August 26, 2003

Solving the payment problem for open source and P2P file sharing

- 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.