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Debate on Downloading

Posted By Barry Ritholtz On February 8, 2005 @ 9:37 am In Finance,Music | Comments Disabled

My friend Cody Willard is a hedge fund manager, focused on telecom and technology. He and I had an interesting public debate yesterday, on P2P, downloading and the music industry.

This was originally published on the (subscription only) RealMoney.com, but is reproduced here with permission. It got enough positive feedback that I thought Big Picture readers might find it intriguing. For your reading pleasure, Me vs. Cody. Enjoy!

>

Cody WIllard [1]  :   Piracy
Steals Music Companies’ Thunder

2/7/2005 1:23
PM EST

The effects of piracy on the economy and the world are just getting started.
Music company EMI told investors today that it would miss sales
projections for the year by about 9%. Trading in England, the stock took a huge
hit on the news, wiping out billions of dollars of value.

Music content sales such as records, tapes and CDs have long trended with the
broader economies. With global economies steadily growing the last couple of
years, the music business should have been on fire. Alas, that is not the case,
and the single biggest reason is piracy.

 

Guide PicksCody WIllard [1] (Cont.):  Piracy
Steals Music Companies’ Thunder

 
Initially, the Recording Industry Association of America (RIAA) spent a long
time with its head in the sand as the nefarious iteration of Napster (as opposed
to today’s legal iteration of Napster) began to undermine the entire industry’s
model. Then, about five or six years ago, the industry decided that it should
fight the peer-to-peer (P2P) technologies like Napster that were enabling mass
sharing of pirated copies of music. Napster’s model was indeed illegal and
eventually shut down. However, in a clear victory for both technology and
freedom itself, the newer versions of P2P software aren’t illegal because they
simply enable people to freely trade data files without actually keeping track
of what those files are.

It’s not even really a fine line in my mind: If the technology provider, such
as Napster, is knowingly assisting in the trading of files by keeping a
centralized command of what files are being traded, it’s illegal. But technology
that simply enables blind trading of files isn’t. After all, if Gnutella
is liable for the illegal activities that users of its software partake in,
shouldn’t it follow that Microsoft (MSFT [2]:Nasdaq
- commentary [3]
- research [4]) and Intel (INTC [5]:Nasdaq
- commentary [6]
- research [7]) are, too? Heck, so is the power company and the
telephone company. And the vendor of the glass in the monitor. Where does it
stop?

Let’s be clear, though: It’s illegal — and flat-out immoral — to mass-trade
copyrighted material. We all accept that stealing a CD from our local record
store is wrong. So, too, is it wrong to steal the content in an MP3 file.
Nothing drives me crazier than the hypocrites who say they favor free markets,
but who rationalize the theft of music content. Free markets by their nature
entail property rights, and music content is a form of property according to our
law system. If you’re illegally downloading music, stop now!

Likewise, I often hear and read the argument that illegal MP3 downloading
actually drives sales. Even if that were true (which, as EMI’s and the overall
music industry’s sales trends obviously show, is decidedly not), that doesn’t
make it your right to violate the rights of the content’s owners. If they, in a
free-will choice, decide that it makes financial sense for them to allow their
music to be distributed in MP3 form for free, then go crazy and download. But
that’s simply not the case.

Other shills for content theft like to point to the parallels between the VCR
and P2P. Certainly there are similarities, such as the content providers
fighting against a technology that is enabling copying of their content. The
piracy advocates like to point out what a boon VCR and eventually DVDs ended up
becoming to the content owners. Those technologies absolutely did end up
generating all kinds of sales of content in the form of video sales and rentals,
and I would have blasted the industry for trying to shut down a technology
enabler (such as I am doing here, blasting the industry for fighting the legal
P2P network enablers), which they clearly didn’t have the right to do. But just
as making an MP3 copy of CDs that you have purchased isn’t illegal today, it
also wasn’t illegal for people to record television shows. Those recorders
didn’t enable the mass distribution of that copied content, and that’s where the
parallels end.

The recording industry is in big trouble because a lot of folks have decided
that content rights are meaningless. I applaud the industry for going after
those stealing its wares — whether it’s a 12-year-old honor student or a
grandmother of eight, who the media like to portray as the "victims" of these
lawsuits. Simply put, theft is theft and the industry has a right to pursue
those who are stealing it, regardless of age or social status.

I certainly hope there are unforeseen revenue streams that will arise out of
the P2P networks that enable this mass theft and wealth destroyer that we are
seeing play out before our eyes, embodied in EMI’s blowup today. Music is the
first to feel this squeeze, but you can rest assured that all content owners
will be affected by these thefts in mass. Television and movie studios are next.
Books, magazines, news — all content will eventually be affected by this mass
theft movement, and it’s going to be ugly for these owners like Time
Warner
(TWX [8]:NYSE
- commentary [9]
- research [10]), Sony (SNE [11]:NYSE
- commentary [12]
- research [13]) and others unless the very ownership laws that our
quasi-capitalistic economy is based on are enforced.

(On another note, how about we all work on vilifying this theft in a grass
roots-type movement, too?)

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Barry Ritholtz:    A lot
More to Copyright than Meets the Eye

2/7/2005 4:00 PM EST

You know, for two guys who are good friends, Cody
and I disagree on a lot of things … what the Unemployment
Rate actually means
, significant P2P [14]
issues and RIAA
litigation
are but a few areas where we are far, far apart. While there are
plenty of issues in which we are sympatico, the music industry is certainly not one of
them.

It’s a complex issue, and people tend to grossly oversimplify it.

Cody doesn’t address the issue of the near infinite extensions of copyright,
a constitutionally unwarranted legislative act, a corruption of the framers’
intent, and a large corporate giveaway at the public’s expense.

There are many more issues — why didn’t the music industry explore digital
distribution a decade ago? The short answer is that its retail distributors
vehemently objected to it. So it did nothing, despite its clientele clamoring
for a digital distribution channel. The marketplace hates a vacuum, so up popped
Napster, Scour, Kazaa, Donkey, Bit Torrent and the rest.

While I don’t condone file-sharing (I do use it to check out songs before
buying CDs), I believe it is the industry’s own fault. File-sharing came about
due to horrible business management and decision-making by the industry.
Consider for a moment that legitimate downloadable music wasn’t truly available
until less than two years ago. That’s truly astounding.

Further, I believe the RIAA made a mistake selecting a show-horse approach –
making peer-to-peer its top priority. What it should have focused on, in my
humble opinion, was counterfeiting. This would have been more of a workhorse
strategy. According to the Industry’s own studies 35%
of all physical CDs are illegal copies
. That’s where I would have put the
focus, had I been running the RIAA. Of course, that sort of enforcement is a
long, hard slog, involving a lot of police work, private investigations and
grind-’em-out type of IP enforcement. Not a lot of photo ops or headlines when
you bust two guys in a garage in Singapore or a small Russian mobster.

Further, the industry was complicit in the 1996 telecommunications reform
act, which enabled firms like Clear Channel (CCU:NYSE) to consolidate the
industry and catch short-term profits — but at the expense of their longer-term
health. (For more on this, see Radio’s
Wounded Business Model
)

People turned to P2P as a replacement for radio.

This is before we even get to the issue of price [15] fixing [16] scandal [17],
which the industry gets caught doing on what seems like a regular basis. It
recently paid a large fine as a settlement for its illegal behavior — and even
got caught cheating on that.

Then there’s the larger issue of DRM, abusive copyright enforcement and more
crimping innovation in the technology industry. There’s an article on this very
subject in today’s New
York Times
, but I first addressed this issue here back in
2000
.

There’s a lot more to this issue than meets the eye.

>

CW:  Barry
and Downloading

2/7/2005 4:14 PM EST

Barry, you bring up some good points. However, I would first call attention to your saying that you don’t "condone" file-sharing but that you do use it. I’m not sure how you rationalize utilizing something you don’t condone.

On the same note, theft is theft. And you don’t legally (or morally, IMHO) have the right to download songs you might or will or won’t pay for in the future. The owners of that content assuredly have not contractually agreed to your stealing their content, even if you plan to pay for it later. Maybe you can go to your local record store and try that approach — just sneak the CD out and come back later to pay for it.

>

BR:    Condone
This

2/7/2005 5:01 PM EST

I drink alcohol, eat fried foods and drive too fast. But I do not condone those activities by others.

Further, you are assuming that all P2P MP3s are illegal — and that’s a false statement. I believe the reason the major labels are against P2P is that it eliminates the need for a middleman — them! The term is disintermediation. And the P2P networks threaten the labels. In one possible digital future, artists will sell their music to listeners directly.

iTunes offers a partial solution to the problem of not hearing new music on the radio by allowing you to hear 15 or 30 seconds of a song before you buy it. But that’s not really a satisfactory solution.

Lastly, definition of theft is incorrect. Theft requires an intent to convert someone else’s private property into your own, depriving them of the quiet enjoyment of it. If you think I am guilty of anything, it’s probably an unlicensed use — not theft. This is a civil and not a criminal offense.

Sorry, but that’s the lawyer in me being precise with legal terminology.

>

CW:  Parallels
and Convolutions

2/7/2005 5:19 PM EST

Barry, I think you must be saying that you neither condone nor condemn illegal downloading by others. I think it’s important that we do condemn theft of property.

To your point about downloading not always being illegal, I am certainly not assuming that is the case. I myself have written and recorded dozens of songs and could easily make them available for free. That would be my own choice as sole owner of that content — I’m not exactly signed by EMI (yet, LOL). But the mass of P2P downloaders most assuredly have no idea if they’re downloading legal content or not, and the mass of copyrighted material being downloaded is indeed being downloaded illegally.

iTunes is likely a new middleman, in this disintermediation. Again, most assuredly that is the case, as I’ve said repeatedly in these pages.

>

An
Overview of the Music Industry’s Problems

2/8/2005 4:09 PM EST

I expect we will be continuing this debate in the months to come . . .

 

In response to Cody’s missive [18],
I felt an obligation to set the clarify the matter a bit — set the record straight, so to speak. I would rather engage in intelligent discussion than allow this discussion to devolve further (J’accuse!). Since this is an investor site, rather than one dedicated to moral evaluations, let’s explore some questions that are of great significance to investors in the Music/Technology/Radio complex of companies that are so affected by these issues:

1. Sales in every type of "Old Media" have suffered as consumers discovered newer forms of digital entertainment. Primetime television viewing is down, ratings for many sports events are significantly off, Movie theatre attendance is lower, Newspaper circulation has declined, magazine sales have slowed, radio station listenership is way down, and of course, CD sales are lower.

On the other hand, DVD sales have been booming [19],
VideoGames sales continue to set new records, the internet keeps growing exponentially, Blogs are stealing the thunder from print, Radio execs are panicking [20]
- not over satellite
radio
, but over Apple’s iPod [21], which has become the new radio.

2. The music industry fought against legal downloadable music for years. They eventually acquiesced to Apple’s (AAPL) desire to make music easily downloadable in their iTunes Music Store, but this was only after years and years of ignoring obvious market demand. Those intervening years allowed a thriving P2P mindset to develop. 

Question: Which rocket scientists were responsible for this grievous error in business judgment? Have they been fired yet? If not, why?

3. There was an opportunity to co-opt Napster [22] (NAPS) before it was litigated into non-existence, only to be subsequently purchased in bankruptcy for its brand name. That was an historic missed opportunity. Was this ever explored by industry execs? Shall we just instead chalk up yet another business poor decision to the same brain trust?

4. The music industry’s love affair with insipid boy bands [23] certainly hurt sales. A parade of mediocre talent – some who can barely
sing
, others who can’t even be bothered to fake it [24] – also led to weakened sales. I wonder: How much of the industry’s problems merely reflect their poor judgment and an inability to gauge what the public wants to hear?

5. The music industry has heavily lobbied Congress for favorable legislation. In addition to the RIAA, an umbrella organization representing the major labels, they also employ a variety of full time lobbyists. What was their position on the 1996 Telecommunications reform act, which allowed the consolidation of radio station ownership. Do they lobby for or against it? Did they even know about it, or foresee the possible impact it might have ?

Further, did anyone in the industry ever consider the impact of this consolidation on music sales? [25]Have they investigated or commissioned any studies into what the impact of stations such as Clearchannel Communications (CCU) or Infinity, (now part of Viacom – VIA) buying up lots of smaller chains had on sales, play-lists, etc.?

6. We have been seeing significant increase in DVD
sales
at the expense of CDs [26]. How have the major labels moved to exploit this trend, and to what degree are they cannibalizing their own sales? Does the rise of new media provide an opportunity for management to throw the blame to a suitable scapegoat?

7. CD sales also fell when the economy went into a recession; They started to recover once the recession ended [27]. Is there something I don’t understand about the music industry – namely, why they believe they are exempt from the Business cycle?

8. When the industry cut their prices, they saw sales rise [28]. Yet we continue to see a reluctance to allow open competition in the market place. Suggested retail prices still thrives, the same few CDs seem to be on sale at different stores each week [29]. That’s something which at least implies some limited coordinated discounting.

Question: Why won’t the big music labels allow the market place to determine pricing?

9. Maybe its because they are unrepentant Price Fixers [30]. Lets not forget that nearly all of the big labels signed a consent decree (an admission of guilt and a big settlement) for illegal price-fixing [31].

To be blunt, I find it laughable that this group has claimed the moral high ground, when these habitual anti-trust violators clearly have dirty hands.

10. Some studies have suggested that the Nielsen ratings on CD sales consistently undercount sales [32]. Indeed, one wag went so far as to declare that RIAA
accounting practices a leading cause of declining music sales
.

Are sales off as much as advertising, or are the labels pulling yet another fast one?

 

That’s 10. I could go on and on with this, but I think by this point, you get the idea. The issues surrounding P2P and downloading are far more complex than the "Oh, woe is us industry" makes it appear. I cannot help but think that many of the music industry’s problems are largely of their own making, as well as part of a larger trend away from older media.

 

CW:  Call
Illegal Downloading What It Is: Theft

2/8/05 1:53 PM ET

I really created a firestorm of dialogue both here
on the site
and in my emails with my commentary about piracy yesterday.
Though I think most readers followed these points, I did get several questions
and comments from emailers who seemed to miss them:

1. I wouldn’t even begin to think that RIAA is somehow battling for private
ownership rights in some grand manner for the benefit of our economy and nation.
I think they are totally, 100% wrong for going after most of the surviving P2P
technology providers. I think they are totally, 100% right for going after
people who are stealing their music content property. I think it’s important for
all content providers to be protected from thieves, just as I think it’s
important for shop owners, homeowners, lawnmower owners and anyone else to be
protected from thieves.

2. I seriously doubt the lawsuits will have much long-term effectiveness in
stopping the theft. But they have certainly had some near-term impact, as I know
the kids I work with think twice and have slowed down their illegal downloading
activities.

3. It’s irrelevant if the RIAA did or didn’t react quickly enough to the
downloading phenomenon. Just because they have or haven’t figured out how to
offer their products in an economic manner off the Internet doesn’t mean that
they can now freely be looted.

4. To Barry’s point about downloading music before purchasing it, one emailer
asked what’s wrong with that — after all, consumers try out cars, tennis
rackets and golf clubs before purchasing them. Hey, again, it’s totally 100%
kosher if the seller is willing to allow you to try out the music. But the
sellers in this case aren’t willing to do that. You don’t like it? Don’t buy it!
If you wanted to try out a lawnmower and the dealer wouldn’t let you, would that
give you the right to steal it first, try it out and return it in perfect
condition? Didn’t think so.

5. One emailer wrote to say that correlation isn’t causation. Fair point.
It’s possible that all this theft of music isn’t what’s actually keeping the
music business under wraps in a strong economy. That still doesn’t make it right
to steal, and it doesn’t mean that a mass move to piracy won’t undermine all
kinds of content business models, from TV and movie studios, to books, to this
Web site.

6. Finally, if you’re downloading this stuff illegally, you are a
thief, plain and simple. Quit trying to rationalize your actions and get over
it. Just stop stealing. Long before this stuff became mainstream controversial,
I never did and never will download content illegally. Ain’t gonna happen.

There are a couple possible ways to play this ongoing and escalating battle
of piracy and content. Macrovision (MVSN:Nasdaq) is rolling out a product
that will search P2P networks for any illegally traded songs and kill them. I’m
doing more homework on that.

Then, of course, there’s Apple (AAPL:Nasdaq) with its iTunes store,
which is likely to become the largest (legal) distributor of music over the next
few years. Audible (ADBL:Nasdaq), Napster (NAPS:Nasdaq) and
RealNetworks (RNWK:Nasdaq) are also potential plays on the legal
distribution of music over the Internet. Of course, these distributors of legal,
protected music are likely to have ongoing battles [33] with
pirates too.


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/02/debate-on-downloading/

URLs in this post:

[1] Cody WIllard: http://www.thestreet.com/p/_rms/rmoney/theteleconomistrm/10207734.html

[2] MSFT: http://tools.thestreet.com/rmy/quotes.html?pg=qcn&symb=MSFT

[3] commentary: http://find.thestreet.com/cgi-bin/texis/rmfind/results.html?tkr=MSFT

[4] research: http://thestreet.investor.reuters.com/reports.aspx?ticker=MSFT

[5] INTC: http://tools.thestreet.com/rmy/quotes.html?pg=qcn&symb=INTC

[6] commentary: http://find.thestreet.com/cgi-bin/texis/rmfind/results.html?tkr=INTC

[7] research: http://thestreet.investor.reuters.com/reports.aspx?ticker=INTC

[8] TWX: http://tools.thestreet.com/rmy/quotes.html?pg=qcn&symb=TWX

[9] commentary: http://find.thestreet.com/cgi-bin/texis/rmfind/results.html?tkr=TWX

[10] research: http://thestreet.investor.reuters.com/reports.aspx?ticker=TWX

[11] SNE: http://tools.thestreet.com/rmy/quotes.html?pg=qcn&symb=SNE

[12] commentary: http://find.thestreet.com/cgi-bin/texis/rmfind/results.html?tkr=SNE

[13] research: http://thestreet.investor.reuters.com/reports.aspx?ticker=SNE

[14] P2P: http://bigpicture.typepad.com/comments/2005/01/us_versus_uk_cd.html

[15] price: http://www.ftc.gov/opa/2000/05/cdpres.htm

[16] fixing: http://www.mndaily.com/article.php?id=3590

[17] scandal: http://www.theregister.com/2003/07/29/labels_charged_with_pricefixing_again/

[18] missive: http://www.thestreet.com/p/_rms/dps/td/20050208/tradingdiary1.html#entryId10207987

[19] booming: http://bigpicture.typepad.com/comments/2004/03/cd_no_dvd.html

[20] panicking: http://bigpicture.typepad.com/comments/2005/01/radio_execs_fea.html

[21] iPod: http://bigpicture.typepad.com/comments/2005/01/ipod_shuffle_ne.html

[22] co-opt Napster: http://bigpicture.typepad.com/comments/2003/09/the_napster_coo.html

[23] insipid boy bands: http://slate.msn.com/id/2069732/

[24] fake it: http://www.lostremote.com/archives/002766.html

[25] consolidation on music sales? : http://bigpicture.typepad.com/comments/2004/02/radio_consolida.html

[26] CDs: http://bigpicture.typepad.com/comments/2004/12/us_album_sales_.html

[27] recession ended: http://bigpicture.typepad.com/comments/2004/02/cd_sales_rise_b.html

[28] sales rise: http://bigpicture.typepad.com/comments/2003/12/music_sales_ris.html

[29] different stores each week: http://bigpicture.typepad.com/comments/2004/02/if_its_tuesday_.html

[30] unrepentant Price Fixers: http://www.ftc.gov/os/2000/05/mapanalysis.htm

[31] illegal price-fixing: http://www.usatoday.com/life/music/news/2002-09-30-cd-settlement_x.htm

[32] consistently undercount sales: http://bigpicture.typepad.com/comments/2004/05/nielsen_ratings.html

[33] ongoing battles: http://news.com.com/2100-1027-5111426.html

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