The case against protectionism

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Summary

  • The Internet fundamentally challenges existing business models.
  • The space for innovation presented by the Internet should be protected.
  • These changed conditions challenge incumbent industries who will seek to advance their own economic interests.
  • The public interest demands a different approach to that being developed by ACTA.

Discussion

The Internet offers almost unlimited opportunities for innovation and change, with a range of applications from e-mail, to websites, to peer-to-peer systems, enabling the instant copying and low-cost distribution of content.

Because the Internet is a public network built on open standards, innovation faces only very limited constraints and new ideas do not require permission from network owners or service providers.

Effects on content industries

Some of the biggest effects of the Internet are being felt by industries that deal in non-tangible items. Music and movies are key examples: they are made available either on physical media from which content can easily be extracted (CD or DVD), or they are made available digitally direct through online vending from content owners (for example, downloadable tracks from iTunes).

Some content industries did not understand, at an early stage, the changes in consumer preferences that saw people seeking content online. It appears that the public has an appetite for accessing content in such a way, and does not always distinguish between lawfully and unlawfully gained content. This is despite ongoing campaigns by some content industries to deem the use of illicit content as “piracy” (i.e. morally akin to stealing physical goods or money by way of threating or causing actual physical harm or death).

The past profits of the music and movie industries were built on control of replication and distribution of their content. The rise of the Internet and the accelerating speed of access to it and its content has provided alternative, low cost channels for content to be shared.

Some available data1 seems to suggest that the content industries are continuing to grow and develop, despite the challenges presented by the loss of control of dissemination. Meanwhile, a range of new media services have been developed including lawful pay-for-use or free-to-use services such as TVNZondemand, iTunes.

It does seem likely that some parts of the economic interests of the established content industries have been negatively affected by the rise of the Internet2. The most obvious change has been in CD sales, a highly profitable channel for music content which has been declining for several years. As such, it is an unsurprising response on the part of the content industries to seek to change the balance of copyright law to protect their existing business models.

For example, the Chairman of Maltby Capital, the private equity firm that acquired EMI (one of the big four record companies) said in the 2008 annual report3:

"EMI’s catalogues are rich and extremely valuable and it is home to many very creative, able and committed people. Why, then, was it looking for financial rescue? EMI - and much of the industry and its commentators – saw declining music industry fortunes as primarily a market issue. Falling CD sales and piracy had eroded revenues from its core product so quickly and so severely that the resulting losses could not be offset even by the continuing good performance of EMI Music Publishing. In its public statements, EMI highlighted piracy and a generally adverse market as the reasons for its difficulties, while its strategy was particularly focused on external solutions such as anti-piracy legislation or a merger. Whilst it was right for EMI to address these external market issues and to pursue legal or regulatory solutions, analysis quickly revealed that it had also failed to tackle equally important problems in its own business

.......

The market was, of course, a major factor in EMI’s recent decline. But close involvement with the company over the past year has exposed how internal factors within EMI Music had significantly eroded the Group’s profitability.

Firstly, EMI Music had a culture where high expenditure at odds with the challenges it faced was widely accepted. This meant the company accepted as normal costs that should have been substantially cut back.

Secondly, EMI Music’s traditional way of working with artists – highly successful in the days of booming CD sales and a significantly simpler and less fragmented market – had become less fit for purpose. As a result, EMI Music’s creative performance, as well as its financial performance, had begun to slide.

Thirdly, the company’s internal reporting, while data-rich, focused on traditional measures which could tell the company little about the major changes in its market place as they evolved. It provided insufficient information for fundamental metrics – such as artist profitability.

......

EMI Music did gather and analyse substantial amounts of data and it did identify clearly the need to cut costs in the business. However, the new management’s analysis quickly led well beyond this to the conclusion that a large and critical part of the Music business was losing substantial amounts of money because its business model was fundamentally flawed."

 

The open Internet

The open nature of the Internet provides a wide range of diffuse and small scale opportunities for innovation. Sometimes these innovations grow and become economically significant themselves – consider the story of TradeMe, or Google, as two examples. Sometimes they do not.

Recent policy debates have been oriented towards the defence of existing economic interests. The ACTA negotiators seem to be focussing on protecting these, rather than seeking to protect the future potential enabled by the Internet.

This is not surprising. A large, well organised industry is harder to ignore than the prospect of future wealth. The interests at risk from changes to the status quo have an incentive to protect themselves, and have the resources to do so. The interests of those who might emerge if the open Internet is protected are only defended by a coalition of those without matching levels of money and power.

Preserving innovation

It is important for New Zealand, given the distance from key markets and the growing imperatives of higher incomes and responding to global climate change, to maximise its own opportunities to earn a living. Many ideas as to how to do this involve greater use of ICT and the Internet, given its ability to counter the tyranny of distance. The Government's plans to invest up to $1.5bn in the rollout of fibre optic broadband infrastructure is a signal that it understands the importance of Internet access across the community.

To consider policies that would restrict people's access to the Internet and limit innovation seems to run counter to these objectives.

The Internet as an open platform for innovation allows disruptive new business models and challenges existing economic interests. As is the case in other areas where some seek protection from change, the New Zealand Government should not be in the business of providing economic protection to a few. It should promote the interests of all New Zealanders.

If ACTA includes proposals to restrict access to the Internet, be it through a “three strikes” model, a “graduated response” proposal, or through any other means, then it appears the treaty it is unlikely to be in New Zealand's interests to sign.

References

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