Monday, January 24, 2005

Peer-to-peer file-sharing.

Let’s first start with some history and economy that will give the reader an idea of just how absurd some aspects of this issue are.

In the early 20th century, when the gramophone started to become a household item, some artist started to worry that people would stay at home listening instead of going to concerts. They therefore felt that their entire profession might be threatened. As we all know, the exact opposite happened; music, even live such, became more popular than ever, making the artist richer than ever.

Shortly after the gramophone came the radio. The first programs consisted mainly of talk radio mixed with music. When the newly born music industry realised that people could listen to the music for free instead of buying the records they reacted just as the artists had to the gramophone. Together with the artist, they basically proclaimed their own death. Again, as we all know, this did not happen, in fact the exact same thing happened: music became more popular, more records were sold, and everyone made more money.

Some time after radio became popular, the first tape recorders started to appear. To this fearsome new technology, which allowed people to copy their gramophone records and the music on the radio, the music industry reacted in a way I think most readers can predict by now…

Obviously there seems to be a pattern to the history of technology vs. the entertainment industry – technology which invariably has increased the profit of both those industries. Here is a short list of some of the most terrifying technology ever created: the gramophone, the radio, TV, VCR, BetaMax, and CD. Today’s beasts also go by terrifying combinations of letters: mp3, P2P, DivX – cue thunder and lightning, will you please.

For the readers who are still not convinced that the death of the entertainment industry isn’t coming up on us faster than you can cry “wolf”, I’ll explain some very basic economic principles. Economy can be studied from many different perspectives, on a macro level, however, some principles are elevated to tautologies, below I list the two most important.

1. The customer is always right.

We’ve all heard this expression, most people, however, probably haven’t quite realized what it means. First let’s see what is meant by “customer”, this term refers not just to people who buy the product, but also everyone who would like to buy the product at some price. This means that the people who are illegally downloading music and other copyrighted material, are also right. The implication of this is that the companies are providing the right product, because people want it, but the customers aren’t willing to pay for it.

A common misconception about the people, who illegally download music, is that they want free music. There are certainly people who want that, since they couldn’t afford to buy the product at any price – those people, however, wouldn’t be customers even if the internet shut down tomorrow. The vast majority of downloaders, who would be willing to pay, choose not to do so because of price. This leads to the inevitable conclusion that music, as the music industry provides it, simply is too expensive. This also goes for the other industries that are affected by illegal downloading.

2. If there is a demand, there will be a supply.

This is probably the hardest principle for people to accept, personally I believe this comes from the democratic principles that our society is built on – if there is something we don’t like, we have the power to stop it. Obviously this would make the principle harder to accept the more power one has, which most likely is why politicians seem completely incapable of it.

One example of how this rule works is drugs and the “war” against them. Because of this principle, the war against drugs can only be won at home, or through economic incentives to the suppliers. This means that the US will have to either decrease the demand for drugs at home, or pay the farmers of coca not to grow it. The only other alternative thankfully isn’t available to democracies; namely to summarily execute everyone involved in making or distributing drugs.

The relation between this principle and the illegal downloading of copyrighted material lies in the first rule; if there is demand for cheaper music, it will be provided. Just as for the US government, the only solutions available are to affect the popular opinion or to provide economic incentives. The problem for the music industry, and soon the movie industry, is that they’ve pretty much burned their bridges when it comes to getting sympathy for their cause, the reason is of course the heavy-handed way in which they’ve treated their customers. Therefore the only solutions to the problem are to lower the prices, or to provide more value, such as discounts for concert tickets for those who own the artist’s records.

By now I hope it is clear that file-sharing and illegal downloading is little more than an economic reaction to the badly priced products that the entertainment industry and the software industry are selling.

An argument the music industry often brings up is that for every big selling record there are ten badly selling ones. In order to counter this you need to perform market research, something that the internet is perfect for. If, for instance, the music industry wants to improve its profit per album they can create a freely available database of artist where people can register their own bands and upload their own songs, if a certain artist becomes popular they get to make an album.

Above I mention the software industry, being a computer scientist I would like to take this opportunity to criticize the pricing of software. According to rough estimates, something like 70% of the code in software products are reused from the previous generation of the product. This means that for every generation the customers are asked to pay for less. This follows from that the older the code is, the better it will have been tested and therefore requires less maintenance. This is clearly not a sustainable cycle, and should be broken before open source programs become too popular for a change to have the desired effect.

Conclusively, the industries I’ve mentioned in this post should be careful about how they act; the fact that they’ve been able to keep too high prices suggests a lack of competition. While competition might seem threatening, it is ultimately a form of cooperation, without which no one in the market gets the necessary information on whether they need to improve their efficiency or not.


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