Blocking the Pirate Bay: A Tale of VPNs, Proxy Servers and Carrots

Today the UK’s High Court ruled that UK ISPs must block access to the Pirate Bay on their networks.  The idea isn’t a new one, Wippit’s CEO Paul Myers first touted the idea of UK ISPs voluntarily blocking access to P2P sites nearly a decade ago.  In some ways it is intriguing that it has taken so long for media industries to come round to the idea of enforcement via domain blocking rather than going straight after file sharers themselves.  The Sopa / Pipa legislation had many faults but it was markedly more forward looking with its focus on blocking domains than the old school French Hadopi bill which opts instead for the ‘punish your own customers’ approach.

Of course domain blocking itself is beset with challenges and moral dilemmas, but of the tools available to media companies domain blocking can make a pretty compelling case for being the best blend of effectiveness and consume friendliness.  After all, the aim of any piracy enforcement is not just to stop the activity but also to persuade illegal downloaders to become paying customers.  It is much easier to try to convert a file sharer who is getting frustrated not being able to find free unlicensed downloads than it is one who you have just taken to court and sued for damages.

There are however two key technical challenges surrounding domain blocking:

• VPNs: Virtual Private Network (VPN) applications can enable a user to tunnel out of their ISPs’ network, bypassing domain filtering systems such as BT’s Cleanfeed system which will be used to implement the Pirate Bay ban. Although VPNs have well established legitimate business uses, a number of VPN providers, such as BT Guard, are positioning themselves explicitly as tools to evade piracy enforcement. VPN providers may become the next front in the war on piracy, with media companies likely to start subpoenaing their user activity logs.  Some providers have already started putting anonymity systems in place, such as not tracking IP addresses and deleting logs after 7 days.  Proxy servers – which can be used to circumvent domain filters – are another option, often used in conjunction with VPNs.
• New domains: the most challenging aspect of domain filtering is keeping track of all the new domains.  Earlier this month in Belgium the Antwerp Court of Appeal imposed a Pirate Bay domain block on two Belgian ISPs, a band which covered 11 associated domains.  Within days the Pirate Bay had registered a new domain depiraatbaai.be though that was swiftly added to the ruling and Belgian users now get this message if they try to access any of the Pirate Bay domains.  The Belgian example illustrates how easy it is for new domains to come into play.  Effective domain filtering is an iterative and continual process that can only work well with willing cooperation from ISPs.  Going to the High Court to secure a new ruling every time there is a new domain is simply not viable.

The aim of domain blocking, as with all piracy enforcement measures, is not to turn off the tap entirely but instead to make it so inconvenient for mass market consumers that the activity will become unappealing.  So the technical challenges need not be fatal flaws in domain filtering strategy if the net result irritating inconvenience for most users.

The Pirate Bay has had the unusual effect of creating a centralization of activity for decentralized file sharing.  As networks went decentralized to evade enforcement, the Pirate Bay pulled the Torrent diaspora together to create a nice big juicy target for media companies.  Removing the Pirate Bay from the UK web will have a significant impact on file sharing, at least in the short term.  There are only a handful of other public sites that index torrent files and have a working tracker, though there is a longer list of sites that have indices but not trackers.  If the music industry acts quickly and puts something new and compelling in place to capture the demand of frustrated Pirate Bay users then there is a strong chance that a host of new digital music customers can be won.  But that means a new generation of product.  The 99 cent download and 9.99 subscription have proven patently uninteresting to the majority of digital music consumers (by which I mean people who listen to music digitally and / or access it digitally).

The alternative is the risk of some of those users simply falling out of the music consumption arena (as appears to have happened in the US) with the rest soon being catered for by a host of new unlicensed alternatives filling the demand vacuum.

A carrot and stick approach is always going to be an evolving strategy.  But when the stick changes, so must the carrot.

What Happened to the RIAA’s Missing 3.5 Million?

The RIAA has highlighted research which indicates that its closure of P2P site Limewire has significantly reduced P2P levels in the US.  Unfortunately the evidence is not as clear cut as it may first appear.

According to the various sources the RIAA cites (mainly a combination of Nielsen and NPD data) the effects between September 2010 and September 2011 in the US of Limewire’s closure were:

• 95% reduction in usage of Limewire by its users
• Total P2P users declined by 9 million
• Total legal downloaders grew by 5.5 million

An immediately apparent trend is that 3.5 million P2P users appear to have disappeared entirely from the digital music consumption landscape (i.e. 9 million ‘lost’ P2P users minus the 5.5 million new paid downloaders).  For argument’s sake let’s assume that 100% of those consumers that abandoned P2P switched straight to paid downloads. That would mean that 39% just dropped out of digital music.  But of course a 100% transition is improbable.  Also many (the majority?) of the new downloaders will not have previously been P2P users.  So what happened to the missing 3.5 million?  The answer is found in a combination of three factors:

• P2P is a technology in decline for music piracy.  Consumers are going elsewhere, to what I term Non-Network piracy.  That is, activities such as Bluetoothing, harddrive swapping, phone ripping, darknets, binary groups, lockers etc.  Individually each activity is small but collectively this is where music piracy is heading.  I remember in my days as a JupiterResearch analyst that as we watched German P2P penetration decline steadily year-on-year in apparent response to music industry anti-piracy measures, we also saw Germany become Europe’s largest Non-Network Piracy market, actually exceeding P2P penetration.  And that is going back a lot of years now.  Today much more still needs to be done to better understand Non-Network Piracy, particularly so in the age of cloud-based music experiences.  Because the same arguments about ownership mattering less for legitimate services apply to piracy.  Downloading an MP3 file from BitTorrent may seem as incongruous to a Digital Native as buying a CD.  Measuring piracy effectively in the age of cloud means viewing illegal streaming services and even music blog streams in the same way as illegal downloads.
  Bottom Line: many of those missing 3.5 million will actually be happily sating their appetite for free unlicensed music via Non-Network Piracy.
• People lie.  I’ve been tracking music piracy for long enough to know that it is unwise to draw definitive conclusions about year-on-year trends.  In Sweden for example, in the early and mid-noughties P2P penetration dropped from 28% to 18% following the closure of a legal loophole and then again to 12% following government enforcement.  Within a couple of years penetration was back up in the mid 20’s%.  Furthermore the main ISP Telia reported that it had seen no noticeable decline in P2P traffic levels.  As Dr. House’s mantra goes ‘People Lie’.  On the one hand this proves that enforcement is effective in that it makes people conscious they are doing something wrong and don’t want to admit to it, until the heat dies off. But on the other it suggests that the impact can be superficial for many file sharers.  Though untruthful respondents should be less important for Nielsen’s panel methodology than NPD’s survey methodology, bear in mind that file sharers are often pretty savvy consumers who use dedicated computers for download.  So it is not unreasonable to expect many to switch their P2P activity from their metered PC for the same reason they wouldn’t admit to file sharing to a survey vendor.
  Bottom Line: surveys are better at measuring consumer attitudes to piracy than they are actual behaviour. 
• Limewire is closed! A 95% reduction in usage of Limewire by Limewire users sounds pretty impressive until you consider that the site was actually been closed down by the RIAA in October 2010.  Limewire agreed to ‘stop supporting and distributing’ its P2P client.  A number of unauthorized spin-off clients (such as LimeWire Pirate Edition) were created but a visit to Limewire’s site reveals a message urging users to refrain from using these apps and to remove them from their computers).
  Bottom Line:the majority of Limewire users unsurprisingly stopped using the defunct client. 
• P2P users are holding their breath. A significant share of the missing 3.5 million may well have stopped downloading illegally for now.  But if they are not buying downloads nor using Non-Network Piracy then they have markedly changed their music consumption behaviour,  perhaps increasing their use of YouTube, listening to more radio, watching more music TV.  For active music downloaders this means an effective dis-engagement from music, falling on the ‘supporting’ channels as their main behaviour.  This will have 1 of 3 long term outcomes: 1) they remain disengaged, casual music fans 2) they finally opt for legal services 3) they eventually go back to piracy.  Of the three, the third is the most likely outcome.
  Bottom Line: nature abhors a vacuum.

Whack-a-Mole Remains Firmly Game-On

The last factor is arguably the most important, particularly in the context of locker services running scared in the wake of the Megaupload arrests.  The demand for free music remains whatever happens to supply.  Closing most of the current illegal channels creates a demand vacuum that will unfortunately be filled, and the history of music piracy to date teaches us that what comes next will be even more difficult to enforce than its predecessor. However there is a fortuitously timed wildcard factor which may help aid the digital transition.  Since July 2011 Spotify has been available in the US, so many of those lost Limewire users may quench some or all of their free music thirst there.  But because we still don’t have any definitive data to suggest that Spotify is reducing piracy so we must keep Spotify as a wildcard for now.

The slightly depressing conclusion in all of this is that the Whack-a-Mole game is not over. But encouragingly the RIAA’s Joshua Friedlander states:

The single most important anti-piracy strategy remains innovation, experimentation and working with our technology partners to offer fans an array of legal music experiences.

I couldn’t have put it better myself. Of course enforcement remains an important part of the mix, but there is an increasing risk of negative ROI (both in financial and publicity terms) that the music industry can ill afford at the moment. Closing down sites hits supply not demand. The solution to piracy lies first and foremost in innovating to meet those clearly demonstrated consumer needs.

When the Media Industries Really Need to Start Worrying About Piracy (and it’s not yet)

I’ve been a digital media analyst pretty much as long as mainstream music piracy has been around.  I’ve tracked the rise and fall of many sites, services, networks, applications and protocols, including MP3.com, Napster, Music City Morpheus, iMesh, Audio Galaxy, Bear Share, eMule, Gnu Network, Kazaa, Limewire, Pirate Bay, Rapidshare, Megaupload etc etc.  The point I’m trying to make – other than my career’s slightly concerning alignment with the rise of music’s grey market – is that the sector is built upon reinvention.  And that power of reinvention is the key reason why the music industry has a bigger piracy now than it has ever had before.

Of course there are statistics that suggest the file sharing is on the wane in a few markets – notably Germany – but overall the problem is getting bigger because:

• Non-network piracy is in the ascendency. P2P is declining in importance as a medium for piracy.  Non-network sharing (hard drive swapping, darknets, Bluetoothing, mini-nets, digital lockers, forums, binary groups, Instant Messaging, music blogs) are collectively more widely adopted than P2P in many major markets and are growing fast.  All tactics of course which are much more difficult to track and police than P2P
• P2P is getting smarter.  And for those who still do use P2P there is an ever growing array of tools at their disposal that make it harder for their activity to be tracked, ranging from encrypted versions of mainstream P2P apps through to the Pirate Bay’s current shift from Torrents to Magnets

Of course media industries are upping their game too, with major legislative efforts in the US, UK and France, though all with mixed levels of success.   The lesson of the last decade plus though, is of course that whatever actions the media companies take, the piracy problem will be more than a step ahead.  Legislation, judiciary process and enforcement are all slow moving beasts.  Typically by the time media industries catch up technology and consumer needs have moved on.  For example the Pirate Bay looks like it could be blocked from consumers in the UK but a quick search on Google for the name of your content of choice followed by the word ‘torrent’ will serve you up an exhaustive list of alternatives.  Pirate Bay simply isn’t needed anymore.

Do we have the right services?

All of these dynamics are probably familiar to most, but I think we may be on the verge of something very different and of far greater concern for rights holders.  One of the key reasons – some would argue *the*key* reason – piracy is still growing is because the $0.99 cent download and the heavily delayed movie release  simply don’t appeal to most digital consumers.  US VC Fred Wilson recently stated in a Paley Centre debate that ‘we are all pirates’ and that if ‘99% of people are breaking the law then it is the wrong law’.  My twist on that statement would be that if ‘99% of people aren’t using the services that they are the wrong services’. (Of course more than 1% use legitimate services but we are still talking about a nice minority).

Don’t get me wrong, we have some absolutely fantastic services out there for the current installed base of digital music customers, but they are patently not the right services for majority of consumers who account for the 95% of total downloads which are illegal (according to the IFPI).  Regular readers will know that I have been building a case for a music format revolution (you can download my Music Format Bill of Rights report here for free).   There are some really promising first steps happening from some promising start ups but rights complexities are acting as a major decelerator on innovation in this space.

What happens if digital piracy starts to learn from the mobile App revolution?

Of course the grey market has no such problem.  They only ever concern themselves with rights issues if they get taken to court or decide to try to go legit (Napster, Limewire, iMesh, Kazaa etc).  To date the focus of piracy technology has been evading the music industry.  But now, with the revolution in high quality user experiences that the App market has created, there is a very real risk that much of this ethos will bleed through to the grey market.  Indeed there is undoubtedly some direct overlap between the App developer community and the piracy developer community.

The nightmare scenario for media companies is that the pirates turn their attentions to developing great user experiences rather than just secure means of acquiring content.  What if, for example, a series of open source APIs were built on top of some of the more popular file sharing protocols so that developers can create highly interactive, massively social, rich media apps which transform the purely utilitarian practice of file sharing into something fun and engaging?  If you though the paid content market was struggling now imagine how it would fare in the face of that sort of competition.

In the longer term one could hope that such a scenario would act as an accelerator for liberalization and innovation of rights owner practices, but in the nearer term it would be a death knell for many of the current services that have worked so hard to get achieve what they have within often suffocating confines.

Content monetization strategies need reworking too

I’ve said it many times before and I’ll say it again now, and many times again: fighting piracy requires a big fat carrot to go along with the stick.  More than 300 $0.99 download stores in Europe and North America alone is not a carrot.  Now is the time to give the legitimate sector the tools, licenses and support to innovate like never before.  It is also time to recognize that just because piracy users don’t always spend money does not mean that they are not spending.  In the digital age consumers transact in three equally valuable currencies:  Money, Data and Time. Those currencies however are not equally valuable to all industries (e.g. TV broadcasters value time more than record labels, online newspapers value data more than book publishers etc) But it is time for those three currencies to be equally tapped by digital content strategies across all industries (regardless of whether that currency is valuable to them), with supporting ‘virtual commodities’ trading marketplaces in the backend to ensure that all stakeholder ultimately end up getting paid in the currencies they value most.

Unless user experiences and monetization strategies are innovated beyond recognition then the grey market will do it instead, creating a wave of digital piracy that will do for media revenues what the iPhone did for Nokia’s smartphone business.

Megaupload: Another Mole Down The Hole

By utterly amazing coincidence, ahem, just as the US Congress is considering Sopa and Pipa, cloud locker service Megaupload gets closed down and its top executives arrested and refused bail.  The timing is of course important, but nature of the media industries’ latest scalp is even more intriguing.  Megaupload, along with Rapidshare, Filestube and other such services, has been more than a thorn in the side of media businesses, it has been making tens (perhaps hundreds) of millions of dollars of annual revenue by essentially sticking the middle finger up at copyright owners.

Megaupload’s closure has wreaked the wrath of the hacker community with Anonymous taking down various sites in retaliation.  But Anonymous’s anger is misjudged.  This is no blow against Internet Users’ rights, and Megaupload is no evangelist for the hacker community.  Napster’s Shawn Fanning thought he was changing the world, the Pirate Bay’s Peter Sunde thought he was leading a revolution in copyright.  But Megaupload’s Kim Schmitz (aka Kim Dotcom) had no such ideals, for him it was all about the cash.  Just take a look at the opulent excess of his mansion and fleet of luxury cars with registration plates such as ‘Mafia’ and ‘CEO’.   Schmitz earned his wealth not just through advertising but also by charging users premium fees for better download speeds, thus charging people to download illegal content.

Megaupload et al are an interesting anachronism in the digital piracy landscape.  The overriding trend has been for piracy destinations to get more sophisticated and more difficult to tackle each time the media industries take a step forward.  Think darknets, encrypted P2P applications, anonymous networks etc.  Commercial locker services though are easy targets, typically with central servers and clearly defined commercial operations.  If anything, it is surprising that it has taken so long to get Megaupload taken down.

But as with any piracy victory for the media companies, the sweet taste of triumph will be short lived.  Close down one upload site and another one will arise.  In fact there are already alternative IP addresses for Megaupload circulating around Twitter.

So Megaupload’s takedown is simultaneously a landmark victory and just another furry head smacked downwards in the never ending game of digital-piracy-whack-a-mole.

 

Sopa Highlights Media Industry Strategic Failings

The controversial US copyright and piracy acts Sopa and Pipa (see this Wired piece for a Bluffer’s Guide on what they are) have been thrust centre stage by Wikipedia’s planned protest black-out on Wednesday.  It has taken an entity the size of Wikipedia to bring the debate out of the confines of the digerati and to the mainstream.   For that Wikipedia deserves great credit.

And the debate does need to take place in the mainstream.  The effects of the bills (if passed, upheld in the face of legal challenge and then successfully implemented) will be felt keenly by mainstream consumers.

However I am not going to add to the already vibrant and detailed discussion about the ethical and constitutional implications of the bills, nor the legion flaws and ambiguities in the proposed legislation. Instead I want to put Sopa and Pipa in the context of wider media industry strategy and response to digital change.

Sopa, Pipa and the Media Meltdown

Back in my days at Forrester I helped develop the concept of the media meltdown to describe the process of media industries responding to the impact of digitization.

The media meltdown occurs in three key stages:

• Stage 1: Audiences take control of their content consumption via new digital technology (think CD ripping, P2P, on demand video streaming, iPads etc).
• Stage 2: Traditional media industry business models crumble while media companies grapple with denial.  Instead of comprehending that a paradigm shift in consumer behaviour has occurred they think they can turn back the proverbial clock by fighting online piracy and restricting the disruptive threat of legal services.
• Stage 3: There are two potential conclusions, either the media industries comprehend that user behaviour has changed for ever and that they need to embrace that change with new business models, or they fail.  (For more on the media meltdown check Forrester’s CPS blog and the ever insightful James McQuivey)

Of course as with any analytical framework, this is a generalized world view but it provides a very useful lens through which to view media industry anti-piracy legal activity, lobbying and resultant legislation.  It is immediately apparent that Sopa and Pipa fall within stage 2 of the media meltdown but it would be disingenuous to suggest that the media companies that have lobbied for them – and for other acts such as the French Hadopi act and the British Digital Economy Bill – are in complete denial.  Rather what we have is a distortion of priorities.  These media companies and their industry bodies in particular rightly identify online piracy as a major disruptive threat to their businesses.  However,  instead of recognizing that behaviour shifts have occurred around which new businesses should be built, they reason that turning off the tap on piracy will starve piracy of oxygen, until it withers away.

Digital Piracy Perennially Outwits the Pursuer

As well intended as this thinking is, it is flawed.  Digital piracy (in its many, many guises) is all about innovation and change.  Every time media companies manage to finally catch up with digital piracy – either through enforcement, legislation or technical measures – the pirates have already moved on. Fighting piracy is akin to a game of whack-a-mole, but in this version of the game the moles learn.  Every time one is smacked down another one comes up that is smarter, harder to see and more difficult to reach.

Mainstream Consumers Become  the Effective Targets of Anti-Piracy

The simple and unavoidable fact is that piracy will always move more quickly and more effectively than its pursuers.  Technology improvements can be measured in days, even hours.  Legislation takes years.  This dynamic is one of the key reasons why acts like Sopa and Pipa have such far reaching implications for mainstream consumers: the hard core tech savvy pirates will always find ways of evading the counter measures, the mainstream will not.  Remember how DRM inconvenienced legitimate customers and did nothing to impact pirates?  The parallels here are clear.  Of course there are obvious and important differences between digital content buyers and passive pirates, but there are also similarities.  One of the most important of which is that they are often the same people.  Many paid content buyers also access free illegal content: they blend their content acquisition practices, often using free illegal sources for either discovery or the content they are just not willing to pay for, and then paying for the rest.

Legislation is Fully Necessary But Strategic Priorities Need Rebalancing

To be clear, this is not an apology for piracy, nor is it an argument against legislation – indeed it is crucial that laws evolve quickly enough to keep up with digital change so they can establish the frameworks in which legitimate content business models can prosper and illegal ones cannot.  Instead I am making the case for a rebalancing of strategic priorities and for taking the long view.  Consumer behaviour has changed for ever.  More people are consuming more content across more platforms than ever before, but fewer of them are paying for it.  Making free illegal content harder to get will only weaken consumption and demand unless game-changing legal alternatives simultaneously fill the vacuum.

For example, turning off access to the Pirate Bay and then pointing users  to iTunes will fall far, far short.  Media companies need to get brave, like never before, and quickly so.  They need to start looking at what makes the illegal services so threatening to them and then give legitimate companies licenses to do just the same, legally.  Some media industries get this more than others. For example the TV studios quickly realized the best way of fighting free was with free itself, launching Hulu, ABC.com and iPlayer as genuinely compelling (in fact even more convenient) alternatives to BitTorrent.

Legislators: Compel Media Companies to License to Identikit Legal Alternatives

If the US Congress wants to ensure that Sopa and Pipa are balanced in a way that will help drive digital innovation rather than stifling it in favour of analogue-era protectionism, they should look to baking-in binding innovation commitments from media companies.  To ensure that for every type of illegal service that is wiped out of the US-facing Internet, the opportunity is created for new companies to offer the same type of service legally, with guaranteed licenses from media companies (i.e. without being watered down to irrelevancy with usage restrictions).  Then Sopa and Pipa could become the foundation stones of a period of unprecedented media industry innovation that would finally recast the mould of media business models in the post-meltdown world.  The alternative is media industry failure.  Though they might not realize it, the media industry lobbyists are currently on track for hastening their industries’ demise, not safeguarding their futures.

‘Music As Free’ – What You Think

I’m going to do something I’ve never done before, I’m posting the highlights of the comments from a blog post.  The quality and the quantity of the comments was such that they deserve extra attention.  In fact the quantity is part of the reason I’m doing this summary: they added up to just under 8,000 words(!) so for those who don’t have the time to trawl through them all, this is for you.  For those who do have the time I heavily recommend reading them here

I’ll be writing up a follow up piece to my original post soon, addressing some of the recurring themes in the comments.

In the meantime, here are the comments.  I’ve tried to keep a balanced representation of opinion and they are largely chronological.  There are some real gems in there too.

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Your nostalgia for a golden past is wrong-headed because there was never a golden age in the first place, except for a small minority of superstars

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As an artist, it’s my choice whether to give my music away or try to force the common public to pay for it.

Do I deserve to be forced to? No.

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If everything is for free then how do artists make money. Why should art be free but not anything else?

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Music doesn’t have to be free to be fair to the consumer, it just needs to be sensible.

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A strange thing happened to me this morning. I had to get a new car battery and you know what? The guy from AAA wanted me to pay him for it!!! I said to him, “How are you gonna build any brand equity this way?!?! I finally caved in and paid the guy. Unbelievable!

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The profits labels experienced years ago were inflated….Those days are over…

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Record labels and artists are just as guilty as consumers for not being innovative and either going along with it blindly because the got a deal or because the same old prehistoric fat cats that have been exploiting artists for decades are still there and refuse to give up the excess they are used to.

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Not everyone fits the profile of an indie band. If every person on the planet wants to work for free, maybe the people in the music biz will join in. In the meantime, everyone needs to buy food, provide shelter, and take care of their families.

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It seems like the music business is disappointingly LAST to realise that giving something away for free isn’t the end of a relationship

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Composers and songwriters do not have “add-on services.” They do not have advertising revenue….not everyone fits the newcomer “indie band” model that can sell T-shirts and CDs at their next concert.

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$0.99 for a song is a ridiculously good deal for something you want, can keep forever and play on all your personal devices.

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Good tunes aside, everyone who wants my stuff for free should also want to pay – UPFRONT – for the cables, gear, time, talent, etc that went into the music they like.

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Q. EVERYBODY GETS PAID FOR WHAT THEY KNOW AND HOW THEY EXECUTE. WHY SHOULD MUSICIANS BE TREATED ANY DIFFERENTLY?

A. Because if people CAN pull it, they will.

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People are happy to pay McDonald’s, tobacco companies, and anyone else their hard-earned money to kill them slowly and break their bank, but to pay for something you enjoy, that does all of the things that art does for us, if you can steal it, why bother?

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Frankly, anyone should be happy to assign a reasonable value to the work of those responsible for creating the soundtrack of our lives. I know I do. The Music Business is indeed an incredibly tough one to survive. Thank goodness for those willing to stay the course.

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I believe piracy in general does the industry more good than bad and my livelihood will depend on this fact, since I’m getting in the music promotion business

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As far as giving away 200 digital copies online to sell 20 – that makes perfect sense to me – much more so than giving a plugger or publicist $2k!

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We are all learning. That’s why we’re blogging about this topic. But so far, I’ve only gleaned that you gotta be well established in order to devalue your main craft and make a living at it.

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I mean look, you believe free stuff is the way to go, too…
That’s cool if you pay my bills. When I can afford to be a philanthropist, I will.

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I’m not in favor of free music, but when it comes to 30-second snippets and other promotional tools (even a CD if a band WANTS to give it away), I believe they ought to be very, very free.

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Why the ‘Music As Free’ Argument Just Doesn’t Hold Water

Regular readers of this blog will know that I take a pretty hard line on the idea that music can ‘just be free’ and that I take a fair share of flak for my position  (see my previous post here for background).

Numerous sites, forums and discussion boards pride themselves on their ‘everything should be free stance’ and argue that only money grabbing cynical artists would ever take the side of record labels in the piracy debate.  This is patently not the case.  Last week’s statement on tackling piracy from a 100 UK artists illustrates that artists care about this.  They understand that if people stop buying their music and download it for free that they simply won’t be able to be professional musicians anymore.  I for one used to be a struggling recording artist, many years ago.  I never made enough money from music sales to give up the day job, but I would have loved to be able to.  Not so that I could be rich, but so that I could spend more time doing the thing I loved: making music.

It is easy to argue that if consumers want music for free that the industry will simply have to adapt and develop free business models. But we don’t like our favourite artists because they or their record labels are good business people.  If the music industry proves inflexible enough to adapt to a free model and many professional artists go back to their day jobs who has won?  If the music business (in whatever guise it may evolve – i.e. it doesn’t have to be record labels at the centre of it) locks into a race to the bottom, ultimately less money will filter back to the artists.  That means that fewer artists will get contracts, and artists will have shorter careers.  Many more aspiring artists than today will never make it out of their MySpace page or their day jobs.

One of the counter arguments used by commentators is that having a MySpace page is an ends in itself these days.  No, it is a means to an end, and the VAST majority of artists see it that way.  If an aspiring artist doesn’t get signed to a label / publisher / agent they’ll remain one of those many tens of thousands of artists struggling to stand out from the crowded pack on MySpace.

The majority of artists just want to play their music to their fans and to be able to make a living out of doing so.  Most artists with record deals won’t and don’t make much money out of it, but they get to do what they love, and we get to enjoy their music.  But that model breaks down if people stop paying for music, whether that be buying CDs, downloads, gig tickets, ring tones etc.  And yes, of course, ‘feels like free’ models can pick up the slack, but they won’t do the job on their own, and they certainly won’t do enough whilst illegal free services continue to dominate.

But rather than try to persuade you with my words alone, please take the time to read this blog post from an artist that just felt the impact of file sharing (note this was recently reprinted in the UK’s Guardian by UK Music).  This is the pain of a real life artist and reveals the fallacy of the music ‘must be free’ argument

http://blogs.myspace.com/index.cfm?fuseaction=blog.view&friendId=62653487&blogId=485944356

Why UK Artists are Taking a Strong Stance on Music Piracy

Yesterday 100 UK based musicians got together in a behind-closed-doors meeting to thrash out their differences and agree on a position on file sharing.  This was done in the context of a deadline next week for submissions to the UK government on suggested provisions for tackling file sharing.  It also comes in the week that Lilly Allen closed down her ‘anti-file sharing’ blog after just three days because of the vitriol that came her way as a direct result of starting it.

After a reportedly heated debate the artists agreed on a statement to “alert music lovers to the threat that illegal downloading presents to our industry” and voted to support a plan to send two warning letters to file-sharers before restricting their broadband speeds that would “render sharing of media files impractical while leaving basic e-mail and web access functional”.  There is obviously a distance between this position and the record label position of termination of access on the third strike, but it still represents a massive change in artist opinion.  Compare and contrast with Travis’ Fran Healy stating that file sharing was ‘brilliant’ back in 2003, hot on the heels of Robbie Williams having said it was ‘great’ earlier in the same year.  (It’s worth noting that the Featured Artist Coalition of which Williams is a member was a part of this week’s meeting).

So what’s changed?  The decline in music sales can now be seen as a fundamental market realignment rather than the blip it looked like at the turn of the century and artists are beginning to get worried.  Many might not have seen much money from their labels once costs had been recouped but they recognize the marketing and talent development value that labels bring and that without them they wouldn’t be able to sell as many gig tickets or t-shirts.

It worth keeping a sense of perspective on this though.  Are we to believe that these 100 artists suddenly coalesced around this issue just as their paymaster record labels are nearing a pivotal stage of their lobbying efforts?  Probably not.  Also Radiohead’s Ed O’Brien said that the meeting got “quite emotional” and “a little heated at times” which suggests that there was strong diversity of opinion and that this statement is not a definitive representation of all artist opinion.

However, the fact remains that these 100 artists did attend and did bury their differences to deliver a powerful compromise statement at first time of asking.  This illustrates their collective recognition of the urgency and seriousness of the situation.  So even though artists and record labels will always have differences of opinions and agendas, they’re beginning to recognize that they have a lot of common ground. Together they can start to educate the marketplace that music cannot just be free.  Somebody somewhere has to pay else the investment in artists ultimately dries up.  It’s easy for a file sharer to say that music should be free and that labels and artists and labels are greedy, just in the same way it’s easy for a burglar to say that the owners of a nice house are greedy once he’s stolen from it.

A wholesale revision of music business models and practices is both necessary and is beginning to happen, but that is not an excuse to allow file sharing to go unchecked until that process has run its course.  Of course compelling and differentiated legal services are the best way to fight piracy, but there also needs to be a clear legal framework and, even more importantly, a shift in consumer mindset.  Most file sharers wouldn’t dream of stealing a CD from a music shop, but don’t hesitate to download tracks via BitTorrent.

If this shift towards artists being seen to take a stance against file sharing helps to start the requisite change in mindset then that will be a true achievement, more so than if they influence the legislative process.

Future Business Models for the Pirate Bay and Historical Revenues

Yesterday evening I spoke with Hans Pandeya, CEO of Global Gaming Factory, the company that bought Pirate Bay.  I asked him a few specific questions about his plans for the Pirate Bay.

The plans revolve around building a new  peer-to-peer network from scratch, with a new application that uses smart peering technology to ensure bandwidth usage is as local as possible.   The intention is then to sell this localized peer based distribution capacity to ISPs (though I’m not quite sure why ISPs would buy back this bandwidth when it is theirs in the first place).

Mr Pandeya stressed his commitment to supporting rights holders’ interests and incentivizing users to download legal content.  The direct implication of incentivizing users of course is that they’ll get to chose from unlicensed content also, which suggests that the commitment to rights holders will fall far short of what they’ll need.

Besides likely rights holders problems, the other challenge will be to convince Pirate Bay users to download a new application to run on a new  and unproven network that at outset will have minimal content.

He also explained that he expects to generate strong ad revenues from the Pirate Bay website.  Yet the site, which he positions as a ‘search engine’ is a massive series of links to torrents which have been established in the Swedish court to contain extensive unlicensed content.  So either he removes these and loses his traffic, or he retains them and puts himself on a collision course with the rights owners.  Basically it looks like the Pirate Bay site could just be continuing as is with stronger and more robust financial backing.

My Pandeya was very bullish about the ad revenue potential of the site (though he insisted the peering business would be the main revenue source).  Based upon his calculations of Pirate Bay impressions and page views he expects the site to generate €40 million a month.   (FWIW those numbers feel high to me, but I’m not an online ad expert).  When I asked him what he though the Pirate Bay was currently earning he said he didn’t know because it had been ‘illegal’.  I found it hard to believe he will not have done the due diligence.  Indeed, to have such a strong sense of the inventory and audience of the site suggests he has in fact delved deeply.  So I pressed further, and eventually he said he thought that the Pirate Bay “probably” generated about €3 million a month in ad revenue, but that he “couldn’t know because it was illegal”.

Even if we say that Pirate Bay was earning a third of that, it still gives the site an annual income of €12 million, which doesn’t sit very well with the founders’ claims that it was not a strong revenue generator.  Indeed if you consider the upper end of Mr Pandeya’s estimates the Pirate Bay was a €66 million business.  Not shabby at all for a bunch of Robin Hoods, and far above the $1.2 million estimated in the trial.

Why Would Anyone Buy the Pirate Bay?

A small Swedish company Global Gaming Factory today announced the acquisition of the Pirate Bay.  The acquisition poses far more questions than it does answers.

The acquisition was for $7.7 million, which the founders described as “great bit underneath its value”.  Which is kind of interesting considering that they argued strongly in court that the Pirate Bay was not a cash cow.  Of course the fee neatly covers the fines $3.6 million handed out in the trial with over $4 million on top.  And it comes hot on the heels of the ‘bias’ claim against the judge being thrown out and the bid for a retrial being refused.  It isn’t clear whether GGF have acquired the liabilities of the Pirate Bay.  (When Roxio bought the assets of Napster it pointedly left the liabilities with Bertelsmann who then went on to face settlement fees with major record labels.)

GGF claim that they intend to launch “new business models that allow compensation to the content providers and copyright owners.”  This appears to involve some sort of supra-distribution model and GGF are at pains to stress they intend to compensate copyright owners.  Of course it is one thing to argue this and another to do it.  Normally in such situations there is a massive gulf between content owners’ valuation of their own content and that of software companies seeking to build business around it.  Also why buy a site that is diametrically opposed to copyright if you want to build a service which upholds copyright?

The history of file sharing networks and sites ‘going legit’ isn’t exactly a vibrant one:

• Napster sold its brand and mailing list to Roxio.  As a file sharing network it peaked at over 20 million users, as a subscription service it has less than 5% of that.  And really the new business has nothing to do with the old one, nor its user base.
• Grokster closed down in 2005 following legal action, stating that it would be back ‘soon’ with a legal alternative.  We’re still waiting.
• iMesh re-launched, again after legal action, as a licensed service, with modest success.
• Kazaa owners Sharman Networks settled with the music industry $100 million including provisions for launching a legal music service, which we still haven’t seen any sight of.

The trend is clear, and in many ways it is important that the message is clear that you do not get to the content licensing table by building an audience with unlicensed content.  (Though to be fair imeem did push the boundaries).

So why have GGF bought Pirate Bay?  All that Pirate Bay is is a list of locations of files.  It’s not a network, it doesn’t have content per se.  But it does have an audience. If they at some stage want to launch a licensed music service they have a number of problems:

• I can’t see them getting licenses from the majors for a file sharing service (Play Louder have been admirably fighting this battle with little success for years)
• If they do get licenses for some other form of music service they’re unlikely to be able to monetize that successfully with advertising given the current malaise that ad supported content finds itself in.  Not to mention the fact that Pirate Bay users are not the most attractive audience for many advertisers.
• If they intend to charge they’ll have a minimal conversion ratio: Pirate Bay users are there for finding free content, plain and simple.

So what other revenue models are left?  There are a number of possibilities:

• GGF’s CEO is doing this as a philanthropic act because he believes in the cause.  Though he asserts that he sees this as a viable business proposition.
• Pirate Bay has other (cash?) assets that were not revealed in the court case.  The experience of Sharman Networks shows us that owners of file sharing properties tend to have incredibly opaque and convoluted business structure to obscure accountability and ownership.  I have no evidence that this is the case with Pirate Bay, instead I’m simply making the case that this has happened before elsewhere.
• The last, and probably the most likely, option is that GGF will launch an adware business, building a client that tracks users’ behaviour and serves up ads based on context and behaviour, typically superimposed on publishers’ inventory.  This pretty much the Kazaa model.  The fact GGF have additionally bought a peer-to-peer technology company Peerilism points to this also, as does their current internet café ad business model.  The big issue here is around whether the application will run on other networks or a proprietary one.  If it is the former they simply won’t be able to meet content owners’ requirements and if it is the latter, do they really intend to block out all non-licensed content.

Returning to where I started, this acquisition leaves a lot more questions than it does answers.  The only thing that is clear is that the Pirate Bay owners, despite claiming to be modern day Robin Hoods have now become multi-millionaires, making them more like the rich Sheriff of Nottingham than the swashbuckling archer.