Decriminalising Copyright Infringement

It is one thing to make a law. Any fool can make a law, which is lucky for politicians. It is quite another thing to enforce a law. Enforcing laws can be expensive. Especially if lots of people are inclined to break the law. And when breaking a law is profitable, the dynamics of supply and demand make the job of enforcement even harder. Because if more money is spent on enforcement, some criminals may be stopped, but probably not all. So the remaining successful criminals then benefit from higher profit margins, enabling them to spend more on evading enforcement. Think of how mobsters thrived in prohibition-era USA, or of the rise of production cartels despite the war on drugs. Copyright infringement has been following this same pattern, except the internet means there is no need for a recognisably criminal organisation. Instead, mutual self-interest encourages millions with P2P software and broadband connections to work together at breaking the law.

George Orwell wrote that the quickest way of ending a war is to lose it. EMI will start to sell DRM-free music via Apple’s iTunes store from May. Selling DRM-free music is effectively showing the white flag of surrender in the war on copying music. You can see and hear EMI’s press conference here and the BBC’s write up of the story here. Not surprisingly there have been countless articles and blogs dedicated to the news – read a more cynical and thoughtful blog entry here. But most miss the point. The only reason why EMI – and the other major labels who are bound to follow – would stop fighting is because defeat was inevitable. As Steve Jobs pointed out during the announcement, DRM-free music is everywhere already: it just gets distributed as CDs. CDs are inconvenient. Electronic communications is far more convenient, but not if you muck everything up with lots of DRM software that obstructs reproducing the music on any device you please. So rather than wasting precious resources on two declining and doomed business models, one involving physical distribution of music and another involving artificially inconvenient electronic distribution, EMI have opted for first-mover advantage on a radically different model. The new model, as exemplified by the clever way of splitting music sales between cheaper/DRM/lower-quality and slightly more expensive/non-DRM/higher-quality, depends on trust. But the kind of trust on offer is intimately linked to convenience. In other words, EMI have rationalised that people will not go to the trouble of stealing if they can get a better deal without breaking the law. It all comes down to the value proposition: if the customer can get better value, whilst avoiding effort and saving time, they may well pay to download music instead of stealing it. Interoperability was a straightforward motive for stealing music, but EMI’s move outflanks that motive.

Of course, EMI cannot afford to say they will never enforce their rights. But what they are signaling is that low-level and domestic infringements of copyright – equivalent to making a mix tape of music for a friend – will fall into a decriminalised gray zone. Only the abuse that most obviously costs them revenues, and which is easiest to enforce, will attract their attention. Instead of fighting the fanatical peer to peer anarchists, EMI is becoming more like them. They are trying to eliminate their competitive advantage in terms of convenience, in order to retain some opportunity to charge for the content. But there is also a subtle second side to the business model that may be ignored here. Cosying up to Apple is no longer just good business sense for a content business wanting a clever new way to shift product. For the majors like EMI, it is a matter of economic life or death. Content and distribution will inevitably become inter-dependent, as neither will be viable without the other. Because whilst charging for the content is under threat, charging for the devices that reproduce and store the content, and charging for the communication of the data is not under threat. Nothing the P2P phreaks can do will totally eliminate those costs to the consumer, so the game will change to using content as the reason for buying devices with more memory and for buying bitpipe capacity. In turn, the people selling those devices or bitpipes will need to ensure there is a worthwhile return to keep the content suppliers in business. More than one observer noted that the EMI/Apple offer of DRM-free music at twice the quality – hence twice the size – would encourage sales of devices with larger memory. It also means double the communications traffic.

What this means is that revenue assurance will need to shift focus. There will be some charging for content, but this is likely to be steadily eroded as part of ongoing competition. Competition will intensify as smaller content businesses, including the DIY music contingent, will find they can more effectively compete with the majors in the digital domain. As a result, a large proportion of retail revenues generated by the sale of content will be earned by the broadband providers and flash drive manufacturers. There will be competition between the various commodity suppliers of content, devices and bitpipes and also with the web anarchists. Many products that will be dressed up with different front ends and interfaces will be essentially the same underneath. So the potential for growth in retail revenues will effectively be capped. In contrast, business profitability will be increasingly determined by the deals made between owners and distributors of content. That is not an area where revenue assurance has traditionally been as strong. But understanding and assuring the profitability of such deals will take more than a marketing model and forecast; it will also need good business intelligence to calculate the real underlying profits created by content, and how this is shared between all the business partners. Managing that data across several businesses will be no small challenge.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.