A Losing Strategy on the Internet

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Record sales are tanking. The numbers continue to tumble, seemingly week-by-week, and digital sales have not been the savior that some had hoped. In the wake of horrid record sales and bleeding bottom lines, I constantly hear music pundits claim, "the model is different now" and "things have changed." The idea is an easy one to demagogue about, especially since it is clear that something has changed and that the record labels need to change along with it or face extinction. But I don't think that when people say this they are getting to the heart of the matter. They are generally talking about the kind of change when an industry transitions from one format to the other, like from analog tapes to CD's. What has changed isn't just a model for an industry, but the very foundation of the industry itself. In essence, these claims don't go far enough.

Since intellectual property relies on government backing for enforcement, in this relatively government-free zone, little IP can ever really be protected. It is no secret that since the RIAA has been using the government courts to enforce its claims, file trading has not gone down. In fact, according to Big Champagne, it increased after the RIAA started on their “sue them into submission” campaign. The more people discover the freedom of the net and the inability to truly police it, the more file sharing grows.

It ultimately comes down to low risk in trading. When the risk of actually getting caught is so low, many users will calculate the economic benefit for the individual to trade music. It is likely that most traders have less than $500 worth of files on their computer, which is hardly worth the legal costs associated with tracking them down and suing them in an environment of anonymity, especially when the RIAA's resources get used up going after the biggest fish. Running such massive suing operations isn't cheap, and I would be shocked if there is any economic "profit" in suing most of the traders.

So indeed the foundation has changed. Record labels must realize the true implications of this change. They will not have the complete protection of a powerful government of old. On the Internet, they must learn to innovate within the world of commerce without state protections. They must cut deals with partners who can help protect their interests privately, like the Internet service providers, the destination websites, and the aggregators. There must be new ideas of distribution that take into account the fact that IP laws are weak in such a free environment. Will they come to grips with the fact that IP is different in this new world? Will they innovate themselves through this revolution? That is the billion-dollar question.

August 15, 2007