Saturday, February 16, 2008

Better Than Free: Piracy vs. Legitimacy.

I came across a really good article today called Better Than Free written by Kevin Kelly. The article is about how something that may be free and infinitely abundant—referring to digital media—can still be valuable enough that people will pay for it, even though the law of supply and demand states that if something is in infinite supply it will cost nothing.

This made me think about how the ability to make perfect copies of digital media will affect the kind of work that I want to do. Every media industry that I can think of is complaining about piracy and how it's hurting their business: music, movies, video games, books, software, the list goes on and on. If it's so easy to get copies for free then why would anybody pay for it?

I've been thinking about this topic a lot over the past few years because our studio's primary form of distribution will be internet downloads. Trying to create the best possible product and cultivate a high level of trust with customers, while protecting our business model at the same time, is a tricky problem. If it's done poorly it can have disastrous results. Out of all the media companies I only know of a few that have done it well by our standards.

Currently the only solution to fixing the piracy problem, as far as the majority of media companies are concerned, is to make prefect digital copies harder to make through copyright protection (commonly referred to as digital rights management or DRM) and inflicting stiffer legal penalties for doing so. It's basically a lock and key approach with additional scare tactics to keep their business model working the way it has in the past. The problem with this strategy is that it only stops an extremely small amount of total piracy: casual piracy (although easy piracy would be a more accurate term). The other copyright infringers will still go through the same channels and their pirating experience will be the same as before. The copyright protection already been broken when they download it. Pirating isn't anymore difficult for them, just a little more challenging for those cracking the software.

So the only thing that copy protection really inconveniences are the crack teams who get praise and glory for being really clever, and the paying customers because of all the hoops they have to jump through in order to enjoy their media: DVDs not being playable in all operating systems, games requiring the original install discs be in the drive in order to play, 16 character CD keys, online activation, encrypted music and movie files restricted to "approved devices", PDF textbooks that expire and become unreadable after the semester is over, the list goes on an on. These are all things that legitimate customers have to deal with but the pirates do not. There's no copyright protection on the pirated copies. No DRM. There's nothing stopping you from making backups, editing, transcoding, reading or playing the file whenever you want, which makes the illegal copies more valuable than the legitimate ones. This phenomenon is referred to as the Better Than Original Vulnerability, and is why DRM in it's current state is grossly ineffective. To top it off, in order to get that more valuable product you don't have to pay anything for it.

Pay more for a defective product, or nothing for a better product. It's no wonder why piracy is so rampant.

There are however some characteristics that can't be copied. Kevin Kelly describes these as the 8 generatives: immediacy, being able to get something as soon as it's released; personalization, something that is custom made and that directly addresses your unique needs and wants; interpretation, documentation and training to make the product useful; authenticity, reliable media that is virus free and legal; accessibility, being able to access the product at any time and not have to worry about keeping back ups; embodiment, a physical reproduction, live performances or experiences with friends and family; patronage, the warm fuzzy of supporting artists by paying for their work; and findability, mind share, a work has to be known for it to be valuable.

These are all things that can't be copied that make something valuable and incidentally things that people pay a premium for. By taking a look at what the different media distribution services have to offer, you can gauge the quality of each service by how well it holds up to these generatives. So let's look at some examples in these terms.

Boxed video games contain the install discs, a manual and occasionally some extra goodies like posters or figurines. Many games use some kind of copyright protection system like SecuROM and a CD check which requires that the install disc be in the drive to be playable, even though all the game files have been copied onto the hard drive. In recent years the only way to get games on launch day from a large outlet like GameStop is to preorder it or try your luck elsewhere.

Authenticity, embodiment in the form of box art and figures, and patronage. That's 3 out of 8.

Let's compare that with Steam, Valve's online content distribution system. With Steam you can search for hundreds of new, classic, and out of print games. Immediately after purchasing you can start downloading the game from their high-speed servers, and in some cases preload the game so it'll be unlocked as soon as it's released. You can install Steam on any computer, log in, and download your purchased the games and play them so long as you are not already logged in elsewhere. There are no CD checks.

Immediacy, authenticity, accessibility, patronage and findability. That's 5 out of 8. As for the 3 missing points, the Steam Community does let you upload a custom icon representing you in online games and many of their games come with creation tools (personalization), Steam is very easy to use so documentation isn't really necessary but free support is available (interpretation). So already it's really close to having 7 out of 8 points. If Steam games had a network license, you could play with all your friends with just buying one copy (embodiment). That would give it all 8 points.

Let's look at the music industry for a minute. iTunes allows you to buy and quickly download songs and TV shows so you can play them on your computer using Apple software or other Apple devices. The price of albums is cheaper than retail and you can buy a single song for $0.99. iTunes is searchable and contains most new releases from the Big Four record labels.

Immediacy, authenticity and findability. That's 3 out of 8. The problem is that the files (except those in EMI's catalog at time of writing) have DRM, so backing them up properly is difficult and impossible if you don't know where the key file is, there's a limit on how many times you can do that, and the files are restricted so they'll only work on Apple approved devices. As far as patronage, the artists see very little from each sale.

Compared to CD Baby, the site lets you download MP3s or have the album shipped to you, you can redownload the MP3s again at any time, there's no DRM on either the downloads or the discs, the site is searchable by genre and similar (popular) bands, and the artists receive 91% of each sale. Each album on the site is also previewed and users can comment on the album, providing good feedback to help you make a buying decision, and free samples for each track on the CD are generally 2 minutes long.

Immediacy, interpretation, authenticity, accessibility, embodiment in the form of CDs, patronage and findability. That's a whopping 7 out of 8. It's missing personalization, which could be fixed by offering multiple audio format options like OGG or FLAC. The artists could also provide more instrumental versions of their songs, or even go as far as what Trent Reznor did when he released a GarageBand project file of "The Hand that Feeds" so fans could remix it.

With peer-to-peer networks you can search the database to find just about anything you want but it can be difficult to find obscure material. It can take a couple of days or even a week to download large files since you are downloading from users who are also sharing those files with others. Doing so is also illegal and it's easy for distribution companies to track you down. You may also be downloading viruses and/or malware with your pirated material. Movies are often leaked so downloading rips long before the official DVD release is possible. Cracked games let you play with friends without spending $60 per person. It is also possible to get translated versions of games and videos which have not been internationalized yet.

Personalization, accessibility, embodiment in the form of playing games with friends and findability. 4 out of 8. The only way that pirated copies can become more value is by taking out the legal risk, and I don't see that happening any time soon, and society and commerce would likely be doomed if we did.

What I've learned is that the thing most people find valuable about pirating is that it's easy to find things that are out of print, sold out, do not exist (e.g. English translations of anime) or have been repaired (e.g. CD checks removed from games, DRM free files). The fact that it's free is a plus for many people, but for those that have the money the benefits of not having to live in fear of getting caught or downloading viruses, and all the other generatives that come with buying legitimate copies are certainly worth the money and outweigh the benefits of piracy.

Understanding why people pirate media will help us understand what the industry is not offering customers and provide us with solutions about what can be done.

When there's no proper market for a certain good a black market appears. That's what happened with MP3s and Napster. Being able to download any song you want and get it in a portable digital format was not an option back then. It was a completely new method of getting music that the music industry didn't create themselves, didn't capitalize on after the technology and distribution methods where commonly used, and has been fighting the digital age ever since. The success of iTunes significantly encouraged industry adoption of digital downloads, but the record companies insisted on included DRM with the music files. Recently EMI finally listened to the many disgruntled customers (although it's more likely they listened to the open letter by Steve Jobs on DRM), and has finally starting offering customers what they've been pirating for years: a digital music file that isn't encrypted and can be played on any device.

It's hard to know how much money is lost due to piracy. It's claimed to be in the tens of billions, but it's argued that these figures are false because not every pirated copy is in fact a lost sale because many people would never pay for a copy either out of corporate rebellion, interest in the product, necessity, or available income.

It is also argued that pirating is actually good for the industry because more users will raise the popularity of the product. Pirates that "try out" the software might eventually buy it at a later time. This may be true in some or most cases, but certainly not in all, and it's impossible to really know what percentage of people will never buy a product.

Also, do these arguments have any truth or are they simply justification for breaking the law?

As someone that is planning on releasing shows, games and all kinds of other media online, here's where I currently stand on the issue. Assuming that there are people that pirate because they can't afford a legitimate copy or can afford it but won't, there's no point in going after that group. I have nothing to gain by preventing that particular group from viewing my work. Sure, we could go after them for damages and scare potential pirates from downloading our work for fear of legal action, but I don't know if it's financially worth it. I know for a fact that it would be bad PR. I can't take that chance without accurate information. The last thing I want is the same kind of customer backlash received by the RIAA as a result of their lawsuits.

What really needs to be done is to ensure that legitimate copies from our website are more valuable than the pirated ones. The first few generatives are freebies because piracy has automatic drawbacks. From our site you'll be able to get our media quicker and easier than any other source (provided our projects don't get leaked), you'll know that you are downloading the original high-quality versions of the show, you won't have to worry about viruses or malware, you can download the media in a variety of different formats that's best suited for your hardware and software, and of course you'll have the warm fuzzy of knowing that there's no middle man between your money and the artists who created it.

In addition to those freebies, our software won't have copyright protection, meaning that you can back them up and play them on your laptop without needing to worry about CD checks or going to a shady site for a no-CD crack, and you can redownload what you've purchased at any time.

We've also managed to come up with ways to address the interpretation, embodiment and personalization issues for digitally distributed media: videos, music, ebooks, games, and another significant category which I'll keep secret for now (the very name gives too much away, sorry). Those three generatives are the holy grails of digital distribution, and I haven't seen a company adhere to those values as well as they could. I'm not going to get into specifics because I like having hope for my future business endeavors, and our solutions haven't been put to the test yet so I could be giving bad advice. So I won't share with you our solutions but I will tell you the formula and part of our design process that brought us to our conclusions.

Listen to people. Listen to what they say they want, and what they don't say they want. You'll need to do some primary research and careful synthesis to understand what people want and are not getting: what their dreams are, and "what they want to do but can't," to quote part of our design process. Understand that there's more to life than entertainment, so don't design a product that's intended to be addictive. I'm serious. I've heard companies refer to that planned addictiveness as "our product will become the centerpiece of your lifestyle," and there are established methods on doing that, especially in the gaming industry. Again, there's more to the customer's lives than your product, so look outside of that field to come up with solutions to design problems. The solutions may be too unorthodox for executives and stock holders to approve, but remember that the only thing that makes a business successful is its customers and understanding their behavior.

Another important thing to consider when solving these problems is that your main competitor is not so much other companies that are in the same field as you, but what people spend their time doing. Time is not a replenishable resource, which is actually my primary concern with piracy. Even though a pirated copy doesn't necessarily mean a lost sale, people are spending their time on the pirated copy, time which could be used on something legitimate.

To me, the concept that we are in competition with people's time is a very dangerous one to consider, and we need discernment because it also means that we are in competition with healthy activities as well. Entertainment can take too much of people's lives, and I'm appalled at the overall contempt that most entertainment companies have over the well being of their patrons.

Consider what people should be spending their time doing and how your product is going to affect that. Are they going to be consumed by it? Is it going to make their lives better or do nothing for them? Can you make something that people will find enjoyable and makes their lives better? Again, learn about what people genuinely want or need and don't create a cheap substitute for it. Conventional marketing research probably isn't going to provide you with the information that you need because it's focused simply on sales, which are important, but ideally shouldn't dictate the product, just how its sold.

Going back to creating media with more value, Kevin missed some key generatives or values. One thing I believe he missed about embodiment is that data, as soon as it's decoded and displayed on the computer or played through the speakers, has actually obtained a level of embodiment. It's now information, imagery, sound, the same things that to our mind processes from events that we consider real, such as a live performance.

The social aspect of media is also important, like watching a movie with friends and talking about it afterward. The experience of a movie lasts longer than the running time of the film, and it's shared between more than one person. As with piracy, the activity is socially driven and has a strong community. So if we are going to create media that beats what piracy has to offer, then it too needs to be socially driven. Let people enjoy it with each other, allow them to share it to some extent, let them edit it, take part in the creative process, and make it clear that they have these rights. Again, consider"what do people want to do but can't."

Lastly, some of the most important values in media: the strength of concept, purpose, originality, emotional effect and aesthetic value. Is this piece of work something that people actually want to own? People are more likely to pay for something that is good than something that is artistic garbage. There are people that will buy something purely out of principle because they understand than in order to support someone's creative efforts we have to purchase it. That's why I love to buy independently created work; I want to support them so they make more.

One popular argument is that people wouldn't pirate as much if better media was being produced, saying "I would pay for that movie if it was worth buying." I think this is mostly rationalization, but people do have a habit of only buying the best DVDs and games out there. It's another issue of cost. A poorly made movie isn't worth $18, but a good one is.

While we are still on the subject of piracy, a recent Gamasutra article entitled Casual Games and Piracy: The Truth is the account of Reflexive's anti-piracy measures and how it affected sales. They claimed that 92% of people playing their games pirated it. What is interesting is they had a significant increase in sales by improving their copyright protection. From the article:

Below are the results of sales and downloads immediately following each update:

Fix 1 – Existing Exploits & Keygens made obsolete – Sales up 70%, Downloads down 33%

Fix 2 – Existing Keygens made obsolete – Sales down slightly, Downloads flat

Fix 3 – Existing Cracks made obsolete – Sales flat, Downloads flat

Fix 4 – Keygens made game-specific – Sales up 13%, Downloads down 16% (note: fix made after the release of Ricochet Infinity)

From the results above, it seems clear that eliminating piracy through a stronger DRM can result in significantly increased sales–but sometimes it can have no benefit at all...

As we believe that we are decreasing the number of pirates downloading the game with our DRM fixes, combining the increased sales number together with the decreased downloads, we find 1 additional sale for every 1,000 less pirated downloads. Put another way, for every 1,000 pirated copies we eliminated, we created 1 additional sale.
What do I think about their results and conclusions? It's important to remember that correlation doesn't mean causation. Looking at the pattern, the most realistic scenario seems to be that the DRM fixes created an increase in sales because a lot of people, by that point in time, have already played the game and once it's more difficult to pirate, existing gamers decide to go ahead and pay the $20 to purchase it. The only other sales increase was when they released Ricochet Infinity before another fix, which seems to match with this theory of gamers first experiencing the game through piracy and then having to pay up.

Could it be better to have loose DRM in the game and when enough publicity has been generated by piracy we then tighten up the copyright protection, so we reap the benefits of pirated games increasing interest and giving those people that will eventually pay for the game a reason to do so by making their current copy or piracy methods non-functional?

Of course that is just a theory, and we'd have to do more research and experiment with that business model to really get a better understanding of customer's behavior. We can't trust the research that's currently being done because of bias. There are so many factors to take into account before you can know the best way to handle piracy: how easy is the media to pirate, how popular is it, how much does it cost, is the legitimate media defective by design, is it a high-quality product. All of these things have an effect, and what worked for Reflexive probably won't work for a bigger company like Electronic Arts.

So, what about making a product that is better than the pirated one? What about the 8 generatives and all those other ideas that I wrote about and kept to myself? What about your ideas? Will any of these things work?

I believe that they will, but the hard part is actually creating that kind of product. We are slowly working on that now, and I hope within the next 5 years we'll see the fruits of our labors. But we need to go out on a limb, put our necks on the line, our money on the table, and sacrifice for the first little while to create something worthy of purchasing instead of pirating because of the value it has and the additional rights it gives our patrons. Create something that the pirated copy can not duplicate, and do nothing that will make the pirated copy better.

One of our motivations for starting the studio and the ideology behind it is to set a bar for the rest of the industry. Basically, we are fed up with what's being created and how customers are treated, and if our ideas are successful then the rest of the industry will follow. We want to buy better games, better movies, and more of that special category that I don't want to talk about yet, more end user rights, and in the end a better lifestyle.

If you are already a content producer then you have a head start on us, so please use your influence to set the bar for the rest of the industry to follow. Your customers, including us, will love you for it.


Kernon Dillon said...

Very interesting read. Thanks!

Glen Moyes said...

Great! I'm glad you liked it.

Anonymous said...

You really got a point ("the" point?)
Looking forward updates on your opinion and how your business evolve.
Thanks for sharing

Clay Diffrient said...

Wow, Nice article Glen!

remington said...

This lecture was very inspiring!
I am coming here after your article on blenderartists

I'd like to know your opinion about terms like open source, open content and collaborative work in this context. I am sure these phenomena could be very useful for "create something that the pirated copy can not duplicate".
A new form of entertainment: collaborative art experiments, simultaneous (MMRPG-like) creation and consume of art.

"art editing"?

I like your "touch the table" very much.

Glen Moyes said...

Thanks. I'm glad you liked the article.

Things like open source and open content generally are not designed to make money, or are instead to promote something else that will. Almost all of the open content I've seen has the purpose of propagating ideas, information, education, and publicity. In the case of Big Buck Bunny, it stimulated development for Blender, shows off what Blender can do and teaches people how they made it by releasing the source files, all of which are intended to increase Blender's user base and to make Blender better, not so much about creating an animation that people will enjoy and pay money for. I've also seen quite a few documentaries licensed as Creative Commons so it'll reach as many people as possible with it's message. Open content works really well when the primary goal is to promote something else or it is done purely out of altruism and bettering society without expecting anything in return.

Collaborative art can be really hard depending on what the product is; collaborative movies almost inevitably fail if it's just for fun, so it is better to provide opportunities where one—maybe two people can work together to create something with little time commitment and without having other people intrude. There are games coming out like Spore that are based on community created content. Since your creatures will be put in the Encyclopedia and will show up in other people's galaxies, can be downloaded, and edited, in that sense it's kind of like open content because it's available to everyone. In Spore's case it works because your creativity is restrained to creating just a single creature which only takes 30 minutes or less to finish. Imagine if two people worked on the same creature; they would get into conflict over what the skin color should be, how many legs, and it becomes a mess because each person has their own vision of what they want to create. However, if you have one guy in charge that makes the final decisions, then it's more like a job than fun. So for entertainment purposes it's best to give people their own sandbox to play with, let visitors view what players have made, a let them make a copy and remix it.

As for art editing, the ability to edit and remix art is really important. There's a good documentary that you can watch called Good Copy Bad Copy that talks about the current state of copyright law, sampling, remixing, and how important it is as an art form.

People do want to create, but often their time and skill is limited. Someone may want to make a silly animation and it needs a soundtrack but they know absolutely nothing about music composition, so they need to get a song from somewhere. Someone may like video editing an wants to create AMVs but using copyrighted footage is illegal. There's all kinds of examples of why open content is good for education and creating new art. I think the laws need to relax a little bit, but since that's not going to happen for a long time, if they ever does, the best we can do is use open source, Creative Commons and open content to fill in the gaps because it is better than using someone else's copyrighted works (i.e. piracy) to remix, sample, customize, and distribute while risk being sued.

For us however, we'd really like to make money off of what we create so we can do it for a living; we can't have all of our stuff be creative commons. What we will do is give people more rights to our work than other copyright holders do with theirs, and some of those rights are why people gravitate towards creative commons in the first place: the ability to make back ups and edit, the ability to use clips in education, to remix, and so on. Of course they only get those rights if they buy a copy legitimately, but it'll make our work much more valuable to the community, and hopefully it will spread more rapidly than if it was all rights reserved.

On the other hand, the artists that worked on the Blender open movies did in fact make a living off of it during that short period of time. So if they are constantly making open content that people will actually donate for, then it might work as a full time job. Unfortunately I don't think there's enough demand for a company to do that all the time and stay afloat. Would people buy DVDs for two open movies a year? How many tutorial DVDs will be too much, and at which point will they be unable to make anymore because all of the tutorial topics will be covered? When will the community stop being interested in buying open content because it's not needed as much anymore? Those are questions I don't have answers for. But the open movies do show that you can money off of it provided that there's more for viewers to gain than just watching the animated short.