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Content vs. Platform: The Battle of the Titans

The first few months of 2012 were rich in events in the ongoing battle between content owners and Internet players. This battle, seemingly unimportant at first glance, if put into a larger context can be described as one of the most pivotal challenges in our digital society and will define the survival of the Internet and future of the digital planet as we know it.

Three events could be extracted from recent news to illustrate the current state in the battle between “the content and the platform,” a battle of the titans.

The Pirate Bay Logo
Source: The Pirate Bay [Mar 2012]

The first event comes from Sweden on Feb 01, 2012. The Supreme Court upheld a ruling against the file sharing website The Pirate Bay founders, cutting their prison sentences to 10 months but raising the cumulative fine to 46 million Swedish crowns (US$6.57 million). The Pirate Bay site that continues to operate today under a .SE domain name to avoid US authorities, will appeal to the European Court of Justice, though the Swedish court ruling will prevail. Despite the Swedish sentence, major Dutch ISPs (T-Mobile and KPN) still refuse to sensor The Pirate Bay. Invigorated by their success against the owners of The Pirate Bay, the International Federation of the Phonographic Industry (IFPI) is thinking about suing Google next.

MegaUpload.com Now
MegaUpload.com [Mar 2012]

The second event splashed the world headlines on Jan 19, 2012. The United States Department of Justice, with the help of the New Zealand police authority, seized and shut down the file-hosting “cyber-locker” site MegaUpload.com and commenced criminal cases against seven individuals, including MegaUpload.com’s colorful founder Kim Dotcom. The next day Hong Kong Customs froze more than HK$300 million (US$39 million) in assets belonging to the company. The US Justice Department and the FBI have charged these seven individuals and two corporations in the United States with running an international organized criminal enterprise allegedly responsible for massive worldwide online piracy generating more than US$175 million in criminal proceeds and causing more than US$500 million in harm to copyright owners. At the time of the seizure, MegaUpload.com had more than one billion visits since its inception, 150 million registered users, 50 million daily visitors, accounting for four percent of the total traffic on the Internet, and was once considered the 13th most visited website worldwide. MegaUpload.com downloads represented 30-40% of all file sharing in the US, and was the market leader of a large group of cloud storage companies such as Uploaded.to, Filesonic, MediaFire, RapidShare, YouSendIt, Dropbox, Box.net, and similar services from Amazon, Google and Microsoft. In the span of an hour, Internet traffic globally dropped by an astounding 2-3%, but rapidly the distribution pattern changed with more files coming from hosting facilities outside of the US. In a matter of hours everything went back to normal.

File Sharing in the Post MegaUpload Era
Source: DeepField Networks [Feb 07, 2012]

The Motion Picture Association of America (MPAA) who was at the forefront of the battle and as an early investigator in the case was extremely pleased by the announcement of the MegaUpload.com shut down.

"This criminal case, more than two years in development, shows that law enforcement can take strong action to protect American intellectual property stolen through sites housed in the United States" — Christopher J. Dodd, Chairman of the MPAA and former US Senator [Jan 20, 2012]

The third and last key event in the battle between the content owners and the platform providers came from the Stop Online Piracy Act (SOPA) and the Protect IP Act (PIPA) online protests on Jan 19, 2012. For years, the recording industry, Hollywood studios and major publishing houses (Pearson, Cengage Learning, McGraw-Hill, and Houghton Mifflin Harcourt) have pressed Congress to act against offshore websites that have been giving away their content for free. In October 2011 SOPA (in the House) and PIPA (in the Senate) were introduced to address this major issue. The bills, written essentially by movie studios and record labels (Universal/EMI, Sony/BMG, Warner) aimed to halt the spread of copyrighted content on the web by taking the names of the piracy-accused websites from the DNS directory (equivalent to a “website shut down”) and forcing payment processors to halt money flowing to these websites on court order, based solely on an accusation (“guilty until proven innocent”) [see SOPA 101 for a more detailed explanation].

Wikipedia Black-out Homepage
Source: Wikipedia [Jan 18, 2012]

A few days before the bills were put to vote, a worldwide online protest (including a 24-hour Wikipedia shutdown) from the online communities pressured their legislators to reevaluate the bills. On the single day of Jan 18, 2012, 162 million attempts to Wikipedia were redirected to a black-out page inviting visitors to use an online form to look up the address of their Congressional representatives and call them regarding the issue (8 million people did). Google managed to attract 7 million signatures, and over 2.4 million SOPA related tweets were sent. The Internet was rebelling and inevitably the two bills were abandoned.

"Those who count on quote 'Hollywood' for support need to understand that this industry is watching very carefully who's going to stand up for them when their job is at stake. Don't ask me to write a check for you when you think your job is at risk and then don't pay any attention to me when my job is at stake." — Christopher J. Dodd, Chairman of the MPAA and former US Senator [Jan 20, 2012]

It was the first time in history that a well-funded political effort with cross-industry organization and powerful lobbyists has been defeated on Capitol Hill by an open online protest.

What’s Going On?

The core argument of US copyright owner representatives such as the MPAA, IFPI or the Recording Industry Association of America (RIAA) have always been that the unique problem in the entertainment industry is piracy, and the only avenue to fight against piracy is through legal means.

Today's stories reveal a new spin in this ongoing claim. US copyright owners are now moving the fight to the international arena (Sweden, Hong Kong, New Zealand), with the support of the US government bodies such as the FBI and the Department of Justice. It also reveals that content owners are continually pushing for more restrictive, internationally recognized and expeditious laws in US to confine the propagation of content over the Internet. More importantly, it finally shows that such legislation is unilateral and done behind closed doors with the hope of being approved under fire, before a US election, just in time to raise campaign money. It is also important to note that current legislation is sufficient to address piracy on a world stage (MegaUplaod.com in New Zealand), and there is no need to push for a more restrictive set of laws.

This is not the first time that Hollywood representatives have argued that new technology would threaten their entire industry and kill thousands of jobs. In fact, with each new technology evolution (cable, VCR, DVD, DVR, and now the Internet), Hollywood tried to shut down the innovation and/or distribution channels through legislation and the courts.

VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone.” – Jack Valenti, President of the MPAA [April 12, 1982]

In reality, each innovation has opened up a new market for Hollywood, to the point that today these threatening innovations bring more revenue than the original core business of movie making and distribution. The all-time high 2010 worldwide box office revenue (US$31.8 billion) represented only one-third of the total film industry revenue (US$87.4 billion), the rest from DVD's, merchandizing, promotional events, etc. The movie and music industries have been consistently wrong in saying that technological innovation would end their businesses. In each evolution, the new technology created a new market far more profitable than the previous ones. In reality, what these content owners are fighting for today is to have the right to capture the profit of a new technology called Internet. And to do so, Hollywood and Music Majors have decided to move one step beyond in its legalization of the content distribution.

Back to the Future

Today the US is using the Digital Millennium Copyright Act (DMCA), which is a copyright law implemented in 1996 under the World Intellectual Property Organization (WIPO). European Union is using the equivalent called the European Union Copyright Directive (EUCD). These sets of laws criminalize production and dissemination of technology, devices, or services intended to circumvent measures (commonly known as digital rights management or DRM) that control access to copyrighted works. On Oct 28, 1998, the DMCA was amended (Online Copyright Infringement Liability Limitation Act, or OCILLA) to extend the reach of copyright, while limiting the liability of the providers of online services for copyright infringement by their users. OCILLA created the notion of “safe harbor” against copyright liability if, online service providers block or remove access to allegedly infringing material upon notification. In short, OCILLA relieved online service providers from policing the content and forced copyright owners to monitor the Internet. This balance of forces has been at play for the past decade, but had been resented by copyright owners as unfair.

On Oct 01, 2011, Australia, Canada, Japan, Morocco, New Zealand, Singapore, South Korea and the United States signed the Anti-Counterfeiting Trade Agreement (ACTA), a multinational treaty for the purpose of establishing international standards for intellectual property rights enforcement. The EU and its 22 members signed ACTA on Jan 26, 2012, bringing the total number of signatories to 31. No signatory has ratified the agreement yet, and the trade agreement is under scrutiny at the European Court of Justice over possible rights violations. ACTA was originally designed to be a "coalition of the willing" which "would aim to set a 'gold standard' for IPR [intellectual property rights] enforcement among a small number of like-minded countries, and which other countries might aspire to join” – Tokyo Embassy, from Wikipedia Cable [Feb 3, 2011].

Source: Komitee für freie Bildung [Feb 06, 2012]

In its last revised copy, the treaty (negotiated secretly for years as a trade agreement between countries and therefore not debated publicly) proposes to criminally punish copyright infringement, remove “safe harbor” and force governments around the world to comply to a new set of rules without possible legislation. The early “three strikes” measures (adopted in France under HADOPI) have been removed. Condemned not only on the process itself but also on the content, ACTA has raised massive protests around the world.

ACTA is not the only trade agreement that tries to regulate copyright infringements. The Trans-Pacific Partnership (TPP) is also a multi-nation trade agreement that tries to control intellectual property laws around the world. The secretive negotiations between the US, Australia, Peru, Malaysia, Vietnam, New Zealand, Chile, Singapore, and Brunei aim to eliminate 90% of all tariffs between member countries by 2006, and reduce all trade tariffs to zero by 2015. The treaty also has a controversial provision over intellectual property, far more restrictive than previous agreements and laws. A leaked version of TPP agreement indicates that negotiators are pushing for eliminating any possibility of parallel trade in copyrighted content, criminal enforcement, legal regime of ISP liability, legal incentives for service providers to cooperate with copyright owners, identifying Internet users for any ISP, and adopting compensation for infringement without actual damages. Like ACTA, the TPP is being negotiated rapidly with little transparency and many US representatives have voiced concern about it.

Pirates of the Caribbean

Copyright infringement, most commonly known as piracy, has been around since the European invention of printing (the Gutenberg press) in the fifteenth century. In its “The ABC of Copyright” the World Anti-Piracy Observatory (WAPO), a UNESCO program engineered to help combat piracy, argued accurately that copyright legislation is “the cornerstone for the legal protection of cultural goods and services. It is indispensable for the establishment of an environment that enables creativity and cultural industries’ growth”. No argument could be made to allow piracy or copyright infringement over the Internet, in the digital economy or the real economy. Today a set of laws exist managing copyrights. Some might find them abusive in their length (at least 50 years after the death of the author and in some countries no time limit for moral rights), or in their enforcement (Jammie Thomas condemnation to pay US$1.5 million for downloading 24 songs over a P2P network), but these laws exist and must be respected.

A more appealing argument and endeavor would be to estimate the real cost of piracy to the economy. The Institute for Policy Innovation, a conservative think tank tied the Motion Picture Association, estimated that major US movie companies lost US$6.1 billion in 2005 to piracy. The OCDE estimated also in its “The Economic Impact of Counterfeiting and Piracy” report that in 2005 international trade in counterfeit and pirated products altogether could have been up to US$200 billion. Of course these numbers are biased and cannot be taken as a base for objective discussion.

Pirated content consumes almost 24% of the world bandwidth
Source: Envisional Ltd [Jan 2012]

Recently, the British market intelligence company Envisional presented its State of Digital Piracy Study, in which it showed that piracy is diverse (cyber-locker, file sharing, streaming video, and BitTorrent), regionally specific (Russia is BitTorrent heavy while Brazil is cyber-locker serious) and touch all content types (picture, film, TV, music, game, software, video, and books).

There is little evidence today that piracy is hurting Hollywood dramatically and that copyright infringement is responsible for all the problems the entertainment industry is facing. A recent study by Sweden's Internet Infrastructure Foundation shows that a larger percentage of file sharers actually pay to download individual songs, than those who do not share files [Nov 18, 2011]. There is no evidence either that BitTorrent piracy hurts US box office returns [University of Minnesota and Wellesley College, Jan 16, 2012]. And counterintuitively, online pirates could be the music industry’s most valuable customer, and some major content creators have already mentioned that piracy could be treated as a new form of viral marketing or used as a marketing research focus group.

Piracy is the new radio. That’s how music gets around. That’s the real world for kids” – Singer and songwriter, Neil Young [Jan 31, 2012]

Many studies have pointed out that piracy has been driven essentially by three main factors: scarcity, price, and cheap alternatives. Delaying legal availability of the content outside the US drives overseas consumers to piracy [Wellesley College, Department of Economics, Jan 16, 2012], but more importantly universally fixed prices are deterrent in general [Would you pay US$136 for a Tron Legacy DVD in Mexico?]. Despite major difficulties to manage its monopoly, Microsoft understood the need for effective local price discrimination in its US$51 billion war against piracy.

An Inconvenient Truth

At the core Hollywood and Internet have based their success on opposite business models. While Hollywood instigates scarcity, high price, staggered schedule and controlled distribution model, the Internet is ubiquitous, pervasive, instantaneous and has zero marginal distribution cost.

Despite all the noise Hollywood is making around piracy, the paying consumer decline is essentially due to scarcity and high price strategy. Piracy is a mere consequence of the lack of availability and affordable price of Hollywood movies around the world. With strong competition from TV, cable and Internet but also from other entertainment options (live shows and sports), moviegoers are moving away from this traditional media. And to make matters worse, the costly 3D bet taken a few years back has not save Hollywood from its ultimate faith. Hollywood has no choice but to seriously embrace and invest in new available technologies if it wants to reach out to its full consumer base. Many Internet-based businesses such as Spotify, NetFlix, Tivo, iTunes, Hulu, and even Facebook have successfully distributed content, and are flourishing today as successful digital content ventures.

First they ignore you, then they laugh at you, then they fight you, then you win.” – Attributed to Mahatma Gandhi with no known citation

If Hollywood wants to be part of its consumers' future it has to adapt to their needs: “what I want, when I want, where I want and on the device I want”. To be relevant Hollywood has to stop thinking short-term and change its content copyrighted mindset. The six big studios (Paramount Pictures, Warner Bros. Pictures, Columbia Pictures, Walt Disney Pictures/Touchstone Pictures, Universal Pictures and 20th Century Fox) have to embrace the Internet distribution channel and build adequate platforms to give its consumer base the ability to use, edit, comment and consume its rich and high quality content.

The only way to control your content is to be the best provider of it” – NRK, a Norwegian Broadcasting Company [Mar 26, 2008]

Jan 19, 2012, was the first time in history the online community pulled together a unified voice to put a halt against SOPA and PIPA. Hollywood needs to see that big money spent on lobbying efforts is becoming less relevant than listening to its consumer base and going where they already are. The Motion Picture Association needs to sit down with Silicon Valley to invent the next entertainment evolution together, or it will disappear swallowed by the digital world.

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