Thursday, August 11, 2011

Why can't copyright "reformers" understand minor business points?

Copyright "reformers," or better yet copyright warriors (they're at war with copyright a lot more than they want to reform it) fail to understand some basic business points; that gets in the way of meaningful discussions about copyright. Which turns all discussions of copyright into politics.

My evidence of the copyright warriors' blind spot is this convenient video of Cory Doctorow giving the keynote address at SIGGRAPH 2011:

I agree that there have been some abuses of copyright law, but the whole address is marred by his failure to see value in anything other than content creation.

Here are some points that anyone with a minimal interest in the business of content would make:

1. Distribution is a value-added activity. This point needs hammering in, because there's a large subset of otherwise intelligent people who believe that distribution is some sort of parasite on the creatives. Because they don't understand the various functions of distribution beyond the physical movement of materials (or bits), they fail to see that financing, promoting, and filtering/bundling have a value of their own.

2. Revenue models are built with many elements. Another point that seems to escape the copyright warriors is that the hardware, the services of the brick-and-mortar bookstore, and customer support are cheap (or free) because the provider funds those services out of the revenues collected otherwise. When deciding whether to launch a new product (and at what price), companies take into account the costs and investments required and all the sources of revenue.

That's why restaurants charge a corkage fee. Yes, you can buy the same Chateau d'Proglos at Safeway for half the price, but the restaurant's markup on the wine is how it subsidizes the price of the meal. Yes, the very expensive meal is still subsidized by the drinks. Copyright warriors want to pay the subsidized price for the hardware and then escape paying the content prices that support that subsidy.* (Economists call this an horizontal externality.)

3. Ecosystems and their components don't fall from the sky. Apple had to develop the iTunes/iPhone/iPad ecosystems by actually paying money to engineers, designers, patent holders, and business consultants. Much of that money went into blind alleys, under the rubric of "acceptable business risk" and "cancelled project." The components of the ecosystem may be cheap to reproduce, but they were expensive to produce. (This problem is much larger in pharmaceuticals.)

When deciding on these investments, spending billions to develop their own chips and millions to design their interfaces, Apple and other companies look at total revenue projections, not just the small markup on hardware (yes, it looks big – to people who have no notion of the cost of capital or the failure rate for internal projects).

4. Corporations are not college bull sessions writ large. A corporation like Apple, Amazon, Microsoft, or Google is bound by a very large body of law and regulation. If a corporation fails to protect its intellectual property, for example, it soon loses its right to control it. Therefore, it's a fiduciary obligation of that corporation's management to use legal means to protect it. It's true that many companies manipulate the legal -- and sometimes the political -- process to their advantage. But failing to protect their copyrights would be a failure of the fiduciary obligation; a dereliction of duty.

Companies have some flexibility given the trade-off between the obligation and public relations, but the only cases that are visible are the ones where the trade-off comes on the side of the obligation; that many companies ignore violations of DMCA is obvious by the number of copies of Handbrake found in macs, for example.

5. There are good reasons for keeping one's ecosystem controlled (as much as possible) beyond revenue creation. For example, Apple's vetting of apps for iPhone/iTouch/iPad is in part a protection of Apple's brand equity, the part of which that says "apple is a safer product to use than others." (See also the footnote about the iOS payment system.)

6. Recent history shows the need for some copy protection. Not that it is very hard to defeat, but without it – consider the free distribution of music in the early days of file sharing – making a living out of content becomes very difficult. In other words, copy protection is necessary to have a consistent revenue model that can fund creative industries. Yes, you can write a book very cheaply, but what about TV shows, blockbuster movies, professionally recorded music, art photographs with professional models or in remote locales?

All these observations stem from the same point, the inability to see value created by other parts of the process involved in the consumption of content. Yes, there are abuses of copyright protection, made for simple revenue enhancement; but treating content as carrying all the value and the rest of the ecosystem as being somehow irrelevant – or as something that exists for the benefit of content creators only – is unbelievably myopic.

A first step towards a rational discussion of copyright is to accept that actions other than content creation have value. Cory still hasn't taken that step.

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* Here's the response to the "evil Apple wants 30% of all money spent through their platform," which is the corkage fee-equivalent: this can be avoided simply by having the customers make their purchases through the web site of the provider, even from the iOS product itself.

What that 30% fee is capturing is not just the price of convenience; what iOS is giving to the app is the credibility of "transaction via Apple," as opposed to "transaction via the web page of a company that makes the app." Is it hard to understand where the value comes from in this difference?

Yes, Amazon can complain, but they can easily use the Kindle app to tell their servers what sample the reader just ended, and to put the book sampled at the top of the recommendation list; Apple would probably get into serious trouble legally if it gave Amazon privileged treatment.

NOTE: I'm a fan of Cory's fiction and I agree that there are clear cases of abuse and even political use of copyright for nefarious ends. But to reform copyright we need to accept that businesses exist for the creation and capture of value and that includes businesses built around content. Pretending that the content business is somehow insulated from the rules of economics is myopic and ultimately self-defeating.