France Fights to Protect IP

The great early 19th century, French economist Jean-Baptiste Say noted the importance of property rights: "Political economy recognises the right of property solely as the most powerful of all encouragements to the multiplication of wealth."

On protecting private property as a necessary role of government, Say wrote: "Without this protection of each individual by the united force of the whole community, it is impossible to conceive any considerable development of the productive powers of man, of land and of capital; or even to conceive the existence of capital at all; for it is nothing more than accumulated value, operating under the safeguard of authority."

While the technological state of our economy is light years ahead of where it stood two hundred years ago, the protection of private property - including intellectual property - remains a critical duty of government, and central to economic development and growth.

On February 20, The New York Times ran an interesting article titled "A Piracy Law in France Appears to Curb File-Sharing and Lift Digital Music." The main point of the story was that two years afo France approved a measure to fight digital piracy, and the result has been a sharp decline in file-sharing piracy, growth in digital sales, and a stabilization of music industry revenues.

The article described the process under the French law: "The agency that administers the three-strikes system, known by the French abbreviation Hadopi, had sent 822,000 warnings by e-mail to suspected offenders as of the end of December. Those were followed up by 68,000 second warnings, issued through registered mail. Of those, 165 cases have gone on to the third stage, under which the courts are authorized to impose fines of €1,500, or nearly $2,000, and to suspend Internet connections for a month."

The piece also quoted Éric Walter, the secretary general of Hadopi, explaining: "Our work is to explain to people why piracy is a bad thing and why they should stop... When the people understand that, they stop. Of course, some people don't want to understand. Then we have to transfer their dossiers to the justice system."

A study on the impact of Hadopi by researchers from Carnegie Mellon University and Wellesley College was referenced in the article. That study, conducted by Brett Danaher, Michael D. Smith, Rahul Telang and Siwen Chen, summed up its key findings this way: "Our results suggest that increased consumer awareness of HADOPI caused iTunes song and album sales to increase by 22.5% and 25% respectively relative to changes in the control group. In terms of robustness, we find that these sales changes are similar for each of the four major music labels, suggesting that our results are not driven by one particular label. We also find that the observed sales increase is much larger in genres that, prior to HADOPI, experienced high piracy levels (e.g., Rap and Hip Hop) than for less pirated genres (e.g., Christian music, classical, and jazz). This tends to strengthen the causal interpretation of our results given that if HADOPI is causing pirates to become legitimate purchases, its effects should be stronger for heavily pirated music."

So, credit France for taking a significant and apparently powerful step to protect intellectual property. Jean-Baptiste Say would be pleased, and U.S. policymakers should take note.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Steve Jobs' IP Grammy

The 54th Grammy Awards on February 11 claimed boffo ratings. Some 44 million viewers tuned in, up from 27 million people watching last year.

Perhaps that was not surprising given the salute to Whitney Houston after her untimely death, along with a reuniting of the Beach Boys, the comeback of Adele, and Paul McCartney taking the stage, among other top performers.

But one of the most interesting Grammies awarded this year did not go to a singer or musician. Instead, it went to a businessman. The late Steve Jobs, co-founder of Apple Computer Inc., received a Trustees Award.

At the Recording Academy's Special Merit Awards Ceremony on February 11, as noted on the Grammy's website, "Jobs' Trustees Award was accepted by Eddy Cue, Apple's senior vice president of Internet software and services, who made note of Jobs' love of music. ‘Music shaped his life and made him who he was,' said Cue. ‘When he introduced the iPod in 2001, people asked, "Why are you doing this?" He said, "We love music and it's always good to do something you love.'"

If anyone deserved being honored by the music industry, it would be Jobs, who, arguably, saved the industry.

It's worth reminding ourselves that online theft of music took off in the late 1990s, in particular with the creation of the Napster file sharing business in 1999. Jobs responded with the iPod and iTunes in 2001, which made online purchases of songs affordable, easy and appealing.

Music theft online continues, of course. Indeed, it remains a major problem. The RIAA, for example, reports: "While the music business has increased its digital revenues by 1,000 percent from 2004 to 2010, digital music theft has been a major factor behind the overall global market decline of around 31 percent in the same period. And although use of peer-to-peer sites has flattened during recent years, other forms of digital theft are emerging, most notably digital storage lockers used to distribute copyrighted music." The RIAA numbers show how daunting music theft is: "Since peer-to-peer (p2p) file-sharing site Napster emerged in 1999, music sales in the U.S. have dropped 53 percent, from $14.6 billion to $6.9 billion in 2010. From 2004 through 2009 alone, approximately 30 billion songs were illegally downloaded on file-sharing networks."

The RIAA also notes a striking correlation between the decline in music sales and a decline in the number of people working as "musical groups and artists" according to Bureau of Labor Statistics numbers (see the analysis here.) The RIAA analysis sums up: "Selling music is an important motivator to creating music, and ... the decline in sales has correlated with fewer people making a living in music."

Keep in mind that the music business is overwhelmingly about small firms. For example, in that industry category of "musical groups and artists," 93.6 percent of firms with employees had less than 20 workers, and 99.9 percent (i.e., all but five firms) had less than 500 employees (according to the latest Census Bureau data from 2009).

Jobs' love of music, combined with his business common sense, led him to understand the need to protect intellectual property if the music business were to survive.

In another recent SBE Council Technology & Entrepreneurs analysis, we quoted the recent biography Steve Jobs by Walter Isaacson, when the author wrote about Jobs, piracy and protecting IP. That is worth highlighting here once more:

"At this point Jobs could have decided simply to indulge piracy. Free music meant more valuable iPods. Yet because he really liked music, and the artists who made it, he was opposed to what he saw as the theft of creative products. As he later told me:

"‘From the earliest days at Apple, I realized that we thrived when we created intellectual property. If people copied or stole our software, we'd be out of business. If it weren't protected, there'd be no incentive for us to make new software or product designs. If protection of intellectual property begins to disappear, creative companies will disappear or never get started. But there's a simpler reason: It's wrong to steal. It hurts other people. And it hurts your character.'

"He knew, however, that the best way to stop piracy - in fact the only way - was to offer an alternative that was more attractive than the brain-dead services that music companies were concocting."

Steve Jobs combined an understanding of the importance of IP with an incredible talent for innovating, and the result allowed the music industry to have a fighting chance in competing with "free," that is, online piracy.

Depending on your music tastes, you can always debate who did or did not deserve a Grammy. But whatever kind of music you happen to favor, there's no debating the Grammy honor awarded to Steve Jobs.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Piracy not a big problem??

A January 30 headline at TheHill.com caught my attention: "Report minimizes online piracy impact." Really?

The article was about a new study from the Computer and Communications Industry Association (CCIA), authored by Mike Masnick who writes about technology policy for Techdirt, which focuses on the growth of entertainment choices and opportunities that have emerged in recent times due in large part to the Internet and broadband.

The study highlights, for example, that consumer entertainment spending as a share of household income grew by 15 percent from 2000 to 2008; the entertainment sector employment grew by 20 percent during that last decade, including 43 percent growth among those identified as independent artists; box office revenues, according to the MPAA, rose by 25 percent from 2006 to 2010; music concert sales in the U.S. tripled from 1999 to 2009; and the value of the entertainment industry, according to data from PricewaterhouseCoopers and iDATE, grew from $449 billion in 1998 to $745 billion in 2010.

That's great news, and given the obvious expanded opportunities due to Internet and broadband advancements, it's not a surprise.

The study also offers the following summary on the challenges and opportunities at hand: "For the traditional middlemen, the internet represents both a challenge and an opportunity. There is no doubt that the internet has eaten away at some traditional means by which these businesses made money. But, as the data shows, there is more money going in to the overall market, more content being created, and many new ways to make money. That shows that there is a business model challenge -- and a marketing challenge -- but much more opportunity in the long run. The key challenge for business is in figuring out how to capture more of the greater revenue being generated by the wider entertainment industry. Legacy players certainly face a lot more competition (and fewer reasons that artists have to do deals with them) -- which can explain some of the public complaints about the ‘death' of various industries -- but overall, it's clear that by embracing new opportunities, there are plenty of ways to succeed."

That assessment is basically on the mark. But none of this should minimize the impact of piracy, and the need to countdr such theft.

Unfortunately, though, the minimization of piracy appears to be the main purpose of this CCIA report.

CCIA President & CEO Ed Black declared: "The numbers paint a quite a contrast from the vision of doom and gloom the entertainment industry has pointed to lately. Having a more clear picture of the economic successes and challenges of the content industry will help lawmakers around the world as they consider policies like increased copyright enforcement." As TheHill.com reported, "Both Masnick and CCIA were strong critics of the Stop Online Piracy Act and Protect IP Act, which were championed by the entertainment industry as vital cures for the epidemic of online piracy."

The line of thinking in the CCIA report seems to be that since new opportunities exist, then the very real losses experienced due to IP theft do not matter, and stronger IP rights and protections do not matter. That's absurd.

Internet and broadband technologies have vastly expanded opportunities for creators, consumdrs and businesses. That's not really in dispute. At the same time, this does not mean that real and significant losses due to IP theft are not occurring. The full potential of the Internet obviously is being restrained due to widespread stealing of intellectual property, as has been made clear by countless studies and analysis on, for example, losses to the entertainment and software industries.

Stronger IP protections are not bad for consumers, or for small businesses and independent artists. To the contrary, beefing up IP rights will only further expand choices for consumers, and increase opportunities for independent creators and the business community.

Acknowledging new opportunities should not serve as an excuse for ignoring IP theft.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.