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  It's likely there are more illegal copies of Windows than legitimate ones. It may seem obvious to someone in Australia, the US or the UK to put a stop to this piracy and install similar controls on piracy in China as have been imposed in western countries. But it could be argued that this is the opposite of what Microsoft should try to accomplish. To win this war, Microsoft need to lose the battle. For now anyway, some industry experts have suggested that Microsoft turn a blind eye to the piracy that is rampant in China for two main reasons. Once you build your IT infrastructure around Windows, it is highly likely you will want a number of add-on applications, many of which are made and sold by Microsoft. And secondly it will be easier to enforce anti-piracy measures when China's own nascent computer and software indus-tries begin to value a more 'respectful' relationship with intellectual property rights advocates, and when Linux no longer poses a significant strategic threat.

  This may seem like a very audacious thing to suggest for a company that has profited hugely from exercising strict control of their product, but winning by losing is actually a strategy Microsoft knows well. The Xbox 360 is built on this strategy. Microsoft and others see the next big market opportunity in becoming the operating system and hardware vendor of choice in the 'living room', as people increasingly receive and store their entertainment content digitally. In an attempt to gain the dominant position over its main rival Sony, and more recently Nintendo, Microsoft sells the Xbox 360, which ironically is still very expensive, at a loss.

  It seems that Microsoft has been doing this in China for longer than we may think. In a 1998 presentation at the University of Washington Bill Gates remarked, 'Although about three million computers get sold every year in China, people don't pay for the software. Someday they will, though. And as long as they are going to steal it, we want them to steal ours. They'll get sort of addicted and then we'll somehow figure out how to collect sometime in the next decade.' That decade is basically up and Microsoft has yet to collect. However, any attempt to control piracy in China is likely to be ineffective. In this case Microsoft will only get some control if it is willing to give it up for a little longer.4

  If the internet is the main power shifter, it would be remiss not to examine the company that has probably best worked out how to profit from the democratisation the net has created: eBay. The last chapter of this book is about the flip that 'Action precedes Clarity', and eBay is the ultimate actionprecedes- clarity business. Pierre Omidyar began eBay as a 'thought experiment'. He was interested in finding out if people could trust each other enough to buy and sell items without being controlled by some third party. Obviously it worked. In terms of the preceding chapter, Omidyar brought his innovation in from the fringe of his own mind and had it validated by the wisdom of crowds.Not only that, but even the name was not part of some grand master plan. Prior to starting eBay in 1995, Omidyar owned a business consultancy called Echo Bay Technology Group and tried to register EchoBay.com, but it was owned by Echo Bay Mines. So he abbreviated it to eBay.

  To show the power of eBay, consider the following numbers:

  Since its launch in 1995, eBay has grown from nothing to US$6.35 billion a year. Not bad for a company barely a decade old.

  More than US$52 billion worth of goods were sold on eBay in 2006.

  Approximately 1.3 million people around the world used eBay as their primary or secondary source of income in 2006, including almost 13,000 in India.

  There are more than 222 million members of eBay who trade in over 50,000 categories of goods. More than US$729 is spent on eBay every second.

  There are more than 100 million items on the site at any given second, with 6.6 million added per day.

  Last year, more than £2 billion worth of goods were sold on eBay in the UK alone (a car was sold every two minutes), and eBay claims that as many as 70,000 Britons now make their living from eBay.

  What is cool about eBay is that it is not a middleman in the same way Mortgage Choice is a middleman. In my mind it is not a middleman at all. It is simply a marketplace, a platform with very limited controls, policed mainly by the users (the wisdom of the crowd), where buyers and sellers meet and transact.

  Pierre and eBay still kick Yahoo! Auction's butt because they moved fast, had a simple and fast procedure and gathered a critical mass of users that makes it seem crazy to buy or sell anywhere else. As a result they are able to charge a premium for listings and sales that is three times that of other competitive online auction sites. And it is not just eBay that wins. By removing the layers of control (all the people trying to skim dollars off the top), the eBay buyer gets a better deal and quite often so does the seller because of the excitement of the auction and the absence of high rent retail space.

  Best of all eBay owns, stores and ships nothing! You don't have to own everything!

  The next big frontier,which to date they have generally failed to establish, is in the Chinese market. After ploughing tens of millions of dollars into China, eBay recently announced a partnership with Chinese company Tom Online Inc.

  FREE MUSIC ANYONE?

  The recorded music business offers an example of an industry that until recently was very resistant to the changing nature of its marketplace. The entire industry is being dragged kicking and screaming into allowing customers to purchase and download individual songs online rather than buy an entire CD. Despite the enormous success of selling song downloads in the last couple of years, the recording industry is still wasting time and money suing illegal downloaders in court. Whether they like it or not, that war is already lost to the overwhelming force of consumer action. Some day an economics student will make a nice PhD thesis calculating how much money the record companies lost in refusing to face reality.

  One of the hall of shame examples in that thesis will be Sony's misguided attempt to copy-protect its CDs with a virus that invaded customers' computers. Sony secretly implanted two types of viruses on around one hundred different CD titles which it sold to consumers.

  When CD owners went to play their CDs on their computers, the viruses secretly installed themselves on the computer operating systems and started making changes to the media player to ensure the CD could only be played on one computer. The problem was, the program automatically installed upon insertion of the CD and the user was never informed about its presence. The changes it made to your computer also made it susceptible to other viruses and hackers. The program also communicated personal information to Sony about the computer on which it was installed, including the user's IP address (enabling Sony to identify you).

  This was seen by many, justifiably, as a massive breach of privacy and trust. Eventually, Sony had to recall the CDs from distribution. They also faced legal action over the copy protection programs, due to breaches of privacy and damage to personal computer property.

  Sony Pictures Entertainment senior vice-president Steve Heckler said in 2001, 'The industry will take whatever steps it needs to protect itself and protect its revenue streams . . . Sony is going to take aggressive steps to stop this. We will develop technology that transcends the individual user. We will firewall Napster at source – we will block it at your cable company, we will block it at your phone company, we will block it at your ISP. We will firewall it at your PC . . . These strategies are being aggressively pursued because there is simply too much at stake.'5

  Music industry executives justifiably worry as music CD sales continue to fall in the face of downloading, but the position outlined by Mr Heckler is not a winning one, as Sony's copyprotected CD fiasco shows. Illegal downloading I think is just plain wrong, but when asked, many who engage in this activity have said that if it was easier and less restrictive to download legally they would. Obviously iTunes and a host of other such sites have now thankfully made it easier to download, but still make it restrictive to use.

  Digital music sales from legitimate downloading have not yet offset the decrease in CD sales. But they are getting closer and closer to doing so. Legiti
mate downloads increased 89 per cent in 2006 over 2005, and global digital music sales over some 500 legitimate downloading sites reached US$2 billion. Total music sales were down 4 per cent from 2005 to 2006, but the trend is clear: music customers want to pick and choose the songs they buy, not be locked into the music company's, or the artist's, album offerings.

  Not only do customers value control over the songs they buy, but buying online is faster and easier. The simplicity builds on the power of ideas presented in chapter 3, 'Superficial is Anything But'.

  There are signs of the music industry beginning to recognise that it is better to adapt to rather than fight global customer behaviour. The New York Times reported from the January 2007 meeting of Midem, the music industry's annual trade fair, that the major recorded music companies are feeling their way towards joining independent labels in selling digital downloads in Mp3 format without copy protection, based on the realisation that hackers will quickly figure a way around any copy protection software and on the expectation that these unrestricted file formats will serve as a form of advertising.

  Earlier in the same month, EMI announced that it would make free streaming music available on Baidu.com in China. And Yahoo! is continuing experiments, backed by Sony BMG and EMI, in selling a limited number of songs without copy protection. In addition to this EMI are dropping piracyprotection restrictions from the digital music it sells over iTunes in a bold move to increase the popularity of online music downloads.Most music you download from iTunes can only be played on the owner's iPod and can only be authorised to play on a couple of different computers. EMI – who own the rights to some big names such as Coldplay, Lenny Kravitz and Norah Jones – are experimenting with a 30¢ price increase for the copy-protection-free downloads. Although they have been widely criticised by the industry, I love their willingness to trust the customer, and the willingness to diverge from the crowd and, as per the title of this chapter, give up control.

  Customers' demands to access music as and when they want to do so will also put pressure on Apple's digital rights management model, which makes iTunes available only on the iPod. Fuelled by customer frustration, legislative proposals to mandate interoperability are being made in France and other European countries. Throughout its history Apple (like Sony) has had a reputation for making things that only work on its proprietary platforms. The first important signs of moving away from this were making iTunes compatible with Windows and using Intel chips in the latest Macs.

  I have talked about the halo effect of the iPod on Apple computer sales, but I can assure you that the introduction of an Intel chip into Macs and Apple laptops was a major reason for the strong growth in sales in very recent times. I owned an Apple before and did not become a typical Apple disciple, but now I would again consider moving across to Apple and over time this may attract me to the OS X operating system as well. Obviously iTunes will need to follow a similar path. Sooner rather than later I hope. Considering the rate of downloads, Apple will likely find more money and better margins selling digital music than they did selling digital music players.

  Meanwhile the musicians who have embraced free downloading have vastly broadened their potential markets. This is not surprising considering that until such technology came along their ability to access the market was very low without a record label, and in effect they had no control.

  The Arctic Monkeys are one of several bands to use MySpace to attract the interest of record labels.Adding to the list of music industry turning points, in January 2007 was the first instance of a band hitting a major music chart without being signed to any record label. The 'unsigned' rock band Koopa, from Essex, England, hit the UK top forty with a single called 'Blag, Steal & Borrow' that was available only as a downloaded Mp3 file.

  Unfortunately the PR frenzy that surrounded Koopa being the first 'unsigned' band on the UK charts was a little misleading. You technically can't be on the UK charts without being signed, because you need what is called a Catco ID in order for royalties to be paid. So in truth Koopa were actually 'signed' with a company called Ditto Music, owned by two Edgbaston brothers Lee and Matt Parsons. The key differentiator is that a deal with Ditto Music is non-exclusive and is only for distribution and promotion. In other words, Koopa retains the rights, whereas with a 'traditional' music label this is usually not the case.

  The real example of getting control by giving it up is in fact Ditto Music, not the band themselves. Ditto managed to get their second 'rights retained artist' (which they spin as being an 'unsigned' artist) onto the top forty charts in the UK in March 2007 when Midas entered at number three. According to their website Ditto Music have hundreds of artists as clients. They have these clients because they don't want to 'own' the rights for their clients' music. Sure, they are not the multibillion- dollar giants that EMI or Sony Music are, but they are certainly a sign of a new business model emerging – a model that seeks to get control (distribution of new music) by giving it up (rights).6

  As television executive turned internet entrepreneur Jordan Levin puts it, 'Ultimately these big media companies are all wrestling with the same thing – the power is being taken out of their hands. This is an industry that for its entire history has imposed its model on consumers. They've always said, "We'll tell you when you'll watch our TV show or see our movie." But that's fundamentally changing. The whole structure of people who control content is being supplanted by the content users themselves.' And according to MGM executive Harry Sloan, 'We've got to get the creativity to stand against user-created content, because that's what people are watching at my house.' In an interview with Variety, Sloan described his 17-year-old son with the television on behind him and 'two screens in front of him, one connected to friends and one to play World of Warcraft.'7

  What I would add to this is that current trends do not spell the end of the movie and television companies but the end of the movie and television companies controlling when and where we watch what we watch.

  YouTube has become an arena for copyright-protected content uploaded without the copyright holders' consent as well as user-generated content. Thanks to its US$1.65 billion purchase of YouTube, Google gets the chance to demonstrate that advertising tailored to each individual user's viewing habits, like the advertising on Google Search that changes depending on what you're looking for, can adequately compensate copyright holders for the loss of control over their intellectual property. Google will also be making advertising-based payments to the amateur video makers who upload their own creations to the YouTube site. No doubt the most successful of these amateurs, who may as well be film school graduates as self-taught, will face the same quandary as the rock band Koopa: if there is profit without them, who needs the movie and television companies or the record companies? Personally I think YouTube is a holding yard for a collection of garbage. Organised garbage, for sure, but I am astounded daily at not only how many clips get loaded up, but worse, how many hours people will spend downloading them. The scary thing is that they are probably your staff.

  I am more of a fan of the News Corporation, AOL and NBC deal which will use the internet as a means for distributing quality content. I will talk about this innovative deal in some detail in chapter 7, 'Action Precedes Clarity'.

  This example is evidence that despite some nutcases suggesting the 'end of TV', the industry will not die. They just need to flip some of the paradigms that until recently have made them phenomenally successful. It is time to take some action and have the courage to explore new business models. For example, despite the movie studios' and cinema owners' resistance, simultaneous release of movies in cinemas, on pay-per-view television and on DVD is coming soon, because that's what the public wants. In the United States the maverick entrepreneur Mark Cuban, who coincidentally owns the NBA team the Dallas Mavericks, has staked out an early lead in this arena.

  Together with fellow entrepreneur Todd Morgan, Cuban has assembled a vertically integrated media and entertainment company that includes a
movie production studio, a movie distribution company, a chain of cinemas and an all highdefinition digital television network 'to experiment with a "day-and-date" model in which films will be released simultaneously across theatrical, television and home video platforms, thus collapsing the traditional release windows and giving consumers a choice of how, when, and where they wish to see a movie.' The model is already proving successful with films like George Clooney's Good Night, and Good Luck and the documentary Enron: The Smartest Guys in the Room.

  To complete this tour of the entertainment industry's challenges in updating its treatment of intellectual property, book publishers have also struggled to come to terms with the world of downloads. Interestingly, book publishing shows perhaps the clearest benefits to both companies and artists in making downloads freely available. Listening to a downloaded file is no different from listening to a CD (sorry to all of you audiophiles). The best file formats, which perhaps will not even be Mp3, can offer CD quality sound, and video and film downloads will surely follow the same upward quality curve. But reading a book on a computer is nowhere near as enjoyable and practical as reading an actual printed book. Dedicated electronic book readers have not yet bridged the gap in terms of the quality of the reading experience. This helps explain why authors like the marketing commentator Seth Godin and the science fiction writer Cory Doctorow, who have made their books available as free downloads, have reaped huge increases in the sales of their books in traditional print format.

  For example, sci-fi author Cory Doctorow makes most of his books free online before they are available for sale. This apparently self-sabotaging flip has helped to make the regularly published and sold editions of his books bestsellers.