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.

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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