Take Five (the big five stories and data you need to know) December 2nd 2019

Bytedance / TikTok split: Bytedance appears to be getting nervy about the impact of Chinese censorship regulation on TikTok, to the extent that it is reportedly mulling spinning off the app as a separate company. This follows negative reactions to the closure of an account of a TikTok user that posted about Uyghurs. TikTok’s value to Bytedance is external to China, so it appears to want to ring-fence it from China. Whether Chinese authorities will permit that is another issue entirely.

Netflix at the movies: Netflix is reopening an iconic, boutique movie theatre in New York. This is all about cultural relevance and credibility. Netflix already does small screenings of some of its movies to be eligible for awards. This enables it to have red-carpet, star-studded premiers which will help its actors, directors and producers feel like they are still in the movie business. Old-world hangover.

Joyn (not a typo): ProSiebenSat.1 and Discovery have added a premium tier to their free OTT service Joyn (which is apparently a combination of ‘joy’ and ‘join’…). Naming quibbles aside, we are going to see more and more video services launching. Consumers will have to spend ever more in order to get all the shows they want to watch. The original streaming promise of replacing expensive pay-TV with a couple of cheap streaming subscriptions is dying on its feet.

Create Music, one to watch: Streaming and independent artists are rewriting the music business. A new(ish) breed of companies is emerging, playing by the new rule book. One to watch in 2020 is Create Music Group, which just signed a global distribution deal with Latin and hip hop label First Order Music.

Piracy is back: Well, maybe. But the principle that piracy could be the big winner of the streaming wars is valid. The more expensive it becomes to stream all the shows you want due to service fragmentation, the more likely people are to start pirating again, and streaming piracy is way harder to deal with than peer-to-peer downloads.

Media Companies: Your Nightmare Piracy Scenario has Arrived, And Its Called Popcorn Time

Two years ago I said that the nightmare piracy scenario for the media industries would be when the pirates gave up trying to fight enforcement and turned their attentions to build great user experiences.  Now with the arrival of Popcorn Time that scenario has come to pass.  However bad piracy might have been for media companies, it is just about to get a whole lot worse.  This is the new era of Experience-First Piracy.

Popcorn Time is an open source interface that sits on the top of pirated video content on torrents.  Instead of downloading the video Popcorn Time streams them to the end user, with titles selected from a neat Netflix-like interface.  In fact one might argue a ‘Netflix clone’ interface (see figure) but with new releases that Netflix does not even have.  On top of all this Popcorn Time is open source, with installer and project files all hosted on developer collaboration site GitHub, and with the app built on a series of APIs.  With multiple development forks already this is an entirely new beast in the piracy arena.  Forget whack-a-mole, this is potentially a drug-resistant, mutating contagion.

In fact Popcorn Time looks exactly like what I envisaged two years ago:

“What if 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 thought the paid content market was struggling now imagine how it would fare in the face of that sort of competition.”

Piracy for the Mainstream Consumer 

Until now, piracy was largely the domain of youngish tech savvy males (69% male, 50% under 35). Popcorn Time and the inevitable coming wave of new Experience-First piracy apps will give piracy truly mainstream appeal.  It looks and feels just like the real thing, only for free and with even better content.  What’s not to like?  Worse still – for media companies, not consumers – these sites might – even have a legal defense as they do not actually host any of the files.  The emphasis there is on the ‘might’ as it is an argument that ultimately the Pirate Bay was not able to defend in court.

Three Ways to Hit Back at Experience-First Piracy

So what can media companies do to respond to Experience-First Piracy? Legal action will be the first port of call but ultimately it is a pain killer, not a cure.  The problem itself needs addressing with three key strategic focuses:

• Windowing: Netflix can only dream of having the content Popcorn Time has, just as early licensed music services could only dream of having the catalogue Napster had in 1999/2000.  The movie studios need to learn that lesson fast, and treat Netflix and Amazon Prime etc. as tier 1 release window partners.  As soon as a release is ready for its first post-theatre window it should go straight onto the paid video services.  BlueRay and DVD are fading yesteryear technology, the media industries’ most engaged and valuable audiences are online and using online services.  It is time to treat them as first class customers, not second class ones.
• User Experience: Before Experience-First Piracy, the retort to media companies was that all they needed to do in order to stay ahead of piracy was to create more compelling alternatives.  Now the ante has been well and truly upped.  There will never ever be the user experience gulf again.  That time has gone.  This means licensed services have to be continually pushing the user experience envelope, using their capital to hire the very best designers and developers.  Which means that content companies need to saddle them with as little up front rights acquisition debt as possible, freeing them up to spend big on development and design.
• Pricing: The harsh reality of the internet economy is that when something is widely available for free you have to make your paid-for product even cheaper than it was intended to be.  For Netflix and Spotify et al, that means getting below $5 a month.  Ironically this happens at just the time that Amazon increases its pricing for Prime and Netflix is considering increasing its pricing in order to cover higher rights costs.  Media companies have a crucial decision to make: do they want to get more revenue per user out of a user base that will quickly lose share to Experience-First Piracy, or instead do they want to take a near-term revenue hit in order to shore up their digital service partners’ longer term future?

The fact that piracy has spent so long locked in a user experience quagmire is testament to the media industries’ counter measures: pirate sites were just too busy figuring out how to evade enforcement to focus on user experience.  But now that era has come to a shuddering halt.  It is difficult to over state the dramatic effect Experience-First Piracy will have on the paid content landscape unless media companies do everything within their powers to help the nascent licensed services respond in kind.  The smart companies realized long ago that content is not the product, experience is.  Unfortunately the pirate’s just figured this out too.

Why the LSE’s Piracy Arguments Just Don’t Hold Water

The renowned LSE this week published a paper arguing against implementation of the UK’s Digital Economy Act and calling for policy makers to recognize that piracy is not hurting the music industry but is in fact helping parts of it grow.  To these academic researchers the findings probably feel like some dazzling new insight but to anyone with more than a passing understanding of the music industry they are as if somebody just time travelled back to 1999.  The piracy-helps-grow-the-pie / help-makes-the-sky-not-fall / actually-helps-the-industry arguments were common currency throughout most of the first decade of the digital music market.  In more recent years though, following perpetual revenue decline and the growing plight of struggling ‘middle-class’ artists and songwriters, most neutral observers recognize that the piracy=prosperity argument just doesn’t hold water anymore.  Though of course that won’t stop the pro-piracy lobby fawning over this ‘research’ as more ‘evidence’ for their case.

Why Live Is NOT Saving the Music Industry

One of the key arguments the LSE paper makes is that the total music industry is in fact growing or is at least stable, primarily due to the impact of growing live income.  The ‘artists can sell tickets and merchandize to make up for shrinking music sales’ argument is frequently wheeled out by the pro-piracy lobby but it is one riddled with problems (and of course doesn’t apply at all to songwriters):

• Live revenues are over reported: as impressive as global live revenues may look, they are not accurate.  Most often they include reseller revenue, which is income that does not go anywhere near the artists or any other part of the actual music industry.  A scalper reselling tickets at extortionately high prices on eBay doesn’t benefit an artist in any way but at a macro level can look like booming revenue.
• Price hikes drive revenue: Much of the live revenue growth is actually from increased ticket prices, both from venues and resellers.  The average ticket price has increased by 34% in the last 10 years.  Only a portion of this increase gets passed back to artists and their managers.
• Live income is unevenly distributed: Live simply isn’t working for many artists, those that do best are those are heritage acts.  According to Deloitte 60% of the 20 top-grossing US live acts are aged 60 or over.  This is where promoters and venues focus their efforts and it leaves little oxygen for the emerging acts.
• The live boom will suffer: The likes of Bon Jovi and the Rolling Stones sell out massive arenas because they sold so many albums in the glory days of the recorded music industry.  What will happen when the generation of artists that do not sell millions get to the age where they hope live will pay the bills? The likelihood is that there will not be another era of heritage live acts such as we are seeing today.

A dependence on live income for building the case for piracy is thus fraught with difficulty and misunderstood assumptions.

The Right to Not Earn a Living?

Any discussion of the music industry makes an assumption about what actually constitutes ‘the music industry’. There is no single right or wrong answer other than the bits that really matter are the artists and the songwriters.  Therefore any proposal or framework for ‘saving the industry’ needs to ensure they can thrive.  Diminishing music sales and the various above-stated issues surrounding live mean that for most ‘middle class’ artists who didn’t make it big in the glory days of the CD are finding it harder to thrive.

Another tired argument that the LSE paper rehashes is the idea that artists should just want to make music for music’s sake.  That because of platforms like Soundcloud they can just make music without expecting or wanting to earn a living.  Of course every single one of us could do the same for our job too. A call centre operative could offer to forgo their salary, a bus driver could drive for free, a doctor could refuse her pay. All of which sound ridiculous of course, so why doesn’t it when applied to an artist?  Well actually it does, and that’s the point. The idea that somehow because music is creative that artists should not pollute this with seeking to earn a living is an utterly insidious concept.  If the LSE scholars truly believe this then I recommend that they henceforth refuse their stipends and insist on lecturing for free for the rest of their careers. And if they start finding the bills stacking up maybe they can start selling t-shirts or something?

When I spoke to Marillion’s Mark Kelly for my forthcoming book he made devastatingly simple comment on the impact of free and alternative business models on artists: “Artists have choice, a choice of what? To not earn a living?”  Piracy is having a hugely tangible and real impact on artists and songwriters, and guess what, it is not a positive one for most.

Does the music industry still need to undergo dramatic change? Of course it does.  Do many record label practices still need changing? Of course they do?  Do Artists need to get even better at making alternative revenue streams work? Of course they do.  Should change be happening more quickly?  Yes, of course it should. But crucial progress is being made on all fronts and what matters most is that all responsible parties and stakeholders (and that includes government) do what they can to ensure that a fair and level playing field is created.  Not for the sake of an ethereal macro economic concept of ‘the music industry’ but for the the struggling indie label boss, the small gigging artist, the part time manager and the aspiring songwriter.  Ask them what they think about piracy and how it is impacting the music world.  That’s where you will heae the answer most grounded in earthy reality, not in an academic reworking of obsolete, half baked piracy lobby arguments from yesteryear.

Kim Dotcom’s Just Getting Started

Self-styled digital Robin Hood Kim Dotcom’s highly effective PR machine successfully secured him vast media coverage this week for the launch of his new locker service Mega, which as the Register’s Andrew Orlowski correctly points out, isn’t actually anything particularly new or innovative.  But in some ways that doesn’t even matter. Kim Dotcom matters most to media companies now because he is a focal point of anti-media-establishment sentiment.  He’s the plucky start up taking on the fat cats of the media industry.  Except of course that he’s done a pretty impressive job of establishing himself as an fat cat too as this and this reveal. Ironically Kim Dotcom has made his money using the same assets as the media fat cats: i.e. music, movies and TV shows.  The difference being that Kim Dotcom doesn’t finance the creation of the content. But Dotcom’s supporters are willing to turn a blind eye to his play boy ways because it is all done while sticking a proverbial finger up at the old guard

But all this is old news and obscures why the media industries should actually be afraid of Kim Dotcom, very afraid.  Dotcom has the vision for a differentiated consumer experience that no other ‘piracy’ innovator has yet had.  Prior to his much publicized FBI raid and the closure of Megaupload.com, Dotcom was on the verge of launching a new, interactive, multimedia content service called Megabox.  It didn’t happen, but – judicial wrangles permitting – it will, and will likely be built upon the foundations of the newly launched Mega.

Piracy Cold War

To date file sharing (by which I mean all forms of unlicensed content downloading and uploading, not just P2P) has been in a secrecy arms race with the media industries.  Every time the media industries have caught up with file sharing, the networks and services have devised new means of evading policing and enforcement.  Although media companies have always inherently been trapped in reactive mode, unable to set the terms of engagement, this strategy has nonetheless been highly effective at keeping file sharing services on the back foot.  As with the cold war two super powers have expended vast resources staying still, investing heavily in being armed to the teeth.  The net result is that piracy has continued to grow but hasn’t been through any transformational innovation in years.  Also the sites and services have become progressively more complex and sophisticated to use and navigate. Pushing them slightly further away from the mainstream.

But what happens when someone finally decides to innovate the file sharing user experience?  When someone scales down the combat zone investment and focuses instead of delivering a great user experience in the way that licensed services do.  That is when media companies need to start worrying.  As I wrote back in February last year:

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.

Kim Dotcom has the requisite combination of vision and balls to take piracy through a user experience revolution.  If he does then piracy will become a vastly more worrying adversary for media companies than it currently is.

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.

The Music Format Bill of Rights

Today I have published the latest Music Industry Blog report:  ‘The Music Format Bill Of Rights: A Manifesto for the Next Generation of Music Products’.  The report is currently available free of charge to Music Industry Blog subscribers.  To subscribe to this blog and to receive a copy of the report simply add your email address to the ‘EMAIL SUBSCRIPTION’ box to left.

Here are a few highlights of the report:

Synopsis

The music industry is in dire need of a genuine successor to the CD, and the download is not it. The current debates over access versus ownership and of streaming services hurting download sales ring true because a stream is a decent like-for-like replacement for a download.  The premium product needs to be much more than a mere download.  It needs dramatically reinventing for the digital age, built around four fundamental and inalienable principles of being Dynamic, Interactive, Social and Curated (D.I.S.C.).  This is nothing less than an entire new music format that will enable the next generation of music products.  Products that will be radically different from their predecessors and that will crucially be artist-specific, not store or service specific.  Rights owners will have to overcome some major licensing and commercial issues, but the stakes are high enough to warrant the effort.  At risk is the entire future of premium music products.

D.I.S.C.: The Music Format Bill Of Rights

The opportunity for the next generation of music format is of the highest order but to fulfil that potential , lessons from the current digital music market must be learned and acted upon to ensure mistakes are not repeated.  The next generation of music format needs to be dictated by the objective of meeting consumer needs, not rights owner business affairs teams’ T&Cs.  It must be defined by consumer experiences not by business models.  This next generation of music format will in fact both increase rights owner revenue (at an unprecedented rate in the digital arena) and will fuel profitable businesses.  But to do so effectively, ‘the cart’ of commercial terms, rights complexities and stakeholder concerns must follow the ‘horse’ of user experience, not lead it. This coming wave of music format must also be grounded in a number of fundamental and inalienable principles.  And so, with no further ado, welcome to the Music Format Bill of Rights (see figure):

• Dynamic. In the physical era music formats had to be static, it was an inherent characteristic of the model.  But in the digital age in which consumers are perpetually online across a plethora of connected devices there is no such excuse for music format stasis.  The next generation of music format must leverage connectivity to the full, to ensure that relevant new content is dynamically pushed to the consumer, to make the product a living, breathing entity rather than the music experience dead-end that the download currently represents.
• Interactive. Similarly the uni-directional nature of physical music formats and radio was an unavoidable by-product of the broadcast and physical retail paradigms.  Consumers consumed. In the digital age they participate too.  Not only that, they make content experiences richer because of that participation, whether that be by helping drive recommendations and discovery or by creating cool mash-ups. Music products must place interactivity at their core, empowering the user to fully customize their experience.  We are in the age of Media Mass Customization, the lean-back paradigm of the analogue era has been superseded by the lean-forward mode of the digital age.  If music formats don’t embrace this basic principle they will find that no one embraces them.
• Social. Music has always been social, from the Neolithic campfire to the mixtape.  In the digital context music becomes massively social.  Spotify and Facebook’s partnering builds on the important foundations laid by the likes of Last.FM and MySpace.  Music services are learning to integrate social functionality, music products must have it in their core DNA.
• Curated. One of the costs of the digital age is clutter and confusion: there is so much choice that there is effectively no choice at all.  Consumers need guiding through the bewildering array of content, services and features.  High quality, convenient, curated and context aware experiences will be the secret sauce of the next generation of music formats. These quasi-ethereal elements provide the unique value that will differentiate paid from free, premium from ad supported, legal from illegal.  Digital piracy means that all content is available somewhere for free.  That fight is lost, we are inarguably in the post-content scarcity age.  But a music product that creates a uniquely programmed sequence of content, in a uniquely constructed framework of events and contexts will create a uniquely valuable experience that cannot be replicated simply by putting together the free pieces from illegal sources.  The sum will be much greater than its parts.

Table of Contents for the full 20 page report:

Setting The Scene

• Digital’s Failure To Drive a Format Replacement Cycle

Analysis

• Setting the Scene
• (Apparently) The Revolution Will Not Be Digitized
• The Music Consumption Landscape is Dangerously Out of Balance
• Tapping the Ownership Opportunity
• The Music Format Bill Of Rights
• Applying the Laws of Ecosystems to Music Formats
• Building the Future of Premium Music Products
• D.I.S.C. Products Will Be the Top Tier of Mainstream Music Products
• The Importance of a Multi-Channel Retail Strategy
• Learning Lessons from the Past and Present
• We Are In the Per-Person Age, Not the Per-Device Age

Next Steps

Conclusion

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.