Making users and content pay at Stephenson blogs on homeland security 2.0 et al.

Making users and content pay

reproduced, with permission from the Boston Globe, October 24, 2000
By W. David Stephenson

Companies reassured by Paul Gupta’s op-ed (”Whose content is it, anyway?,” 9/12/2000) on the courts’ prompt response to quash free distribution of intellectual property by Napster and MP3.com will find they’ve won the legal battle but lost the economic war. The only profitable answer will be adoption of new economic models based firmly on Web technology. Those solutions are at hand, but it’s an open question whether companies firmly rooted in traditional pricing and distribution will be able to adapt in time.

Napster is just a first-generation example of ”peer-to-peer” computing, which lets many users directly share files without downloading them from a server that could control the access. Needless to say, that scared companies that profit from tight control of intellectual property.

Music companies responded with two approaches that worked under old economy rules.

The first was the legal approach. Napster was a visible target because it maintained a central directory of available music — but newer peer-to-peer systems have no central site: They are constantly changing ad hoc networks of teenage music lovers. The companies simply won’t know whom to sue. The companies’ other tactic was also proven: make a few tracks available online at $1.99 each or sell online subscriptions to artists’ future work.

Won’t work.

Once people taste free content, the only way to satisfy them and profit is new pricing structures that come close to free and are still profitable. The Web will make that paradoxical goal feasible, with ”micropayments.” A single click on a song’s name (or a video game, article or picture) will purchase and download it for prices that could be set as low as 1/10 cent (that’s not a misprint). The purchase price will be deducted instantaneously from your online ”digital wallet” and credited to the content provider’s account. The components for such a system will be available this year.

Micropayment is a ”true use” of the Web: letting you do something impossible by any other means. It will allow purchases so inexpensive that they couldn’t possibly be profitable if processed by a conventional credit-card system. Because the process is frictionless, without human intervention or paper generation, the content provider would get a 90 percent payout even with that hypothetical 1/10 cent transaction.

Record and book producersshouldwelcome the new system. It will transfer distribution responsibilities to us, the end users. The company would just have to put a single copy of a song on a Web server, and billions of customers worldwide would download it at almost no incremental cost to the company. A study several years ago estimated that 75 percent of a record or book’s costs are attributable to printing, packaging, distribution and processing costs. Since all those costs could be eliminated, content producers’ operating costs would be cut dramatically.

Meanwhile, their worldwide customer bases would increase exponentially. Selling 1 billion copies worldwide of an album at $1 with costs limited to payments to the artists and creative production costs such as editing or arranging would be more profitable than selling 1 million copies in the US at $15 each but with high production and distribution costs.

This shift would let producers concentrate on their core competencies: finding and polishing talent - not stamping out discs and printing paper. They could compete with Napster because of their other assets. As the Vineyard Group’s Jimmy Guterman wrote, ”Labels can do over the Net what no one else can: They can deliver sonically high-quality music with ace packaging, allow for interaction with the performer (via a chat or another method), provide advance word on tour dates and so on.”

I suspect micropayments will meet stubborn resistance until some artist takes matters into his or her hands and makes a mint off Web-based distribution. That’s because companies used to the old rules must overcome a real problem: their unwritten assumptions about how business must be done.

The Web’s single most important attribute, in my opinion, is that it rewards sharing and collaboration, and penalizes hoarding. Companies that want to profit on the Web must figure out how to profit by partnering with customers and distribution innovations such as Napster, not fighting them.There will undoubtedly be more lawsuits regarding sharing over the Web, but it is here to stay. I’m not so certain the same can be said of companies who don’t understand that shift.