Wednesday, January 11, 2006

Pandora’s Box Evaporates

I once shared a ski lift with a lawyer. I will spare the obvious lawyer-joke, since I am married to an attorney, and go straight to the point: he worked for Nickelodeon, the kid’s TV network, and he was working on protecting Nick’s content from being poached by the emerging digital downloading pirates.

This was at least three years ago, just as the thing that started it all—Napster—was being shut down by lawsuits and an anti-piracy campaign led by none other than Lars Ulrich, drummer and co-founder of death/thrash/hair-metal band Metallica.

Ulrich, who is a terrific drummer even if you don’t happen to like his music (sample lyric: “Taste me you will see/More is all you need/You’re dedicated to/How I’m killing you”), ultimately succeeded in helping shut down Napster.

But he did not succeed in stopping digital downloading. It went, as the Godfather liked to tell his wife the Corleone family was also doing, “legitimate.”

Now, back to my lawyer on the ski lift.

I asked him, very innocently, about what kind of lessons the TV industry had learned from its music counterparts, who had at first ignored Napster and then brought out the lawyers—while dismissing the fact that the digital downloading of music made enormous sense, being both far easier for the customer and far cheaper for the music companies.

He went, to use the technical term, “off.”

How could I say customers wanted digital downloading? Didn’t I know it took too long to download? Didn’t I know there wasn’t enough bandwidth? Didn’t I know the music quality suffered with digitization? Didn’t I know customers like to browse?

And where, he wanted to know, did I get off with the idea that downloading music was cheaper than printing a CD and a CD case, wrapping them in plastic that is harder to open than the President’s nuclear briefcase, shipping them to distribution centers and then to stores, losing some off the back of the truck and others to the sticky fingers of the store clerks, and selling the rest at whatever mark-up was necessary to cover store rents and utilities???

(He didn’t actually say all that—but he did, and I am not making this up, scoff at the notion that downloading music was a cheaper way to go than the brick-and-mortar approach.)

All I can say is, it’s a good thing he was wearing thick ski gloves, or he might have tried to strangle me.

I did not bother explaining to him about my daughters, who loved Napster for its speed, variety, and ease-of-use. Nor about my self, who loved it for the fact that you could find anything you wanted, no matter how obscure—even some stuff never-before-available to anybody, like outtakes from old Beatles recordings.

Nor did I try to tell him that he and Nick-at-Nite and the rest of the video world ought to get ready for the digital shift, in whatever form it would take. He didn’t want to hear about it.

So I thought about that lawyer as I looked at Google Video, the new Beta from the folks who brought you Google Maps and Google Mail and just plain old Google.

Announced last Friday at CES, I expected very little from Google Video, owing to the fact that I had been studying it a couple of weeks ago when doing “The Business Story of the Year”—about the digital downloading phenomenon.

At the time, I was disappointed in the breadth of the Google offerings compared to, say, YouTube.

But now that the site is available, and content from CBS is being offered for downloading at an Apple-like rate, the shift has really begun: legitimate video content is available on the biggest search engine in the world.

Pandora’s box didn’t just open—it evaporated. I wonder what that lawyer is doing these days?

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


Johnny Debacle said...

He probably doesn't want to hear about it because it's almost definitely a negative for him and all content owners and some realize (or wrongly think?) that there is nothing they can do but use lawyering to slow down the inevitable diminishment of their library of contents value.

Otherwise, unless you think the Music and Video executives were really incompetent, which they may well be, why wouldn't they be embracing the change rapidly to make sure that they maintain some control? Because it's disruptive to their existence. Music and video content will still be produced and distributed but the middlemen will change and fade.

dkman said...

You gotta give credit where credit is due here.

In my opinion, the one person who single-handedly opened and blew away this Pandora's Box is Steve Jobs.

I can't wait for someone to publish a book about how he convinced the tight-fisted, backwards recording industry executives to go along with him and offer their content for downloading, because it was regarded as *the* mission impossible by most, if not all.

The fact that most of the recording execs seem to now harbor regrets about the whole thing is an indication of how hard Jobs' job must have been and how significant the accomplishment.

Then Jobs followed it up by convincing the TV networks to hop on the bandwagon. Not a paradigm-shifting breakthrough like the first one, but certainly a significant development and a first for the TV industry.

My personal bias against Google aside, but I would consider them as just one of the followers/imitators when it comes to digital downloads.

Time will tell, of course, who will manage to make the most of it.

KC said...

Just to be clear: Metallica is quite clearly neither a "death metal" band (like the aptly named Slayer) nor a "hair band" (a la your late 80's Poison or perhaps Winger). Metallica is certainly a heavy metal band - and if you ask me, the highest quality most durable heavy metal band there is. I hesitate to call them a "pop" band - and all that implies (namely, flash-in-the-pan status and canned lyrics, beats and acts) but you cannot argue with the fact that they are the most popular heavy metal band ever - and one of the most popular bands of the last twenty years.

In addition, they are socially conscious. You've already highlighted their dogged fight to preserve the intellectual property rights of musicians - for which they have been vilified. But if somebody invented a technology that made it absurdly simple to steal money out of a bank account, I don't think there would be such an uproar when it was made illegal. (Possession of burglary tools is a crime - so why not possession of napster?)

Unwittingly, I'm sure, you've served up another example of their socially progressive views. The lyrics you've scoffed at - "Taste me you will see/More is all you need/You’re dedicated to/How I’m killing you" - are from a song called "Master of Puppets." Back in 1986 (before they were anywhere near as big as they are today), they wrote this song to condemn cocaine use (the "master" being cocaine and the "puppet" the user). Here are some other lyrics from that song: "Needlework the way /never you betray/life of death becoming clearer/Pain monopoly, ritual misery/chop your breakfast on a mirror." Other of their songs contain similarly stark messages - albeit touching other subjects (one recurring theme is the horror of war - to wit, "One", "Disposable Heroes" and "For Whom the Bell Tolls").

So, whether or not you like Metallica (or lawyers), you must admit they're socially useful.

JFB said...

The lawyer is a perfect example of underestimating new competition in all forms.

New competition has two options: improve to beat you, or do nothing. Since newer competition is REALLY very rarely does nothing.


jult52 said...

Nickelodeon and other cable channels are content aggregators. Television content is usually either produced by independent production companies or licensed from an owner of a library (for older material). It's not at all clear that these cable channels won't actually be even more powerful in the future. The real question is whether TV content will continue to be paid for by advertising or whether viewer subscription fees will replace them (and, if so, to what extent). It's all going to be very interesting.

Also, I'd be careful about drawing conclusions about an entire industry from an encounter with an individual, esp. if that individual is going to have a particular (legalistic) slant on the state of affairs.

julia ebert said...

I just hope that said attorney did not breach his duty of client confidentiality.

jucojames said...

One huge issue I hear internet video bulls ignore is the emergence of HD content. The cable and satellite companies are already struggling to find bandwidth for existing HD content, which is paltry in its volume. As the recent BBY and CC numbers show, flat panel HD tv sales are exploding and everyone I know who watches things in HD simply wants more and more content in HD. I don't see how HD can or will be downloadable (word?) in a reasonable time anytime soon. Mark Cuban has addressed this issue on his blog. Seems to me that internet video is more likely to be like AM radio after FM came out than some new massive replacement market.

Cuban actually sees the bandwidth limitations driving valuations higher for those few companies who own and control its distribution - I think he put forth a number like only 30 or 40 channels in HD in the intermediate term. That is very small compared to the 200+ channels most systems currently offer....

BelowTheCrowd said...

I had a similar conversation with a friend who is formerly an entertainment lawyer (with various studios and production companies) and now runs some piece of a women-focused cable network.

When it came down to it, her ultimate justification of the action to shut down downloaders of all kinds, to maintain existing "windows" for movie releases, and to ensure that content had to be aggregated the way the distribution companies wanted (eg: $15 albums from which you want one song), all came down to one statement:

"Look how many jobs this industry has created."

Deep down inside, I know that what wasn't said is as important as what was. A more complete statement would have been: "Look at how many jobs this industry has created that will be completely irrelevant in an electronic distribution world. Jobs just like mine!"

That's ultimately what the fighting is about. It's not about profit. The money spent on lawsuits could have been better spent on new mechanisms to continue securing profits in a digital world. It's not about incentives to create content. Those also exist, and in some case exists more in an electronic world.

It's about the layers and layers of managers, marketing managers, product managers, geography managers, talent scouts, lawyers, channel managers, promoters, and others whose nice fat salaries are justified primarily by their mastering of an infrastructure and process that largely disappears. Even the people at the very top of the business have little of the skillset needed for the new electronic world, which is why Jobs is beating them all.

They all know it, and they're fighting a rearguard effort to protect their personal gains, their Beverly Hills estates, their weekends in the Hamptons, their palatial offices with all manner of lackeys at their beck and call, as well as the parties, the drugs, the hookers and everything else that they've become accustomed to. All that goes away pretty quickly in the new world.

They stick their heads in the sand not because they can't see the sky, but because taking their heads out of the sand means facing very unpleasant realities about their futures.


Aaron Koral said...

You know, after reading your post, I think the interesting aspect of the internet and digital downloading is with the independent providers of content.

With the advent of "channels" (i.e., YouTube, GoogleTV, et. al) for content providers to "shop their wares", one would think that the major studios (i.e., GE/NBC, Viacom/CBS, Disney/ABC) are worried that the opportunity cost of not putting their content on the 'net won't be outweighed by the marginal benefit of pricing their content "at the margin" for consumers to download (increasingly).

The winners in this shift, IMHO, are the independent producers/providers of content. With the Internet as a forum for introducing their movies and programs to viewers, independent producers of content now can bypass the Big Three networks and cable to "find their audience".

I could be wrong though...

justanotherhedgie said...

...probably sharing another lift ride with the SBC exec I had beers with in Snowbird last year who told me that people would always have land lines. After a couple more beers, even HE admitted he just used a cell phone these days...but that was just 'cause he was travelling so much'.

Maybe if these guys weren't paid to take vacations, they wouldn't have their heads up their asses all the time...and keep running into trees in Vail.

BelowTheCrowd said...

Hey, we make a lot of money off those guys up at Alta.

Mostly they're morons, who will actually believe you're showing them "the good stuff" just because they asked you to...


econjohn said...

kc on the mark.

Johnny Debacle said...

"In addition, they are socially conscious. You've already highlighted their dogged fight to preserve the intellectual property rights of musicians - for which they have been vilified. But if somebody invented a technology that made it absurdly simple to steal money out of a bank account, I don't think there would be such an uproar when it was made illegal. (Possession of burglary tools is a crime - so why not possession of napster?)"

Portraying Metallica as do-gooders is ridiculous. They act in their self-interest (as most people do) and copyright infringement is a much different crime than stealing, both conceptually and according to the law.

Re: This greater argument about companies who are about be made obsolete sticking theit heels stubbornly in the ground, the WSJ is advertising on blogs. I saw their BlogAd appear on and was able to calculate that it costs them $300 for a week of that ad which represents roughly 20k page views. Say he gets a 1% CTR (high). That's 200 clickthroughs for $300 or $1.50 for a click. Given the audience, you have to assume that most readers already subscribe to the WSJ so how many clickthroughs would actually lead to new subscriptions? I dont really know.

But I do know that it looks like the WSJ is supporting its own dillution. Im not sure whether to applaud them for not acting like the above mentioned entertainment lawyers or condemn them. The dollars amount are small but the symbolism is not.

The Irrational Investor said...

Now, if only google would offer free pharmaceuticals manufacturing to those that supply raw materials...