Tuesday, September 26, 2006

Warner Music and YouTube

The media companies are lining up to either cooperate with or litigate against YouTube. This could be a watershed moment defining who gets the Internet and who doesn't. More interestingly, what will the business ramifications be? You can be the most forward-thinking company on the planet, but if it doesn't bring in the scratch, it doesn't matter.


I think this is a forward-looking change that will have interesting ramifications. I think it shows that Warner accepts the realities of the changed market, and that as a media company, they cannot profit from maintaining a totally artificial monopoly on distribution because what they might gain in slowing down piracy will be far outweighed by customer ill-will and bad reputation (cf. Sony). The media companies in general have been sacrificing the good in favor of the perfect and ending up with neither.

Whereas eMusic (no, I am not on their payroll ;-) ) has jumped with both feet into the Internet Age and seem to be doing a decent business despite themselves, the big media companies are still being dragged kicking and screaming out of a 19th-century mode of product distribution at the expense of the good will of their most well-informed (and often high-spending) customers.

Like I've always said, I don't support piracy, but I also strongly believe DRM and other similar tactics take far more from legitimate customers than illegitimate ones. We went through all this in the 80's with floppy disks and the marketplace voted DRM down by a landslide. It was a mistake then, and it's a mistake now. The only people who really benefitted, IMO, were the folks who made stuff like CopyIIPC.

I think making your product more convenient and less expensive is always the best way to increase revenue. I also really think most people would rather be honest than dishonest, but in a situation where the product you can get illicitly for nothing has much more value than the product you rightfully pay for, can you really expect people not to rebel? To wit, should I pay money for a low-resolution, DRM-encrusted video from iTunes that I can't even play on my TV, or should I download, at no cost, the same thing in higher-quality DivX at DVD or HDTV resolution from the file-sharers that I can do with what I want? iTunes may be catching up to this standard, but what they offer is still significantly less preferable to the pirated stuff even without considering the price. This is not a case of people simply wanting to rip off the companies, but literally companies wanting to rip off their customers under the guise of self-defense of an obsolete business model. It might be morally, legally and tactically valid, but as a business plan, I think it's bound to fail. It's not like it will ever stop Chinese bootlegs, for one thing.

Take a look at eMusic again. They carry no major labels, and not too many big name artists, (nor many of my personal favorites), yet they have 11% of the American download market. Gee whiz. They are not being destroyed by piracy... then why are the RIAA members so petrified? Could they be afraid of having to compete in a fair and open market? Could the be afraid of not having a stranglehold on promotion and marketing? Could they be afraid of having to find real talent, rather than manufacturing some fake, lame flavor of the month because their customers only ever hear what ClearChannel is pumping at them?

The interesting question here is:

Can Warner's openness to share their material be the basis for more revenue for them and You-Tube, or are they essentially giving stuff away free with no real benefit for either company? I guess it all boils down to: Do you punish the majority to pretend* to fight piracy, or do you accept a certain amount of loss and attempt to balance it with increased value and a better relationship with your customers? Also, can you make money when you, technically, aren't selling anything? It's a lot more complicated than the old TV/newspaper/radio model of selling eyeballs/earholes... I think advertising as it traditionally has existed is slowly becoming obsolete. While it's a strong basis for doing business, I don't think it will be forever, or if it is, it will have to change a lot.

Maybe I'm too optimistic, but I would pursue the better relationship with customers, and would attempt to change the culture for the better, not through strongarm tactics and intimidation, but by building a positive customer relationship. It's worked for Apple... people are more than willing to pay a premium for a product that is in many ways better (but not as much as a lot of people claim), but in reality Apple owes a lot of its success to intangible attitudes and mindshare won through many hard years of trying to truly serve customers in a way that the larger companies have not. Granted Apple sells hardware, and you can't download a Mac from Limewire, but I think the vibe it has garnered over the last 20 years earns it a lot of business it would not earn were its offerings considered solely on price, or even quality. After all, Microsoft is now what IBM was in the 70's and early 80's... something the typical business just assumes without considering the often superior alternatives.

I think one of the important effects of the Information Age is something I mentioned on a mailing list recently: whuffie. In other words, an intangible reputation based largely on public perception that is becoming too astute (and too cynical) to succumb to plain-old ordinary 20th-century marketing tactics. I think the idea of treating your customers as a commodity will become more and more dangerous as the flow of information increases, customers become far more informed and savvy because the information channels are no longer locked down by a powerful few. We've got quite a ways to go, but are definitely headed inexorably in that direction.

Whuffie is not likely to ever become the basis of an economy like it was in Doctorow's book, it will certainly translate into good business in the 21st century. The question will be, can you succeed without it?

* I say "pretend" because as we keep seeing, all these attempts to control copying are defeated within days, if not hours of their release.

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