In this post I summarise his key points, and then build on them to produce a value net analysis of the media industry from the perspective of the current incumbents. In later posts I will look at the analysis from the perspective of the people who create the content and devlop some thinking on the strategies open to both parties.

The Dave Winer view
In the podcast Dave draws strong parallels between the current rush of music, audiobook and video producers to adopt various strong forms of DRM to the practices of the software industry in the 80′s when copy-protection of software was common. What was once the industry norm rapidly fell out of favour as companies began to get lots of negative reactions from paying customers who wanted to do sensible things like make backup copies of the software.

The introduction of tools to circumvent copy-protection from companies such as Central Point Software (who merged with Symantec in 1994) didn’t, to the surprise of the software companies, result in a sharp fall in revenues. On the contrary because software that you can backup is more useful than software you can’t, sales increased.

Dave extrapolates some key lessons about copy protection and its aftermath:

• It makes life harder for genuine, paying customers “Locks only keep out honest people”
• Eventually, legitimate customers react badly to being treated as thieves
• The companies that thrived were the ones that listened to their customers and built features for them (in other words, they found ways to reward loyalty and honesty).

He goes on to suggest that companies can only get away with the reduction in perceived product value (caused by the inconveniences of DRM) whilst the majority of the customer base are too technologically naive to realise how much easier and robust their use of the material they have bought would be if they could copy files, make backups etc.

Further, he suggests that because of the inconveniences of protected material, the takeup of digital media (in particular audiobooks) has been lower than it would otherwise have been, leaving an opportunity in terms of available listening attention that has been exploited by the explosion in podcasting. Even more, he suggests that just as tech blogging has undermined the market for paid-for technology magazines, the growth in podcasting will undermine the market for paid-for content.

Would you like an Apple with that?
Of course the latest big change in the podcasting world has been Apple’s entry (podcast modifications to iTunes, combined with the addition of a podcast directory to the ITMS). Dave references this New York times article by Randall Stross that speculates about why Apple would make easier for users to access free content that competed with the paid-for audio content (e.g. that by Audible.com) on ITMS.

The answer in the article comes in the form of an analyst’s view that the podcasting phenomenon had simply become too large for Apple to ignore – it had to embrace it or resist it.

I think it’s more straightforward than that – lots of available content is a very clear complement to sales of iPods, so I’d guess that Apple believes that what it might lose on lost content margin will be surpassed by increased hardware sales.

There’s A New Game in Town
Who are the players in the online content game? Let’s pretend that we are an existing media supplier, using DRM as a way of extracting payment from our customers (and probably working from a mindset that says to do otherwise would be “giving away the family silver”).

The easy bits of the [bliki]Value Net[/bliki] to fill in are the Customers and Suppliers. The Customers of our mythical company are the people who give us money for the services we provide – in this case this is the end-user who is prepared to hand over cash in return for a protected copy of one of our pieces of content. Our Suppliers are the people to whom we give money in return for services or goods – primarily in this case the content creators who are prepared to sell us the distribution rights on their material in return for money (either up front or in the form of royalties).

Complementors come in two forms, the first and more obvious of which is the group of players who increase demand for the services our company offers. So in this case that would typically be the people who manufacture audio devices and the aggregation/e-trading sites that lead people to our services – hence the tie-up between Audible.com and Apple ITMS. The second form of Complementor is the group of other customers of our suppliers who, collectively with our demand, drive up the overall size of the Supplier market and reduce prices. I’m not sure how that model applies to knowledge creations (as opposed to physical goods) so will pass over that factor for the moment.

Substitutors, like Complementors, come in two flavours. The first group are people or companies who provide goods or services to our Customers which reduce their desire to give us money for our goods or services. The obvious group here are other media suppliers who may tempt away “our” customers with a more attractive offering. An important, and growing, subset of this group are content creators themselves, using the dis-intermediating technologies of the internet to build direct relationships with the people who want to enjoy their creative work. Whether they are charging, and thus drawing money away from our services, or providing free content that competes for the attention of our customers, the more such alternatives exist the harder we will find it to continue drawing in money.

The second group of Substitutors are media providers who compete with us for the attention of our content Suppliers. Providers who can offer a more attractive deal to content creators are likely to be their preferred route. This might be a matter of more money for their work, it might also be less tangible rewards such as greater exposure, being seen “in good company” etc. Again, a growing subset of this group of Substitutors will be groupings of content creators who find ways to gain economies of scale without needing an internediate organisation.

The Added Value of the media company comes from several inter-related roots, all of which relate to the “middle man” role. One group of these relate to the aggregation role played by a media company. As a content aggregator our company makes it possible for a given viewer/listener to find stuff that interests them. As an audience aggregator we bring together a group of viewers/listeners who like certain types of material.

Both of these lead us to the role of an aggregator of funding – either advertising funds drawn by our aggregated audience, subscription funds drawn by our aggregated content or public funds drawn by our ability to deliver certain sorts of content to certain parts of the audience. All of these ways of adding value work because they facilitate the flow of money to the content creators and the flow of interesting content to the viewers and listeners.

The other main class of value-adding activity comes from the control of the means of distribution in a broadcast-based world – there have traditionally been high costs of entry to these markets because of the investment in technology, licences etc. Traditionally these barriers to entry created a situation where there was a shortage of routes for material to get to the people who wanted to watch, listen to or read it, and because there was a scarcity of distribution routes there was the possiblity to extract money for the use of one.

In [bliki]PARTS analysis[/bliki] Rules cover everything from laws and contracts to “unwritten rules” of how a market operates. By far the most powerful of these sets of rules in this context are the contractual provisions around the rights to broadcast in different territories. Historically media companies were able to extract very broad rights from content creators in return for access to money and a distribution medium.

The Tactics traditionally used by media companies have revolved around controlling the methods of distribution and using their considerable financial muscle to oppose any technological change which threatened that control.

The Scope of this game used to be constrained to “professionals” – largely because of the costs of entry. This too is an area that is especially vulnerable to imposed change because of technology development.

Playing To Win
In the paragraphs above I’ve (briefly) outlined the strategic position of our traditional media company. The beauty of the [bliki]Value Net[/bliki] as an analysis tool is that you can take any of the players and place them in the centre of their own net, thus helping enormously with the task of thinking allocentrically. I think the other interesting group (and one that is often overlooked) are the people who create the content in the first place. I’ll save analysis of their Value Net for another post. Also to follow is a look at the strategies that are open to the players.

Coda
As a footnote – listening to (and making notes on) DW‘s 40+ minute podcast reminded me of Euan‘s post Less is More – the essential argument about the true market impact of DRM could have been made in a few hundred words of text – perhaps more labour to produce but easier to analyse!

Henceforth all original content created by myself and published on this website (including material previously published under different terms) is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 England & Wales License.

bq. Here’s what I’m here to convince you of:
1. That DRM systems don’t work
2. That DRM systems are bad for society
3. That DRM systems are bad for business
4. That DRM systems are bad for artists
5. That DRM is a bad business-move for MSFT

+and now someone has turned it into a “wiki”:http://www.commonhouse.net/wiki/drm/FrontPage+
+and an “HTML version”:http://junk.haughey.com/doctorow-drm-ms.html+

The article quotes Lessig

“Economists, of course, will tell you that this is the efficient way to sell, to make the content available, because where a marginal cost is zero the price is zero, where the marginal cost is positive you should charge a positive price.”

and describes how the new models of information-sharing, constrained to non-commercial use in this case by the Creative Commons licence, drive a word-of-mouth market for the (paid-for) physical product that is probably far in excess of that which would otherwise exist.

Suw, a professional writer, goes on to describe her frustrating experience of trying to discuss the issues raised by Lessig’s book on screenwriters’ home zoetrope.com – a general lack of interest broken only by intractable opposition.

It’s at this point that I have to admit to a lingering element of confusion in my mind about Lessig’s message. I find the ideas of the Creative Commons intellectually interesting at a personal level, but in my professional life at the overlap of media and technology I am involved in a world where we take the concepts of (the value of) intellectual property and licenses very seriously indeed.

As yet I have not been able to draw a scenario for deploying the CC approach in that world that convinces me, let alone others. My hunch (and it would take more economics knowledge than I possess to develop this argument) is that a key difference between the areas where CC is taking off and those where it has yet to make it’s mark relates to the relationships between:
* cost of original production of “the work” and cost of distributed product;
* the differences in value between different formats or versions of the distributed product;
* the possible value to the originator of “word of mouth”;
* perceived control of the means of distribution

In the arena where most attention seems to have been paid to CC, let’s say the general case of the written word, as in the Lessig example, the cost of production of “the work” is moderate as is the cost of distributing the “paid for” article. (i.e. a physical book). However the paid-for article has (in most people’s eyes) a value somewhat above the free version (e.g. a PDF). The value to the originator of “word-of-mouth” is two-fold as it potentially drives both direct reward (greater sales of the book) and indirect reward (higher profile and professional esteem potentially leading to more interesting and/or financially rewarding work).

More extreme still are the current rifts in academic publishing, where the reward to the originator is almost entirely indirect through advanced professional standing (and thus advanced by the widest possible dissemination of ideas) and is in almost direct conflict with the interests of the journal publishers.

By contrast, consider movies or high-end TV. In this case the cost of original production and distribution are very high, yet to the end-user the value of a cheaply copied DVD is almost as high as the “authentic” product. Combine this mismatch with a selection of commercial models that are almost entirely built around controlling access to the product (e.g. pay-per-view, selecting what is on a specific channel, advertising interspersed with the content etc.) and it is little surprise that most media companies take a similar view to the RIAA.

What might change this? The key commercial factors are probably:
* increased viewer choice due to massively increased numbers of ways of accessing content;
* leading to reduced audiences for each item; and
* decreased relevance of the “channel brand”
* together (perhaps) with sociological changes leading to increased consumer resistance to direct advertising models

all of which directly attack the revenue models of commercial broadcasters and film distributors.

What steps might they take?

One obvious answer is the approach some of them are taking – “writs at dawn” for anything or anyone who they perceive as threatening their business. For a while that will work but I suggest that in the limit it is a zero sum game – as more and more choices appear for accessing content then fewer and fewer people will be prepared to pay the prices asked for material that is less and less imaginative and entertaining.

Perhaps though the more imaginative might begin to think generatively and realise that in a world of choice where you are competing for attention then it helps to focus on creativity and originality – making sure that you have informative, imaginative and entertaining content on offer, lots of ways for people to “spread the word” and lots of ways for people to get to you. Once you’ve got people’s attention then you are halfway towards finding a way to generate money to sustain the process…

And this I think is where the commercial logic of the media business might actually join up with the aspirations of Creative Commmons.

Lots more to be worked out, not least how a viable business model is created with proper protections, and I haven’t even begun to touch on the debate about the role of publically-funded high quality content in the digital world.

If you’re an economist and can help turn this into a tighter argument please stop by and leave a comment!
Standard disclaimer: my opinion, no-one else’s. YMMV.

Tim Hadley on the long-term effects of Creative Commons licences [via Ernie the Attorney]

Douglas Clement writes “Does innovation require intellectual property rights?”:http://www.reason.com/0303/fe.dc.creation.shtml reviewing this “paper(Perfectly Competitive Innovation [PDF 253kb])”:http://minneapolisfed.org/research/sr/sr303.pdf by Michele Boldrin and David K. Levine [ via "TeledyN":http://www.teledyn.com/mt/ ]