Wednesday, March 30, 2005

End of the Digital Revolution?

I don't know if any of you has been keeping track, but the Supreme Court has recently heard oral arguments on the Grokster case. For those of you not in the know, Grokster is a file sharing system that came about after the demise of the original Napster. Essentially, the RIAA was able to successfully sue Napster for copyright infringement because it kept a centralized list of its users' shared files, many of which were copyrighted. Grokster and its siblings worked around this hurdle by maintaining no central server. Instead, each computer maintains its own list of files and the company itself has no way of monitoring who has what.

The end result, of course, is the same as it was with Napster -- people can use these systems to exchange copyrighted music, movies, etc. and they do. En masse. So, the Entertainment Powers that be are back to close the door that the Napster decision left open.

This raises an important question - will this end the digital revolution? As the Court noted, many new forms of technology can be used to infringe copyright - from the printing press to the Xerox machine, the VCR and the iPod. Since each of these can be used to infringe copyright, are their makers liable? Will new technologies emerge if there is an omnipresent threat of litigation? At the same time, is it fair to allow companies profit off of illegal activity? Is this the end of the digital revolution?

I was watching the intro to a DVD I rented yesterday that illustrated the core of the problem - a shot of someone downloading music from the internet. Cut to a shot of someone lifting a CD from a store. Its the same thing, right? The Industry would have us believe so. I think most people sense that something is wrong with the analogy. Is it really stealing if the store still has the same number of CDs it had before you walked in? At the same time, is it right for someone to get the music/movie for free?

Ultimately, economics is based on scarcity. The whole purpose of copyright is to create an artificial scarcity in order to give creators a way to reap rewards for their creation. In this case, supply and demand breaks down because once a song is in digital format, there is potentially infinite supply at no cost - and hence you have the rise of "pirating."

The Industry's best defense against this has been iTunes and similar services offering songs at $.99 a song. Cheap and easier to use than many of the illegal alternatives. Of course, now that there's a good amount of traffic, many of the record labels are trying to raise the prices, which will ultimately lead to more people pirating - why pay more when you can get it for free? The Industry hasn't learned from the past that the key is to lower prices and sell high volumes - that's what happened with video and DVD movies.

Essentially, the Industry is stuck in an old system that is on its way out. They can fight to prolong it, but this beast is dying. A new system is needed. Another blog, The Long Tail, explains how the economics of abundance can work. The question is when someone finally decides to put it into practice.


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