• 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
    .

    Gary
    North Archives

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