Don’t Invest in Copyright-Protected Companies

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.

Entertainment companies are now facing the end of their ability to enforce copyright protection of their products. This development will force a complete restructuring of their financing. No economic model yet exists to offer them anything like the income potential that enforceable copyright has offered them for 300 years.

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

New technologies are now making it very expensive for monopolists who possess the legal right to distribute copyrighted ideas and images to retain rents created by this monopoly grant of privilege. This development is seen by some people – perhaps even tens of millions – as an assault on private property. At the same time, most of these millions shrug their shoulders and conclude, "So what?" They don’t care. They want digital copies of movies and music. Soon, they will be able to download best-selling books from servers located in copyright-ignoring nations.

Self-regulation is not working. The cost of suing 60 million Americans, one by one, is too high. All such talk is nothing but public relations fantasy. Similarly, the cost of suing companies that are incorporated in island tax havens, with site-servers set up in copyright-ignoring countries, is astronomical. Lawyers hired by American companies – not exactly beloved in foreign nations – will have to seek convictions in two or more jurisdictions for each violation. This will take many years for each case. If successful, which is unlikely, the convicted company will be found to have no assets. A mirror image of its site will then appear, overnight, in some other nation. The legal process will have to start over.

Copyright is just about over, short of a one-world state.

The defenders of copyright privilege present their moral case as defenders of private property. Most people who pay any attention to copyright laws – a small group – think of copyright as originally designed to protect authors. This legal protection, we are assured by many economists and all publishers, promotes the free flow of ideas to the public. We are assured that if writers were not able to establish property rights over their words, most of them would cease writing.

This moral defense of copyright was not always popular. In fact, the opposite was true. Copyright was an unpredicted outcome of government policies to restrict the free flow of ideas.

COPYRIGHT AND POLITICALLY CORRECT IDEAS

Prior to about 1700, there was no copyright protection for authors in the English-speaking world. An author could not keep his books from being reprinted. He saw his ideas spread if he was successful, but he collected no income as a result.

Beginning on Oct. 31, 1517, Martin Luther transformed northern Europe by means of his uncopyrighted pamphlets. He launched what soon became the Protestant Reformation by means of a list of 95 questions for formal academic debate, written in Latin, which he posted on the door of the Wittenberg church on Oct. 31. The questions dealt with papal indulgences – a means of purchasing immunity from posthumous punishment for certain past sins. He did not predict or plan what happened next. No one could have. Without Luther’s permission, a printer translated these 95 questions into German and published them. They sold well. Other printers stole the book.

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 copyright laws were an extension of the government’s attempt to control the content of published books and newspapers. By establishing a legal monopoly for printers, the government extended its control over ideas. The concentration of economic power into the hands of licensed printers enabled bureaucrats to control at a lower price the flow of ideas. A printer could lose his monopoly if he did not conform to the censors. This made economic self-interest a tool of political control.

What is significant for our understanding of copyright law is this: it was never established to protect the interests of authors, who are the creators. It was established to enable the government to regulate less expensively the flow of politically incorrect information into the hands of the public. Secondarily, it established what economists call an oligopoly for printers. As for authors’ economic interests, who cared? Nobody. Not at first. But this slowly changed over the years. Amy Masciola writes:

The Licensing Act of 1662 confirmed that monopoly and established a register of licensed books to be administered by the Stationers’ Company, a group of printers with the authority to censor publications. The 1662 act lapsed in 1695 leading to a relaxation of government censorship, and in 1710 Parliament enacted the Statute of Anne to address the concerns of English booksellers and printers. The 1710 act established the principles of authors’ ownership of copyright and a fixed term of protection of copyrighted works (fourteen years, and renewable for fourteen more if the author was alive upon expiration). The statute prevented a monopoly on the part of the booksellers and created a "public domain" for literature by limiting terms of copyright and by ensuring that once a work was purchased the copyright owner no longer had control over its use. While the statute did provide for an author’s copyright, the benefit was minimal because in order to be paid for a work an author had to assign it to a bookseller or publisher.

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

Digital files can be reproduced perfectly at almost no cost. Analog files cannot be reproduced perfectly. This technical difference is about to end the enforcement of copyright law.

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 20^th 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.

There is a race between the analog distribution monopoly and digital technology. The race will be won by digital technology. There is no way to stop this. No appeal to the viewers to honor copyright is going to work.

American copyright law was changed in 1998 to add another two decades of monopoly for owners of copyrighted material. Was this the result of Congress’s desire to help the third-generation heirs of Steinbeck and Fitzgerald? I have an alternative theory. It was done because copyright protection for the most profitable fictional character in human history was about to end. That figure is a nonhuman, Mickey Mouse. Someone – I mention no names – persuaded Congress to pass the Bono copyright law in the name of the then-deceased Congressman, Sonny Bono. Monopoly once again received its subsidy. And the beat goes on. And the beat goes on.

AMAZON'S NEW VENTURE

There is one new area of book publishing that is worth considering. Amazon is about to launch a searchable data base of books' actual content. These are copyrighted books. You will not be allowed to read more than 20% of any title in any month, but you can find what you're looking for. This strategy will probably sell lots of books. Dead inventory will become valuable: resurrection! Print-on-demand (POD) technology will let buyers be able to purchase books that are long out of print.

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.

But what nobody mentions in all the hoopla about Amazon's breakthrough is this: the publishing companies have lost the copyrights on most of these out-of-print books. After a year of being out of print, a book's ownership reverts to the author, which is one of the few modern copyright law revisions that deliberately helped authors at the expense of publishers. This new marketing strategy assumes that authors will not scream "copyright infringement," which is likely initially if they start receiving royalties. But they can then make a deal with Amazon directly. The publishing companies may own the original typesetting – they say they do, and the courts may uphold them – but they do not own a book's words if they have allowed the book to go out of print for a year. The authors can legally cut the publisher out of the Amazon deal if they re-typeset the book, which is easy today.

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

The old copyright model was based on the government’s desire to control published content. Copyright law led to the creation of government-licensed monopolies over physical production and distribution. The property rights of authors have always been a peripheral effect of government-created monopolies. That model is now dying. Don’t take my word for it. Ask Matt Drudge. I call this the Monica Lewinsky amendment to copyright law. It will defeat the Bono amendment. As you may have guessed, I am not pro-Bono.

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.