Imitation & Innovation in China

It is said that imitation is the sincerest form of flattery. If true, it should follow then that China are huge fans of most consumer electronics brands. We’ve written before about threats to intellectual property. The impact of such imitators is most keenly felt by the end user, and can be mixed. In India, back in 2011, counterfeit DVDs of The Dark Knight sold for over $600 a pop. In China, where a limited embargo on foreign films exists, scarcity has spurred innovation, leading to grey-market DVDs with more special features for viewers to enjoy.

Such innovation still flouts the law, however, and is nothing new. In his book A History of Future Cities, Daniel Brook writes in detail of the Westernisation of Shanghai at the end of the 19th century:

“As early as 1863, the British food company, Lea & Perrins, was taking out ads in the North China Herald to warn Shanghai consumers of ‘spurious imitations of their celebrated Worcestershire sauce [with] labels closely resembling those of the genuine Sauce’ and threatening lawsuits against anyone who dared to manufacture or sell the knockoff product”

Today, China still struggles to build powerful brands that work outside the country as well as they perform domestically. An editorial earlier this week in the Financial Times confirmed this status, with a focus on handset manufacturer Xiaomi. The editorial rightly points out Xiaomi have made good attempts at brand cultivation, including a strong social media following that cultivates a sense of belonging that results in people attending new product releases in the same uniform and plush toys (see header photo). More could be done though. Ultimately the brand can be as glitzy as you want, but without an exciting business beneath, generating excitement will be hard: “It is a sound business, but not an innovative one”. Its product specs borrow from Samsung, its product design and launch motif from Apple, albeit with some mildly diverting software additions of there own, such as a way to navigate automated phone systems.

The risk of failure in markets outside of China has potentially been heightened by the centrally planned market environment present there, which rewards and protects national incumbents while doing its best to hinder new, foreign entrants. A domestic market with over a billion people is not a bad starting place, but as the FT concludes, “If Chinese brands are going to take on their rivals around the world, they need to dazzle us with something we have never seen before, much like Sony did with its life-altering Walkman“. Sony though will feel keenly that such dazzlers do not a sustainable competitive advantage make.

The Business of Fashion – Regulation, acquisition and the slowdown

When the global financial meltdown struck in 2008, many of those with a vested interest in the luxury market watched nervously; high net worth individuals had surely seen many investments wiped out as the recession struck and would thus be more inclined to austerity. While there was a brief moment of humility and caution over indulgence in life’s finer things, it was brief. The luxury market proved surprisingly resilient. Global spend has increased since the recession by around a third, helped in no small part by the explosion of growth in developing regions, China in particular. Orson Welles once said “If you want a happy ending, that depends of course on where you end your story”. Our story, sadly, does not end here.

It was not a good omen when fashion curator and director of the Musée Galliera in Paris Olivier Saillard said during New York Fashion Week last month, “We are in a moment that’s very bizarre in fashion: there are too many clothes”. Business of Fashion lamented both a lack of quality and vision in contemporary collections,

“Fashion seems stuck between the need to surprise using a new array of communications tools and the urge to deliver novelty at the fastest possible pace. Slowing down might be a solution, but that would be a hard route, which will hardly find followers.”

And it is followers that fashion, and the luxury market as a whole, are in need of. Earlier this month the Financial Times reported on the global slowdown of luxury spending. Behind this slowdown lie two factors. On the one hand, there is what are hopefully short-term influences; geopolitical turmoil is rife. Hong Kong continues to see protests that refuse to simmer down, causing disruption to myriad businesses. The city accounts for perhaps 20% of global luxury spending. The Middle East, whose consumer origin or nationality according to Bain & Co. has the biggest average per capita spend, is similarly in chaos, with Syria, Iraq, Afghanistan, Egypt, Libya all in various stages of unrest. Regions like Saudi Arabia and Qatar are caught between a rock and a hard place. In Russia, sanctions have hit oligarchs and their ilk hard. As a result, shares in luxury good companies have been hit hard. Prada has seen profits slide 20% in the first half of the year. Everyone’s darling of fashion innovation, Burberry, has warned of a “cautious outlook”. Mulberry has issued a string of profit warnings and recently ejected its CEO.

McKinsey illustrate the drift of luxury growth from developed to emerging markets

So we can reason that these companies are seeing fewer customers. But they are also attracting new ones, albeit with very different expectations of the service they expect from the companies they have relationships with. This is the longer-term challenge. Millennials may have been treated as a distinct niche group with quirky demands from brands, but next year they will outnumber Gen Xers, according to McKinsey. These utterly digitally savvy citizens have embraced and contributed to a digital fragmentation in the consumer decision journey, the production process and the fundamental nature of buyer / seller value exchange.

“[A] confluence of digital, the rising power of street fashion and changing consumer attitudes… are radically altering the industry. [It is a] consumer-led shift away from ostentatious and mainstream mega-brands towards understated originality”

One of the most obvious ramifications of this has been the trend of ‘logo fatigue’. It is likely to hit those like Gucci particularly hard, while benefiting those like The Row, and little-known retailers like L’Art du Basic. For larger brands there are some examples for inspiration though. Yoox, whom we have profiled in detail before, have gone from strength to strength in embracing effective digital strategy. The fashion ecommerce site reportedly sees 42% of its global traffic coming from mobile devices, and has recently made a significant push into experimenting with instant messaging app WeChat. As elaborated by Fashion and Mash, the account allows users to “shop via an interactive look book, and to instant message customer service teams and personal stylists. Content also invites users to exclusive events and provides early access to specific products”. In the physical world, Ralph Lauren’s hosting of a cafe in its Fifth Avenue store in New York may be less immediately strategic but seeks to leverage the same burgeoning trends. Brands will need to do more of this, more often, if they are to find what works best for them in terms of engaging and converting future prospects.

Also this month, Zeitgeist found itself at an event at London’s Four Seasons hotel off Park Lane, hosted by law firm Baker & McKenzie. Threats, tech trends and M&A were the main subjects of discussion. Zeitgeist scribbled down some bons mots which were thought worth recounting here. Last month, McKinsey produced an insightful piece on the future of luxury growth, indicating growth would come for the most part from what they termed global megacities, a large proportion of which were located in emerging economies. But China is facing a slowdown; no doubt one of the reasons it was recommended in the conference that businesses start to think less of China as an independent market of growth and more of ASEAN as a region.

3D printing was a matter of much conjecture, but it was pleasing to see that the regulation of such materials was already being considered. One speaker offered the technology would be a greater problem for toy manufacturers than luxury, but cautioned that fast fashion and high customisation were a potent mix. Current UK regulation allows for printing any designs (of one’s own creation or not) at home for personal use for no gain. Such laws may have to be re-examined as 3D printing becomes more widespread. It is difficult to protect the IP of a fashion designer’s work, and difficult therefore to know where to draw the line between inspiration and infringement. The case of the red shoe, specifically between Yves Saint Laurent and Christian Louboutin, has illustrated such difficulty. In the case of 3D printing, one speaker suggested that printing could be limited via restriction similar to how publishers use paywalls, or a more sophisticated version of the DCMA. The importance of protecting the source code of 3D printing designs looks set to be important; Pirate Bay already has a section for such product. Social networking as a new source of IP was also discussed. David Yurman sought opinions on styles to be included on a Valentine’s campaign; users could drop hints to their partner. Bergdorf encouraged fans to design Fendi bags over social, too. But there have been slip ups; Cole Haan offered to pay fans $1,000 for taking pictures of their shoes, without making it clear it was part of contest where someone would win and that the company was sponsoring the activity. They got off with a warning from the regulator, but luxury brands must treat that as a cautionary tale as they continue to experiment. “The law is not keeping up with the technology”, as one speaker sagely confessed.

David Yurman’s Facebook campaign suggests new IP possibilities for businesses in the future

The M&A chat was equally of interest. Speakers ruminated on the rise of vertical integration as LVMH et al seek to own the whole process. It’s a brave step for companies that traditionally haven’t involved themselves with supply chains or distribution, according to those speaking. Acquisitions were taking two forms: one was spotting missing gaps in the portfolio. For LVMH, the hole in their portfolio was jewellery, which lay behind their purchase of Bulgari in 2011. More recently Giorgio Armani – or as one speaker referred to the man himself, “King George” – reclaimed control of Armani Exchange as it attempts to leverage fast fashion trends. The other form was that of acquisitions in support of brand development – innovation, technology, CRM in Mandarin, social media, etc. More of these sorts of acquisitions were expected on the horizon.

How do these deals play out today? Private equity buyers have a lot of capital and access to cheap debt, but traditionally many of the targets of a buyout have been family-owned businesses who were not ready to relinquish control to a PE firm. These firms are much quicker and more aggressive at deals; they can quickly globalise a brand, can improve the supply chain and stretch the brand up and down from the original price point. Of course, adding new assets, like social media, makes due diligence – and knowing how to allocate risk to a mercurial medium – much harder. Owning supply chains carries risks of more exposure (see Apple and Foxconn). One of the most thorny issues that speakers envisioned was for a luxury good empire known for provenance and quality to be acquired by a a company in a jursidiction that is not known for such things. What if Alibaba bought Balenciaga from Kering, for example?

Digital is expected to drive, on average, 40% of projected luxury sales growth from 2013 to 2020

Next year will see the return of John Galliano to the runway stage to the helm of a fashion house, this time at Martin Margiela. A recent article on the designer’s flameout while creating works of wonder for Christian Dior emphasised the way in which Galliano “had been cloistered off into a strange protective bubble. Sometimes, we isolate (and elevate) talented creatives so much in the fashion industry that they lose connection with reality”. It is arguably a similarly protective bubble that the fashion industry itself has often been accused of being in, and we would argue it is in now with regards to the need for greater digital sophistication and a more significant investment in digital strategy as it concerns customer insights and the law. It is plain to see that the luxury industry continues to face disruptive challenges, be they at the hands of digital, demographic or geopolitical trends. Some of these disruptions will hopefully, as mentioned earlier, be more temporary in nature. The more fundamental shifts in consumption, though challenging, also present myriad opportunities for businesses that are brave and agile enough to test what works best to capture and retain the customer of the future. Last month Exane BNP Paribas published a report illustrating just how important digital sophistication will be (see above chart), and naming those most likely to benefit from such changes. They could do worse than start by reading our previous post on the future of retail.

Threats and Opportunities for the Entertainment Industry in 2014

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*Our 2015 trends for the sector can be found here*

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At the start of a new year, what to make of the entertainment sector? It depends where you look. One thing is for certain though; at the close of 2013 that old laggard the music industry upstaged its media cousins. For sheer daring and innovative nous, few initiatives could claim to beat Sony in its launch of Beyoncé’s new album. In the face of increasingly ailing streaming services, the album was released as a fixed bundle on iTunes, with no marketing behind it. The news of the release thus came as a last-minute surprise to the industry and consumers alike, creating a short but extreme burst of anticipation. The artist posted a message on Facebook saying she wanted to recreate the “immersive experience” she used to have listening to music. The album sold 80,000 copies in three hours. It is difficult to envision Sony’s film division at Columbia Pictures doing anything similar.

Near the end of last year, Zeitgeist was fortunate enough to be able to attend the 5th Annual GlobeScreen Conference at London’s May Fair Hotel. Eve Gabereau, the co-founder and MD of Soda Pictures lamented “nurturing a film is not possible any more… there is less opportunity for a film to find its audience”. Word of mouth, she said, had to be very good, and happen very quickly, in order for it to have an effect. Simon Crowe, founder and MD of SC Films International, disagreed with another speaker, who asserted that filmmakers were being hampered by a lack of data, in that they did not know who they were making films for. He dismissed the need for data, and, most worryingly, stated the primary focus should not be on the bottom line. This is dangerous thinking. Films may be art, but if the medium is to continue then it needs to be profitable. So the primary focus has to be ‘How will this product turn a profit?’. Zeitgeist asked him afterward about the viability of VOD (video-on-demand) as a channel; Crowe was not optimisitic about its future as a significant revenue producer, calling films that have found success on such platforms – such as Arbitrage and Margin Call – outliers. Zeitgeist offered that Netflix had not been considered a significant distribution channel for a while, until suddenly it was. Did he foresee a similar situation with VOD? “Don’t know”, was his retort. It was well worth staying late to receive such gems as answers. The whole conference spoke of an ignorance of the insight data can provide, a shunning of profit-focused management, and a general yearning for bygone times when the industry – not to mention the champagne and other substances – was flowing more freely.Such anecdotal frustrations found company in the form of hard data. To cap off 2013, Business Insider published an article entitled ‘The US 20: Twenty huge trends that will dominate America’s future’. Number 16 was ‘Old Hollywood is dead…’. It noted that inflation-adjusted box office receipts were down around 8% from their 2004 high (see chart). Industry trade mag Variety reported recently that UK box office fell 1% in 2013, which was the first drop in ten years and the biggest in more than twenty. Of course, part of the reason for this was because 2012 had a rather suave helping hand from James Bond, in the form of Skyfall. When Zeitgeist prodded Cameron Saunders, Managing Director of 20th Century Fox UK, about the news over Twitter, he was quick to leap to into the fray, noting that it was “still the second biggest box office year on record”. He also went on to concede though that “UK admissions however have flatlined, despite lots more films = fewer people seeing each movie”. The same scenario is happening in the US. China is one of the few bright spots in the world of film, and has seen an explosion in the number of physical screens installed in the country over recent years. But even the Chinese film industry has medium to long term challenges it will need to overcome, if, as some predict, it is to become the world’s largest film market – overtaking the US – by 2019. It is still at the mercy of a government with strict controls and vague whimsical notions about what makes for permissible content; the state is involved at almost every level of production and distribution. Moreover, though the quota on foreign releases in the market has been relaxed slightly, it is by no means open season for Hollywood. In much the same way as the banning in China of Google’s app service and videogames consoles led to poor knock-offs, so with film. The restrictions have spawned poor remakes of American films that didn’t see a release on China’s shores, which inspires little creativity or excitement.

It was not all doom and gloom in the cinema of late of course. Gravity continues to light up screens across the world, and seems poised to do well come Oscar night. Its only obstacles come in the form of other films that critics and audiences have been similarly impressed with this season, including 12 Years a Slave and Captain Phillips. But such artistic achievements can hardly make us forget what was a poor summer for the film industry. We have written before about how films in development are increasingly either mega-blockbusters or niche arthouse films. Producer Kevin Misher, talking to The Economist last month, echoed our thoughts; “Hollywood is like America: the middle class has been squeezed”. The article went on to lament the unique situation the film industry finds itself in, relying on outsiders for both ideas (“imagine if Apple or Toyota did this”) and funding.

Will more content producers partner up with those infringing intellectual property?

The challenges extend further. Though Kodak suffered from other problems too, one of the things that prevented it from ever laying down a long-term strategy to embrace digital photography was the revolving door of executives at the top. Hollywood is similarly afflicted. In the past 18 months, according to The Economist, four of the six main studios have seen change at the top. Perhaps some longevity in senior roles would have encouraged these companies to embrace new ways of delivering films to eager customers. Instead, most films, particularly the ones glutting the summer schedule, still cling to an outdated distribution strategy of staggering releases across platforms. Studios resist doing this – save for the odd arthouse release – because it risks the ire of exhibitors. We’ve written before about the antiquated nature of such thinking. Every delay in getting to a consumer increases the chances that customer will resort to piracy. Companies like Netflix are reporting that intellectual property rights infringement dips once legal alternatives are made available to people; there are signs of hope.

Piracy is of course playing a role in television, too. In Poland, consumers have to wait months after the US broadcast for their dose of Homeland. It is thus one of the more popular shows to be pirated. Making the most of this trend, a publishing company responsible for a new book detailing Carrie’s life before the start of the series has been inserting adverts into the subtitles for the show. The MD of the publishing company told TorrentFreak, “We decided to advertise via subtitles because we wanted to show the book to all the fans of the Homeland series in Poland, no matter where they watch the show”. You can’t argue with placing a promotion for where you know your likely customers are. It will be interesting to see if any other unlikely coupling between pirates and content producers emerge. For, as amusing as this news is, it does point to a fragmentation in audiences, and thus in places for advertisers to reach them. It should have come as little surprise then when, last month, the Financial Times reported that TV’s share of advertising spend will slip this year, after three decades of uninterrupted growth. Jonathan Barnard, ZenithOptimedia’s head of forecasting, warned, “After television ad spending has grown pretty consistently for at least the last 35 years… there will be quite a lot of disruption to come over the next 10 years.”

Of course, disruption will come to other sectors of the entertainment industry, too. This was apparent at the recent Consumer Electronics Show in Las Vegas, where Samsung and Sony, among others, held court. It wasn’t the best of showings for Samsung, where famed producer / director Michael Bay walked out seconds into a presentation on curved televisions after the autocue failed. Sony had its disruptor product to tout, a cloud TV service. Beyond the glitz and glam of such new product releases, a big question remains: Can Sony use what assets they have and combine them effectively? A great article in the FT probed deeper, asking whether all these new products and services – we would be remiss were we not to mention the PS4, currently outstripping the Xbox One in sales – can be successfully integrated into an ecosystem that Sony is desperately trying to create. The corporation dabbles in film distribution, film production, smartphones, music as well as videogames and is slowly trying to tie them all together. All this while seemingly trying to disrupt itself, with cloud gaming doing away with the need for a console and image projectors doing away with the need for physical screens (Sony loses about $80 on every set it sells currently). As the article concludes,

“[CEO] Mr Hirai is trying to pick up the pace as Sony searches for its digital destiny. But the familiar questions remain: can it execute on the plan, how fast can it move – and how much pain is it prepared to take along the way?”

Where next for Sony?

Certainly if companies like Samsung and Sony wish to succeed in the coming years, they will have to do away with the obsession of focusing on hardware. It is plain now that, in consumer’s eyes, technology has reached a tipping point where the specifications of an object are no longer a unique selling point; they are a redundancy. This became clear at the Mobile World Congress in 2012, when PC Magazine published its event wrap-up under the headline “The End of Specs?”.

There are some companies that are embracing disruption, or at least, trying to hire those who started it in the first place. Disney, which often seems to have a strong strategic head on its shoulders, recently made the eminently sensible move of hiring the chairman of Twitter Jack Dorsey to join the Walt Disney board. This was no isolated occurrence for Disney, who had previously had Steve Jobs on the board and who have also hired Facebook COO Sheryl Sandberg. Elsewhere, the canny Weinstein brothers, who rarely miss an opportunity to make impressive artistic works that turn a decent profit, reteamed with their old company Miramax to develop further iterations of their film library. Seeing the opportunity for increased creativity in television, as well as new channels like Netflix and Amazon, they will also be developing new television series. And while online takes away advertising spend from other channels under the promise of reaching the right people at the right time, new local television development in the UK promises to do similar as it targets localised areas. Still, the film industry as a whole seems to be outright resisting any changes to the calendar; schlock in the summer sun, followed by arty pretense come Oscar time. Repeat. A writer in the New York Times elaborates,

“And then, after the Oscars, the machine picks up speed and starts excreting ghastly product like Oz the Great and Powerful, one of the worst movies of 2013 and the eighth highest domestic grosser of the year. Then the fall hits, and we cling to movies like Gravity and insist that, really, it isn’t all bad. And it isn’t, of course, even if creating a Top 10 list is finally an exercise in exceptionalism.”

The worry is that any shift in the schizophrenic nature of film scheduling and creation will probably involve at least a short-term hit to the bottom line. And a recent dismissal hints that no such shift is underway at the moment. In October, the great James Schamus of Focus Features was let go by Universal. Schamus was instrumental in bringing director Ang Lee to the US, distributing his Crouching Tiger, Hidden Dragon before going on to make The Pianist, Far From Heaven and Brokeback Mountain, among many other extraordinary films. Doug Creutz, senior media and entertainment analyst for Cowen & Company, told the New York Times in December,

“The major media companies are so big that nothing but a blockbuster really makes sense. Say you make a low-budget comedy and it brings in $150 million. So what? That doesn’t move the needle. You make a blockbuster… You can do the sequel and the consumer products and a theme park attraction. The movie itself is almost beside the point. All Disney is going to be doing is Marvel, Star Wars and animation.”

That would be a great shame for those who like artistic diversity, as well as sensible financial returns, in their film studio output. Current business models seem to be producing diminishing returns. This is true for videogames, movies and music. Experimentation, such as that by Sony’s music division mentioned at the beginning of the article, must be more widespread to engage with new consumer habits and to rekindle jaded minds. Consumer engagement and feedback as a whole is largely missing from much of the strategy with which the entertainment industry steers itself. Shareholder returns and operational logistics occupy most of their time. A far more rigourous approach to data – collecting and analysing it – and a more open ear to one’s customer base, might prove beneficial.

Embracing digital – New moves for old companies

Are incumbent companies starting to see the light when it comes to embracing digital? Evidence is slowly starting to point in that direction.

Artists are known for embracing change and innovation, but the art market itself has been slow to adapt to changing consumer behaviour. Now mega e-tailer Amazon is selling art on its site, and venerable auction house Christie’s is pushing headlong into online-only sales, as Mashable recently reported. And while fashion designers know how to use digital to push the envelope, the fashion industry as a business has been notorious for their skittishness at investing in efficient, immersive digital experiences for their customers, so worried are they about detracting from the brand. So it was reassuring to see during Paris Fashion Week recently that French marque Chloé had gotten the message. As Zeitgeist’s dear friend and fashion aficionado Rachel Arthur details on her blog, the brand launched a dedicated microsite for their runway show. Brands like Burberry and Louis Vuitton have been doing this for at least three years, so in of itself it’s nothing new. What made the experience different were two things. Firstly, the site created a journey that started before the show, and continued after it, rather than merely offering a stream of live video and little else. More importantly, it tried to make the experience one that reflected the influence of those watching. As Rachel points out,

“As the event unfolded, so too did different albums under a moodboard header, including one for the collection looks, one for accessories, another for the guests, and one from backstage. Users could click on individual images and share them via Twitter, Facebook, Pinterest or Weibo, or heart them to add them to their own personal moodboard page.

‘[We] are excited to see how you direct your own Chloé show,’ read the invite.”

The recognition of platforms like Weibo should be seen as another coup for Chloé. Too often, companies send out communications to global audiences with perfunctory links to Facebook and Twitter. Not only is there no call to action for these links (why is it that the user should go there?), but there is no recognition that one of the world’s most populous and prosperous markets are more into their Renren and Weibo.

Elsewhere, despite what seems like some niggling problems, Zeitgeist was excited and intrigued to read about Disney‘s latest foray into embracing how consumers use digital devices, this time creating a second-screen experience in movie theaters. Second Screen Live, as Disney have branded it, doesn’t immediately sound particularly logical, as GigaOm point out,

“Of all the places I’d thought would be forbidden to the second screen experience, movie theaters were near the top of my list. After all, you’re paying a premium ticket price for the opportunity to sit in a dark theater and immerse yourself in a narrative — second screen devices operate in direct opposition to that.”

And yet the Little Mermaid experience that the writer goes on to describe cannot be faulted for its attempt at innovation, at reaching beyond current thinking (not to mention revenue streams), in order to forge a new relationship between the viewer and the product. Kudos.

Lastly, Zeitgeist wanted to mention the US television network Fox as a classic example of a company that has slowly come to realise the power of working with digital, rather than against it. In years passed, companies like Fox were indisputably heavily involved in digital, but only from a punitive standpoint. Fox and others were ruthless in their distribution of takedown notices to sites hosting content they deemed to infringe on their product. Fan sites that exploded in support and admiration for shows like The X-Files were summarily threatened with legal action and closed. There was little thought given to the positive sentiment sites were creating around the product, and little thought given to the destruction of brand equity that such takedown notices brought about. Not to mention the dessication of communities that had come together from different parts of the world, their single shared attribute being that they were evangelists of what you were selling. Clips of shows, such as The Simpsons, appearing on YouTube would be treated with similar disdain. So it shows how far we’ve come in a few years that this morning when Zeitgeist went onto YouTube he was greeted on the homepage with a sponsored link from Fox pointing him to the opening scenes of the latest Simpsons episode, before it aired. Definitely a move in the right direction.

Once notorious for their stringent outlook on content dissemination online, Fox now pushes free content across multiple digital channels

The Piracy Pivot – A new heading for copyright enforcement?

Pretty much seven years ago to the month, Zeitgeist was putting the finishing touches to his Master’s dissertation. It centered on intellectual property rights, and the infringement of those rights by consumers who were downloading content they weren’t paying for. Zeitgeist conducted multiple interviews, including several with key people at studios and industry bodies in Europe and Los Angeles. It was a time when the industry were trying to curtail piracy using massive fines and jail sentences, at the same time providing few legal alternatives for content consumption online (this latter issue is still a problem today). Needless to say, there were a fair amount of heads buried in the sand. We’ve talked about piracy before, from its murky impact on the bottom line to the stricture of copyright law.

It was refreshing to see the news reported by industry trade mag Variety that Comcast – a large cable operator in the US, which also owns NBCUniversal – is investigating new methods of disrupting piracy online. Specifically, they are planning to push pop-ups to those who are downloading content illegally, providing them with links to alternative domains where the same product can be downloaded legally. There are privacy concerns here, undoubtedly. What was most reassuring about the idea though was crystallised below by journalist Andrew Wallenstein, which for Zeitgeist hits the nail on the head:

Using pirated content as a platform to drive legal transactions reflects an alternate philosophy regarding copyright infringement, one that sees the illegal activity less as a crime that requires punishment and more as lead generation to a consumer whose behavior is borne out of inadequate legitimate digital content options.

On Piracy

The terribly dry yet fascinating Harper’s Magazine recently featured in its ‘Readings’ section an excerpted essay taken from a book, out this month, entitled Stealth of Nations: The Global Rise of the Informal Economy. The following is a summary and rebuttal of some of the key points made.

The excerpt begins in China, where intellectual property theft is, as most of us know, already rampant, and has been for several years. There are contributing factors for this. One is a market that allows around only 20 Hollywood films to be released every year. Another is the premium placed on legitimate DVDs sold in emerging economies like China. As The Economist reported in August, DVDs of The Dark Knight sell for $663 a copy in India. In China, the LA Times reports, counterfeit DVDs may have more special features than the genuine article. This last point taps into what most advocates of piracy usually tubthump; piracy gives people what they want. Not necessarily just regarding price – Zeitgeist would be hard pushed to fork out $663 for The Dark Knight – but also with regard to access and to functionality of the product. At The Future Laboratory‘s Spring/Summer trends briefing earlier this year, the emphasis was on loosening control over proprietary technology, collaborating with others in order to enhance innovation and ultimately help make the product better.

The product in question in this bazaar, however, is not DVDs; “There’s essentially just one product sold here: mobile phones.” The handsets are all knock-off, counterfeit items, playing on and abusing the brand equity of established companies with names like “Sansung”, “Motorloa” and “Sany Erickson”. It brings to mind the episode of the The Simpsons when Homer is duped by brands like “Panaphonics” and “Sorny”.

The competitive advantage for these products over their authentic brethren is the price. With no need for an R&D budget, the price of a “pirated Nokia N73 [is] $85, a fifth the cost of a real N73”. The author predicts sellers get an “extraordinary” 100% return on the initial investment. This, then, is big business. Big in the terms of holistic number of customers, returning multiple times, and big in the sense of the amount of profit it turns, and the number of people employed in such activities.

“The International AntiCounterfeiting Coalition… predicts that, with hundreds of thousands of industrial workers still facing unemployment and dislocation from the global recession, China will allow more piracy in order to prop up employment and avoid potential civil unrest.”

The author contends that this kind of behaviour is entrenched in society, and owes its debt to Bernard Mandeville, who argued for liberalising the market to the extent that things like tax-dodging, piracy and overcharging were “good for society”. The pamphlet in which he extolled his virtues became extremely well-known because pirates quickly got a hold of his six penny publication and distributed it in half penny sheets. This obviously made Mandeville no profit, but it raised his profile no end and, according to the author, “gave him the opportunity to publish a new edition”. Keeping as many people employed as possible, no matter the scrupulousness of their work, he argued, would lead to a better society than one dominated with excessive rules and regulations. And it seems, prima facie, that selling pirated goods allows access to consumers who can’t afford to pay full price. The difficulty, however, lies in whether the consumer can’t afford to or whether they just don’t want to. Whether someone whom a company would initially attempt to covet and convert to a prominent customer at a later age is instead lost to a world of pirated goods, which, not being subject to the same standards as the genuine article, ultimately disappoints the buyer and pushes them away from the brand entirely.

In a tale similar to that of Mandeville, the author Neuwirth suggests similarly that were it not for piracy, Shakespeare himself would also be confined to the realms of anonymity. During production of his plays, piracy allowed for other productions to run different versions – “King Lear was remade with a happy ending”, for example. In 1709, publisher Jacob Tonson bought the rights to the complete works, publishing them at a premium every fourteen years,  “enough to secure his perpetual copyright”. When one upstart pamphleteer threatened to sell the plays in sets for a fraction of the price, the argument that ensued resulted finally in Tonson flooding the market with plays sold at a penny.

“Shakespeare’s plays were suddenly available all over London at rock-bottom prices – something that had never been true even in the playwright’s lifetime. A century after his death, piracy helped make William Shakespeare a household name across social classes.”

Without deep research it is hard to dispute this intriguing interpretation, except to say that some of the adaptations of the plays may well have fallen under today’s terms of ‘fair use’, and that perhaps what this example really demonstrates is the need for a regulatory environment, one that stipulates that culture be accessible to all, rather than leaving it to excessive price gouging. Similar stories occur in the present-day as Neuwirth moves on to illustrate the situation in Peru, where “more books are sold in pirated editions than official versions”. The price for a legitimate copy of a book is too steep for most people to afford; thus the piraters are the ones that undertake market research, attend book fairs, etc. This is a dramatic fault with the publishing industry in Peru, which clearly has missed business opportunities here by not aliging prices sufficiently with customer demand. This again, then, is an example where regulators should be stepping in to correct market deficiencies. It is not necessarily an excuse for piracy to be celebrated. An absence of morality is not an imprimatur for immorality.

The Business Software Alliance affirms that in 2008, piracy cost software companies $53bn. The author rightly challenges this, writing that the BSA “assumes that every pirated program represents a lost sale at full retail price”. With relatively high prices for products like Adobe InDesign and Photoshop, this thinking by the BSA is indeed questionable. In some cases, initial access to a pirated copy, much in the same way a legitimate trial version works, might well help incentivise the consumer to purchase the full, legal product. Interestingly, the author quotes a note, hidden away in the BSA’s results,

“‘Business, schools and government entities tend to use more pirated software on new computers than ordinary consumers do’. The government – the same entity that the industry calls upon to police piracy – is actually one of piracy’s largest patrons.”

This revelation is startling as it turns the notion that it is consumers who are the wrongdoers, consumers who need the educating, on its head.

The notion of piracy contributing positively to business turnover is a tough one though. The author contends that in the world of fashion, going from a world of ‘planned obsolescence’ (a term used for things like when BMW will decide to release their new version of the 7 series), to “induced obsolscence”, where piracy “spurs demand for new styles”. This may be so in some sort of roundabout way, but the presence of piracy can surely be said to do little for the customer trying to differentiate between the legal and the illegal product, and little for the brand. Louis Vuitton et al. have surely suffered considerable losses over recent years, and invested significant amounts of time and money on combatting piracy. Though an anonymous executive of a “major sneaker manufacturer” might concede piracy doesn’t really impact the bottom line, it is debatable as to whether this is the case for those in the high-fashion world.

Ultimately, while the rise of pirated goods allows consumers more options, it also requires them to be increasingly savvy about the products they are purchasing. An over-regulated environment may stifle innovation; collaboration among multiple entities has been proven to sometimes enhance the development of a product. Quality of craftsmanship is necessarily going to be harder to discern when purchasing a pirated good, though. The trick is to create a legal framework that allows businesses to thrive, to provide their customers with a product at the right price, and to employ people who are protected under laws that they would otherwise not be granted under illegal outfits.

A sense of ownership

In an increasingly homogenous and globalised world, how important is craft?

In some industries, the concept of owning something tangibly has become redundant; an antiquated thought that occupies old minds and outdated marketing and sales strategies. Netflix, the online video rental service, is a prime example of this. Recently the service reported record quarterly profits, with revenue up 31%, adding just under 2m subscribers in the last three months. The service, which started as a way to rent DVDs online, eventually introduced a streaming service, which, as of this month, is now more popular than the DVD part of its offering. This has not been a sudden shift, but rather one that has been happening gradually, helped independently by DVD’s gradual decline since its heyday. Blu-ray is a temporary panacea and will not combat the inexorable shift toward a medium that someday may not exist in hardcopy form. The challenge will be in how to maintain a sense of ownership for the consumer when all their films (as well, of course, as all their books and music), are only visible through an electronic device, rather than being stacked on shelves. Having physical media on your shelves is a statement of sorts, and not merely a tool to show off your intellect. Though by turns irritating and immature, Taleb’s book Black Swan does make a great point about the purpose of a library of books, a metaphor which can be extended to music and film as well. Anecdotally, Zeitgeist doesn’t know a single person who favours the practicality of an electronic book over the unique feeling of owning something tangible. Creating desire for such software [i.e. books, film, music] will be another challenge, one that at the moment is being countered by creating desire for the hardware [i.e. the platform: iPad, Kindle, etc.].

At the same time, other industries, where individuality and provenance are of greater advantage than practicality or cutting-edge convenience, are experiencing a different problem. The Economist this week reports on the problems facing the industrious knitters on Fair Isle, part of the Shetland islands. The distinctive prints they create for their knitwear, which the magazine describes as “in vogue”, has also tapped in to an increasing post-recession desire for “garments that look chunkily lasting and homemade”. In this case, provenance is a hugely significant part of why people would choose to buy this particular product. Ownership of the product is not for the mere intellectual consumption of the product, it is also about wearing something that means something, in the sense of Roland Barthes’ Mythologies. This importance, The Economist maintains, is being diluted as neighbouring knitwear manufacturers unfairly play off the Fair Isle’s name. Following in the footsteps of Harris Tweed and champagne, the cottage industry, like Cornish pasties and Yorkshire pudding, is seeking special protection for exclusive use of it’s name.

So there’s clearly a push and pull going on as to the importance – the essence – of ownership. Perhaps what is needed is a total reappraisal of what ownership means when the content you are talking about is not something tangible that you carry around with you and are free to do with as you wish, but rather something floating in the Cloud, that you merely have access to.

Intellectual Property ReBoot

The British Library corrals some bright sparks and lights some fires over copyright protection.

At the Emmy Awards recently in Los Angeles, emcee Conan O’Brien bemoaned (or rather, celebrated, see above) the demise of old media, in particular his erstwhile host, NBC. While media fragmentation has played a significant role in this, many in the industry also complain of piracy. Intellectual Property Rights [IPR] are not sufficient they say. At the end of last month, the British Library published a paper under the Creative Commons license entitled “Driving UK Research. Is copyright a help or hindrance?”, in which 13 scholars, journalists and artists, all intimately familiar with IPR, advocate for a more relaxed approach to incentivising and regulating.

“There is a growing tension between laws designed to protect the intellectual property of writers and performers and their desire to capitalise on their own copyrighted material.”

The above quotation is from author and journalist Richard Donkin, featured in this report. The original purpose of copyright as set out in the United States is to incentivise people and to encourage innovation. Zeitgeist would argue that these original aims have been lost in a orgy of corporate overindulgence. As discussions continue on lengthening Europe’s current 50-year copyright term to equal the 95-year length in the US, one issue that many of those writing have difficulty with is the issues of ‘fair dealing’, more commonly known by it’s US term, ‘fair use’. According to this paper, it currently allows little scope for sampling for educational or critical purposes. As Professor Lionel Bently comments, “the publisher insists that I and my co-author have the consent of the copyright owner. But identifying and locating the copyright owner is not at all straightforward.” It is often very hard to track down the rights to a work as attributed to a particular person – especially if this person is no longer among the living. One of the contributors to this paper argues that people should be actively encouraged to register their copyright, rather than just assuming it as the work is created. This would not only give some authors the option of immediately making their work rights-free, but would also make the identification process that much simpler. The labyrinthine complications are echoed by Dr. Estelle Derclaye, who calls issues of IP law a “daily dilemma to some researchers”, constantly worried that photocopying this extract or inserting a video into a presentation would bring them (or the institution they work for) a step closer to a lawsuit.

‘Fair dealing’ also states that “[t]he copying of an image to make a presentation [on PowerPoint] is an infringement, as there is no statutory exemptions”. This is quite remarkable, and indicative of an anachronistic copyright structure. The notion is also hampered by issues of semantics. Professor Nick Cook writes that there are “specific problems” with ‘fair dealing’, one of which being that they “do not fully cover sound and film”, allowing only small excerpts to be reproduced. There is, however, no clear definition of ‘small’. This is stunningly inadequate. Until matters like this are cleared up, those creating, using and critiquing content will face confusion as to their rights. Cook continues,

“[P]erhaps the greatest problem… is ignorance of the law on the part of researchers (who frequently ask for permission they don’t need), publishers (whose copyright guidelines are often needlessly restrictive, and rights holders (a number of music publishers, for example, claim that fair dealing does not cover printed music – a claim for which there is no legal foundation.”

The danger of this last example of overprotective rights holders is that content does not find its way into the public domain and hence does not become used. Everyone from Picasso to Dizzee Rascal has used previous works to create their own content. Works “that people cannot access create no revenue for anyone”, comments Cook. This is no mere hypothetical abstraction. There are currently many, many films literally rotting away in the basements of various film studios in Los Angeles, waiting for their copyright limits to expire. Inaccessible, and not making any revenue for anyone. Journalist Mike Holderness argues that an alternative revenue stream could be set up to compensate creators of works for making their works available online and to anyone

The irrelevance or mere disdain people have for IP laws today is abundantly clear. Marshall Mateer, Education Consultant for the National Education Network, writes simply, “[t]oday copyright often becomes a barrier standing in the way of what it should be enabling”. Dr Gabriel Egan points out that the effort to get people to stop pirating content purely by enforcing Digital Rights Management software has failed spectacularly (not least because there are always loopholes in software). Taking an educative stance by trying to convince people of piracy’s moral corruptibility rather over-stated the case, and rather too late as well. Egan points out,

“Trailers in cinemas warning that copying a film is theft, akin to purse-snatching, strike most spectators as manifestly untrue. Stealing deprives someone of the use of their property, while copying something only adds to the number of copies in existence. The supposed loss to a rights holder is notional and dependent upon the untestable hypothesis that a consumer prevented from copying something will buy it instead.”

Richard Donkin, perhaps optimistically, writes that “[w]idespread disregard is often a prelude to legal reform”, arguing among other things that the copyright term needs to be shortened to around 20 years. It would be nice to see Mr. Donkin’s dreams come true.

Nike’s “Future” Re-written

The remix and mashup are emblematic of the pluralistic society we live in today. Renowned professor Lawrence Lessig would have it no other way, as he points out in his book, ‘Remix’. Every time a company lays itself on the line by broadcasting its intellectual property, it submits itself to reinterpretation by a society who through the use of cheap, simple technology, can easily reinterpret the original content, and under claims of educational or critical purposes, the new content is legal under terms of fair use. The above, reworked Nike ad is was a great example, but has since been taken down due to claims of intellectual property rights (IPR) infringement. An Oriental homage of Nike’s “Write the Future” can be seen above.

Yesterday’s insightful op-ed in the FT (which mentions the great Lessig), calls the implementation of the current 95-year copyright limit “a terrible strategic blunder”, advocating instead for shorter but better regulated terms. Over-protective IPR stifles innovation, and is unnecessary since “most holders of copyright gain all the money from a work they will ever do within five or 10 years and the rest of the term is like a one-in-a-million lottery ticket for the rare artist such as J.K. Rowling”.

The Consumption Conundrum

A quick thought while Zeitgeist takes a well-deserved break in the hinterlands of the Côte d’Azur, and that centres on continued desire for content and immediate access, versus a dilapidated infrastructure for providing that content. A recent front page article from film industry trade paper Variety expressed concerns over who will be able to fill the shoes as the new head of the Motion Picture Association of America, headed by the much-loved Jack Valenti, and latterly the effective Dan Glickman. The post requires juggling many balls and keeping disparate parties happy, from the cultural binaries of Washington and Los Angeles, to the contrasting desires of consumer and corporation, (the issue of Net Neutrality being a particularly important example).

One principal concern for whomever takes hold of the reins will be that of the continuing threat of piracy, and the fear of ending up like the moribund music industry. One significant move that Glickman was able to implement was ensuring the creation of a post for “copyright czar” at the White House. Worries continue though as, according to the article, “technology advances make Internet speeds ever faster”. While this is true in a normative sense, in practice things are not as simple. For while improvements in technology may make computers ever more capable of handling more data at faster speeds, the delivery systems that support the transfer of this data are not being kept up to date, specifically in the US and UK. Telco networks AT&T and O2 have both recently pulled their unlimited data plans for mobile use. What is the impact for services like Facebook, Twitter and Foursquare? Unfortunately it can only have a negative one, as users may begin to worry about updating their status if it will push them over their data limit for that month.

All these moves – including other industry machinations such as the decision by Hulu, a free, legal website, to begin charging – will serve only to further consumer confusion and distance the brand from their audience.