Here’s a call-out to all my former Kellogg School of Management students. I’ve heard from several of you lately (hi to Adam, Mark, and to Allison). If there are any of you out there, you can link up to me at LinkedIn.com. Or drop me an email. I’d enjoy hearing how you’re doing.
In 1999, I started and taught the first Entertainment Marketing and Culture course at Kellogg. It was a great course, and I ran it in a manner similar to the GIM (Global Initiatives in Management) program courses that were already taking students on trips around the world. We did ten weeks of classes, mostly with entertainment industry people from music, movies, videogames, and TV, and then followed it up with a one week trip to Hollywood, California. In Los Angeles we would tour a variety of different studios and entertainment oriented businesses, including Disney, Viacom, Activision, Sony Pictures Imageworks (terrific people there!), Dreamworks, and Univision. We would also meet up with students and faculty from the Anderson School at UCLA. It was a memorable course. I don’t know if they are still running it at Kellogg. I started it and, as far as I know, it left when I left.
We had all heard about MP3s and MP3 players and this was the hot management topic we were always coming back to in class. Did they pose a threat to the music business? I said absolutely. No question about it. People feel ripped off and this gives them an opportunity to rip the music companies off right back. At the time, I had an ambitious young grad student visiting me from Germany (the inimitable Markus Giesler). Markus and I had talked about this topic a lot as he worked on his Master’s dissertation as a visiting student. We formulated a number of ideas together that he later developed further and wrote up.
I remember an early guest speaker in 1999, who flew in to talk about music marketing. In class, the executive passed around one of the early MP3 players. The thing was playing some blues song and as the students took the headphones, you could see them start to bob their heads and shrug their shoulders in time with the music. When everyone had listened, he asked the students if they thought that what they heard was a threat to the sale of recorded music. Most said yes.
He then proceeded to explain why it was not. “What you heard was a very compressed version of the music with very poor fidelity. When consumers hear how poor the sound quality is of MP3 files, they aren’t going to be willing to settle for it.” My jaw dropped. The evidence that people couldn’t hear the difference (or didn’t really care that much) was in front of this guy, but he wouldn’t see it. Students were bopping to the tune, but he was explaining from an audiofile connoisseur’s position why the compressed music format wasn’t good enough for the average consumer. He was weighting the costs in sound fidelity without concern to the benefits in terms of portability, conveinience, tradeability, storage, and cost.
I have seen the exact same sort of horse-with-blinders mentality in the entertainment industry ever since. Unfortunately, I have many more stories like that one, stories about entertainment industry execs refusing to believe that the dam is bursting, that people would actually share their precious digital properties with one another over the Internet. ‘How dare they? This must be stopped.’
Back in 2000, I started talking to my students about file sharing of videos and motion pictures, something with much larger financial ramifications than spilling the entire musical catalog out onto the Internet. I said back then that the genie for music was already out of the bottle. And there is no way it is going to go back in. I still enjoy thinking about later classes where we would usually have a few outspoken advocates of Apple’s iTunes, saying that now that there was a user-friendly legal interface, most of the file-sharing would go away. That was a common stance. P2P would gradually decline and be replaced by legal download and streaming methods like iTunes and Rhapsody. Statistics are hard to find, and I’d appreciate hearing from you if you have recent figures on P2P music & video traffic versus legal downloads. As it stands, I strongly believe that iTunes accounts for only a tiny fraction of the music exchanged online. A figure I’ve heard but not been able to validate is that there are over two billion songs exchanged using P2P in the average week. iTunes has sold just over that volume the entire 6 + years they have been operating. The model for the music industry has changed in ways that I predicted seven years ago, but surprisingly few people are talking or writing about it.
The reason that I’m writing about DRM (digital rights management, in other words, the software encryption that locks in the rights to use digitized entertainment like music or movies so that only paying customers have the right to hear and/or see it) is that I saw an interesting story in the news yesterday that only proves my point further. TV Squad (a great media blog) ran a story called Hackers discover how to download streaming video from Netflix. The funny thing is, I wrote a case about a company just like Netflix (called “Networked Flicks Inc.”), several years ago, in which one of the management alternatives being considered was a streaming video service. The big concern that we discussed in this case was DRM–would they be able to keep out hackers and keep the entertainment companies happy that their works were secure? Pretty prophetic, I guess.
In class my argument was that any code that can be encrypted is just a challenge to hackers. Hackers will break any encyrption, and they’ll do it pretty quickly. I still stand by my position and here’s why. Breaking codes is a challenge, it’s fun, it gets you free stuff like movies and music, and people admire you for it. Free crap and undying glory. How about those Norwegians who cracked the original encryption on the first DVDs. What did it take them, two weeks to do it?
The analogy I always used with my students for file-sharing services and for DRM hackers is the same. It’s the old carny game of Whack-a-Mole. One P2P service, like Napster or Kazaa, goes down and then another one, like Limewire or Morpheus or BitTorrent or eDonkey comes up. You encrypt your film with one DRM software service. It will get cracked, decrypted, and your stuff will get shared and copied. You encrypt it again with another service (even though it’s now all over the Internet distributed across file-sharing servers). It gets cracked and copied again.
Wash, rinse, repeat. It’s a futile game (hmmm…what a “wiki” game to play).
Here’s another recent example. How many of you have HD-DVD or Blu-Ray players? Well, here’s good news for you, and bad news for believers in DRM “protection.” The rights management on both of these high def DVD formats have already been cracked and shared with the world online (here’s the story). And several groups of programmers are very likely working on user friendly GUI interfaces for shareware and freeware programs that will allow consumers to rip their high def DVDs and share them over P2P networks just as easily as they are now ripping their CDs and regular def DVDs. Ingenious and resourceful, aren’t they? But you know, when you think about it, that easy rippability makes the high def players that much more attractive to potential purchasers (and as I’ve blogged about previously, those purchasers have gotten off to a pretty slow start).
Entertainment executives (most of them, anyways) are still swimming against the tide or hiding their heads in the sand. They’re protecting and locking their properties up. But they can’t win. They are going against the collective intelligence of the crowd, and defying communal imagination and motivation. Even after all these year, entertainment companies haven’t even come close to getting it. When they do, they’ll learn to work with the trends and not against them. That’s going to be an interesting day.
Until then, I have a special educational tool for anyone who works or wants to work in the entertainment industry. I’m a great believer in computer simulations of business scenarios for management training. Click here and press play for your simulation of DRM and rights management work in the industry. Enjoy!