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Solving the payment problem for open source and P2P file sharing

By on August 26, 2003 (8:00:00 AM)

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- by Matt Asay -
The software and entertainment industries have a problem, but it's not the problem they think it is. Both believe they have intellectual property problems. In the case of software, large software vendors are struggling to figure out how to keep their IP and associated revenues from being cannibalized by open source software. Record labels and movie studios, for their part, believe that peer-to-peer piracy is destroying their ability to charge for the art they produce. Both are wrong. Neither has an intellectual property problem. Instead, both have a payment problem.

In the face of open source and P2P, consumers (be they businesses or individuals) are less and less likely to want to pay for the goods that the software and entertainment industries deliver. Not because consumers are evil, but because the models of access to software or media have outpaced the models for monetizing that access.

Companies like SCO, unable or unwilling to move into the 21st-century software business, cling to their IP and wage lawsuits against competitor and customer alike, trying to frighten the world into believing in their 20th-century business model. On the entertainment side, groups like the RIAA sue end users, write threatening letters to businesses and universities, and generally try to force the P2P genie back into the bottle.

This is folly. Pure folly.

Why? Because these tactics make criminals out of a massive pool of would-be buyers. Such tactics focus so much on the encroachment on their IP (and the ability to monetize it) that they fail to see the expanded world of opportunity now open to them.

Consumers want control

Software companies have charged a premium for their IP for years; who can blame consumers for grabbing a more malleable (and generally cheaper) alternative when it presents itself? Why pay hundreds of dollars to Microsoft for Office when I can download OpenOffice and get all the functionality I need, or nearly all, for free? Why lock myself into a single vendor of an operating system when I can rely on the fluid innovation of Linux?

Of course, open source technology is not truly free of cost, because I must make trade-offs to use an open source product. And no, access to source code is not a panacea to all problems. But given the margins that proprietary software companies have been able to command, and given the strict control over their code that they have maintained, no one should be surprised when consumers look elsewhere, even if the open source alternatives are not yet perfect substitutes for proprietary products.

On the entertainment side, the entertainment industry has been conditioning consumers to not pay for many, many years. Radio and TV have conditioned consumers to expect free entertainment. Under these models, the only thing consumers pay is the slight annoyance of listening to or watching advertising. No money ever changes hands between the content creator and the consumer in these two media.

And, as with software, P2P networks deliver greater control over entertainment to the consumer, so who can blame consumers for flocking to these services? In MP3 music and DIVX movie downloads, the concepts of radio and TV have been perfected. Suddenly, consumers hear or watch what they want, when they want.

In both software and entertainment, the consumer's focus is not really about avoiding payment. Rather, the impetus for using these alternatives to IP is to maximize access and control. The matter of cost is of secondary concern.

Hence, my earlier statement that the software and entertainment industries have a payment problem, and not an IP problem. Both industries need to invest their resources in figuring out how to monetize this rabidly open market.

Solving the payment problem

The solution to a new technological reality is not to try to litigate that reality away. The music industry learned, or should have learned, this with radio in the 1920s. Radio crushed recorded music revenues, and all sorts of dire warnings were issued as to the record labels' ability to survive. But the labels fought back, not by slapping lawsuits on radio, but rather by resolving the payment problem through ASCAP, a licensing regime that permitted radio and the record labels to flourish.

What then, are possible payment models for the software and entertainment industries?

Software

Big IT vendors like IBM, Sun, and HP are already solving the payment problems presented by open source, though they may not recognize that they are doing so. I am referring to "on-demand computing," or, to use the name that I prefer, "utility computing." In this model, IT vendors (mostly hardware companies at present) deliver computing power in a utility fashion: Enterprise Consumer X gets the computing cycles when it needs them, rather than buying all of the hardware/software itself.

Importantly, customers in this model buy IT (including software) as a service, rather than as a standalone product. As such, customers do not really buy software at all -- they buy a solution to their business problem. Whether the "guts" of that solution are open or closed source does not matter anymore. Customers will increasingly pay for value, delivered as a service: SP (service property) rather than IP (intellectual property).

A closely related model is the ASP model. Companies like Salesforce.com are already delivering this model, and doing exceptionally well. As with utility computing, in the ASP model software is delivered to the customer as a service, hosted on a central server by the vendor, and customers pay for the value they access over the network. Whether the software underpinning the service is IP or open source becomes irrelevant.

One additional benefit to customers, in either the utility or ASP models, is that they no longer need to worry about SCO-like lawsuits. Why? Because they would not actually be in possession of code in source or binary format. The vendor might still be in violation of IP infringement, but the customer would not be. Given this benefit, let us hope that the Free Software Foundation does not short-sightedly "close the ASP loophole," as they are reportedly planning to do with version 3.0 of the GPL. Closing this so-called loophole would benefit proprietary interests like SCO; it would not advance the FSF's cause of freedom in code.

These two emerging models for software both enable software companies to continue to deliver value to customers and get paid for it. Many more models are possible, but will not be discovered by fixating on forcing customers into outdated business models.

Entertainment

Interestingly, at least one obvious model for entertainment has already been suggested for software: the utility model. Each month, I pay money to the cable utility (for broadband and CATV access), the phone utility, and the electric utility. Why could I not also pay the entertainment utility?

The easiest way to administer this would be to add a flat rate to the ISP bill, perhaps $5.95 per month. That sum would then be divvied up between the ISP and the entertainment industry, parceled out in a manner similar to the way ASCAP works. If the utility wanted to charge in a more accurate and granular fashion, the ISP could charge according to data usage. (To get really granular, one could also envision a pay-per-file methodology whereby each .mp3 or .mpg would be charged against a user's account. The technology for metering such usage is already available.)

This utility model would completely eliminate the piracy problem, because consumers simply could not evade the fees, absent burning the songs onto physical media and mailing them. To the extent that such an option is politically impossible for ISPs (because they would lose customers to non-compliant ISPs that do not charge the data fees), the ISPs could lobby Congress for legislation that mandates their compliance. My own feeling is that there would not be much customer churn; consumers generally are not going to chafe at the idea of paying (remember: it is the mode of payment that currently keeps most from paying, and not the idea of paying), and will not want to lose an email address simply in the name of piracy.

Another option is to allow users to bill downloads to their cellular phones. Again, the idea is to make payment seamless, so that the consumer is focused on enjoying the art, and not the act of payment. If he's online, the user simply types in his phone number (with some additional added security to prevent unauthorized charging of downloads to a third-party account), and gets the music (with the cell phone company managing payment to the record or movie label on the back end). If he's offline but using his cell phone, I can envision Johnny sending Jane a download of Audioslave's newest "love song," routing it to her IP address for immediate download the next time she logs on to her computer.

Or perhaps the answer is much more mundane: advertising. It has worked for television -- why not for MP3 and DIVX downloads?

Conclusion

This is not an exhaustive list of possible solutions to the payment problem inherent in open source software and digital media piracy. Smarter people than I will innovate these models. The point is that neither industry will ever discover these models by looking backward. Innovation around access to great new technology has outpaced innovation around payment for that technology, but this is a momentary lag, one that the software and entertainment industries will resolve by focusing on payment, rather than property. Let's look forward.

Matt Asay has spent most of his professional life trying to conceive novel ways to monetize open source software. Asay was GM of embedded Linux startup Lineo's Network & Communications business, and moved from Lineo to Novell, where he is responsible for charting Novell's Linux/OSS strategy. Asay holds a juris doctorate from Stanford, where he worked with Larry Lessig on analyzing the GPL and other open source licenses.

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on Solving the payment problem for open source and P2P file sharing

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utility model is useless

Posted by: Alex Valentine on August 26, 2003 10:57 PM
As an EFF member, I was shocked when <A HREF="http://www.eff.org/homes/fred_von_lohmann.html" TITLE="eff.org">Fred Von Lohmann</a eff.org> starting pushing an ISP tax to pay record companies. People have taken this idea and made it their own, this article is another example.


The flat fee model is exceptionally flawed because there is simply no way to fairly distribute earnings. The model itself would simply become a subsidy, propping up the obsolete recording industry business model. There would be no way to meter P2P use, because people could always use encryption. The only way the RIAA would even consider this is as a TAX on all isp users, which most isp users don't use P2P in the first place.

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Re:utility model is useless

Posted by: Anonymous Coward on August 28, 2003 12:43 AM
Spot on mate.

To the recording industry, "adapt or die".

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Another interesting angle...

Posted by: Anonymous Coward on August 26, 2003 11:28 PM
I was reading some articles at zeropaid.com the other day and noticed an interesting conclusion in one. Up here in Canada we have a tarrif on blank audio media that goes to the record companies. Each blank CD or tape(and soon possibly more) has a small tax added to them. The conclusion was that if I am paying that fee, and it goes to pay the record companies, then I have paid for the music that I copied onto that CD, and therefore do not need to pay again for it. Leading to the possibility that, if I was sued here in Canada, I could just show them the CD's I burned of my music and say "I paid the company for this!". I might actually work too... heh.

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Re:canadian p2p

Posted by: Anonymous Coward on August 27, 2003 12:17 AM
I believe you are right. From my understanding the copyright act in Canada was changed do they could charge a small flat fee on all blank audio media and that would compensate for "private copying". So if I loan you a CD and you make a copy for yourself this is legitimate in Canada. While this law was enacted before p2p I believe that it does legitimize p2p downloading. This is why they want to increase the fees and broaden the number of media and devices which would be charged this levy

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Re:canadian p2p

Posted by: Anonymous Coward on August 27, 2003 05:32 PM
here's a link about the said tax.

http://www.cpcc.ca/english/index.htm

The problem with the said tax is that there are other industries that use blank cds. Why is it that they have to support the RIAA and ilk?

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Re:canadian p2p

Posted by: Anonymous Coward on August 28, 2003 03:50 AM
Another problem is that the RIAA is certainly not paying any royalties to anyone out of that fund.

Zip.

So the only ones who benefit are industry fat-cats and lawyers. Artists get nothing.

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Re:Another interesting angle...

Posted by: Anonymous Coward on August 27, 2003 01:17 AM
Dosn't the Home Recording Act in the US do the same? That is, proceeds from sales of recording media go to copyright owners.

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Gray area?

Posted by: Anonymous Coward on August 27, 2003 01:38 AM
Well I think it's a bit of a gray area. You are allowed to copy (hence blanks) but I don't think you can lend it to someone to do the same. Isn't burning ideally for your own backups? (lol I actually know ONE guy who really does this - every cd is his car is a burned copy of the real deal at home.. smart but costly..)

Regardless, I agree. I think, though, that it would be difficult to implicate this when it comes to p2p because as said by another poster, "Not everyone uses p2p" (most don't, and if traffic is monitored, use encryption) so the tax on internet service by the provider wouldn't work the same as taxing blank cd's (because one who buys a blank definately uses it)

Then again, I suppose if you were using the blank for free GPL'd software my point is moot! lol Nevermind - in fact we should fight for that blank cd tax $$$ back!! lol

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Nice write up, but...

Posted by: Anonymous Coward on August 26, 2003 11:32 PM
I was with you right up until the end:

Or perhaps the answer is much more mundane: advertising. It has worked for television -- why not for MP3 and DIVX downloads?

Ick.

It is my opinion that advertising has been a major downfall for email/www information-sharing. Let's try to find a way to keep it pure. I'd rather pay a nominal subscription fee than have to worry about "taglines" being added to all my MP3 files.

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Re:Nice write up, but...

Posted by: Anonymous Coward on August 27, 2003 01:12 AM
No reason you shouldn't be given the choice, is there?

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Re:Nice write up, but...

Posted by: Anonymous Coward on August 28, 2003 04:22 AM
In theory, you are correct. However, no other media (that I know of) that uses advertising to generate revenue gives you the choice. I would love to watch ad-free television, read a magazine with no ads, listen to ad-free FM radio, or surf an ad-free WWW.

None of these are an option; I can only assume that once advertising got into a media distribution system, that it would be there to stay.

I would, however, love to be proven wrong!

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Payment is coupled with the trust in free software

Posted by: James Michael DuPont on August 26, 2003 11:46 PM
On of the biggest issues facing the payment is the trust of the client software.

It is very difficult to set up a payment and distribution system on free software when every link in the chain is able to be modified.

Inside of business transaction, each partner in the transaction needs to be able to be sure that the other partners are not cheating my modifing the software to do unfair things.

My proposal is a complex checksum and encryption process that allows for free software to be used in areas that have never been accessible for free software before.

The FSEDU project needs to have this type of security for the handling of learning materials and administering of tests. Many commerce applications need to have this type of security in order to function properly.

See my detailed proposal relevant to this issue on the FSEDU Wikiw thread here :
<A HREF="http://fsedu.org/fsedu.pl?ContentDelivery" TITLE="fsedu.org">FSEDU Content delivery</a fsedu.org>

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Re:Payment is coupled with the trust in free softw

Posted by: Anonymous Coward on August 27, 2003 12:15 AM
Opensource software survive by using paypal.

And it looks they are surviving because ppl are donating.

An example is freenet

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Re:Payment is coupled with the trust in free softw

Posted by: James Michael DuPont on August 27, 2003 01:52 AM
Thats right. The software.

My comments are directed not at the software, but the content delivered by this software.

I want to make it possible for freesoftware to compete on the level that is only possible currently using non-free software.

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Re:Payment is coupled with the trust in free softw

Posted by: Anonymous Coward on August 27, 2003 07:18 PM
Yes, what a great business model.

ROTFL

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I don't buy the central argument

Posted by: Anonymous Coward on August 27, 2003 01:28 AM
It is logically inconsistent to say that it's obvious people will choose OOo over MS Office because OOo is free, and then to say that maximizing access and control is the central issue. Most people are extremely cost-conscious, but the issues around vendor lock-in are a bit esoteric and require more detailed explanation to the average consumer. The analogy between software and entertainment is somewhat apropos, however, but not for the reasons elaborated in the article. People pirate software, and people pirate music. They do it for the same reason -- cost.

The place where the comparison breaks down is that there is no real large-scale offering of "Entertainment Libre" that is not owned by the oligopoly of the music and movie industry. Sure, you can watch street musicians, but where are the huge libraries of recordings of independent performers who work every day for a living and play for pay on the weekends?

Let's make up a crackpot scheme here: let's take the FOSS model and apply it to entertainment. If you want to listen to a song, download it for free or listen to the radio. If you want to hear it performed live, pay the performer. This is similar to the way FOSS vendors make money: give the software away, but if you want service or customization, you pay for that.

Nobody will get rich off a scheme like this, and that would probably condemn it to failure -- there are too many people who have become addicted to the cash that comes from IP. But I like the idea much better than the utility model: paying each time I listen to a song, or each time I open my word processor or web browser.

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Re:I don't buy the central argument

Posted by: David Gerard on August 27, 2003 07:30 AM
"The place where the comparison breaks down is that there is no real large-scale offering of "Entertainment Libre" that is not owned by the oligopoly of the music and movie industry."

Enter "BBC Archive" into news.google.com . Go on.

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Re:I don't buy the central argument

Posted by: Anonymous Coward on August 27, 2003 10:10 PM
this model actualy exists in various websites including http://www.peoplesound.com, and most creators and inovators don't reach the lots of cash stage anyway so I don't think they'll mind.
the majority of musicians are not signed musicians and they don't get many oppertunities to produce records, many produce records at a loss because they want their music to be heard, they already make their money from live gigs and session recording its only record companies and mass produced pop that stands to loose.

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Who do you pay ?

Posted by: gerardm on August 27, 2003 01:54 AM
When I HAVE to pay for an entertainment surcharche, who is to benefit. You quote the way radio works but the RIAA pays radio stations for air time for the records that are the pick of the moment. When we have to throw money in a hole to pay the RIAA et all off, does this benefit the persons actually producing the goods?

Consider movies, a good movie will entertain me I go out buy a drink and I pay for the privilidge. Then the movies are rented and if I want to watch THAT movie I may rent it. Then it goes to television I watch it, if I feel like it, preferably on the BBC as they do not have advertisements. I pay for the channels as cable does cost. So at all stages I pay. Movies are expensive to make but consider the marketing that is put into the product (at all stages off the sale) that is a significant factor that buys me nothing as many movies with less marketing money are out spend. However, when you compare movies with drama or television the justification for the amount of money paid to the movie industry is hard to make.

The only reason why so much money is involved is because these monopolies have had their act together. When you consider how little money (relatively) ends up with artists AND how little service the customers get (it is getting increasincly difficult to buy classical music for instance). The problem is not only with payment but also that the organisation of the middle men is increasingly the problem.

Thanks,
Gerard

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adding value to "atoms"

Posted by: Anonymous Coward on August 27, 2003 04:43 AM
Record albums used to be artistic and informative in the days of vinyl. It was definitely part of what you were buying with your $8.98 or whatever. The size of today's jewelcases makes that a challenge, but it still can be done. Some multi-CD sets are packaged with multi-page booklets with nice photos, lyrics, commentary on songs by a fan, a history of the band, etc. That's a great idea, something that people would be interested in. I don't know that this would help Britney Spears but it should definitely help the older bands from the '60s and '70s - every album should have this.

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Already paying

Posted by: Anonymous Coward on August 27, 2003 11:52 AM
I think that a lot of people feel that since they are already paying their ISP for access to the web, they have already paid for whatever they download. This is the service they think they are already paying for: web content.

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Moron

Posted by: Anonymous Coward on August 27, 2003 03:00 PM
You like your fix of downloads, so you propose that I subsidize your downloading habit through an isp tax?

I've never purchased a cd. My newest technology in music are LP records, and cassettes. I'm quite happy with them. I don't even own a cd player, except for the data cd players in my computers. Most of which don't even have speakers.

You like downloading music? Pay for it yourself. Don't go proposing laws that get others to subsidize your music habit.

Apple supposedly has some good model where you pay per download. Try that.

Don't ask me to pay for your music through another tax.

How would you calculate the tax rate, or amount collected/paid to the riaa? Are you going to take their word for it? Their "loss" in the last year? 2 years? 3 years? Their sales during a recession? Their sales with bubble headed bimbos of today compared to quality music of yesterday?

Get your hands out of my pocket!

Moron!

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Software solution?

Posted by: Anonymous Coward on August 27, 2003 04:17 PM
The software solution is no software solution. It's a solution for some consultant companies (the same as the one they have always used) NOT for software companies/developers.

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Re:Software solution?

Posted by: Anonymous Coward on August 27, 2003 10:02 PM
If the artists are so damn good, then people will pay to see them sing live and pay for promotional merchandise.

P2P is helping even out the inbalance of wealth in the world and also as people get to try-before-they-buy it also helps to weed out the crap.<nobr> <wbr></nobr>/me curses all the artists whose albums he bought with only 2 good songs on them.

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In my ideal world...

Posted by: Anonymous Coward on August 28, 2003 09:02 AM
...I would like to pay the artist directly for the entertainment they have given me. I propose an honesty system where you can pay the artist (via an escrow agency) a standard donation that would fairly represent the value of the entertainment I've received AND adequately recompense the artist for the good work they've done.
Once paid they could send me an autographed album cover with cool a Official Supporter certificate on it (or something equally silly/neat)

The thing most people forget is that we generally want the little guy to do OK and the big guy to remember who put them there - us little guys! The net should let us get closer to the source NOT put things in our way..

M@

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Some refinements

Posted by: John Clayton on August 31, 2003 01:38 PM
The easiest way to administer this would be to add a flat rate to the ISP bill, perhaps $5.95 per month. That sum would then be divvied up between the ISP and the entertainment industry, parceled out in a manner similar to the way ASCAP works. If the utility wanted to charge in a more accurate and granular fashion, the ISP could charge according to data usage. (To get really granular, one could also envision a pay-per-file methodology whereby each<nobr> <wbr></nobr>.mp3 or<nobr> <wbr></nobr>.mpg would be charged against a user's account. The technology for metering such usage is already available.)


Another refinement would be to develop a music file standard that included facility for including audit information containing copyright data, that is already included in most popular file formats, digitally signing the music and copyright infomation with the copyright holders digital signature. Using a programs to check if the downloaded file is correctly signed,and if not blocking it, and also determining who needs to be paid for the particiular file being downloaded.

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Canadian Comments

Posted by: Anonymous Coward on September 01, 2003 02:59 PM
There's <A HREF="http://www.p2pnet.net/article/7514" TITLE="p2pnet.net">article on p2pnet in Canada here</a p2pnet.net> with a reciprocal link to this story.

--

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Baby Ruby says <A HREF="http://www.mutley.uklinux.net/Ruby/Grandma%20&%20Noisey%20Ruby.html" TITLE="uklinux.net">"bwarghhhhh!"</a uklinux.net>

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