Filesharing, copyright and my attempt to change the attitude of the music industry

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This is a lightly edited transcript of a talk I gave at the Westminster eForum on Filesharing, copyright and the digital consumer on 14th July. I was pleasantly surprised by how open the music industry seemed to be towards changing the role of copyright. We are winning.

Further information on the Westminster eForum (and the transcripts from other sessions) can be found at their website.

Thank you, Peter.

I’m Nicholas Lovell, founder of GAMESbrief, and I work in the games industry. A long time ago, I used to be an investment banker. I stopped doing that before bankers destroyed the world so I can safely claim that wasn’t my fault.

I fear that you won’t like some of the things I plan to say today. I’ll start by saying that although this a policy and legal conference, I tend to start my thinking by following where the money is flowing and how business models are changing, rather than starting by thinking about the law. My view of the law is that in a democracy it should reflect what the market and consumers want rather being an attempt to proscribe activities that are demonstrably in demand.

First, the good news. I don’t think that there has ever been a better time to be a content creator. Your ability to reach audiences, to explore new ideas, to spread your message is easier than it has ever been before.

The bad news is that I don’t think that there has ever been a worse time to be content distributor – that, I think, is the heart of the issue we are discussing today.

The Internet has reduced barriers to distribution and for most media businesses, distribution was the heart of the business. In most media businesses, the content creation is a small part of the costs. In a newspaper, maybe 15% of the costs are journalists creating content. The rest is printing, distribution, ad sales, senior staff – not content. In the games industry, Modern Warfare 2, the blockbuster hit of 2009, cost £50 million to develop and £200 million to market, manufacture and distribute. In the book world, authors generally get less than 10% of the cover price in royalties. Broadly, you can say that eighty per cent. of the costs of a media business are distribution costs and only twenty per cent. are content costs.

That isn’t going to work any more.

The internet has made distribution essentially free. If not free, it has certainly made it cheap. Marketing is still important; discovery is still a big problem. But if you are a band which builds up a big following, you previously had no choice but to pay up to eighty per cent. or more of your earnings to do something that used to be very hard: to get your music in front of consumers, in a physical form, and to take their money. That has now changed and the media landscape has altered irrevocably as a result.

A previous speaker, a partner at Berwin Leighton, said that when she was young and often chose to spend money on music, one of the reasons was that she wanted to make sure that the artists got rewarded for their work. I think that resonated with consumers, and luckily it still does. You can persuade users to pay lots of money for live gigs, but increasingly you can also get them to pay for special elements like limited edition box sets or some other premium version of the content.

I love Mos Def’s idea that he can’t sell a CD to consumers, but he can charge $15 for a T-shirt that says “I bought the Mos Def album” and then send the consumer a free copy of the album on CD with the T-shirt.

That’s a great illustration of how the consumer mentality has changed. Consumers will pay for status; they’ll pay for belonging, they’ll pay to express their membership of a tribe – and music has always been a very tribal and status-led medium. Music is often about saying “I’m a tribal follower of Runrig” (I’m not, I’m afraid, Peter) and when you can harness that, you can be very successful, as great bands know.

In my world of games, we’ve seen the emergence of a business model around virtual goods. To those people in the room who don’t understand virtual worlds and how important it is to be able to, for example, decorate your avatar, I’m afraid I don’t have time to explain how important and significant virtual goods are. But it’s a huge thing, and it’s all about sociability.

In many ways, it’s no different to the real world. You may think that you pay for physical items but consider, for example, a Prada handbag. You might buy one for £5 from a street vendor or an identical one, made in the same factory, for £500 from a Prada store. The main difference is that one is legitimate and one is not. You pay for the premium handbag because you want the social kudos of being able to afford an expensive luxury.

Clearly luxury goods still suffer from the counterfeit problem but in the end, since it is all about status, if you have a knock-off version, you are not getting the status. In the music world, if you are a committed fan of OK Go, you want to declare your allegiance to them. Pirating their music is not declaring allegiance; if you spent £300 on a limited edition box set with an exclusive run of only 10,000 copies for £300, that’s showing your allegiance.

And that’s how consumer behaviour has changed.

If I were to continue to talk about the bad news, I would suggest you should be very scared by this: my book called How to Publish a Game.

Not because of what is in it, but because of the way it came to market. I’ve been talking to publishers about getting a book on the business of games written for two and a half years. I have an agent, I’ve been trying to go through gatekeepers. I’ve been seeking permission.

But I run a blog on GAMESbrief which has 10,000 to 15,000 monthly users. That’s enough for me to think that I have sufficient distribution to make a business book viable – that’s a really important point: you still need distribution.

But at a big trade show called E3 last year, a bunch of my clients said “what we need is a book on self-publishing”. So in the last twelve months I conceived it, I wrote it, I typeset it, I marketed it. All myself. The only bit I paid for was a designer to create the cover. In the first six weeks, I have made 80% of what my agent said I would get as an advance from a publisher.

For business books, authors rarely receive royalties other than the advance, so I expect to earn significantly more money from self-publishing this book than I would have done through the traditional publishing industry.

Just to be clear, How to Publish a Game will never be in Waterstones. I won’t get the same kudos from working with a traditional publisher and I will get fewer calls from the BBC asking for quotes because I’m not the guy who published a book with HarperCollins. All of those things would be helped by having a publisher, but there is still a role for them.

But my main point is that with the destruction of the value of providing distribution for content creators, there is a huge problem for the industry.

We were also asked to talk about consumer confusion. Consumers are particularly confused about what they can share. One of my popular blog posts on GAMESbrief is called “Are Constantin Film the stupidest company in the entire world?” (http://www.gamesbrief.com/2010/04/are-constantin-film-the-stupidest-company-in-the-entire-world/).

You may be familiar with the movie Downfall. It has a scene where Hitler is in his bunker getting extremely upset about the imminent defeat of the Third Reich. The scene is in German and there is an established YouTube meme where users take that scene and subtitle with, well, just about anything. Steve Jobs on the iPhone 4 reception problems or people complaining about the Digital Economy Act or whatever.

Constantin issued a takedown notice for every user-generated clip. They set their lawyers to taking down four minutes of an obscure movie that no-one had previously heard of but which was getting the kind of viral marketing that most companies can only dream of. There are companies out there who would have paid massive bonuses to a marketing agency to get that kind of viral exposure.

As an aside, it’s also almost certainly fair use, since it was only four minutes of a much bigger work copied for parody purposes (Note: a lawyer in the audience pointed out that this is a US legal defence, not a UK one), which means that Constantin may not even have had the right to ask YouTube to take it down.

So what you had with Downfall was consumers doing something really cool with cool content, promoting Constantin’s intellectual property, driving awareness of an obscure movie and they chose to take it down because our current legal structures say that that’s what Constantin needs to do to protect its intellectual property. Despite the fact that this kind of value-added sharing is what consumers want – and in my view, should be allowed – to do.

I’m getting a red flag here. I’ll end by saying that we have two big issues. Distribution is permanently changed and is no longer as valuable as it used to be and secondly consumers are deeply confused about what is allowed and what is not. These are two very big problems for our industries.

Thank you for listening.

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