Every thought about how many parallels you can find between one life experience and another, one business model and another, one product and another? Wherever you look, parallels abound.

Right now the big issue for every Prime Minister, Finance Minister, President.... is the Global Financial Crisis or the GFC for short.

But as a report just prepared for the PM of the UK, Gordon Brown, indicates, the problem is not about the banks - it is about society itself.

The problem that the report highlights seems to also apply to the entertainment industry and its relentless search for greater profitability at any cost. It is like an inefficient virus - that is so successful at growing that it kills its host. If the entertainment industry has its way it will, along with the banks, kill the goose that lays the golden eggs - the consumer!

Here is an excerpt from the story published last weekend:

THE ECONOMIC system is broken, and attempts by governments to fix it by kick-starting growth and consumerism are "delusional" and "pathological", the Westminster and Holyrood governments will be warned by their own advisers this week.

A ground-breaking report by the leading environmental advisers to First Minister Alex Salmond and Prime Minister Gordon Brown will deliver a damning verdict on capitalism and demand a radical shift to a fairer, more sustainable society.

............

The pursuit of economic growth, founded on the increasing consumption of material goods, has failed to bring social justice, prosperity or happiness, the report says.

"The narrow pursuit of growth represents a horrible distortion of the common good and of underlying human values," the report concludes. "The market was not undone by rogue individuals or the turning of a blind eye by incompetent regulators. It was undone by growth itself."

The report presents a fundamental challenge to the economic policies being pursued in London and Edinburgh, raising questions about some of the basic tenets of modern capitalism. We are living in an "age of irresponsibility", it says.

 The fundamental story here is that P2P is the only true social solution for the future of content distribution. Sure, the business models need to be sorted, but the only way to do that is to get started.

When Rolls-Royce sells a car, they want the user to have the highest level experience.
For this reason, no matter how old a Rolls Royce is, if it breaks down – the  owner can count on Rolls to turn up to get the car off the side of the road. After all, that’s the Rolls Royce reputation being sullied.
But then Rolls Royce has an industry advantage. Each one of their handcrafted machines have been designed to last – for a long time and most owners reward this quality with careful maintenance and TLC.

For those of us that use the same TLC with our DVD’s and CD’s, we own a product that will most probably outlive us.
An acetate polymer disc will take approximatley 189 years to breakdown to its original constituent particles.  Unlike VHS tapes which suffer from wear and tear and magnetic particle adhesion failure and film breakdown within 15-20 years.

So there is the underlying problem.

Records – wore out.
Reel to reel tapes wore out
Eight track cartridges wore out
Cassette tapes wore out
VHS tapes wore out
Even Ipods wear out (10,000 or 15,000 hours live per SSD disk or Hard disk).

But CD’s and DVD’s? Provided they are handled without fingerprints all over the medium (acid, salt, and other chemical residues)  and kept in their cases (dust and airborne contaminants free environment) – they should last between 5 and 15 generations.

That’s the Problem.
Why would anyone hold onto a DVD that they and every family member had watched – at least three times in the last two years. (Especially if you've just been laid off and are looking around the apartment for items to Pawn.)
The numbers are starting to show that they don’t.
They sell them, via EBay, Cashconverters and garage sales.
Indications from EBay are that there is a solid aftermarket trade in used DVD’s. As high as 14000 titles per month and from Cashconverters, that 33% of all items (Australia wide, an estimated 150,000 titles per month) that walk out of their sales franchises are secondhand DVD’s. (Thats nearly two million titles per annum - just from Ebay and Cash Converters). 
“This is however a relatively new segment of our business,” according to a Cashconverters spokesperson. "We only started to notice the growth in about October last year".

This then adds a whole new dimension to the Industry sales figures.

Normal Movie Sales consist of :
Cinema Release, DVD Release,  Airline and Cable Release, Free to Air Network Release.
Each release spaced at approximate three month intervals to ensure maximum market penetration for each product.

With a few exceptions e.g.: The Star wars Trilogy and digital remasters, movies are then forgotten about and relegated to back catalogues to be written off as non-movers – and then impossible to obtain except through P2P or the evolving secondary CD/DVD market..

The problem is – the content industry doesn’t currently have the foresight of its forefathers;  here I refer to the purchase of the GTV9 Australian Television Broadcasting license by Hoyt’s, Greater Union Theatres, J.C. Williamson’s Theatres, 3XY, 3UZ, 3KZ and Cinesound Productions in 1957.


It doesn’t own shares in what appears to be the two fastest growing segments of the content industry – Used CD and DVD content and P2P content.

And the indications are that both have a longer lifespan than all the previous Medias.

A few weeks ago, I wrote about the benefits of Peer to Peer  Ecommerce  using Ebay as my model. It appears that the numbers are proving me correct.

I said…..
1.         Consumers don’t trust big business.
2.         Consumers trust other consumers.
2.         Social Networking (P2P) sells more products faster.

The economic Downturn doesn’t appear to be affecting online commerce numbers.
A look at Global visitors per minute to E-Commerce sites shows that approximately 3,168,000,000 requests were made for e-commerce web pages in the last 24 hours.

That’s 2.1 requests per day from every DSL user on the planet.

Global 24 hour Snapshot – 24th March 2009

Source Akemai

And this trend appears to have increased slightly during Oct/Nov to its current leveled off position showing that even if traditional bricks and mortar establishments are feeling the pinch - on the Internet – people are still interested in at least Window Shopping.

Global Five Month Snapshot – 24th October 2008 - 24th March 2009

Source Akemai


Comparing the peak visitors over the last 24 hours amongst the five continents shows Europeans are the most avid online shoppers followed by North Americans and then Asians.

Europe	3,288,141
North America	2,323,876
Asia (Pacific)	323,296
Australia	221,054
South America	90,964
Africa	17,147

If more Internet users are spending Euros than US Dollars, I’m afraid the US balance of Payments might be out of whack for a little longer. But for the rest of the world – the news is extremely good.

Is this the beginning of the Worlds Consumers talking the needed recovery action into their own hands ?

There seems to be a sense in some people that the GFC is happening somewhat remotely and only affects the way that funds can be raised to run businesses, or affects consumers' interest in spending money...

The GFC is not what is at the heart of the matter. It is the manifestation of the illness, that became visible through the symptoms of increased temperature of the housing market among other things.

The real root cause of the GFC is digitization. The ability to convert information into zeros and ones made it easy to move around the planet using, of course, digital telecommunications technologies. It also made it incredibly inexpensive.

The lowering of the barriers to entry to acquiring technology was like the invention of the printing press by Gutenberg. It enabled knowledge to flow to those who wanted it, to use in whatever way they chose.

And just as business has used information technology to strip costs out of manufacturing and maintenance of inventory etc, so too is the public using digital technology to strip costs out of content, among other things.

The way that the public is doing that is probably illegal in many cases. Whether that should be the case or not is not the issue. The problem that arises is that it is very hard, as the content industry has found out, to sue all your customers.

So the problem that arises is one of business models.

The content industry wants to stop revenue leakage from online distribution. They have several choices:

1. Sue everyone (too expensive and may cause unfortunate precedents where judge's side with plaintiffs)
2. Tax ISP's (the enterprises that facilitate the distribution of the content)
3. Tax digital memory devices (problem here is that the content industry doesn't want to be seen to have implicitly legalized the copying and storage of content)
4. Introduce "paid for" business models such as the "all you can eat" ones that are being used in the UK.

The problem with number 2 is that the content industry is trying to introduce the taxing concept one sector at a time. So at the present it is the music business that is trying to get a payment system in place. ISP's see this as the thin end of the wedge, where if the idea becomes a precedent and a music levy is introduced, next there will be a movie levy, a games levy, etc. And that could increase the costs to consumers by an order of magnitude that would cause consumers to cut back on Internet usage, thus shrinking the market.

One of the key problems in the whole modelling that is being done is that music companies, such as publishers and record companies, are fighting to ensure that the payments that they receive are not reduced on a per unit basis.

Historically, publishers have always been the poor cousins in the music industry. They stand at the end of the line with their begging bowls, and get paid by the record company and receive pennies while the record company gets dollars. With the advent of digital distribution record companies were able to successfully argue that music publishers should get the same quantum of a digital download as they did from a physical record sale, even though, in reality, there was no manufacturing, inventory or other cost component for the record company such as those normally associated with a manufacturing business.

In retrospect that push back has probably been extremely damaging for the record companies - and because of the precedent, for other content owners.

The push back is in essence all about the protection of a "per unit" revenue model.

That "per unit" model was developed in a different age and a different modality. Manufacturing physical goods is all about scarcity. Digital distribution - particularly in an age where P2P is a reality, fortunate or not - is about ubiquity.

In an environment of ubiquity, what needs to happen is for the marginal unit cost to reduce to a sufficiently low number so that all people in the business ecosystem become agreeable to owning content that they very probably will never consume. That way ubiquity can rule rather than demand.

In such a system where all content is present on all available hard drives, people will choose to consume locally whatever they want, and will enable to continuing ubiquity to rule.

But to do this means that the record companies need to be prepared to drop the quantum of revenue that they require down to the same level as the publishers receive now. That would reduce the cost per unit of acquisition to about 15% of what the current sale price is. (Still too high in my opinion, but a step in the right direction). That would encourage more people to be prepared to pay for legitimate acquisition of content, or put another way, to purchase an insurance policy against being sued). 

This is essential for the content industry to adopt if it wants to survive, just as it is essential for other industries which benefit from the potential to make their products more ubiquitous need to reduce their expectations of margins in order to make consumption legal and enticing rather than illegal and exciting.

I was in a venture with MCA in the publishing business which lasted for a very successful eleven and an half years. It ended in the early 1990’s I signed some big Australian acts during that time including Tommy Emmanuel, InXs, Wa Wa Nee, Noiseworks and of course Keith Urban.

MCA, at that time, was a songwriter publisher. I remember having a discussion with Leeds Levy, the President of the company, and suggested to him that he needed to change his business model, because it was too hard to make a profit from his strategy.

The strategy at the time in the US was to sign songwriters who were up and coming hit song writers and to put them into a demo studio so that they could record their songs, and then to pitch those songs to record company A&R men. The best songs would be recorded and would become hits. The company lived and died with the strength of the songwriters.

This model was a carry over from the early days of publishing, when the hit song was the unit of sale in the form of a single disc with two tracks, one on each side. But time had well and truly moved on, driven by the advent of first the long player and then at that time, the entry of the CD. And consumers were interested in bands, not singers. And they were interested in albums.

I said to Leeds that he should change the model. Keep the stable of song writers that he had. Some of them were fantastic and repetitively had hits. The only problem was that the revenues from songwriting come from two sources – the performances and the mechanicals. The performances are generated from radio play predominantly. The mechanicals are the songwriting revenues that come from the sale of records and CD’s.

But the revenues for the record company don’t come from the single. They come from the sales of the album. So the record company puts a significant effort into shifting albums, because that is where the profit is for them. They want the single to get airplay to sell the album, but they didn’t care about single sales volumes except as a means to the end of selling more albums.

On the album there were typically ten songs. So if the single was one of those songs following the MCA model of the time, all you would earn would be one tenth of the available royalties.

I suggested that MCA should change its model and sign up recording artists instead of songwriters. Recording artists all wanted to be writers, and by signing the artist you were investing in what an A&R man had already made a decision about (if you signed an act that had been signed to a label), and you stood to make nine tenths of the available income from the songwriting if they couldn’t write their own hit and had to outsource it.

It was simple economics and an understanding of the ecosystem.

And that is also why in Australia I signed artists more than songwriters. I did pretty well at it too for some time.

The key in this though is not just understanding the economics. It is about understanding the ecosystem. And ecosystems are quite complex generally.

Now with the advent of the Internet and file sharing the ability to develop workable business models is a challenge to everyone in the content industry. Some of them are pretty visionary and want to make changes to existing models to reflect how consumer habits are changing. Some of them want to just hold on to the way things have been.

The people who want to hold on to the past are still driving a good deal of the decision making in the content industry, because the next business model is still probably just around the corner and out of plain view.

When it can be seen and is proven it will be relatively easy to figure out how to make money from it, just like it was relatively easy in retrospect for me to tell Leeds Levy that he should change the company policy away from signing writers into signing artists that could write.

While we are waiting for the next business model to come into plain sight there is a heightened amount of risk involved in whatever you may choose to do. And for the most part, executives who have historically been taking home millions of dollars each year, don’t want to increase the risk and take home a pink slip instead of a seven figure bonus. So nothing changes.

Except that it does.

The consumer changes. And unless you are on the right side of consumer sentiment you are definitely increasing risk.

So this is the dilemma.

The other part of this enigma within a conundrum is that consumers have changed in their psyche.

The seed that was planted by Edward Bernays around 1919 at the end of World War One has finally grown to full maturity. That seed was a meme. The meme was: To change America from being a needs based society into a desires based society.

Edward Bernays was the father of PR. He was the nephew of Sigmund Freud and he used much of Freud’s thinking (among other ground breaking psychologists) to conceptualise how to achieve this change. The meme travelled around the world, and we now have a global society that is not just desires driven, but is also programmed to want instant gratification.

It is this gratification that adds an interesting and very challenging fourth dimension to being able to describe and analyse the current content consumption ecosystem and it is that aspect that needs considerable thought in order for content owners to be remunerated and consumers to be able to have access to content, legitimately.

There are also people who think that copyright law is wrong as it stands. (See this video which features some very visionary economists from Washington University who argue that copyright law and patent law are too restrictive and constrain free trade). I happen to agree with them.

I was involved in email listserver discussion about peering restrictions in Australia recentely and one of the querants whom I’ll call SL asked me if the Swedish Peering model had a positive impact on the countries economy.

My answer was complex but essentially a few weeks ago we rated 172 country’s around the world from poorest to richest in our story “How the Content Industry Won the West”

Today we will utilize only the countries reported on by the OECD in full and compare the OECD Real GDP data data with that from the International Property Rights Index (IPRI) 2009 report; a report which in their own words:

“is an international comparative study that measures the significance of both physical and intellectual property rights and their protection for economic well-being. In order to incorporate and grasp the important aspects related to property rights protection, the Index focuses on three areas: Legal and Political Environment (LP), Physical Property Rights (PPR), and Intellectual Property Rights (IPR). The current study analyzes data for 115 countries around the globe, representing ninety-six percent of world GDP. Of great importance, the 2009 gauge incorporates data of PR protection from various sources, often directly obtained from expert surveys within the evaluated countries. “

I call this analysis the P2P/GDP Ratio.
There appears to be a direct correlation with the speed of a Country’s Real GDP acceleration and the quantity of file sharing.
 

Source: GDP – 2483806 Annex Table 1.  Real GDP
Source 2: http://www.internationalpropertyrightsindex.org Copyright Piracy Classification for each Country

Notwithstanding that in the writers opinion they have understated dramatically the amount of P2P actually occurring within a number of countries, for example within Australia, the latest Whirlpool Internet Report (http://whirlpool.net.au/survey/2008/) shows that 53% of Australians utilise file sharing software. However, IPRI calculates that the current police actions (AFACTS –v- iiNet) and the 2006-2008 legislative amendments to the copyright act make Australia one of the good guys in the eyes of the anti-piracy group that funded the IPRI report.

Perceptric statistics, collected since 2005 demonstrate that the IPRI numbers do not accurately reference the amount of file sharing accurately occurring.

Another way of looking at the data is comparing the volume of P2P to the IPRI rating for the country. It would appear that  generally, the higher the IPRI rating - the lower the P2P file sharing AND the lower the GDP accelerated growth


Whilst this blog posting is only an interim superficial look at the real value of global file sharing, the Perceptric P2P report due out at the end of March takes a closer look at the beneficial results of file sharing on the global economy.