Aug 4

Tim O'Reilly

Tim O'Reilly

Piracy is Progressive Taxation

In his entry The Fan Mail That An Author Wants To Get, Nat referenced my assertion that obscurity is a greater threat to authors than piracy. That was from a piece I wrote in 2002, entitled Piracy is Progressive Taxation. It contained seven lessons from my experience as a print and online publisher:

  1. Obscurity is a far greater threat to authors and creative artists than piracy.
  2. Piracy is progressive taxation.
  3. Customers want to do the right thing, if they can.
  4. Shoplifting is a bigger threat than piracy.
  5. File sharing networks don't threaten book, music, or film publishing. They threaten existing publishers.
  6. "Free" is eventually replaced by a higher-quality paid service.
  7. "There's more than one way to do it."

I've written more recently about the problems of obscurity in some of my postings related to the controversy over the Google Library project, but I think my P2P-era essay is still extremely relevant.

Continue reading Piracy is Progressive Taxation.

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Comments: 14

  aram [08.04.06 07:35 AM]

Interesting piece.

I agree for the most part except for #3 and 4. shows that given a high quality place to get stuff for free or almost free (aka napster/ people tend to use that. I remember Steve Jobs announcing itunes and a comparison he did with "p2p" services. He noted apple's service had to be easier/faster/better to compete with free.

Part of what the RIAA/MPAA do is to just try and make it harder/more time consuming to pirate stuff on the web, so people will just buy it. They also seem want to remind people that they should pay for their music, although there tactics need a lot of work.

I would also say, having been to a couple of foreign country markets recently, #4 seems wrong. Pirated movies/ music are everywhere. This is big business.

To avoid obscurity and yet make enough to pay the bills is interesting compromise. but #1 is the reason I don't get all bent out of shape when people cross post my images as backgrounds on myspace and xanga. It has made my images very popular although noone knows who I am. By using my images, they make my site rank higher and thus more people use my images. Its fine, but I fear for my bandwidth sometimes.

  Tim O'Reilly [08.04.06 07:59 AM]

aram -- Steve Jobs' comment supports my point #3. For an ordinary mainstream user, iTunes is easier/faster/better. And while P2P has a huge user base, there is a huge untapped market that it won't reach till it's legit. What's more, when the music industry caves, and harnesses P2P as technology, and offers the right product and the right price, I bet people will switch.

Why? Two reasons:

1. Jared Diamond's Collapse notwithstanding, markets eventually tend to rationality. And if the money goes out of the music ecosystem, it eventually dies, or is replaced by a new ecosystem that is viable.

2. The evidence of the internet itself. In the late 80's, during the "proto-internet" period, email and usenet news were propagated over a free, cooperative (primitive p2p) network, the UUCPnet. As soon as the ISP model was introduced, everyone switched to paid. (For that matter, as I believe I mention in the article, the same is true of television.) But even more importantly, the "free web" is now dominated by huge new commercial entities. It isn't necessarily the old economic models that survive, but economies survive, and new players and models arise. You can't separate points 3 and 4 from point 5.

Finally, as to piracy in third world countries, history shows that that too passes as economies mature. If you look at the history of book publishing in the US, you may be surprised to discover that all of the original US publishers were "pirates" (and there was huge controversy from UK authors and publishers in the 1850's and 60's to that effect), but as the US economy matured, that went away.

  Ian [08.04.06 08:26 AM]

Whenever the discussion about unreal property and redistributive backchannels begins to affix the term "pirate" to those on the backchannel, I'm reminded of this passage from Thucydides that reminds us that honor and disgrace in such things are malleable and evolving:

"For in early times the Hellenes and the barbarians of the coast and islands, as communication by sea became more common, were tempted to turn pirates, under the conduct of their most powerful men; the motives being to serve their own cupidity and to support the needy. They would fall upon a town unprotected by walls, and consisting of a mere collection of villages, and would plunder it; indeed, this came to be the main source of their livelihood, no disgrace being yet attached to such an achievement, but even some glory. An illustration of this is furnished by the honour with which some of the inhabitants of the continent still regard a successful marauder, and by the question we find the old poets everywhere representing the people as asking of voyagers- "Are they pirates?"- as if those who are asked the question would have no idea of disclaiming the imputation, or their interrogators of reproaching them for it. The same rapine prevailed also by land." - The History of the Peloponnesian War, Book I

  Nick Carr [08.04.06 11:08 AM]


Thought-provoking essay.

But let me push you on it. Here are some of your key points:

Most books have a few months on the shelves of the major chains, and then wait in the darkness of warehouses from which they will move only to the recycling bin.

Piracy is a kind of progressive taxation, which may shave a few percentage points off the sales of well-known artists (and I say "may" because even that point is not proven), in exchange for massive benefits to the far greater number for whom exposure may lead to increased revenues.

Lowering the barriers to entry in distribution, and the continuous availability of the entire catalog rather than just the most popular works, is good for artists, since it gives them a chance to build their own reputation and visibility, working with entrepreneurs of the new medium who will be the publishers and distributors of tomorrow. I have watched my 19 year-old daughter and her friends sample countless bands on Napster and Kazaa and, enthusiastic for their music, go out to purchase CDs.

The simplest way to get customers to stop trading illicit digital copies of music and movies is to give those customers a legitimate alternative, at a fair price.

Customers want to do the right thing, if they can.

If these statements are entirely true, as I'm sure you believe them to be, then it follows that piracy is on balance a good thing from an economic perspective - that piracy increases overall sales in a market rather than decreasing them. If that is true - and correct me if I've misinterpreted your argument - then I don't understand why you, as a publisher, wouldn't allow free, unprotected try-it-before-you-buy-it downloads of every title you publish. If piracy is ultimately a good thing, economically, then why wouldn't you make it easier to accomplish (ie, reduce the barriers to piracy as low as possible)? As long as you continued to provide "a legitimate alternative, at a fair price," you and the bulk of your authors would benefit, right?


  Tim O'Reilly [08.05.06 03:26 PM]

Nick --

You ask a really good question, and I hope I can answer it to your satisfaction. It is indeed the logical endpoint of the argument, but it is not the whole argument. (See "There's more than one way to do it.") Maximizing economic benefit comes from a mix of many factors, and all seemingly similar situations are not in fact equal.

First off, for many types of publishing, I absolutely believe that giving away free copies is the best way to build the market. If I published works -- say fiction -- that users merely want rather than require, and for which there is practically an unlimited supply, then acquiring more visibility is critical. Cory Doctorow has used this technique quite effectively to become much more successful as a science fiction writer than he might otherwise have done.

Now, by contrast, consider many of the types of books I publish. They are already very well known to their limited target market, and some of them are unique goods (say the definitive book on perl, written by the creator of the language). Here, a different calculus might apply. Awareness is not the issue.

Would this argument hold water? Advertising is good for products. Therefore, why don't you spend all your revenue on advertising to increase demand? The oracle at Delphi said, "Nothing too much." Just because something is good doesn't mean that it's the only good.

I remember in Dune, Frank Herbert talked about the ecological "law of the minimum," that growth is limited by that necessary nutrient that is in shortest supply. Sometimes its awareness, sometimes it's conversion to paying customers.

A lot has to do with the ratio of possible consumers of the free product who might be converted to paying customers to the total market size. If I have awareness with .01% of the target market, giving copies away to raise awareness to 10% of the market, where 10% of those might convert (1% total) is a good deal. But if I have awareness with 60% of the target market, and give my product away, with a 10% conversion rate, I've lost a great deal.

That's why I said piracy was progressive taxation. If you have high awareness, my experience (from a number of experiments that I've reported on over the years) is that making copies available for free can reduce your market, but that if you start out with low awareness, it can enhance them.

Open source software is a great example. Projects start small, and use viral marketing to get sampled. Companies (say Red Hat with Linux) ride that wave of awareness and then introduce new products that monetize more limited access.

  Nick Carr [08.06.06 10:36 AM]


Thanks. That makes a lot of sense.

As to Advertising is good for products. Therefore, why don't you spend all your revenue on advertising to increase demand?, I don't think that's a good analogy. I'm not suggesting you spend all your money on allowing free downloads, and my guess is that it probably wouldn't cost you that much - so you could do it without sacrificing other investments (whereas if you spent all your money on advertsiing, you couldn't spend any money on anything else).

More important, though, is that your comment here casts some doubt on a couple of your major points. For instance: "Customers want to do the right thing, if they can." The fact that you have to calculate what percentage of customers would in fact "do the right thing" (ie, "convert") indicates that you accept that customers don't necessarily want to do the right thing, even if they can. I think that, in fact, the percentage of customers who "want to do the right thing" is directly proportional to the cost of privacy. The higher the cost of piracy (whether it's measured in social shame, legal risk, technological complexity or whatever), the higher the percentage of customers who will be inclined to do the right thing. Even if I were to accept your contention that piracy is, on balance, a good thing (which I'm not yet convinced of), I would still argue that it's only good so long as it's perceived to be bad. As its costs go down - as it gains legitimacy - it becomes bad. I think the history of music downloading clearly shows this to be true, as Goldsmith and Wu describe in Chapter 7 of their book Who Controls the Internet?"

Second: Piracy is progressive taxation. As your example makes clear, this "progressive" tax would not just be carried by the "hits"; it would also be paid by a lot of writers and artists who don't sell many copies of their works - and may well struggle to make ends meet - but happen to have high awareness among their small audience. In other words, it may be a "progressive" tax in the theoretical world of the "attention economy," but it's by no means a progressive tax in the real world where people need food and shelter. So piracy is not necessarily "good for artists," as you suggest. It may be good for some artists, and it may be bad for others, even ones who sell only very small quantities of their work. You write that "Our current distribution systems for books, music, and movies are skewed heavily in favor of the 'haves' against the 'have nots.' A few high-profile products receive the bulk of the promotional budget and are distributed in large quantities." But as your own example shows, there are a lot of creative works that "have" plenty of attention in their own narrow markets but are not "distributed in large quantities." If piracy harms these works, as you indicate it would, then your general point becomes less clean and less compelling. At least, I become less willing to accept the massiveness of the "massive benefits" you assume would materialize - and I start to bridle at the term "progressive."

None of this means that you're wrong, but I think it may mean you're less right than you think you are - or at least that the issue is more complicated than your "lessons" make it out to be.


  Chris_B [08.06.06 09:44 PM]

"Progressive" though it may be, the truth is that small publishers/creators are penalized more heavily by even the lower level of loss. As Nick Carr points out, the haves have a much greater war chest to survive lost sales than the have nots. This is particularly true for small music labels where you MUST sell a certain percentage of your product run in order to have money to do the next one. What good is a "progressive tax" that ends up penalizing small businesses more than large ones?

Also its not just the third world where pirate movies, music and software is readily available. I'd suggest you take a tour of NYC, Chicago, Baltimore, Dallas, Tokyo, Hong Kong, London, Paris, LA, SF, etc. etc. etc. In cities and towns around the world, knock off goods and unauthorized copies of media are sold from tarps, flea market booths and storefronts. FYI this does include complete sets of O'Reilly books.

  Tim O'Reilly [08.07.06 08:51 AM]

Nambajin -- I really don't believe this is true. Small publishers are the beneficiaries of the progressive taxation, because they have no other way of letting people know about their work than viral marketing, which is a lot of what happens on p2p networks.

I agree that it's an unstable and difficult time for publishers, but that we will come through them with a real, new economy that leverages these new means of promotion and distribution. Meanwhile, think about how to appeal to your fan base, to let them know that your artists need their support. We get a lot of emails like the one Nat got the other day, which restarted this thread. Not everyone recognizes the need to support authors, artists, and musicians, but enough people do.

Part of the problem, I think, is that the music industry dragged its feet so long that it caused a whole generation to believe that getting free copies is ok, because for so long, it was the only way to get digital copies.

  Oliver [08.07.06 11:04 AM]

Part of the problem, I think, is that the music industry dragged its feet so long that it caused a whole generation to believe that getting free copies is ok, because for so long, it was the only way to get digital copies.

While I wholeheartedly agree that the music industry is responsible for much of the mess in which it finds itself, by no means was piracy the only way to get digital copies. It was (and still is) far easier to rip a CD purchased at a local record store than download the same music illegally — time costs for finding the songs, ensuring adequate audio quality, checking for proper tagging, making sure the entire song is there, etc. drives the economic costs of piracy up substantially.

More likely, I think, is that the music industry dragged its feet so long that it caused a whole generation to believe that getting free copies is ok, because for so long it was nearly impossible to find niche music outside of college radio stations.

  Chris_B [08.07.06 10:17 PM]

Sorry Tim, I didnt buy that reasoning before and I buy it even less now that I have a vested interest in the matter.

To date there seems to be zero hard evidence that "viral marketing" due to P2P networks is a viable method for artists to further their careers or atempt to generate sales by loss leaders.

IMNSHO people didnt get free copies of music because "it was the only way to get digital copies" but because free content will always beat content for pay. Music isn't like an OS or an app where support is needed and thus there is a potential revenue stream for a vendor.

Let me give you an illustrative real world case. In Japan, if you want to sell reggae music (a definite niche product) you MUST press 7" vinyl 45s. This is pretty much the only way to break a new artist into the market. There are no pressing plants in Japan that will deal with small orders so you must order from the US or eastern Europe. Typical costs to do just 500 records and have them shipped approaches $1000 US. This is not including studio costs, mastering costs or time. If you sell through distribution or direct to retail shops you might get $3 to $4 per record so if we split the difference, you have to sell 286 records to recoup your pressing costs. Again, any other costs of time and other expenses are not counted. Next is the cost of publicity, getting potential consumers to know that your record even exists. Printing a few thousand postcard sized handbills, enough to do one round at clubs and shops in one city, $400. Multiply that by the number of cities you want to cover. Next comes either buying a review/ad (same thing) in the niche magazines. No ad buy, no review. Add $1000 (minimum) for ONE review/ad. As you can see you would now have to sell 686 records (out of 500 (assuming all arive in salable condition)) to recoup costs. Cutting out the ad buy gives you a greater chance of breaking on the costs, but definitely reduces sales.

Also as a rule of thumb you have to give away 10% of your production run to local DJs and "tastemakers". Not doing so doesnt help and often hurts since it can result in your label/artist getting a bad reputation for being stingy or mean or whatever.

By the way, that 7" is generally done for the purposes of getting people to buy a CD. Thats more economical, but CDs are actually harder to sell in this particular nice market since the specialist retailers mostly sell vinyl and the mass market ones like Tower & HMV dont like to stock product from small labels.

If you can afford to do this regularly, your label gets known and you can get mass market retailers to stock your product and that generally means a steady cash flow, but again, no costs besides physical product manufacturing are accounted for here.

Add in the fact that case studies of Japanese P2P traffic show that music makes up about 15% of all traffic and of that 90% or more is "Top 20" and the viral marketing justification of P2P starts looking pretty weak.

Maybe things in the US are somewhat different, but I suspect that the reality of so many entertainment products competing for the same pot of young peoples cash and the afformentioned "free beats cost" rationale pretty much crush the anecdotal observations of your daughters spending habits.

In the end, I agree with #s 1 and 7 but find 2-6 as currently phrased to be false. If it hasnt been pointed out here already, the solution to #1 tends to require buckets of cash to let the world know that your product exists in the first place.

FWIW, were looking at just about any idea we can for #7 but just aint seeing anything realistic. Lets be clear about one thing, there is a world of difference between trying to make a business of publishing content of any type and having a hobby of putting out your own work for the world to hear on the hopes that you might get famous.

  Ian_R [07.02.07 04:16 AM]

I am afraid that I too find the argument that piracy = free marketing = benefit to be flawed.

The trouble is that pirates generally sell well known, popular material. I've seen countless knock offs of Disney DVDs but I've never yet seen a pirated version of my school stage show...

For a more sensible example, I've looked everywhere for an MP3 of a old music track I used to have on cassette (long lost) but can't find it on either ligit or pirate sites.

The barrier to entry in publishing achieves at least one thing; selection. If it is expensive to produce something then you want to make sure that it is good enough to provide a return on your investment. This is a major filter (albeit a very imperfect one - there are plenty of rubbish bands and movies and I am sure that lots of good ones fail to get reckonition). But in a music system where there are no record companies doing A&R and promotion then there needs to be some other mechanism for filtering now that it is so easy to produce and publish (via the internet) content.

The internet is not a meritocracy when it comes content.

  Tim O'Reilly [07.02.07 02:50 PM]


You're supporting my point. Progressive taxation is progressive. That is, the folks at the top pay more. So yes, most of the music on p2p networks is for top 20 stuff, just like the rich (despite the rhetoric) pay most of the taxes.

This is still an ecology under development. But with software (which has been doing this longer) you can see how free redistribution has led to new stars: Linux, Apache, Perl, MySQL, etc. etc.

Or take a look at YouTube. Despite the claims of pirated content being the bulk of its traffic, I know of folks who've had hundreds of thousands of views from camera phone videos.

Of course, it would be nice to have more comprehensive data.

But I have published the data from search of our content on Google Book Search, and can definitely see the "progressive taxation" aspect there. New stuff gets most of the use, but a much smaller percentage than in print. meanwhile, stuff that's getting no action in print collectively gets a lot of free views. In fact, 47% of the views of our content in google book search come from books that represent only 9% of our sales in print.

So I think that there's a lot of emerging evidence to support my thesis.

  Hans Burg [07.06.07 02:12 AM]

Steve Jobs' comment supports my point #3. For an ordinary mainstream user, iTunes is easier/faster/better. And while P2P has a huge user base, there is a huge untapped market that it won't reach till it's legit. What's more, when the music industry caves, and harnesses P2P as technology, and offers the right product and the right price, I bet people will switch.

  Tim O'Reilly [07.06.07 08:20 AM]

Hans, I agree completely.

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