Digitally Scared.

No doubt about it – revolutions are truly scary. Whether you think of the French one, the ones that freed Eastern Europe, or the digital revolution that is currently changing much of the transactional structure of our economies, and in particular the music industry. But contrary to most people, I do pity major label executives who never even stood a chance of understanding just what happened to them. After all, this is an industry where the average person?s desk had not seen a computer in 1996, as some insider once said.



As late as Summer 2000, I asked a business developer at EMI Germany about her thoughts with respect to mp3, file sharing and the future of her industry. At a time when mp3.com had already gone public, when the Napster battle was about to become nasty, a business developer at EMI Germany told me that the Internet was not yet a prominent part of their strategy. She was right, of course. The internet was only a big deal for their lobbying and legal departments. Despite some laudable efforts to change this ? for major labels, the most important answer to the strategic challenges of digital distribution is still the law.


Certainly, even if the internet is not ?one giant, out of control copying mashine?, as Hal Varian and Carl Shapiro wrote in ?Information Rules?, its technological nature does trigger changes at the axiomatic core of economics. Brad DeLong and Michael Froomkin have laid this out in a paper called ?Speculative Microeconomics for tomorrow?s economy? ? I quote ?

?This reciprocity-driven revenue stream may well be large enough that producers cover their costs and earn a healthy profit. Reciprocity is a basic mode of human behavior. People in the large do feel a moral obligation to tip cabdrivers and waiters. People do contribute to National Public Radio. But without excludability the belief that the market economy produces the optimal quantity of any commodity is hard to justify. Other forms of provision – public support funded by taxes that are not voluntary, for example – that had fatal disadvantages vis-a-vis the competitive market when excludability reigned may well deserve reexamination.?


In other words, we may enter a world in which Adam Smith?s prediction about the invisible hand might no longer hold true. Clearly that?s an earth-shattering thought, particularly given that economic history has taught us about the incentive nurturing nature of private property. And since we live in a world in which intellectual property is very likely more important than physical property, a reduced level of excludability is certainly not easy to even understand, much less to welcome. But welcome or not – information age societies will have to find a way to reconcile the advantages of internet driven ?semiotic democratisation?, as Harvard?s William Fisher has called the slow digital lowering of entry barriers to cultural interchange, with a producer?s need to live from what they do. ?Mass amateurisation?, blogs, open source, are a great way to socially benefit from positive external effects provided by volunteering human capital. But the same Human capital is usually also toiling in a day job to provide for the food for thought.


Don?t get me wrong. I very much welcome the end of the music industry?s ?winner take all? market structure that reduced excludability is bringing about. I think it is great that the reduced expected return of any brand name piece of music distributed in the ?classic? way is now opening up the market for labels that do a far better job at matching artists with people who love their music. But it must, in my opinion, also be clear that rights holders do have some legitimate concerns, which have to be addressed.


Unfortunately, the conventional, socialised, and certainly codified concept of property is not helping lawmakers to strike the new balance needed. However, it does help the music industry to protect their acquired position in the market. Telepolis? Stefan Krempl (in German) may well be right to predict that last Monday was the day when an all-out copyright war was declared on Europe.


Not that the EU Parliament?s fast tracking of the Intellectual Property (IP) Enforcement Directive last Monday would have usually received much attention, but the events in Madrid that shocked Europe and the world certainly led to a complete premature burial of the subject in the major news outlets (see the list at the bottom of this wiki page for a press survey)


For the moment, the final amended version of the directive as agreed on in the first reading by the EU Parliament last Monday and accepted by the Council last Wednesday does not appear to be online ? all I could find was an empty pdf-file


The most controversial issue regarding the content of the new directive is that is does not explicitly renounce to the criminal prosecution of non-commercial intellectual property rights infringements, like downloading songs from a p2p network for personal use. In fact, the directive leaves it open to national governments to hunt down file-sharers as they see fit. Adrian McMenamin, press officer for the European Parliamentary Labour Party states that ?scare-tactics? have been used by the opponents of the directive ? and he is certainly right that many of the most vocal opponents appear to not see the point of intellectual property protection at all – but I think it is rather na?ve to claim that the directive does not create rather problematic incentives for national lawmakers. This directive certainly won?t make it easier to stand up for consumer rights in the face of a concerted right-holding effort. It seems, unfortunately, this directive will become another case study for ?The Logic Of Collective Action?.


The most controversial formal issue regarding the directive is the Parliament?s rapporteur, the French UDF deputy Janelly Fourtou, the wife of Jean-Ren? Fourtou, the current PDG of Vivendi Universal. While she is declaring ?no financial interests? on her website, according to a vast variety of critics, she should have recused herself as rapporteur.


She should have, indeed. Just as she did in 1999, according to LeMonde , when she chose not to chair the environmental committee while her husband was CEO of the pharmaceutical company Aventis.


But it seems that this time the stakes were to high.


Frits Bolkestein, the commissioner in charge, may repeat as often as he wants that the intention of the directive is only to criminalise commercial infringements of intellectual property rights. But the ambiguity introduced into the directive by failing to clarify just that is certainly sufficient reason for concern when it comes to the true political intentions.


No doubt about it, revolutions are truly scary. And for just that reason, there are very few non-violent ones. After last Wednesday, chances of a socially problematic turn of the ongoing digital revolution have risen considerably for Europe.

5 thoughts on “Digitally Scared.

  1. Interesting post. The most fascinating idea is that given the known incentivizing nature of property, how do economics change when the internet makes intellectual property much more difficult to define and protect. It clearly changes one of the bedrock issues of the capitalist structure. But how?

  2. If any of us knew that–or could make a convincing case that we knew that–we would rapidly be on the shortlist for the Nobel Prize in Economics.

    Sebastian has put his finger on the question…

  3. “we would rapidly be on the shortlist for the Nobel Prize in Economics”.

    Sorry Brad, don’t agree. Looking down the Nobel list for Economics over the years (or Literature for that matter) I’m not at all convinced.

    However I do think you made a start in the linked article. It is really interesting – in fact I’ve said many times it was what woke me from my ‘dogmatic slumbers’ and got me interested in economics again. The point now is to develop on this foundation.

    One starting point might be the idea that shared systems may have some evolutionary advantage. Think about R&D and collaborative computing. Or think about encyclopaedias and wikipedia. Or think, of course, about blogging, and the ‘amateurisation’ of online content provision. Clearly if people begin to have hobbies that give them non-lucrative rewards and yet put them in a space occupied formerly by ‘professionals’ then there are going to be consequences.

    So what I would say here Tobias is that the professional journalist may now be in a similar position to the EMI business developer you mention, ie about to be outflanked by a social phenomenon s/he didn’t know how to evaluate.

    I – along with Ray Kurzweil – have drawn one conclusion from this tendency: that this is all going to be highly deflationary. Basically lots of important things are going to get very much cheaper.

    Eli Noam in a recent FT piece also seemed to reach a similar conclusion:

    ?All these are symptoms of a chronic price deflation that shows no sign of abating. It is a good deal for consumers, including those of developing countries, but it spells disaster for providers. The price for their information or distribution is dropping towards marginal cost, which is close to zero and typically does not cover full cost.?

    Unfortunately he seemed to get his threads twisted by associating this impact with that of the so called ‘tragedy of the commons’:

    ?Volunteerist activities such as open-source software, shared information or public hotspots will not solve the problem, because they, too, are subject to the instability known as the ?tragedy of the commons?, in which individuals? free-loading and over-utilisation destroys the communal effort.?

    I don’t see how this applies to wikipedia at all. The more the merrier it seems to me. OK so there may be some bandwidth issues, but with costs plummeting even here this doesn’t seem to be any big deal.

    Maybe what we need to do is not ‘solve the problem’ but redefine it. The standard move in all this is normally to go for the IP argument (it may be just a coincidence, but I am having lunch today with an old friend who just happens to be a patent attorney here in Barcelona: normally I frighten the life out of him when I start talking about all this!). But if the Metcalfe effect works, and the higher value is to be found in the Net and not the individual this may turn out to be a problematic strategy.

    Bottom line await more information before reaching any definitive conclusions (pun intended).

    One last point Brad, it wasn’t so long ago your were waxing about the marvels of online Britannica, now we have Wikipedia. Some people suggest that the world doth change but slowly. I would rather go with James Gleick in ‘What Just Happened’: the fact that some people still cling to incrementalism tells us more about the way we are relating to change than about change itself.

    This may throw some light on that old riddle about the industrial revolution: why it was that Jane Austin hardly mentions its existence.

  4. I’ve a theory about why Jane Austin doesn’t mention the industrial revolution’s existence:

    We keep measuring the industrial revolution in terms of use value and exchange value, but keep excluding the entertainment value involved. The industrial revolution certainly provided a basis for the enhancement of the former two, but was it entertaining enough to comment on?

    The information revolution, on the other hand, entertains. That is its one hallmark which distinguishes it from former seemingly similar socio-economic upheavals. Add to that the capacity of human beings to celebrate mischief (Linux in subverting notions of proprietary rights, the prevalence of viruses, etc.) and you find a re-constitution of our notions of what it means to be a “consumer” of entertainment.

    It is the identity and the behaviour of that consumer that interests me. Past social theories have relegated the consumer to an end-user status, without seeing that the new order has the consumer shaping the product beforehand, thus changing the identity of the producer. What motivates the producer is less a question of profit, or socialist altruism (Linux), but simply a question of entertainment.

    I’m personally involved in shaping a business model here in New York for an ongoing distribution network for entertainment. It’s still amazing to me how much free labor is being contributed, considering the payoff is… well, nothing, – except for me, and anyone else who decides to compete. There is so much interest in having the model succeed, simply because it would entertain the contributors to see it succeed. That was more of the basis for the success of Linux, and craigslist.org, rather than the more commonly accepted notions of social altruism.

    Entertainment value, in my mind, is grossly misunderstood as an economic force. People still think in terms of music, movies, and television as being consumed by consumers. But what the information revolution has shown is that the divide between the audience and the stage is being blurred, and that is where to concentrate your thinking and analysis. The nature of entertainment, as we know it, is changing.

    As well it should be. Thousands of years ago, drama was not entertainment, but a communal, religious ritual. It’s role has seen countless transformations throughout history. There’s no reason to think such transformations have come to an end.

    This revolution is not scary (well, except for music industry executives and patent lawyers). This revolution is fun, and entertaining.

  5. Edward,

    “Unfortunately he seemed to get his threads twisted by associating this impact with that of the so called ‘tragedy of the commons’…I don’t see how this applies to wikipedia at all.”

    The “tragedy of the commons” is just a version of the free-rider problem, which in turn is just a matter of internal vs. external costs. That’s why Noam associates shareware and the like with it. He sees that one can extract value without necessarily sharing in the costs and extrapolates to the same sort of instability one sees in, say, an unregulated fishing ground open to all fleets. The support offered to the communal project need bear no relation to the utility extracted from it, so the project stands in danger of being starved for resources.

    He may not be wrong. Of course, one needs to take into account the idea RSN expressed that some of the value extracted from the project may be non-monetary and is tied to specific users (i.e. I contribute to the project simply because my ego drives me to want to see it succeed.)

    Possibly of some interest, given the topic:
    http://papers.nber.org/papers/W10361

    I’ve got a copy, if you don’t have access.

    Bernard Guerrero

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