[p2p-research] One more link re: P2P economics ..

[Michel Bauwens]

Hi Jon,

thanks for that,

I have compiled a long piece for the blog tomorrow, also in answer to
Marco's arguments a few days ago:

here at:
http://blog.p2pfoundation.net/the-morality-of-filesharing-why-the-pirate-bay-founders-are-p2p-heroes/2009/04/24

The morality of filesharing: why the Pirate Bay founders are p2p
heroes<http://blog.p2pfoundation.net/?p=2743>
[image: photo of Michel Bauwens]Michel Bauwens
23rd April 2009

 I have spent loads of money on records. No not cd’s or mp3’s but records.
Most of these have been undegrround dance type records that support
smalltime artists. If it wasn’t for the music discovery I get through mp3s I
wouldnt go to the record shop to listen to them or to then buy them.

On the p2presearch list, I/we were recently challenged by Italian digital
rights activist Marco Fioretti, for our sympathy for the Pirate Bay. Surely,
he said, all those youngsters who download music for their private and
selfish music consumption cannot be equated with the egalitarian and
responsible ethos we try to promote and practice through the P2P Foundation.

With Marco, I recognize that motivation for filesharing may be very varied,
and may also take the form of sharing without caring. But I think people are
complex beings, where various moral aspects are competing with each other.
So I do believe that most downloading actually happens not in a context of
purely individual enjoyment, but in the context of sharing cultural
production. Filesharing is about sharing, and I consider that a high moral
value. In a digital age, trying out music that is freely reproducable is
simply the most sensible thing to do.

Furthermore, as the quote above suggests, not only do most filesharers also
buy music, but the evidence is in that the more active you are as a
downloader, the more music you buy. In other words, they behave like library
patrons, where it is known that people borrowing most books, are also the
ones that buy more of them, for the simple reason they like reading, just as
filesharers like listening to music.

According to a recent study by the BI Norwegian School of
Management<http://www.techradar.com/news/internet/online-music-pirates-buy-the-most-music-593366>
:

*“those who download ‘free’ music are actually also 10 times more likely to
pay for music downloads than those who don’t BitTorrent.*

*Nearly 2,000 people participated in the study, which was conducted by
Professor Anne-Britt Gran and his research team at the Department of
Communication - Culture and language, and it seems that those who are au
fait with free music on the web (both legal and illegal) are much more
likely to dip into their pockets when it comes to purchasing the latest
MP3s.*

*The study also found that 50 per cent of those asked in the 15-20 age range
have bought a CD recently.”*

*Umair Haque* makes a complex but important argument about the rationality
and morality of filesharing, explaining it as a risk insurance
behaviour<http://www.bubblegeneration.com/?a=a&resource=musicrisk1>(in
short: a ‘try before you buy’ argument):

*For many people, digital music’s more about risk than it is about music
itself. Not legal risk - but transactional risk, the kind of risk you take
when you buy a used car. Now, this statement has deep economic meaning. I’d
like to explain why.*

*Fundamentally, I’m going to argue that consumers download music, as much to
derive extra value from getting something for free, as they do because they
want insurance against buying something they didn’t want in the first place.
File-sharing is as much about risk-sharing as it is about the ‘theft’ of
value. Technological changes have made this possible - but the way the
business model of the music industry is at odds with the implicit contract
it signs with listeners is what makes it probable.*

*Here are the basic economics of the music industry: The major record labels
assume market risk in exchange for value. They take on the risk of assuming
search, development, and distribution costs, in exchange for uncertain
profits.*

*We can also look at this through the lens of contract theory. Contract
theory says that principals contract agents to do things they’re unable -
for whatever reason - to do. In every such transaction, we can say that
there are extra costs incurred. Economists call these costs agency costs.*

*So we can say that labels are agents hired by music listeners - principals
- to perform a function they don’t have the time to do - find interesting
and entertaining musical artists. The problem is that this simple
transaction creates massive information asymmetries. There’s no monitoring
mechanism, so listeners can’t see what the labels are doing; conversely,
labels can’t really tell what listeners’ preferences are. Even worse, the
principals can’t influence the agent unless they can coordinate amongst
themselves to do so.*

*Now, in most real-world markets, information is an issue. Neither side in a
transaction is perfectly well-informed about costs and benefits. But in most
markets, prices are considered the central economic mechanism of information
transmission, because they convey information about future benefits and
future risks. This point is intuitive if we think about it: prices reflect
the scarcity of a good. Think of the price of blue-chip stock, for example.*

*But, partly because of massive buyer power (the influence the biggest
retailers exert over the record labels), prices in the music business have
long since failed to carry any pertinent information. Prices have become, if
not fixed, as many suspect, certainly standardized. And this robs consumers
of a vital means to gauge how much future value they derive and risk they
take when purchasing different music goods. It also robs labels of the
ability to really understand consumer preferences.*

*So this forces listeners to rely even more on the record industry’s - the
agent’s - choices. In this case, the principals are kind of blindly reliant
on the agent - they have no mechanism to monitor the agent.*

*So what if, under such a contract, the interests of the record labels - the
agent - diverge from the interests of the listeners - the principal? What
if, for business reasons, the labels are more interested in economies of
scale, scope, and brand than providing music listeners with music they
value?*

*In an extreme case, the labels might begin to impose agency costs beyond
the search costs the listeners are exchanging value for - making
transactions with record labels provide negative value for listeners.
Conversely, we can say that listeners might find it more efficient to take
on their own search costs. And this is what’s happened today. Many people
are more happy to spend time searching for new music on the net than they
are simply buying the goods the industry selects and promotes.*

*It’s traditionally argued that the web reduces search costs. But this
argument helps explain a very curious phenomenon: why music today is one of
the few markets in which people, are, curiously, willing to pay very high
search costs.*

*So the net actually begins to make it possible for people to pay higher
search costs at all. They do so because they replace the agency costs
imposed by the music industry - which provide them little value - with their
own search costs, which do result in a transaction that provides them value.
Before the web, people had little option but to pay the agency costs the
music industry demanded.*

*Economists have a name for problems like this: moral hazard. Moral hazard
happens when the actions of an agent can be hidden from a principal,
creating agency costs - because the agent is able to shirk, take additional
risks, and generally not deliver on his end of the bargain. In this case,
the moral hazard is that the record industry, because listeners can’t
monitor or influence it, can effectively shirk, and choose artists not based
on listeners’ preferences, but based on business efficiencies. This is
effectively what the record industry has been doing - adding massive agency
costs that replace the search value it is supposed to provide. It’s
compounded by the fact that music is an experience good, whose value is not
directly knowable to buyers - another fact the music industry has been
exploiting.*

*The way to change the incentives implicit in such a moral hazard-creating
contract is straightforward in economic terms - insurance. Insurance
provides an incentive for the recording industry to choose only acts
listeners value. At the same time, insurance means that consumers don’t have
to pay agency costs - the costs of the music industry selecting acts no one
wants to hear.*

*But doing so would create a double moral hazard. The second moral hazard is
trickier: offering insurance to listeners provides listeners an opportunity
to hide their actions from the recording industry. Listeners might take
advantage of the insurance, and renege on buying music altogether. If the
industry offered consumers the ability to simply return any music they
didn’t like, consumers might return all the music - even the music they did
like, after having copied or consumed it.*

*But this is exactly what the internet has done - offered music listeners a
second moral hazard, in opposition to the first. The net offers a kind of
gigantic way to renege on buying music goods produced under moral hazard,
and completely eliminate the risk listeners take in buying such risky
experience goods.*

*The point is this: the net offers listeners insurance against the music
industry itself. File-sharing isn’t simply theft. Rather, file-sharing is
risk-sharing - against an industry with the freedom to undertake hidden
action in the extreme, and not live up to the contract it has written.
Remember, the contract said that labels would assume the risk in exchange
for dollars from listeners - so when moral hazard lets labels try and push
risk to listeners, is it any surprise that listeners try and minimize it by
parceling it out? In fact, we could go even further - saying that
file-sharing is a way for principals to punish agents operating under
extreme moral hazard, with the hope of bringing the agents incentives into
line.” *

*Jonas Anderson* shows how beneficial this actually also is to the music
industry <http://homepages.gold.ac.uk/j-andersson/Benjamin_updated.doc>itself,
as a form of outsourced labour:

*“The sharing of the online file-sharers could here be seen to actually
contribute to the value of the content spread, although perhaps more as an
unintended by-effect than by deliberation. As with many other contemporary
areas of consumer-producer relations, this is in effect a radical process of
“outsourcing” labour to users. The end-users make part of the effort of
distribution, saving labour on the producer/distributor side, lo¬wer¬ing
prices, altering competition balances, etc. When file-sharers thus help
musicians be heard more easily, they effectively, however tacitly, act as PR
agents in some respects (and may get sued in the process, adding insult to
injury!). If we still are to persist with applying the con¬cept of aura to
the phenomenon, we could interpret this as a form of diversion of the
poten¬tial aura; a positive recognition that the listener makes active part
of, if not the co-authorship, then at least the co-distribution of the
musical object. Not so special anymore, “it’s just a file my mate sent me”.
Another “positive” aspect (at least from the viewpoint of the entertainment
industry) would be that we are seeing how a downloaded file does not
necessarily replace a purchase, since many consumers actually value the
actual nature of the content differently. A film can today exist as an
online file of varying bit-rate and encoding (technical quality) – instantly
duplicable, for free; or as a full-price DVD (with lots of extra material);
as a TV broadcast either (seemingly) free or pay-per-view; or, for that
sake, as a slimmed down DVD version, handed out (seemingly) for free with
Sunday newspapers! File-sharing is here merely part of a radical
fragmentation of distribution vehicles, and – in parallel with that – a
radical fragmentation of value.” (One positive outcome of the uncontrolled
copying is thus that for every file copied, the artist’s or content
producer’s fifteen minutes of fame is momentarily extended and might gain
them in the long run. The sharing of the online file-sharers could here be
seen to actually contribute to the value of the content spread, although
perhaps more as an unintended by-effect than by deliberation. As with many
other contemporary areas of consumer-producer relations, this is in effect a
radical process of “outsourcing” labour to users. The end-users make part of
the effort of distribution, saving labour on the producer/distributor side,
lo¬wer¬ing prices, altering competition balances, etc. When file-sharers
thus help musicians be heard more easily, they effectively, however tacitly,
act as PR agents in some respects (and may get sued in the process, adding
insult to injury!). If we still are to persist with applying the con¬cept of
aura to the phenomenon, we could interpret this as a form of diversion of
the poten¬tial aura; a positive recognition that the listener makes active
part of, if not the co-authorship, then at least the co-distribution of the
musical object. Not so special anymore, “it’s just a file my mate sent me”.
Another “positive” aspect (at least from the viewpoint of the entertainment
industry) would be that we are seeing how a downloaded file does not
necessarily replace a purchase, since many consumers actually value the
actual nature of the content differently. A film can today exist as an
online file of varying bit-rate and encoding (technical quality) – instantly
duplicable, for free; or as a full-price DVD (with lots of extra material);
as a TV broadcast either (seemingly) free or pay-per-view; or, for that
sake, as a slimmed down DVD version, handed out (seemingly) for free with
Sunday newspapers! File-sharing is here merely part of a radical
fragmentation of distribution vehicles, and – in parallel with that – a
radical fragmentation of value.”*

So here we have a system that makes practical sense, economic sense, and I
would argue, as above, moral sense. The founders of Pirate Bay are in my
eyes the heroes of the new world, putting a place a very efficient system of
sharing, at great personal risk, and with little personal gain. It’s only
when we take a feudal conception of property, attached with obligation to be
a serf to the music industry, that this can be constructed as stealing.
Indeed, most shared material has been purchased at some point in the
process.

Filesharing then, functions as most peer production. A minority is actively
engaged in the creation of the structure, most of the time for little
personal gain; a larger group contributes, and most people use and profit
from the system. As in peer production in general, those that use contribute
in other places, they are only profiteers when seen in isolation.

As argued above though, sharing without caring is not something we advocate.
So we need to argue for more, for solutions that sustain the creation of
music and art. I understand that there are many filesharing applications and
trackers trying to include voluntary donations, but that is not enough, and
we probably need collective licensing systems as a sensible solution.

One thing is sure, through its coercive tactics in trying to maintain the
artificial scarcity of digital products, it’s not providing any solutions
itself.

Also, and I’m returning here to Umair Haque, there is something profoundly
immoral in imprisoning people for creating sharing platforms, a net benefit
to society, when the people responsible for creating trillions of damage to
our global economy, and untold hardship, are actually rewarded.

Umair formulated this very
strongly<http://blogs.harvardbusiness.org/haque/2009/04/the_real_pirate_bay.html>below,
then elaborated on his argument in a
follow-up <http://blogs.harvardbusiness.org/haque/2009/04/post_2.html>:

*“Set up a torrent tracker, get fined, go to jail.*

*Join a bank, destroy the economy, profit.*

*Let’s draw out the distinction.*

*The Pirate Bay guys were criminally prosecuted for….violating (largely
obsolete) copyright. Almost no one in finance has been held even civilly
liable for vastly more economically damaging actions.*

*On the one hand, we have damages worth maybe (maybe) a few million. On the
other, a few trillion.*

*On the one hand, innovation and better music is stifled — benefits are
foregone. On the other, reform of a broken banking system is stifled —
losses are incurred.”*

Umair’s conclusion in his second piece, which declares the filesharing war
unwinnable by the music industry:

*“Here’s a final, “strategic” point: every time the music industry kills an
underground distribution channel, a more efficient one arises in its place.
Goodbye mixtapes, hello www. Bye www, hello Napster. Bye Napster, hi
BitTorrent. Bye BitTorrent, hi anonymous, ciphered, totally decentralized
p2p nets.*

*Why? By limiting the supply of interaction, the music industry is only
ensuring that each interaction becomes more and more efficient. The endgame
is a distribution system where every song in the world in the world can be
zapped invisibly and anonymously from me to you in a nanosecond.*

*The point? 21st century economics are radically decentralized. Wars against
networks are unwinnable — when orthodox organizations are the ones fighting
them. Only networks (or markets and communities, if you’re a long-time
reader) can fight other networks.*

*Want a better music/media/etc. “business model”? The understanding that
hierarchies are dominated by networks is the key — and the failure to
understand it is exactly why the media industry is so deeply in decay.”*


On Thu, Apr 23, 2009 at 6:55 AM, Jon Husband <jon.husband at gmail.com> wrote:

>
>
> a follow-up to the Pirate Bay post by Haque ...
>
>
> Why the War on File-Sharing Is Unwinnable<http://blogs.harvardbusiness.org/haque/2009/04/post_2.html>
>
>
>
> Note the concluding paragraphs ;-)  .. but we "knew " that, didn't we ?
>
>
> Regards,
>
>
> Jon Husband
>
> Wirearchy
> www.wirearchy.com
> "Social strategy and architecture for wired organizations"
>



-- 
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Volunteering at the P2P Foundation:
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