The coming of the digital age should have been a golden era for entertainment and, for some, it was: Amazon, Facebook and others appeared from nothing to conquer the world in a few short years. But for others? A darkness descended on the giants of old… Major music labels, broadcasters, production behemoths, newspapers, games manufacturers – their revenues plummeted whilst demand for their products actually increased.

And there was one reason, above all, for all their misery; one thing that set them apart from other industries that had reaped the golden benefits of the digital age: these giants were – and often still are – steered by people whose idea of proficiency in ‘digital’ languishes somewhere around the Casio watch on their wrist. These are people who have never really used the things they are meant to be mastering, people who are simply not equipped for the job.

This series of articles will attempt to explain why, as a result, the entertainment industry is wrong about (just about) everything.

The first thing to do is shoot down a few myths that are repeated in every sector – enduring myths that, through their luscious soundbitey-ness, have become conventional wisdom. These mythical narratives are harmful because they are so cognitively appealing that they have become the whole debate:

You can’t expect to get anything for free

Piracy is theft, like stealing from a shop: aka “You wouldn’t download a car”

Piracy does only harm for artists and other content owners

Illegal downloads = lost revenue

Once people taste ‘free’ they never go back to ‘paid’

Telling people about piracy in a ‘zero-tolerance’ fashion is the only way to stop it

1. “You can’t expect to get anything for free”

Proponents of the age-old adage that ‘there’s no such thing as a free lunch’ point towards a truism: everything has a price. They are generally correct. But the mistake is to believe that the ‘price’ is always a directly or solely financial one.

We have many examples of every day consumption that – if not wholly free – are ‘free’ to use on a daily basis. We may pay a yearly licence fee for TV in the UK but (a) it’s only about £14 a month – compared to, say, upwards of £50 a month for Sky – so seems relatively insignificant to most people and includes payments for the whole BBC including radio, but more importantly it’s (b) not something you physically pay for on a daily basis.

Behavioural economists will tell you that because you aren’t paying for it there and then, it doesn’t feel like you’re paying. It doesn’t cost you any more to turn the telly on five times a day than it does to turn it on once.

Commercial terrestrial TV is a good example because it feels free. But it isn’t. In fact, commercial television relies on free viewers as advertising revenues depend on the size of the audience. The more people who watch, the bigger the fees advertisers pay. I can watch premium content on ITV – say Champions League football – and the cost to me has been subsidised by advertisers. If I watch a newly released film on Channel 4, it will have been subsidised (usually) by a sponsor who pays for a whole season of films, plus the advertisers who pay for slots in the middle of the film. The cost to me is that I don’t get to watch the film uninterrupted – I have to wait for the ads. If I want, I can buy the DVD or watch on a premium subscription channel and then I can have an uninterrupted viewing experience.

In other words, I pay a price but it isn’t directly financial.

The business plans of the broadcasters don’t depend on me paying them money, they depend on me watching. For free. It’s basic economics of supply and demand – the cheaper the price, the more people will watch. The more people watch, the more the advertisers have to pay them. This is true of radio, it’s true of websites like YouTube and Google, it’s true of me taking surveys to get free access to eConsultancy market reports. These things seem free to us, but our exposure to advertising is the price we pay.

So, the idea that ‘free’ is wrong is… wrong.

It’s vital.

2. Piracy is theft, like stealing from a shop: aka “You wouldn’t download a car”

Erm, no. If I steal a car, the owner of the car is deprived of it and cannot sell it to someone else to realise its value. If I download a song, the owner of that song can still sell it again. And again and again. It does not disappear from their repertoire. If I watch a film on terrestrial television it is the same: I do not deprive that film owner of the ability to sell it again. Digital products just don’t behave the same way as physical products.

The fact is, for a lot of people the free downloading is similar to the behaviour in listening to something on the radio: a free – and thus slightly crappier – experience than the paid-for version. I don’t really like mp3s because I like hearing things at a certain quality that mp3s don’t deliver. I listen to digital music on the daily commute because even I’m not quite enough of a Luddite to use a CD Discman. But the things I love, I buy on CD because the quality is better. Some things I prefer to buy on vinyl (old punk and reggae for example) because they were made for the format and digital doesn’t improve the sound. Not only has the entertainment industry missed out on realising the difference between ‘lost revenue’ and ‘lost opportunities’ but they’ve failed to recognise the value of the digital product – and priced it accordingly.

Simply, digital is, for many things, a worse experience with far cheaper distribution overheads – pricing it at the same level as the physical (or not significantly less) just overvalues the inventory. If you could download a car right now, it would be made of paper and need to be powered by wind and pedal-power.

3. Piracy does only harm to artists to and content owners

Ha. Funny thing – the most downloaded stuff is often also the stuff that sells the most. Which comes first, the chicken or the egg?

Back in the very early 90s, before the internet was something people had at home much, I had Sky. I loved the Simpsons. All my friends thought it was for kids and I was loving the subversive humour and telling people they were wrong. Some people came round on a Sunday and would get sucked into the couch with a bag of weed or a beer and it would click. But I was obsessional – I used to record Simpsons VHS tapes on long play, which means eight hours of continuousSpringfield. I did this mainly for myself and my housemates as Sky only broadcast two episodes on a Sunday back then.

But over time, once I had sufficient stock, a trusted friend would be given a tape to enjoy at their leisure – and they would show it to their housemates. Over time, they too would become infected Homerphiles and so forth. As Sky’s broadcasting of episodes increased, so did my taping. People used to beg to be allowed to borrow the tapes. I can confidently state that hundreds of people in the Hyde Park area ofLeedsin 1991-94 were converted to the show through my piracy. And back then, we all spent money on the show too – not only did we watch the show on Sky and thus had a part in improved viewing figures / ad revenues, but we all had t-shirts, pens, stupid bathroom kits, caps, whatever. When my mother found out I liked the Simpsons, that took care of 10 years of Christmas presents: alarm clock, sponge, shower radio (yes, what of it?), bubble bath, greetings cards. Endless revenue. Multiply that by the 100s influenced by those pirated tapes. How’s that working out?

And it wasn’t just those shows. Over the years, the sharing of pirated material amongst my group of friends that has led to people being converted to fans has included Futurama, The Wire, Treme, Family Guy, South Park, American Dad, Fringe, Medium (only the girls, obv.), Lost… just about every major show that hadn’t yet made it to the UK. And those people talked about those shows, became part of the groundswell of opinion that eventually influenced UK TV stations in their choices of imports (NB a lot of those shows were picked up much later than, say, The Sopranos or Game of Thrones).

Piracy can be pure promotion for some entertainment. We used to license records for release in Russia knowing full well that Russian rip-offs would appear in nanoseconds (official sales used to number in the dozens but they’d be in every shop in every city a week later), but the artists used to make money from touring and we’d share the revenue from tour receipts and merchandise. Good days. If you didn’t have pirated material ordinary Russians couldn’t afford your stuff, nobody knew who you were.

Recently a pirated PDF of a children’s book parody called ‘Go The Fuck To Sleep’ was sent round by every parent I know. What happened to the poor unknown title / author? They went to number one on Amazon.

And whenever there’s a study that shows the beneficial effects of piracy, it’s suppressed by lawyers and lobbyists for trade organisations whose narratives are not served by the idea that, say, people who pirate movies are also those most likely to treat it like an extended preview / tester for things they go on to buy.

I have discovered hundreds of games, movies, TV shows and bands from having a pirated copy that I then go on to buy. I know dozens of people like me. I meet hundreds of people like me online. I can see empirical research that supports this notion. So why are the people who could most profit from this knowledge also the people who are shouting loudest against it?

Because they are just not that bright.

4. Illegal downloads = lost revenue

Now, let’s be clear – there is a difference between making the above point and advocating that piracy has no harmful effects and doesn’t deprive – in some cases – people of rightful income. It does, and especially with smaller independent artists and copyright owners who don’t get to make the revenue up from other sources as much as the big guys.

But this argument is often used to back up the idea that piracy costs an entertainment sector £X billion a year and so forth.

This is a crude fallacy.

Supply and Demand is one of the basic elements of a free market and is lesson #1 in high school economics. If the price of something is too high, there will be lots of people willing to sell it (supply) but fewer people will want to buy it because it’s too expensive (demand); if the price is too low, there will be lots of potential buyers but fewer people will want to sell it at that low price. The smart move is to price your product just right, so that lots of people will want to buy it but it’s also profitable to produce. In other words, moving the price up and down affects demand for a product. See the graph below:

What the entertainment industry does is look at the demand for illegal downloads and put a price on it on a per-download basis – the price in the marketplace today. But those downloads are actually priced at ‘free’ – which explains why the demand is so high. If, in fact, the cost of getting that download was the market price, there would not be so many downloads. This is so basic that it makes me want to cry that anyone can have the gall to stand there and tell me that the lost revenue calculated this way is a real figure. It isn’t. It’s not even close.

This MPAA pdf is a good example. It twists the data to fit a point of view but has very little basis in reality – you cannot “lose” sales that would never have happened. This is not to say that there wouldn’t have been some losses – of course there are.

If the price had been 10p a movie download, and it was delivered easily, in an agreeable format and quality, you might have seen, say (just for example), 85% of those people choose the legal option. Had they done that, the legal income on the 5 billion or so movies it takes to make up their “illegal download” figures would be around $500 million. And suddenly all their maths-based hyperbole falls to bits.

This whole approach is unfit for purpose. And that’s not all. I don’t agree with him on a lot of his conclusions but Lawrence Lessig put his finger on the discrepancy between perception and reality as long ago as 2004:

“In 2002, the RIAA reported that CD sales had fallen by 8.9 percent, from 882 million to 803 million units; revenues fell 6.7 percent. This confirms a trend over the past few years. The RIAA blames Internet piracy for the trend, though there are many other causes that could account for this drop. SoundScan, for example, reports a more than 20 percent drop in the number of CDs released since 1999.

“That no doubt accounts for some of the decrease in sales… But let’s assume the RIAA is right, and all of the decline in CD sales is because of Internet sharing. Here’s the rub: In the same period that the RIAA estimates that 803 million CDs were sold, the RIAA estimates that 2.1 billion CDs were downloaded for free. Thus, although 2.6 times the total number of CDs sold were downloaded for free, sales revenue fell by just 6.7 percent… [So] there is a huge difference between downloading a song and stealing a CD.”

And that, as they say, is that. Yes, there are losses, but they are way smaller – and have way less effect – than we are being led to believe.

5. But once people have had it for free, they won’t pay for stuff right?

Wrong… so very, very wrong.

I used to hear this a lot in the music industry. In 1999 you should have heard the screaming. For a while the mantra was “once music has been free, people will never pay for it again.” And then, within a couple of years, there was iTunes.

iTunes gave people what they wanted in a format they accepted at a price they deemed reasonable. And if my memory serves me well it did OK, no?

Supply and demand tells you this – the price may be free, but everything from quality to ease of finding something to format is not well-served by ‘free’. iTunes does it better and punters buy it because of it.

The presumption is that people download illegally because they are either fundamentally criminal or simply don’t understand that content has a value. There may be a little truth in either point, but I’m going to let you into a secret : the real truth is that the vast majority of people download stuff because they want it.

And whoever makes it easiest for them will win. People pay a price for ‘easy’ – understanding demand helps you define “easy” and the basics of supply and demand should tell you what the price is.

6. The only response is “zero-tolerance” enforcement

The funny thing about that Onion article is that in the 1920s and 1930s record companies got drawn into lawsuits against radio stations as artists feared they were being robbed of both record sales and performance income (they thought if people had radio they wouldn’t pay to see live performances. Here’s a good tale from 1935.

The problem is that the enforcement approach starts from a very bad premise: criminalising your potential customer base. If you want people to buy your stuff (which includes, by the way, your PR) then I’d suggest threatening is not a very effective of communication. Even if wholly justified you are going to become the bad guy when you sue a dead grandmother, a homeless man or a 10 year old girl with a disabled mother. Most companies seem to hold the idea that they should be good guys with something valuable to offer to a consumer and would shy away from such confrontations – especially when the net benefit is, at best, a pyrrhic victory.

Once again, this is a failure to understand the nature of the market and its consumers. People take stuff because they can – and the legal options just aren’t as appealing in terms of price (yes, obviously), format, ease of search / discovery etc., i.e. ‘demand’. Reducing the demand for illegal content is not just about stopping the illegal stuff – it’s about increasing the demand for legal content. And if Apple can do it, why can’t these other companies? That’s right: because they’re idiots.

In the book Freakonomics, Levitt and Dubner (who seem to enjoy nothing more than poking economists’ bee hives with big pointy sticks and, frankly, good for them) tell the story of Paul, the Bagel man. He spent years selling bagels by dropping off a load at office parks around Washington, relying on the honours system for payment (i.e. you take a bagel, you drop your money in a collection tin). Crazy, right? Actually, no. It worked damned well. And better still, because he did it for so many offices over 20+ years, and kept meticulous records, he performed a huge economic experiment. 20+ years of empirical data about honesty. How cool is that?

In fact, he found that honesty rates never really varied much (there were some small local variations related to things like local unemployment etc) – the overriding statistical conclusion is that between 87% and 89% of people are honest. Eleven per cent of people are always going to screw you over and there’s nothing much that changes that. I can’t recommend reading the article highly enough.

So tell me – why concentrate all those resources on trying to identify and punish the 11%, taking down a significant proportion of sympathetic defendants from the other 89%? Why not use those resources to improve the service and supply to the 89%? For most entertainment sectors, i can’t see how it’s in any way a a controversial suggestion to say that if they serviced demand properly they would make more money from the honest majority.

In the UK, it’s difficult to estimate how much is spent on copyright enforcement every year but there are some expensive-looking offices and lawyers dedicated to it. There’s also talk of ISPs being asked to fund 25% of such costs – and that’s estimated at up to £500m in costs to the consumer (when the ISPs pass on the costs, which they will). That’s a lot of enforcement going on.

Sounds a bit like The War On Drugs to me. And that’s an unqualified success, right?

Enforcement doesn’t stop criminality in copyright any more than it stops criminality in the real world. It competes with demand, which will always be strong – people love music and don’t want to be kept apart from it. Fear of punishment isn’t as strong a method as convincing people of why you should buy legal. You can carp on about supporting artists, but when these messages come from companies with as much of a record of ruination and interference with artists as success, well, it just doesn’t ring true. These captains of industry, when at a different dinner engagement, will tell people that it’s the market which has the greatest effect on consumer behaviour – so why do they maintain the myth that enforcement can work?

That’s right: they’re idiots.

This is only the tip of the iceberg. But the pattern is clear – actions are based on prejudices and presuppositions rather than evidence or simple market economics – in some cases undue influence on market forces is preventing innovation that may yet become profitable. People who are not qualified to do their jobs often use other people’s opinions to guide their decision-making process, but that isn’t working for large swathes of the entertainment industry because the same personnel have now been institutionalised to believe myths about piracy instead of engendering good business practice.

Instead of digital heralding the golden age for the entertainment industry, it’s become a golden age for entertainment industry lawyers.

In other words, there’s too many people that work in the entertainment industry that are wrong about everything.

To be continued.

Next in the series: how they’re messing up sport on telly.