Thursday, July 12, 2001

Napster ordered to stay shut The courts have ordered Napster to stay shut until it can prove that it can more effectively filter copyrighted material. This ruling has set a dangerous precedent over how the authorized sharing of ideas will develop online.

Some existing business models profit off ideas by using the natural scarcity that comes with physical transmission (book publishers sell books which "bind" the information). That's fine. However, some business models profit from ideas by operating in secondary markets that freely shared ideas create (AOL offers ISP service over open-source TCP/IP). That's fine too. It costs money to impose scarcity on sharing ideas by having complex authorization systems. This is also OK. If a business benefits from imposing scarcity on ideas, and imposing that scarcity has cost (as it does not exist naturally the way it does for physical goods), then authorization and monitoring compliance is just the price of doing business, the same way paying someone for wood is part of the cost of making a chair.

Nevertheless, business models based on making ideas scarce should be under competitive pressure from business models that use the natural abundance of digital information to create secondary markets. Such business models authorize all sharing and so do not have to incur monitoring and compliance costs, which may give them competitive advantage over businesses that do. The most competitive business model will vary industry by industry. In some businesses, the demand for professional quality might justify carefully controlled authorization structures, while in others, secondary markets built on shared ideas might be more profitable than defending a primary market for the ideas themselves. But these different models must be allowed to compete in the marketplace, and may the best model win.

There are legitimate uses of Napster that the current court ruling does not acknowledge. By shutting it down, the court has ruled against a business model instead of against an illegal practice. Although RIAA lawyers say "intellectual property must be defended rigorously," in the world of CDs, unauthorized sharing (what they call "piracy") happens every time someone lends someone a CD, makes a mix tape, or listens to the same song twice. They do not pursue business models that outlaw these practices (and so do not call these practices "piracy") because 1) the cost of such enforcement is higher than its value to the record company and 2) the customer experience is not competitive--customers would flock to less draconian competitors. In the online world, they have managed to convince courts to push the cost of enforcement to others (Napster) and are pursuing business models that create non-competitive experiences (metered listening, tethered download etc.) This will fail because the cost of litigation against distributed sharing programs (such as Gnutella) is extremely high and cannot be pushed onto others, and ultimately, provided that the network remains open and people always have a choice, good customer experiences will win.
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