Viacom vs. YouTube: Misreading history

I’m reading the otherwise perfectly reasonable New York Times piece on the Viacom/Youtube lawsuit and I encounter this bizarre misrepresentation of recent history:

“In the early 1990s music companies let Web companies build business models on the back of their copyright,” said Michael Nathanson, an analyst at Sanford C. Bernstein & Company. “I think the video industry is being more aggressive for the right reasons, to protect the future value of those assets.”

It’s hard to imagine how one could find more ways to be wrong on this topic.

First, there were no “Web companies” in the early 1990s; the first Web companies emerged in 1994-5 — and aside from some unusual efforts, like Michael Goldberg’s Addicted to Noise zine, there was not a lot of music happening on the Web. The MP3 revolution didn’t begin to roll until late 1997 or early 1998 (here is Andrew Leonard’s early report on the MP3 scene, which I edited).

More important, Mr. Nathanson has the history here precisely inverted. What happened in the Napster era was that music companies refused to allow Web companies to build business models on the back of their copyright. They decided that MP3s were all about piracy and they sued Napster out of existence. They refused to do deals with companies that wanted to distribute their music online, and in fact they failed to offer their music online in any way palatable to consumers until Steve Jobs whacked them on the side of the head — and even then they saddled his whole iTunes enterprise with a cumbersome “digital rights management” scheme that even he is now disowning.

The Viacom suit against YouTube does not represent a break with the way the music industry dealt with its rocky transition to the digital age; it is an instance of history repeating itself. The RIAA strategy of “sue your customers” may have succeeded in driving file-sharing underground, but it didn’t do anything to protect the profits of the music industry, which have been in a tailspin ever since. If the Viacom suit is an indication that the owners of TV shows and movies are going to pursue a similar strategy of I’d-rather-sue-than-deal, they may find themselves in a similar downward spiral.

Google has a pretty good case based on the 1996 Telecommunications Act safe harbor provision. If Viacom fails to win against its corporate opponent, will it start suing all the Jon Stewart fans (and, possibly, the show’s own staff) who are uploading clips to YouTube?

If the TV and film industries look carefully at the music industry’s story, they will see that their danger lies not in being too soft on copyright infringers but rather in missing the tidal wave of a platform shift.
[tags]youtube, google, viacom, napster, drm[/tags]

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  1. I was with you right up until the last half of the last sentence. I don’t think the large older media companies are in danger of missing the tidal wave of the platform shift. They seem to see it pretty clearly. The problem is that they’re the platform being shifted away from.

    Though it’s theoretically possible that they could fundamentally change their business model so that they become the platform(s) being shifted to, it’s not realistic. They’ve built their business, and they’re unlikely to build another business from within that. It’s far, far easier to build a new business, especially one the so clearly threatens the existing business, outside of an existing business, free from all of the baggage that existing business imposes.

    The large media companies know this, and they’re trying to stop as much of this platform shift as they can, not because they’re stupid or unimaginative, but because realistically speaking, they don’t have a choice. By definition, this platform shift means their demise.

  2. Well, yeah, I know what you mean — it’s roughly parallel to the process going on in the newspaper world right now. Except that it sounds like you’re saying that incumbent players facing a platform shift have only two choices — roll over and accept the inevitable, or send in the lawyers to fight a losing rearguard action and *then* accept the inevitable. And it seems to me that there is a third option that is almost never attempted: the incumbent has great assets, and those assets, surely, can be deployed creatively as part of an effort to understand the new platform and eventually profit from it. Which is what the people who keep urging Hollywood to get its feet wet in the digital world are always proposing. No one ever wants to relinquish what we quaintly call the “legacy profit stream”, but if you accept that it is going away anyway, you might feel the pressure to experiment more urgently. I agree with you that this third option isn’t easy. I keep waiting for some smart company to attempt it nonetheless.

  3. That third option certainly looks like it should be there, but in practice, I think it’s just a mirage. And it’s not because companies aren’t smart enough. First, the odds of successfully starting a profitable business are vanishingly small. The odds of coming up with a second profitable business are an order of magnitude smaller. The chances get smaller still if the second business will kill the first.

    One way to look at it is in terms of expected return on investment. The expected return on even relatively small investments in a profitable business are fairly high. The expected return on any new business venture is likely to be negative, given 1) the high cost of creating a new business, and 2) the limited chances of success of that business. A healthy company can afford to gamble on a few new businesses on those terms, but not if those new businesses are going to hurt their profitable existing business.

    Look at Viacom’s MTV as an example. MTV makes its money by having kids watch the advertising they broadcast on their cable channel. If they come up with the next MySpace, they will have created something for those kids to do rather than watching the advertising they broadcast on their cable channel. This decreases their existing revenue. Yet the profit they would see from their Web effort isn’t likely to appear for quite some time, if at all. At the level of personnel, there will be person A, in charge of the cable channel, and person B, in charge of the Web effort. In any meeting where they have to resolve resource contention issues, person A will win every argument because he or she represents MTV’s profits.

    A company may very well recognize that their current business model is doomed to diminishing revenue because of a platform shift. That recognition doesn’t, by itself, position them to shift platforms. The chances of their successfully shifting platforms are far lower than their chances of legislatively or regulatorily protecting their business model. And that’s the real problem.

  4. There’s nothing preventing the movie/video industry from shifting to the new platform preemptively. What consumers are interested in is getting the content in the most convenient way possible. Cheap is always good, but most people actually prefer legal and reasonable over illegal and free. But as Scott noted, the music industry and now the video industry has actively fought any attempt to provide legal and reasonably priced access to their products.

    There are some signs that some people are starting to get it. Episodes of certain shows are available for free download at cbs.com and they feature only a few minutes of commercial breaks. Other shows are available on iTunes for around $2.00 – $3.00 per episode.

    This is akin to a strategy that some are urging daily newspapers to adopt, which is to stop the presses and publish online only editions. I think it’s a bit early for that still, but there will soon come a time when the readership will be most online anyway and the costs of producing paper copies will become unjustifiable.

  5. There’s nothing preventing the movie/video industry from shifting to the new platform preemptively.

    Sure there is. Keep in mind that Viacom is actually (at least) two distinct businesses: a content producer and a content distributor. The things preventing existing companies from shifting from one platform to another are different depending on which of those businesses you look at.

    For the content production side of things, the new platforms aren’t yet as profitable as the existing platforms. That’s not to say they couldn’t be, but they’re not now, and it’s not clear if or when they will be. So moving to the new platforms would be moving to a more risky, less profitable business to the direct detriment of a stable, profitable business. Corporations aren’t designed to make that kind of decision, but it is possible.

    For the content distribution side of things, the existing companies are the old platform, and (for many of the reasons I mentioned above) they’re not going to become the new platform. And though Viacom is making a lot of noise about the violation of its copyrights, I firmly believe that this all arises from their attempt to protect their distribution businesses–they’re just using their content ownership as a cover for that. Note that companies that are content-only tend to be less upset about YouTube, etc., because for them it really is free advertising. For companies that also have a distribution component, it’s competition.

    Record labels, for instance, are distributors. With the decreased costs of recording, etc., artists can be their own content producers, so the record companies have to protect the toll booth they’ve built across the music distribution roadway. Yes, they talk about “their” content, but it’s really about their distribution business. And with all of the media consolidation that’s happened, almost all significant content producers also have significant distribution businesses. And as you’d expect with oligopolistic vertical integration, they’re using their content rights to protect their distribution business.

    As long as legislation and regulation facilitate this approach, this won’t change.

  6. >Cheap is always good, but most people actually prefer legal and reasonable over illegal and free.

    That goes against economics. People prefer to pay less. Period. The success of YouTube & Napster are proof of this. And the only thing forcing people toward legal downloading are the lawsuits that this blog article criticizes. Even with them, the chances of being prosecuted are vanishingly small. Yes iTunes makes money but this is mainly the one-time purchase of classic rock by the 5% of people willing to pay. The leakage from DRM to DRM-free content is a one-way trip. Once Sheryl Crow’s hits are on a hundred million computers, no record company iTunes-clone is get to them them off.

    Content is expensive to create and (digital) content is free to copy. How can these two facts ever be resolved?

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