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SOPA, PIPA, and the forces of creative destruction

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Wikipedia Blackout

Much was made last week as large swathes of the Internet went dark in protest of the proposed SOPA and PIPA anti-piracy bills in both houses of the U.S. Congress. Lobbyists representing the MPAA and RIAA made dramatic claims about the dire need for online piracy to be squashed, with the backing of major Hollywood studios, television networks, and record labels. They even went so far as to make what some have interpreted as veiled blackmail threats against the President and members of Congress who reneged on their support.

Emerging from the dust, Y Combinator, a Silicon Valley venture capital firm that provides seed funding for startups, has declared all-out war on Hollywood, calling for tech entrepreneurs to put forward ideas on what will be entertaining us 20 years from now (think iTunes/YouTube in 2032). The proposal’s ominous title, “Kill Hollywood,” has certainly generated a great deal of discussion and proportionate backlash, including one particularly pacifistic response by Ben Parr, in which he declares Y Combinator’s declaration “Short-sighted and Irresponsible.”  The trouble is, Parr’s let’s-all-work-together ethos simply is not possible, and the points he makes, while admirable, run counter to the very nature of the technological change that is eroding the MPAA/RIAA member’s traditional business models.

Counterpoint

Parr makes three points in support of his theory that war is an inappropriate response to the SOPA/PIPA effort, and these points summarize his views on why fighting back will ultimately backfire. Each presents a worthy superficial argument, but upon closer examination it becomes apparent that technological progress invalidates them.

  1. “The heart of Hollywood is in its aspiring stars, not its execs.” This is, in fact, quite true. Equally true is the fact that most members of Hollywood make normal wages and are more impacted by piracy-related losses—think of all the film crew, set designers, drivers, etc. Unfortunately, Hollywood is no longer the sole provider of entertainment nor the steward of all talent.  While YouTube contains its fair share of dreck, rising stars are increasingly self-promoting and skipping the same old story of the starving actor moving to LA.  Look at Darren Criss emerging from Team Starkid’s Very Potter Musical, or (love or hate her) Rebecca BlackMPAA members may be losing money, but not all of it is attributable to piracy. New forms of media are taking eyes and ears away from their traditional revenue streams.
  2. “War is rarely the solution.” In this point, Parr posits that a new generation of Hollywood execs is making good faith efforts like Hulu or Verve, and that war will hamper this progress. Here, again, the problem is that progress is not coming fast enough. Apple had to drag record companies into the 21st century with iTunes 10 years after the MP3 standard was published. Media consumption and consumer electronics are inextricably intertwined, and in a world of iPads and AppleTVs, 10 years is simply too long to wait for any generation of execs to adapt. By the time those newcomers have learned the ropes, the entire game will have changed.
  3. “Entertainment and art are relative.” Parr takes issue with Y Combinator’s impossible dream that “It would be great if what people did instead of watching shows was exercise more and spend more time with their friends and families.”  He urges us to remember that we are dealing with the industry that gave us Schindler’s List and Planet Earth. What he fails to mention is that these companies are also the ones who gave us Indiana Jones and the Kingdom of the Crystal Skull, Bambi 2 (why, Disney!?), and musical acts like Milli Vanilli and an endless stream of boy bands. Does it ever occur to Hollywood that people are not willing to pay for—if you can pardon the vernacular—crap?

And The Beat Goes On

Y Combinator’s declaration was not so much about open hostility and war as it was about the simple, natural progression of industry. Call it technological innovation, call it the human condition; whatever term you use it is simply unavoidable. Ask companies like Nokia, Eastman Kodak, or Pan Am that have seen their business models eclipsed by new upstarts that did things differently and provided cheaper, more desirable alternatives to customers. Heck, look at each generation taking over from the last, with the accompanying fall of dictators, outmoded fashions, and prejudices. Change is the very nature of life itself, and no amount of lobbying money can change that. Piracy certainly accounts for a loss of money by MPAA/RIAA member companies (though it is likely much less than they led members of Congress to believe), but there are myriad technological changes that threaten them with irrelevance more damaging than any amount of piracy:

  • New forms of entertainment form a zero-sum game: Every hour spent playing a Zynga game is an hour not spent playing another game from a traditional publisher. Ad-supported games like Words with Friends bring in less revenue per game than a console game like Halo, so with a set number of hours in a day, the mix of media being consumed matters. Ten minutes spent watching cat videos on YouTube means less time to go to a theater and pay the exorbitant ticket price for the latest installment of the Transformers franchise. Which leads to a second point:
  • New forms of entertainment will be initially less profitable: Apple, the poster child for creative destruction, likely made slightly less profit on each flash-based iPod nano than the older hard disk-based iPod mini. Preserving the company cash cow at the expense of adapting for the future is a good short-term balance sheet activity that has disastrous long-term consequences. Kodak invented digital imaging in 1975, but remained paralyzed for fear of disrupting their existing film business and ended up in bankruptcy last week. New ventures are often less profitable in the short term, but change is nonetheless necessary to stay relevant. Despite some disastrous PR blunders, Netflix successfully managed to increase its profit on streaming services during 2011 by effectively converting free streaming service into an $8-per month standalone product. At launch, the service was not worth that price, but through careful enhancement it has grown to be worth that much to millions of subscribers.
  • Technology changes have broken many old profit-generating assumptions: The MP3 format available from Amazon’s music store and the AAC format available from Apple’s iTunes mean that music purchases are a once-and-done deal for the foreseeable future. Music and movie companies relied on a steady profit stream from physical media sales that were refreshed every so often, necessitating new purchases. Vinyl records wore out and needed replacing, then cassette tapes necessitated the repurchase of music; music companies’ greed reached its zenith with the advent of the CD, which was a vehicle for price fixing that artificially drove profit margins up. Physical media could also be lost, which required a consumer to repurchase it, but digital files can be backed up, synced, and duplicated indefinitely. MP3/AAC backwards-compatibly is insanely simple, so music companies are facing the prospect of selling a song exactly one time per consumer.  Music subscription services like Pandora or Spotify also mean a lower, fixed revenue stream for media companies’ products.  Instead of paying $14 to see one movie you may hate in theaters, many busy folks are content to wait for it to come in the mail from Netflix, which costs only $8 per month.  These new distribution channels challenge existing business models, which leads to point #3:
  • Power to the People: Self-publishing tools like Garageband, WordPress, and HD-capable prosumer DSLRs—coupled with new Internet-based distribution models—have lowered demand for many of the services provided by large media companies. Lewis CK’s recent self-distributed standup show earned him more money than traditional DVD sales through HBO; if aspiring stars truly are the group to be protected, surely diverting revenue straight to them is a positive change? Surely a video’s viral nature is a better indicator of its future success than the word of some studio exec who green lighted flops like Green Latern or the Tayler Lautner vehicle Abduction. In a business where risk aversion leads execs to turn down a movie like Star Wars, why would there be resistance to technology tools that can help pick surefire winners? Technology has a habit of decentralizing things, so there is no longer a need for all the elements of a film to be based in or controlled by Hollywood.

MPAA and RIAA member companies would have us believe that the free and open nature of the Internet poses so grave a risk that legislation altering its very fundamental functioning is vital to protect their industry. Companies like Walt Disney, Paramount, Universal, EMI, Sony Music Entertainment and Warner Music Group wanted to put the brakes on technological change to protect their existing business models in the name of “stopping piracy.” While piracy may be a source of lost revenue for these companies, vast revolution in the form of media creation, distribution, and consumption are the real threats to their industry.

These threats represent creative destruction, and the death of the old to make way for the new stops for no man.  Nobody can win a fight against it, nor can any company or trade group lobby hard enough to reverse it. Y Combinator’s declaration of war is not so much a new call to arms as a statement of simple fact: The world is changing, and will always continue to do so. To fight against it is foolish. To embrace it, as we have seen, could just make your company the most valuable in the world.

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