Commoditization, Total Content Cost, Googleization and other things that go bump in the night: Remarks at NARM Law and Technology Conference November 3, 2011
I spoke on a cloud services panel at the November 3 NARM Entertainment & Technology Law Conference in New York on a very robust panel that was covered in Billboard in more detail. The erudite event was hosted by my friend Jon Potter, who always does a superior job of these things. The following are some general remarks I prepared for the panel, although we did not stick to any particular script.
Commoditization of Common Goods
While the litigators on the panel will focus on the particulars of the Cartoon Network and MP3Tunes cases in detail, in order for those cases to ultimately mean anything, there will have to be some business reality that these holdings are associated with in order for our business to survive. These cases are roadsigns on the highway of commoditization of culture. I draw a distinction between the commercialization of culture and its commoditization. Restaurants commercialized the family dinner, fast food chains commoditized restaurants. Are families better served by dinner at home or by dinner at Mickey D’s?
Subsistence Level Commoditization
Another aspect of commoditization is the effect of commoditization on suppliers. Commoditizers tend to feel most comfortable with suppliers that are other commoditizers of “inputs”, because these suppliers can scale. Mikey D’s is not interested in the high quality low volume ice cream shop on the corner. They are interested in the company that can supply them with a gazillion gallons of ice cream at a quality point that is acceptable to Mickey D, but that will never really be “good”. (This also gives rise to the “Not Mickey D’s” independent restaurant.)
The good commoditizers know that while they can use their buying power and market dominance to drive down supplier prices on “inputs” they cannot drive that price down so low that the supplier can’t stay in business. That subsistence level price is what “equilibrium” means to them.
Less Than Zero: Subsistence Commoditization, Total Content Cost and Googleization
What is different about the online space is what I call Googleization, particularly the Googleization of art and artists. Googleization is similar to subsistence commoditization, but differs in one important respect that varies directly with the total cost of content provided to a commoditizer. With Googleization, you have a dominant company exercising market power (or monopoly power) to drive down supplier prices through negotiation for lawful services. Those negotiations on price are merely the first step. The second step is for the dominant company to facilitate the theft of those supplier inputs to drive down any input price paid by the dominant company to near or preferably below zero. This is why the total cost of content, i.e., the real production cost, to the supplier varies directly with the Googleized price.
Meaning that when Google negotiates a price point but continues to facilitate the theft of the same good and profits from it through other means, for example, by selling advertising on Megavideo, the total content cost to Google is the negotiated price it pays in the legal transcation offset by the profit it makes through the illegal transactions. That is, the price to Google is actually less than the price it pays and perhaps less than the cost of producing the good.
While I doubt they actually run a P/L on this, it seems clear that the total content cost to Google is less than zero or essentially “free” if for no other reason than Google is able to extract monopoly rents from its dominant position in advertising on illegal sites to offset the cost of the legal sales. (This is perhaps one reason why Google is so vehemently opposed to rogue sites legislation as eliminating its profit from online theft would cause it to pay the full price, i.e., the un-Googleized price.)
I would argue that this is essentially the “hybrid economy” model described by Lessig in his Remix book, although he would likely never acknowledge the theft part that I believe his is trying to legitimize.
This works best (and most frequently) with digital goods–because if Googleization occurred with physical goods, the dominant company would eventually be criminally prosecuted very quickly because law enforcement is doctrinally trained and staffed to deal with 911 calls for the theft of physical goods. It is only recently that law enforcement began evolving a doctrine for dealing with 911 calls for the theft of digital goods. (The evolution of doctrine is best illustrated by Operation in Our Sites and the rogue sites legislation, both of which–as the most evolved practitioner of Googleization–Google is most threatened by.)
For example, Google has not fared well in trying to profit from the sale by Google’s customers of counterfeit drugs (zero payment to patent holder) or nonprescription drugs subsidized by the Canadian government (near zero payment to patent holders). In addition to the cost of inputs that Google did not have to pay and that were not reflected in the pricing that its customers were willing to pay for Adwords, Google did not have to directly bear the cost of any wrongful deaths that occurred from its drug sales program or health care costs from those hospitalized from taking bad drugs or the wrong drugs or addicts. Those costs were all socialized, at least until Google paid a $500,000,000 forfeiture to keep from being indicted for these sales. Those costs were then socialized, but just to Google stockholders (and customers, I guess). Google may have learned its lesson about promoting the sale of illegal physical goods.
Google has also not fared well on the digital goods side, especially with music. At the same time as it is trying to make a near subsistence level deal with the major labels (who can supply millions of gallons of ice cream from their catalogs), it is the number one tool for linking to illegal content through search–and refuses to do something as simple as block search results based on the information it has already been provided in YouTube’s much vaunted Content ID filtering system. Or just block access to the Pirate Bay, Isohunt or other adjudicated infringers. Google blocked the Pirate Bay once by accident, why not do it intentionally?
So Googleizing a supplier is conducting simultaneous legal and illegal transactions, the net effect of which is to drive the cost of the input below zero. Liability for the illegal transaction is then limited by arguing that a safe harbor provides an alibi and using vast litigation budgets to establish a new principle of Judeo-Christian jurisprudence–Guilt means only having to say you’re sorry. (With apologies to Bob Evans.)
Things That Go Bump in the Night: Amazon’s Cloud “locker”
When Amazon launched its locker service (a “dumb” locker in more ways than one) it did it without warning in the dark of night without calling any of the suppliers who helped it build its business. That’s always how I announce something I’m proud of, right? More likely, they did not want to have to explain their legal position, because they know it to be faulty.
First of all, the popular cant is that the Amazon Cloud is just like an external hard drive. That would probably be true if it were true, but it is not because it is false. The marketing for the Amazon Cloud is nothing like the marketing for an external hard drive: “5 GB of Free online storage, Your Cloud Drive comes with 5 GB of free storage—enough space to store up to 1000 songs. This space is yours to use as you like and you will never be charged for it.”
Marketing the service by enticing consumers with storage for songs–not Grandma’s recipes, not the avionics for Marine One, but songs. Maybe its free because they don’t want to get a financial benefit for the first 5 GB? And then when the pay service kicks in, there is no limit for songs even up to the highest level of storage at 1000 GB. There is a limit for other storage by file type. Is this not a clear expression of Amazon’s desire to attract customers to its paid locker service by offering users the ability to store large quantities of music–unlimited quantities of music?
Does this not look like they are marketing the service based on Googleizing music storage? So it’s not really just like an external hard drive at all. It’s very music driven and it is being sold based on what one very smart tech-side lawyer described as an effort to wave a magic wand over stolen music. And by the way–Amazon reportedly just talked an app developer into withdrawing an iPhone app that allowed Amazon Cloud Drive customers to stream music from their lockers to their iPhones because Amazon didn’t have licenses that would permit the funcitonality. If it was really just like an external hard drive, couldn’t a user stream their own music to their phone as a private performance of a lawfully obtained copy? Amazon’s lawyers may be more confident in their legal position than is Amazon. (Which is the primary difference between being a seller of legal services and a buyer of legal services–the first and foremost role of the general counsel is to know when to stop listening to the outside lawyers and start thinking.)
And the complaint I hear about Amazon most frequently is that they built their business on the backs of authors and artists and now that they sell washing machines, this is how they treat us?
Equilibrium or Devastation?
The services in front of the Copyright Royalty Judges may argue that they are looking for equilibrium pricing in their rate setting for compulsory licenses. That may well be what they tell the court–but what they do not take into account is that some of them, not all of them surely, but some of them, do their best to disrupt any equilibrium price from forming because they Googleize the suppliers of the music for which they are attempting to pay as little as possible. These companies–like Google–do not come to the negotiation with clean hands. And that’s being very, very kind.
More of the popular cant says that the music industry was stupid for getting into business with Apple which has made a fortune selling devices driven by music sales (and later by movie and book sales). True–Apple did and does make a lot of money off of selling legal devices that are chiefly marketed by selling legal music. If users put illegally ripped music on their Apple devices, that is a different problem.
Remember “Rip, Mix, Burn”? Ever notice that campaign went away at the same time as the iTunes Music Store launched? What replaced it? “Stealing Music is Bad Karma”.
When will Amazon or Google launch similar campaigns? Why should we trust them if they do not?
Apple is not trying to Googleize the suppliers of the content that drives the sale of their devices. Do we wish we got some of that money? Sure. Are our interests essentially aligned with Apples? Absolutely.
The bigger problem we have is not that Apple make a lot of money from selling genius devices that we had nothing to do with designing and for which we bear no investment risk.
The bigger problem is how do we stop Googleization?
“It is natural to give a clear view of the world after accepting the idea that it must be clear.”
Albert Camus, The Myth of Sisyphus