medium.

This was first widely discovered in the consumer electronics industry by Atari, who fed the market for Atari 2600 games until there were actually more games cartridge available than consoles to play them!

Atari thought they had found a way to effectively print money: once the design for a video game was developed, it cost almost nothing to mass reproduce it within a cheap plastic cartridge to sell at a significant profit.

This seemed like a good idea until production glutted the market and retailers found themselves with overflowing stacks of Atari cartridges. Prices fell into the toilet as they tried to sell off their supply, but consumer demand was already satiated, and the low quality of games turned off consumers even more.

The resulting negative backlash on home video games was so profound that the industry wags of the day decided that home video gaming would never return.

The situation was so bad, that when Nintendo introduced their home video game console, they were carefully to avoid calling it a video game, and instead referred to it as a family entertainment system. It was also bundled with a robot to further create the illusion that their product was a new type of toy, not a new video game system.

The Market Meets Media Part II: Ignoring VCR Demand

Media companies were scared to death of the arrival of a consumer device that could skip advertising on television and duplicate movies. They were right: the business models supporting commercial TV were under attack.

After obediently spending decades of sitting through hours of advertising to watch their TV shows, consumers would, for the first time, be able to watch a show at a different time than broadcasters intended, challenging the existing notion of limited competition for a time slot. They'd also be able to skip past all those commercials, further eroding the business model behind forced view advertising.

Media companies sued to stop hardware makers, but failed. The result was not as entirely catastrophic as they imagined however. Broadcast TV was already changing under threat from cable TV channels, which were paid for by viewers rather than advertisers.

Instead of destroying TV, the VCR introduced the potential for studios to sell TV and movies directly to consumers, but they failed to catch on to this concept for nearly a decade.

Instead, the studios over priced their movies. Many VHS and LaserDisc movies were "priced for rental" at around $100-150 each. Those artificially high prices anticipated that consumers wouldn't pay a reasonable amount to own a copy of movie, and that the studios needed to get as much revenue as possible from every cassette and disc sold.

Movies were commonly sold to rental shops, which then rented them out for several dollars a night. Consumers rented movies because they had to; nearly a decade passed before studios realized that they could sell far more than ten times as many individual movies to consumers for $10-15 each.

The Market Meets Media Part III: CD Digital Audio and Failed Successors

The CD offered consumers fantastic studio quality audio reproduction for the first time. Unfortunately, media companies similarly overpriced CDs, and worked to keep prices high. This slowed the initial adoption of CDs, and later induced consumers to find alternatives.

Instead of offering consumers the high quality recordable media they wanted, media companies kept introducing handicapped alternatives:

•DAT was loaded with excessive copy protection that prevented them from ever being adopted;
•MiniDisc was similarly captive to Sony's clumsy copy protection limitations;
•SACD and DVD-A were designed to replace CDs with onerous copy protection, but failed to interest consumers.

Consumers rejected the unsuitable technology offerings designed to appeal to media producers. The resulting supply vacuum was solved by the PC industry in the form of CD-R.

Suddenly, CDs could be copied by consumers, and they found ways to do the things they wanted to do. They copied the usage patterns of earlier generations, who had been making mix tapes for years. Now they could make mix CDs and listen to them in their cars or on portable players.

The Market Meets Media Part IV: Indefatigable MP3

By compressing CD audio into MP3 files, users could copy them around to use in even more unlimited ways. Consumers were still buying music, and CD prices were still high. MP3 file trading started to replace radio airplay as the way to introduce new music to others.

Media companies feared that file trading was not just a new form of free promotional advertising, but represented lost sales. They called file traders pirates, and counted every traded file as lost revenue. By the same measure, media producers have been losing billions of revenue in radio play for decades. Clearly, there is some balance needed between the needs of consumers and producers; media producers just weren't getting it.

Unlimited, mass distribution of music was unfairly devaluing producers' content and inhibiting any real market from developing. But rather than working to create a fair market for music, media labels kept offering poorly designed, ugly, and excessively complex and onerous copy protection systems. The MP3 remained consumer's choice.

Microsoft then offered media companies an alternative: WMA. In this new architecture, media producers would have unlimited and unprecedented control over how their content would work. WMA was designed to be more onerous and limiting than any technology had ever been before. It made all the mistakes of the previous format failures.

Microsoft expected WMA to strangle MP3s, CD audio, and eventually take over movies as well, by encasing all media in a layer of Microsoft taxed encryption. Media companies loved it; consumers didn't. Instead, they continued using MP3s and devices that played them.

After some initial failure with WMA, Microsoft hoped that offering a new way to access a large library of digital music at an ongoing subscription price would demonstrate to consumers a clear benefit of WMA over their existing MP3 files. Instead, a couple years of subscription rental failure later, consumers have clearly shown their preference to:

•own and rip their own CDs, rather than paying to access a subscription pool of locked up, rental music;
•buy whatever device they want, rather than limiting their choice to several specific, inferior WMA players;
•feel like they are paying a fair price for the things they buy.

The Market Meets Media Part V: the iPod & iTunes Clean Up

At the arrival of Apple's iPod, industry analysts were presenting a bitter rivalry between media moguls who overpriced their media, and slacker youth who only wanted to steal music.

Apple's iPod seemed indifferent to the war: it allowed users to use their own music ripped from CDs, or play MP3s that may have been obtained scandalously. WMA devices and Sony ATRAC players had both tried to thwart any use of the MP3 format.

After an initial success on the hardware front, Apple then introduced a music store selling protected music at a fixed price. Apple's store also challenged the notion that consumers wouldn't pay for albums if they could just buy a track or two from them, and later worked to keep prices consistent.

It turned out that many consumers weren't trading MP3 music because they wanted to rip off artists and producers, but only because there was no functional alternative. There had never been a good online music market place offering commercial music with added value.

Rather than getting poorly assembled bootleg tracks, they could buy music with album art, correct and consistent meta tags, and reliable quality encoding. There was no forced commitment to future purchasing, and an open option to continue using their own music from CDs ripped at whatever quality they desired. Apple sold a billion tracks.

More Nails in the Coffin

Clearly, the type of choice consumers want isn't freedom from Apple or Microsoft or paying for anything ever, but simply the freedom from feeling ripped off when buying entertainment. Music and movies have limited value; movies can only be watched a few times; music gets old. The market rewards low media prices with high volume sales.

Rental access to entertainment feels like a rip off because there isn't any real reason to get fewer use rights than are afforded by CDs. This was proven by DIVX and other attempts to create self-destructing DVD alternatives. Why pay $5 for a movie that explodes in 48 hours, when a DVD that works in expected ways, including ripping to an iPod, costs around $10-15?

Consumers are willing to pay for fleeting ideas like fashion. Some might pay extra for a black Mac Book, but they certainly don't want to pay an ongoing fee for a black Mac Book that turns white once they stop paying. Revoking music playback after a period of time, or after a subscription lapses, sounds like a good idea to media producers, but consumers hate it.

Similarly, the reason we rented movies in the 90's wasn't because we didn't want to own movies, but rather because there were few options to own movies at a reasonable price. If movie studios allowed consumers to buy digital copies of movies from the iTMS or other outlets at reasonably low price, consumers would buy them by the handfuls.

Buying a movie and having it disappear or lock up later is an ugly and lame trick that serves no one. It makes movie studios look greedy and cheap, and encourages consumers to do the same thing they did with DVDs: find ways to subvert the limitations of the technology so they could use them in fair and reasonable ways.

How to Sell a Billion Movies

Even better than online movie purchases would be DVDs that included a secondary version of the movie that plays back on an iPod, PSP, or similar mobile playback device. Don't over-think the copy protection: a good start would be FairPlay. Allow users to playback movies on any iTunes computer linked to an account, and burn to DVD or Divx CD for flexible playback.

Another alternative: sanction DVD ripping by Apple’s FairPlay and Microsoft’s WMA schemes, so consumers can buy existing DVDs and use them with the same rights they now get with audio CDs: compressed mobile use on portable players and local streaming for flexible playback options.

Assume consumers aren't thieves, and the ones that matter most will buy billions of your movies. The only alternative is to spend megabucks trying to police an excessively strict DRM system that nobody really wants to use.

Next Article: Why Apple is Winning in Media Downloads & The Danger of DRM

This Series

Tech: Online Music & Media

Tech: Open Source & Intellectual Property

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