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Piracy versus Disintermediation

Posted By Barry Ritholtz On June 28, 2005 @ 1:17 pm In Finance,Music | Comments Disabled

Whenever we discuss issues such as music sales, P2P, piracy and/or counterfeiting, be
aware of the differing items we are discussing. There are 2 key threats to the
music business: one challenging the present, one challenging the future:  The present threat is simply counterfeiting. Running off bootleg copies of CDs and
then selling them is what the International
Federation of the Phonographic Industry (IFPI [1]) terms “piracy.”

The Future threat, on the other hand, is “Disintermediation.”

There’s a world of difference between the two.

What the recording industry’s present business model must contend with is not P2P,
but plain old counterfeiting. A recent report from the IFPI noted that counterfeiting accounts for one of every three CDs sold. That problem impacts the classic model of manufacturing and shipping Polycarbonate discs to consumers.

But that has nothing to do with P2P.

I have long held that the real reason the labels fear of P2P networks has little
to do with copyright infringement. It’s all about Disintermediation [2]: Removing the middleman, taking out the no-value-added player from between the artists and their music fans.

Assuming they continue down their present digital path, in the not-too-distant-future,
the labels (and their A&R departments) will have little if anything to do with how music is created, promoted distributed or sold. They will exist only as a shadow of their former selves, collecting an ever-diminishing stream of royalty payments.

What future models get developed to replace the major labels with something else is
a challenging and fascinating subject. I suspect that ‘thing” will likely be
P2P.

We see that Independent artists have already figured this out [3].

It would make sense for the industry to recognize this, and act preemptively to
become that P2P player (but I suspect they lack the savvy to cannibalize themselves [4]).

As of now, Snocap [5] may be a slim but legitimate hope for this to happen.

When thinking about the future of P2P, the key takeaway from the MGM vs Grokster [6]
case is whether the technology creator manifests any malicious intent, as seen via
their marketing or advertising. That suggests that entities like Google Video [7] are safe, so long as they do not market it as an infringing tool (not that Google does any marketing).

So as an exercise, let’s toss around ideas for a new P2P service, one that is both
financially viable and compliant in the post-Grokster legal era. Since the
major labels have shown little interest in working the P2P outlet, we may leave
them out of the discussion (for now).

Let’s call this “Indy P2P.”

The new P2P should be ideally situated for swapping MP3s, videos, pictures – it’s a
distribution methodology that is designed to cast the widest possible net, yet
filter out major label/film studio product.

Its attractiveness to users would be the fact that it is spyware-free, RIAA
judgment proof, and completely legal. It should be a substitute for the now
defunct terrestrial radio, a place where users can find new music via the
software’s colloborative filtering [8]  (like iRate Radio [9]).

At the same time, it should be a place where independent labels can seed their new
artists MP3s, distribute video excerpts of live shows, and otherwise promote
their roster of talent.

This can be accomplished by digitally watermarking specific files, via a whitelist
(for the participating Indy’s) and by blacklisting all the major label files.

Anything watermarked is a specific file that has been submitted to Indy P2P for
this watermark. An independent label can embed the watermark into all of their
roster’s content. Or, if they desire, then can turn over an entire whitelist of
artists, songs, and video clips, and that white list is added to the kosher P2P
list.

Lastly, to ensure compliance in the post Grokster era, the major labels
are requested to provide to Indy P2P, a list of artists and songs they which to
be non-searchable via this search tool and exchange tool.

When a user requests a particular file, Indy P2P goes thru 3 steps: If it sees the digital watermark, the files are permissioned as “swappable.” So too, if the the watermark isn’t there, but the title is on the Whitelist. If neither a watermarked nor a whitelist exists,
Indy P2P flags the files as possibly infringing, and then checks it against the
blacklist. If it appears on that list, it is not “swappable.”

Note that this system forces the major labels to cooperatively opt-out of the P2P
system. After all, the labels have all of this data readily available in their
own possession and databases. The idea is to share the burden of enforcement
cooperatively between the new media and the old, the dinosaurs and the
mammals. (Plus, I like the irony of having the labels help tie the noose themselves. Its a nice poetic touch).

The difficult question will be what happens when a major label wants to use Indy
P2P to test out a new act (we’ve already seen where U2 [10] and Eminem [11] may have used P2P to create buzz for their new releases)

Will accepting such files create a technological problem for the blacklist? In terms
of the business model, would the firm want to take an all or nothing approach?
It will likely be a function of how successful this model is, and whether the
firm has the marketing muscle to accept or reject major label fare.

That’s my ‘open source’ strategy (free to whoever wants to improve upon it) for the
Disintermediation of the major labels: Legitimate independent P2P.

Now, all that’s necessary is some smart technologists (Shawn?) and a source of
innovative tech funding (Mark?) to create it.

Personally, I cannot wait!


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

URL to article: http://www.ritholtz.com/blog/2005/06/piracy-versus-disintermediation/

URLs in this post:

[1] IFPI: http://www.ifpi.org/site-content/press/20050623.html

[2] Disintermediation: http://bigpicture.typepad.com/comments/2005/04/from_net_to_mai.html

[3] figured this out: http://www.usatoday.com/tech/news/techpolicy/2005-03-25-indie-file-sharing_x.htm?csp=34

[4] savvy to cannibalize themselves: http://bigpicture.typepad.com/comments/2005/06/the_strikeoutna.html

[5] Snocap: http://www.business2.com/b2/web/articles/0,17863,1052438,00.html

[6] MGM vs Grokster: http://www.eff.org/IP/P2P/MGM_v_Grokster/

[7] Google Video: http://video.google.com/

[8] colloborative filtering: http://bigpicture.typepad.com/comments/2003/10/_irate_radio_op.html

[9] iRate Radio: http://irate.sourceforge.net/

[10] U2: http://bigpicture.typepad.com/comments/2004/11/was_u2s_p2p_rel.html

[11] Eminem: http://bigpicture.typepad.com/comments/2004/11/no_coincidences.html

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