Don't Invest in Copyright-Protected Companies

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If your money
is invested in any company that distributes books, music, or movies,
it’s time to sell. You are on the wrong side of the digital revolution.

On the other
hand, if you are looking for ways to get more bang from your entertainment
buck, recent technological developments are moving in your favor.
The more adept you are with the Internet, and the more spare time
you have, the truer this is.

I do not
predict the imminent demise of Hollywood, but I do predict the
end of the distribution side of the existing entertainment model.
Millions of entrepreneurs are nipping at the heels of publicly
traded entertainment companies. When the ants start crawling over
the elephant, don’t invest in the elephant.

I predict
that Blockbuster will start selling more books and renting fewer
tapes and DVDs, following the lead of Hastings, a regional video
rental chain that sells books and magazines. I predict that HBO
will suffer falling revenues as a result of satellite Internet
connections and cable modems. Finally, I predict — no genius required
here — that the big three TV networks will continue to suffer
falling viewer ratings that mindless sitcom degeneracy with laugh
tracks will not restore.

Daytime TV
will survive. Oprah’s income is secure. Live broadcasts to millions
of women by beloved celebrities will retain market share. So will
soap operas. The percentage of women who have entered the business
world is unlikely to increase dramatically. Those who stay home
will tune in, just as women have for seven decades.

Live broadcasts
of sports events will continue to retain market share every weekend.
Women will continue to be sports widows on the weekends. But working
people, especially men, will soon be arriving home at the end
of the day, carrying a freshly burned CD of a movie that they
downloaded at the office. Primetime evening TV market share will
therefore continue to sink into the tar pits.

Any show
that is watched live and only once is what network TV must increasingly
devote its airtime to. There is only so much time available in
a day. The competition from 50-cent DVDs of $50 million movies
is going to overwhelm traditional network TV.

The reality
shows — mindless, meaningless, and aimed at dolts (who don’t have
much money) — will multiply. But they will not retain viewers
beyond each 12-week contrived competition. This is piranha TV
programming. Debauchery will triumph. But revenues will fall because
advertiser-supported TV will lose its targeted audience: people
with discretionary income. The erosion is visible to statisticians
and is irreversible. The commercial monopolies over broadcast
spectrum space that have been granted for eight decades by the
Federal Communications Commission are no longer producing expected
revenues.

THE
END IS IN SITE

Today, nobody
reads the 95 theses other than specialists in Reformation history.
That they could become best-selling booklets seems inconceivable
to modern readers, few though these readers are. That today’s
government-funded school system never assigns them in textbooks
or as term papers or any other form, despite their centrality
to a crucial historical development, indicates how little education
in Western history goes on inside their walls.

Within a
few months after his theses were translated and sold to the public,
Luther was famous in Germany. He spotted the new opportunity.
He began to write pamphlets. He became a master of the pamphlet.
He knew that the greed of printers would work for his budding
religious reform movement. Within a decade, he was the best-known
author in Europe. Within three decades, at the time of his death,
he had transformed northern Europe. Nothing like this had been
seen before or since. Yet when he posted his 95 theses, the printing
press with moveable type was 70 years old. No one had successfully
employed it as a tool of social reform.

Fast-forward
a century after Luther’s death. England was in the midst of its
Civil War, which began in 1642, but which had been simmering in
a struggle between Charles I and Parliament for two years. Pamphlets
began appearing by the hundreds of titles, either pro-monarchy
or anti-monarchy. Pamphleteers began writing directly to readers,
skipping both king and Parliament. This continued throughout the
Civil War era (1642—46) and during Oliver Cromwell’s Protectorate
(1653—58).

By the time
Charles II returned to the throne in 1660, he was determined to
put a stop to the Puritan writers. In 1662, he did two things.
He re-established the bishops’ control over the Church of England,
requiring pastors to sign an Act of Uniformity, which thousands
of Puritan pastors refused to sign, and were then thrown out of
their pulpits. Second, he established the Licensing Act, which
confirmed a monopoly for printers, but which also established
the king’s authority over what they printed.

For over
a century prior to the American Revolution, Cambridge University
and Oxford University possessed a government-created monopoly
over printing English-language Bibles. This is why the only Bible
published in North America until the American Revolution broke
out was the one in the Algonquin language, translated
by the evangelist John Eliot and published in two parts in 1661
and 1663
.

The economic
basis of the enforcement of censorship was the government’s ability,
at low cost, to control printers and printing presses. The censors
sought to control the flow of intellectual content by controlling
the technology of production. Ideas have historically required
paper and ink to spread to large numbers of people. The printing
press with moveable type dramatically expended the market for
ideas by dramatically lowering the cost of production of printed
materials. This technological development was always a huge threat
to governments. Governments fought back by establishing privately
owned monopolies over the flow of printed content.

Now new technologies
threaten governments’ control over ideas, a system of control
that has created economic beneficiaries: the owners of the technologies
of production, and far more important, distribution.

FROM
ANALOG TO DIGITAL

Consider
an old-style analog cassette tape of music. The iron particles
on the tape are reformatted by imposing magnetic fields on them.
These magnetic fields are in turn affected by audio signals. When
you speak into a microphone, it changes vibrations in the air
into electronic signals, which are then changed into magnetic
signals, which shape the arrangement of iron molecules on a plastic
tape. The playback head reverses the flow of information: magnetized
molecules to electronic signals to vibrating transducers (speakers)
to other vibrating transducers (ear drums) into signals recognizable
by our brains.

If the electronic
transducers are controlled by teenagers, but are not embedded
in earphones, this transformation of energy from magnetic to electronic
to atmospheric forms produces a predictable reaction — "Turn
that thing down!" — which is a form of censorship, though not
of content.

Because there
is a loss of coherence of the signals in the copying process,
the result is increased noise: random signals. When you copy a
cassette tape, there is a loss of quality, i.e., accuracy. With
each successive copy of a copy, the noise level rises, i.e., the
information on the tape is degraded. (Given the content of rap
music, this is a degradation of degradation, which is an improvement,
culturally and morally speaking.)

Because digital
files copy perfectly, and because they can be copied inexpensively
on a computer, and because high-speed Internet access is the wave
of the future, Sony’s short-lived empire based on CDs and movies
is under pressure to restructure its economic model. The genius
of the technologists at Sony is making things tough for the content
division of Sony. Technology giveth, and technology taketh away.

The companies
that make their money, as printers did after 1662, based on their
control over physical production and distribution are now threatened
by technologies that make product distribution the domain — and
I do mean domain (www.) — of home-based capitalists with hardly
any money. According to the Nov. 2 segment of "60 Minutes,"
about 60 million Americans have downloaded free file-sharing software
and are now actively sharing computer files with each other. These
files include songs, books, and movies. With high-speed Internet
access, your computer can download a movie in an hour.

The movie
may be so new that it has not yet reached the theaters.

"60
Minutes" reports the following:

But what’s
really at stake for the movie industry with all this piracy?

"Ultimately,
our absolute future," says Peter Chernin, who runs 20th
Century Fox, one of the biggest studios in Hollywood.

He knows
the pirates of the Internet are gaining on him.

"I
think it’s probably in the hundreds of thousands, if not millions,"
says Chernin. "It’s only gonna grow. Somebody can put a
perfect digital copy up on the Internet. And with the click
of a mouse, send out a million copies all over the world, in
an instant."

And it’s
all free. Chernin recently organized a "summit" between
studio moguls and some high school and college kids — the people
most likely to be downloading.

Later in
the broadcast, Chernin admitted that this is not a phenomenon
restricted to students.

"The
generally accepted estimate is that more than 60 million Americans
have downloaded file-sharing software onto their computers,"
says Chernin. "That’s a mainstream product. That’s not
a bunch of college kids or, you know, a bunch of computer geeks.
That’s America."

What are
the economic implications for Hollywood? Nobody knows yet because
the old economic model is based on a monopoly over distribution.
That monopoly is collapsing.

And now,
you don’t even have to watch a movie on a little computer screen.
On the newest computers, you can just "burn" the movie
onto a DVD and watch it on your big-screen TV.

And that’s
a dagger pointed right at the heart of Hollywood. "Where
movies make the bulk of their money is on DVD and home videos,"
says Chernin. "Fifty percent of the revenues for any movie
come out of home video — so that if piracy occurs and it
wipes out your home video profits or ultimately your television
profits… ."

HOLLYWOOD’S
APOCALYPSE WILL BE DELAYED (AGAIN)

Two decades
ago, Hollywood fought the development of VCR technology, fearing
a wipeout of theater profits. Instead, Hollywood’s profits increased
because of the fact that people like to see favorite movies again
and again. Five decades ago, Hollywood fought television for the
same reason, and was wrong that time, too. Finally, in 1965, with
the advent of color television sets as a mass-market phenomenon,
Hollywood ceased producing black and white movies because TV stations
preferred color movies. By then, a new economic model had developed
to deal with TV.

I hereby
predict that a new economic model will be developed this time,
too. Men still want to spend time with women, and women want to
get out of the house. The movie industry provides the primary
avenue to get out of the house. Movies will remain in theaters
for approximately as long as microwave ovens don’t replace restaurants.
Digits cannot replace the dark room and a large screen. For enjoyment
of comedy films, you need people around you who are laughing.
That was why the laugh track was invented in 1950 — one of the
greatest inventions in entertainment history, despite the universal
hostility of cultural analysts to what we all enjoy and demand,
on threat of flipping the channel. Man is the creature that laughs,
and he prefers not to laugh alone.

AMAZON’S
NEW VENTURE

This new
strategy, if it proves commercially viable, will breathe new life
into dead inventory — the back list. Most delightfully, this
marketing strategy will undermine the states’ book inventory tax,
which is the last straw for marginally profitable titles.

Companies
that mainly produce slow-selling academic titles (not textbooks)
may do better with this new technology. It will generate sales
of forgotten books. But I doubt that the companies that rely on
benefitting from a few best-sellers per year will be able to survive
without altering their marketing strategy. Off-shore book sales
sites will eventually undermine the standard strategy of publishing
lots of books and making money on the 20% that sell well, and
then allowing 80% to go out of print.

CONCLUSION

There was
Slick Willie, who needed protection, and there was Steamboat Willie,
who also needed protection. Slick Willie didn’t get his protection.
The digits won. As for Steamboat Willie, the nondigital gates
surrounding Fantasyland will persevere. But the digital gates
of the Disney empire have been permanently breached. From now
on, Michael Eisner is going to resemble the Queen of Hearts in
Alice
in Wonderland
. He will have to run very fast just to stay
in the same place.

November
5, 2003

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.freebooks.com.
For a free subscription to Gary North’s newsletter on gold, click
here
.

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