Nearly any kind of information — print, images, sounds or videos — can be turned into a stream of bits and transmitted over the Internet. This fact has profound implications for the economics of industries that provide such information.
The most recent example is Napster, the music directory service available over the Internet. Napster is being sued by the Recording Industry Association of America on the ground that it enables people to copy and share music illegally; Wednesday, a federal judge issued a preliminary injunction blocking Napster from permitting the exchanging of copyrighted music owned by the major music labels. This is an important case, but it is only a skirmish in a larger battle over the technological and economic forces that are shaking up the music industry.
Napster uses a centralized directory, so it can be forced to shut down. But other systems, like Gnutella and Freenet, have directories distributed over thousands of computers, making them much more difficult to control. Some systems use strong cryptography, so it is impossible to determine what, exactly, is being shared. Even if Napster is forced to shut down, such technologies will ensure that widespread Internet distribution of copyrighted material will continue.
The music industry argues that it cannot survive in its present form without additional intellectual property protection. There is some justification for this view. During the French Revolution, one of the first acts of the new National Assembly was to eliminate copyrights. Within a few years, only pornography and seditious material was being published. Though such material can apparently survive any intellectual property regime, the French had to reinstate copyrights to provide incentives to produce more substantive works.
The current turmoil in the music industry is a result not of a political revolution but of a technological one. The question should not be whether the current business model for music distribution can survive, but whether there is any business model that can support the creation and dissemination of high-quality music over the Internet.
The music industry has pinned its hopes on the Secure Music Digital Initiative, a copy protection standard. There are two difficulties with this approach. The first is technological: There is no way to protect the music once it has been translated into audible sound. A user can capture the music in analog form using a microphone or alligator clips on the speaker wires, then redigitize it and distribute it to others over the Internet.
The second, more critical, difficulty is economic: If you are given the choice between paying $2 for a copy-protected song by a well-known band that can be played only on certain devices, and a free, unprotected song by a garage band that can be played on any device, you may well find the latter choice more attractive.
Today, tens of thousands of musicians, amateur and professional, freely distribute heir music over the Internet. Fee-to-listen music will have to compete with this free-to-listen music, making it difficult to charge a high price for copy-protected content.
In the 1980s much personal computer software was copy protected. Programs to copy such software were widely available, so copy protection was not very effective in dealing with piracy. But the real problem was that copy protection was inconvenient, and inconvenience offers a major opportunity for competitors. In a two-year period, Lotus, the leading producer of spreadsheet software, was forced both to cut its price sharply and to eliminate copy protection, not because of software pirates but because it was losing sales to competitors.
These factors suggest that the current business model for music distribution is unlikely to survive. But this doesn't mean there will be no music; it just means the business will have to change.
In the 1920s there was heated debate about the right business model for broadcast radio. How can you support production of something that must be given away? A hobbyist magazine even sponsored a contest in which the winner advocated a tax on vacuum tubes. In the United States, of course, advertiser support won out.
What made this work was the rise of nationwide networks. You don't have to make much per listener if you have millions of listeners. Today, the Internet means that musicians have access to a global market. The question is how to take advantage of it.
Many possible business approaches could be explored. Stephen King is trying a "ransom" model. He has released two chapters of a book and will release the rest if fans send in enough money. Metallica, which has sued Napster, could experiment with variations on the same theme: release 10 seconds of a new song, pledging to deliver the rest only if listeners send in the required ransom. For extra motivation, fans who contribute could receive special treatment — autographs, coupons for T-shirts, a lottery ticket to meet the performers, or some other benefit that would encourage them to contribute rather than get a free ride.
This particular business model sounds unusual, but it isn't all that different from a subscription. Most readers of this column pay in advance for a physical copy of a newspaper, even though they don't know what will be in it. Moreover, much newspaper content is freely available on the Web.
The recording industry makes money because it controls the distribution channels and the marketing channels of popular music. The Internet offers a superior method of distribution, so control of conventional channels is becoming less valuable. But at the same time, expertise in marketing music is becoming more valuable. The more content becomes available, the more important it becomes to distinguish your content from that of the others.
Today, music companies contract with bands for content that they then distribute and promote. Perhaps in the future, bands will distribute their own content, making money from subscriptions, live performances, and T-shirts, while paying the music companies to handle marketing and promotion.
From the viewpoint of economic policy, the critical thing is to set up a legal environment that provides sufficient incentives to the various parties to create and distribute creative work. There is no requirement that the law should try to preserve current ways of conducting business. Indeed, the rewards should go to those companies, incumbents or entrepreneurs, that take the risk of experimentation to find the models that fully realize the potential of new communications technologies.