Lawyers Discussing Business Models
from the dancing-about-architecture dept
Doug Lichtman’s latest “IP Colloquium” podcast is on the question of whether or not “content can survive online.” Specifically, it’s a discussion about “online content business models.” Oddly, though, rather than having business model experts, it’s a conversation with four lawyers, starting with Doug, and including Brad Smith, General Counsel, Microsoft; Scott Martin, Executive Vice President, Intellectual Property, Paramount Pictures; and Dan Cooper, Vice President, Legal & Business Affairs, MySpace. Lichtman starts it off, oddly, by stating — as if fact — that talking about business models online is depressing because there’s just not much in the way of business models online for content. I think that’s damning things a bit early in the process — something that comes up again later.
While I realize that the podcast is a legal podcast, it still strikes me as odd to bring together four lawyers to have them discuss business models, when their expertise is not in business at all, but in the law.
The podcast starts out with a discussion on the Google Book search and settlement, but oddly no one even seems to give any credit to the fair use question. But, again, since these are lawyers we’re talking about, there really isn’t much of a discussion on business models around Google Book Search, but on legal questions — including a hope that Congress steps in to solve it. Amusingly, Microsoft’s Smith early on suggests that it’s a question Congress could solve “if the industry got behind it; if copyright holders got behind it.” Striking, huh? He basically admits how copyright law works in this country. It’s not about what’s best for the overall society or economy. It’s not about the politicians fixing things where they see a problem. It’s not about consumers. It’ll happen if the industry gets behind it. Welcome to the way things work in DC. The rest of this part of the discussion is interesting — and it’s one (rare) case where I mostly agree with Lichtman, that as a resource, Google’s Book search is incredibly useful, and we should figure out some way for it to happen.
From there, the discussion moves on to other business models, and quickly seems to head off in directions that I don’t think are accurate from a business model standpoint. It starts off with two premises set forth by Lichtman, each of which I think is suspect. First, he claims that piracy is a problem because “you can’t compete with free.” Frankly, I’m sick of this argument because it makes no sense economically or from a business standpoint. Economically, saying that you “can’t compete with free” is the same thing as saying you can’t compete — period. It assumes, falsely, that the only way to compete is on price, but the history of the economy shows that’s not true. You compete on price or you compete on benefits, and competing on price is often a losing battle anyway. Saying “you can’t compete with free” just means you only know how to compete on price. If that’s the case, you shouldn’t be in business.
And, to make that point clear, tons of companies compete on benefits, and allow other companies to offer lower priced offerings. The popular example, of course, is “water,” whereby it’s free (or near free) to drink out of the tap, but the bottled water business is a multi-billion dollar business. Why? It tries to compete on other factors — such as convenience, quality or safety (though, there are arguments that many of these benefits are perceived rather than real). But it’s true in just about any other business as well. In the automobile business, a BMW costs more than an entry level Ford, and that’s because BMW is seen to have a lot more scarce value. Ford could “copy” BMW, but BMW has its reputation and some amount of prestige that Ford simply can’t copy.
Anyone who’s in business recognizes that you don’t just compete on price. So why is it that so many seem to assume that the only way to compete in the content market is on price?
Lichtman’s second premise is that online business models don’t work. He says that Hulu hasn’t been a success because it doesn’t make as much as TV, and that if Hulu displaces TV we “won’t have the money to pay for” expensive TV show production. He claims that even if Hulu is really successful, it’ll never make enough money to pay for the production of a show like Battlestar Galactica. First off, huh? How does he know that? If Hulu is successful, it absolutely could pay for such production. Already, we’re seeing that some of the online ad rates are higher than TV ad rates. Hulu’s barely been around for two years at this point. I’d be willing to bet that Hulu’s revenue today greatly exceeds the revenue of television two years after it was invented. Give it time, Doug!
He then jumps on Redbox — sarcastically saying “we’re renting movies at a dollar per day?” Suggesting that this will never sustain the development of movies. Really? I always find it amusing when people insist that problems in the DVD market will mean the death of Hollywood. It really was just 25 years ago that Hollywood insisted that the VCR would kill the industry (Boston Strangler, anyone?). Now they finally get their “original” wish, and find that putting movies on recordable media is going away, and it’s the worst thing in the world?
Either way, the economic fallacy that Doug seems to be relying on here is twofold. First, he assumes that early business model experiments are set in place and no further innovation will occur that allows them to flourish. He assumes that the markets won’t grow, and some of these experiments won’t click and get much bigger. Second, he seems to assume that the old revenue numbers for these industries need to be sustained. He doesn’t consider that the old revenue numbers may have been a result of monopoly rents, limited competition or technological limits. Markets change all the time, and usually what comes out in the end is much better (subjective, I know, but I’m a believer that the world is a better place today than it was 25 years ago — and that it will be even better 25 years from now).
But, of course, no one challenges him on this. Scott Martin at Paramount, of course, worries quite a bit about piracy of movies. While he admits (finally!) that he’s just the lawyer, rather than the business guy, he discusses it in the terms of adding more windows to movie releases, rather than any discussion of adding more value to the product, or giving people reasons to buy beyond just the content. Then Martin repeats the myth that you can’t compete with free, but leads in with a different myth — claiming that the “copyleft” people say that piracy would go away if they just priced their movies better. That’s a strawman argument. Perhaps someone out there made that argument, but it’s hardly common. Then he says that “the idea that if we charged $2 a download instead of $10 a download, we’d get rid of piracy is a myth.” Sure, it’s a myth, but no one said that. You can’t get rid of piracy. No one thinks you can get rid of piracy. No one suggested anything you do would “get rid of piracy.” What many of us are suggesting is that you can build business models where that piracy isn’t a problem. Even the people suggesting you just charge $2 instead of $10 aren’t saying it would “get rid of piracy,” but that at $2, enough people would pay for it that it would increase profits beyond what the $10 DRM’d version gets you.
Anyway, the discussion goes on from there, including a discussion of the DMCA that again doesn’t make much sense to me, but the business/economic analysis throughout doesn’t strike me as accurate at all. It’s still an interesting discussion, but frustrating because I wish there were at least someone on the panel who would challenge a lot of the “accepted wisdom,” put forth by everyone, that doesn’t seem to be accurate. Brad Smith, at one point, does point out that this is all a “revenue” problem, and does a pretty good job describing the revenue problem… but then falls into the trap of saying the law needs to “fix the piracy problem” because without that, business models can’t be built up.
The last analysis I’ll talk about that is again faulty from an economics standpoint again comes from Scott Martin at Paramount, where he tries to defend the importance of DRM, noting that if he flies into JFK he has various price options on transportation: he can buy a car, rent a car, take a cab or take a train. So there are price differentials. He says that without DRM, content is like saying his only option is to buy a car. That is, if he had DRM, they could offer different “rental options” for content, with “one day pricing or one week pricing.” But that’s totally wrong again. There’s a reason for the differential pricing in the transportation options: it’s related to the marginal cost of each option and the competitiveness of the market. That’s what sets the prices. But with content, the marginal costs are zero, so what he’s doing is trying to set up an artificial barrier to pretend the markets are the same.
While I like listening to these discussions, I just find the economic fallacies frustrating.