Hotfile, the Wolf in Sheep’s Clothing of the Safe Harbour Debate

Last week I found myself in the midst of a heated debate about online piracy.  The discussion had its origins in comments I made to the BBC concerning legal action being taken by media companies against digital locker service Hotfile.  The contentious point was my assertion that for a site like Hotfile the starting point should be to assume that the majority of the content on the site is unlicensed professional content, not the site’s assertion that the majority of the content is legitimate. That is not to say that there are not perfectly legitimate uses for Hotfile nor that there are not some people who get real value out of the service without ever touching a piece of unlicensed content.  However let’s be very clear, this is not how the vast majority of people use the service nor how the company makes the vast majority of its revenue.  To argue otherwise, as indeed Hotfile does, is disingenuous in the extreme.

Everything Has Happened Before and Will Happen Again

I have been a media analyst long enough to have tracked the rise and fall of those piracy pioneers MP3.com and Napster.  With Napster, as it scrambled to defend itself from media industry onslaught, I witnessed a pattern of events which have remained remarkably consistent despite technology changing dramatically:

  • Stage 1: protest innocence, claiming that the site has many legitimate uses and that they would never condone copyright infringement
  • Stage 2: insist that they are doing everything they can to combat piracy, taking down infringing files as soon as they find them
  • Stage 3: offer to implement further measures, such as audio finger printing 
  • Stage 4: publicly state what a fantastic job they are doing of take downs (just as the court case progresses towards judgement)
  • Stage 5: claim that the media industry is broken and will never survive the digital age (when they’ve lost the court case).

You will probably have noticed an uncanny similarity to the Hotfile case, despite the intervening decade of transformation in technology.  The simple fact is that these services never intend to set themselves up as productivity sites, or UCG destinations.  If they did they would have used screening technology at inception to ensure pirated content didn’t make it there in the first place, not protest innocent intent once they get on media companies’ radar.

What has changed since the comparatively innocent days of Napster is an overt commercialization of piracy.  Whether that be the Pirate Bay’s ad business or Megaupload founder Kim Dotcom’s fleet of luxury cars, piracy is big business these days.  In the specific case of Hotfile,  Digital Piracy consultant James Brandes has identified that Hotfile’s financial model depends upon a network of Pay Per Click Affiliate partners who are effectively incentivised to seed movies, TV shows and other such content to Hotfile because that is what will drive users and thus clicks.  Hotfile may make the token effort of banning individuals who upload, but not these cash cows who are responsible for a vast chunk (the majority?) of the illegal content on the site.  And just in case you are in any doubt as to the breadth of unlicensed content on Hotfile, enter the name of a movie of your choice in this Google search within the Hotfile domain and look at the number of file links displayed.

Hotfile is No Champion of Safe Harbour, Instead a Wolf in Sheep’s Clothing

One of the reasons it is important to reveal the true nature of Hotfile is because of the way in which it sullies, discredits and diminishes the Safe Harbour debate.  Hotfile, Megaupload et al are not champions of a censorship-free web.   They are most certainly not a Wiki Leaks for the media world.  They are overtly commercial entities that make money from the sharing of other companies’ intellectual property, who then shield themselves with arguments of being neutral vessel for other’s activity.  Hotfile is a wolf in sheep’s clothing for the Safe Harbour debate.  Anyone who supports the principle of Safe Harbour and wants to see it remain a valid and relevant tenet of the web should oppose Hotfile’s annexing of the debate for its own purely commercial purposes. Every time a company like Hotfile misappropriates Safe Harbour, the concept loses a little more validity, and such mis-uses go onto be cited as evidence of flaws by those who lobby against it.

Piracy and the Innovation Imperative

Clarifying Hotfile’s mendacious positioning however should not divert media businesses from the most important challenge the piracy presents. No, not diminishing revenues, but the innovation imperative.  The simple fact is that unlicensed locker services, P2P networks, darknets, the whole caboodle, fill a consumer need vacuum.  The content being free is of course pivotal to their popularity, but just as important are factors such as convenience, depth of catalogue, lack of DRM and device compatability.   There will always be a market for illegal services as long as they provide more depth of content than the licensed services and without the velvet handcuffs of device lock-ins.

Fighting free with free itself is of course part of the strategy for tackling piracy (as Spotify has shown us in the music space) but more important is conveniently delivering high quality, dynamic content experiences with all the content audiences want. That is the prompt that media companies should take from piracy.  And as I argued over on Music Industry Blog, now is the time to act because the nightmare scenario for media companies is that the pirates turn their attentions to developing great user experiences rather than just secure means of acquiring content.  That, ladies and gentlemen, is when we will really have a piracy problem.

Piracy is relative

A final point to throw into the mix is that piracy, copyright infringement, whatever you want to call it, is not an absolute concept.  Instead it is entirely relative.  Let me illustrate with two anecdotes.

A file sharing site owner was once showing off his new premium app to a former colleague of mine.  When my colleague said he assumed he would be cool with his users uploading a cracked version of the software onto his network his exuberant demeanour suddenly changed.  He robustly argued that he couldn’t allow people to download the software for free because a lot of money had been invested in developing the software and that he had to recoup his investment and make money off it!  Perhaps unsurprisingly he didn’t see the irony nor indeed hypocrisy of his position.

At the other end of the scale, I lost count of how many times when I was at Forrester and at Jupiter, that a record label or a trade body would call me up to talk about one of my reports even though they weren’t paying clients. When I’d ask them where they got the reports from they said they’d been sent them by colleagues, without even a pause in breath.

Clearly for those labels, just as for the P2P site, protecting IP is a fluid concept that applies very differently to other parties than it does to them. And therein lies a key reason why the piracy debate will never truly resolve, because one person’s piracy is another persons’ fair use.

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Why Apple’s Impact on Media Companies Has Only Just Got Started

There was a sense of disappointment in some quarters yesterday as Apple announced the third generation iPod, largely because it looks pretty much like a better version of the iPad2 rather than a dramatic step change.  But it was the right move for Apple.  The history of Apple’s device business in the last decade and bit has been a highly effective blend of step change, and evolution.

An Evolutionary Update for iPad3 Was The Right Move

There was no need for Apple to revolutionize the iPad now.  It is the market leading device that is still the most eagerly sought after and is continuing to leave the competition in its wake (latest figures from Forrester suggest that no single competitor has more than 5% market share).  Just as the iPhone 4S was an incremental update that left some industry observers disappointed but actually went on to perform fantastically in terms of sales, so the iPad3 delivers enhancements without breaking the winning formula.  It also enables Apple to push down prices on the iPad2, effectively turning it into the entry level device for iPad customers – a smart strategy which Apple has used to great effect with the iPhone range.

What iPad Lacks in iPod’s Scale It Makes Up for In Momentum

To date Apple has sold 55.2 million iPads (see figure), no mean feat in less than 2 full years of sales.  But to put those figures in context, Apple has sold 334.5 million iPods.  Add that to the 183 million iPhones sold and it is clear that the majority of Apple’s iDevice customers do not have iPads.  iPods and iPhones remain Apple’s most pervasive impact on media consumption and yet the iPad appears to be the one having most dramatic impact on media business models.  There are three key reasons for this:

  • iPad owners are highly valuable, leading indicator customers. iPad owners are the cream of Apple’s already tech skewed audience.  They spend the most and value content the most.  The ROI on developing for this current installed base alone is enough to justify the pivoting of many major media companies’ content strategies.  But iPad owners also give us an indication of what future consumers will want.
  • Tablets are a tailor made for media experiences. As much as media companies wanted to embrace mobile, mobile phones always had the frustrating restriction of tiny screens, forcing media companies to crush down their carefully crafted content into artificially small chunks.  Tablets on the other hand present most of the benefits of mobile with the visual capabilities of PC but with the added benefit of touch.  Thus while mobile was always a case of cutting down to optimize, tablets actually enable media companies to deliver richer user experiences than ever before.
  • iPad growth is dramatic, and some.  It took Apple 7 quarters to reach 55 million iPad sales.  It took them nearly 5 years to reach the same milestone for iPods.  Of course there are numerous mitigating factors (the increased presence of Apple is just one) but the momentum is clearly with the iPad. 

The TV is Apple’s Way of Really Getting Into the Living Room

So the case for media companies’ obsession with the iPad has no small amount of justification (though of course it should be part of a blended device and platform and device strategy that matches the behaviors and needs of the target audience, not the personal device preference of senior management).  But at risk of sowing fear, uncertainty and doubt (FUD) into the minds of content strategists, beware, Apple has got its sights on a new market: the TV.  It seems increasingly likely that Apple will launch a fully-fledged TV product later this year.  Whether they do or not, this is Apple’s next new market.  Of course Apple has patiently plodded away with Apple TV for years, a product that still – uncharacteristically for Apple – lacks identity and if TV wasn’t so important for Apple would have gone the way of the Newton long ago.

TV matters for Apple because it needs a foothold in the living room:

  • Living room technology spend is all about the TV.  Consumers used to change their Hi-Fi just because the manufacturer changed the colour, now living room tech spend is firmly focused on the TV.  Having an iPod temporarily plugged into another company’s docking station is simply not enough for Apple.  Air Port Express and Apple TV aren’t enough either.  And though Apple shows little appetite for trying to reignite the Hi-Fi space – they can leave that battle to Sonos and Google – they do know that getting into the TV corner of the room opens up a whole new market for them in the way the iPhone did.
  • New markets accelerate growth.  Opening up new markets is important for Apple.  Unlike a company like Samsung,  Apple do not play for the whole market, they play for the upper part of it – not the top, as their entry level device strategy attests – but certainly from the upper mid upwards.  This means that each of their range of devices has a theoretical ceiling and Apple’s way of sustaining market momentum is to find a new market to address before growth in the former slows. (Note that hardly an eyebrow is raised at the fact that iPod growth has been in decline since 2010).  And though some might say TV feels like an unnatural fit for Apple, I remember first joining Apple analyst briefings soon after the iPod launched.  Everyone was asking questions about server and education strategy and gave me very bemused looks when I started asking questions about music strategy!  TV  is in actual fact a much better fit for Apple 2012 than iPod was for Apple 2001.
  • TV helps establish the iPad in the living room. The iPad has many great use cases, and the living room is certainly one of them. But Apple doesn’t want it to go the way of the laptop in the living room and just become a tertiary device for multitasking when you are bored with what’s on the TV.  Instead Apple wants the iPad to become our universal remote control – in the way that the iPhone once looked like it might.  And to do that, it really needs to have a great big piece of Apple – or Apple integrated – kit where the TV currently sits.

Apple’s TV Strategy Could Kill Off Connected TVs

When Apple does finally play its TV card – and there are many, many things it could do – expect it to transform the sector in the way it did the smartphone sector with the iPhone.  Yes, a whole market of TV manufacturers are rightly concerned. Not just because of the competitive threat but because Apple’s TV strategy could well leave their Connected TV strategies stillborn.  I’ve been a technology analyst for long enough to see a few false dawns for interactive TV.  While connected TVs are much better than what has come before, they deliver much inferior browsing and interactive experiences to PCs and tablets.  And therein lies the problem: TV companies are trying to squeeze the Internet into TV, which is a doomed to failure.  Because we know that TV (i.e. video) experiences already work great on the web. The TV is already in the Internet.  The missing piece is simply taking the TV that is in the Internet and placing it in the TV set in a seamless, elegant, convenient and highly interactive way.  And we all know which company builds those principles into its product DNA.  When Apple flicks the switch on its TV strategy it will instantly remove the distinction between TV and web.

Apple has spent the last decade transforming media businesses and content experiences.  But the media companies pay heed: the journey has only just begun.

Ecosystems In The Age Of The API

Walled gardens, Ecosystems, Platforms, call them what you will, but the mechanisms through which our digital content experiences are managed have evolved much over the last 15 years.

In the early days of the web, ISPs tried to control our entire online lives by building proprietary walls around users.  These so-called Walled Gardens were exemplified by  AOL.  But as Internet users got savvy  they banged away at those walls until they crumbled under the weight of inevitability in much the same manner as the Berlin Wall did.  Mobile carriers briefly brought Walled Gardens back from the dead (and there’s still an extended death rattle in some parts), but these days we expect our Internet journeys to be broadly free.  I say ‘broadly free’ because of course many of the destinations on our digital journeys are not open, and some of them are harder to get in and out of than others.  In fact the journey of the digital consumer is analogous to that of a traveller in Medieval Europe.  The highways are sometimes wild and unpredictable, while the coveted destinations are walled cities and heavily fortified castles.

Ecosystems are the success stories of paid content

The reasons the walls exist in the digital realm are not entirely different from that of Medieval Europe’s mercantile cities.   Walls protect their inhabitants from unwanted external intrusion, but most importantly they guarantee those inhabitants a quality of existence that could not happen externally.  This is why ecosystems are the success stories of paid content.  The xBox, Kindle and iTunes ecosystems have all succeeded in converting portions of their users into paid content buyers at rates unachievable elsewhere.

Walls alone though aren’t enough

As many a newspaper will tell you, simply throwing a pay wall up around your content doesn’t magically create a loyal paying audience.  The reason that iTunes et al work is because the priority of their walls is to create and guarantee a quality and consistency of experience within them.   Protecting against external intrusion is of secondary concern.  Once you have created a high quality experience within those walls, then you can start thinking about leveraging revenue.  Just in the same way a successful Medieval city state that could guarantee prosperous trade and commerce within its walls could also demand greater taxes from its subjects than one that could not.

Take the example of xBox Live, the networked gaming component of xBox.  When the service was first launched it was a gimmicky extra.  But when, years after launch, Microsoft turned off access to Live to xBox users who had pirated games on their consoles there was a massive outcry from jilted (pirate) users who claimed that their xBox experience was useless without Live.  What Microsoft had done was use the confines of their ecosystem to create a unique experience that could not exist externally and of which users quickly realized the emotional and monetary value.

A new generation of ecosystems

But as successful as closed, device-based ecosystems are, things are changing, quickly.  We are seeing the emergence of a new breed of ecosystem that doesn’t have the straightforward mechanism of a device operating system to define its boundaries.  Instead this new generation of ecosystem almost paradoxically uses openness to create its closedness.  These ecosystems use software developer APIs to create vibrant platforms in which a quality of experiences exist.  Nobody exemplifies this approach better than Facebook with their Socially Optimized Web Strategy. 

The net result is that we now have three key types of Content Ecosystem Models co-existing (see chart).

  • Closed Door Ecosystems: these have the most impermeable walls, typically defined by the operating system of a family of devices.  Apple’s iTunes is the best of breed example.  User experiences and all externally developed experiences (typically Apps) can only exist within the ecosystem of supported devices. 
  • One Way Ecosystems: these leverage software applications to define boundaries, but unlike Closed Door Ecosystems they do not have the benefit of proprietary hardware so rely upon the quality of the experience delivered by the software.  To help achieve this, One Way Ecosystems leverage developer communities via APIs.  This enables bite sized chunks of the  ecosystem’s experience to be delivered externally, though almost always with a view to ultimately encouraging users in, or back in, to the centre. Control is exercised by ensuring that a core level of experience, and Apps, can only be experienced internally.  A contemporary example is Spotify, who already support some externalization, but last week announced the creation of an internal, closed wall API platform.  Thus Spotify aims to benefit from the external reach of the API era while simultaneously reaping the rewards of the Closed Door model.
  • Revolving Door Ecosystems: these are the true child of the API era.  Typically they exist without an OS or other proprietary software to define their boundaries.  Instead they leverage APIs to deliver a subtler but highly effective ecosystem that fully supports inward and outward flows of externally developed experiences and Apps.   What protects these ecosystems from disintegrating under this laissez-faire approach is tightly policing the flow of data, so that the ecosystem’s data and context is depended upon entirely to deliver the value of Apps and other experiences.  Facebook isn’t the only example of this approach but is simply leagues ahead of anyone else.

The value of uniqueness

The secret ingredient of success of any ecosystem is uniqueness,   a monopoly on control of uniqueness.  A uniqueness that consumers know they cannot experience anywhere else.  However uniqueness isn’t just valuable for the technology companies building ecosystems, it is a crucial commodity for media companies in the digital age.  Piracy and the wider Internet swept away media companies’ monopoly on supply, so now uniqueness is the most important tool they have left to create new senses of monetary value among audiences.  Only when uniqueness has been achieved, can other important assets such as context, convenience and curation be fully brought to bear.

It is easy to fear ecosystems (indeed there is much to give cause for concern) and there are growing issues about how competing  ecosystems will co-exist (if at all).  But they are also the key to successfully monetizing content in the digital age, and they will continue to evolve.  Devices transformed Walled Gardens into Ecosystems, and APIs have transformed Ecosystems into Platforms.  Change will inevitably continue at a bewildering pace, but  the challenge which media companies must rise to, is to become active participants in, nay, catalysts for that change, not shell-shocked observers.

Amazon’s and Apple’s Mirror Opposite Content Strategies

Amazon’s announcement today of their media tablet the Kindle Fire was long anticipated.  I won’t add to the countless virtual column inches discussing whether it can be an iPad Killer (though I do agree with my former colleague Michael Gartenberg that it is competing more with the iPod Touch than it is the iPad).  Instead I think it is worth comparing and contrasting Apple’s and Amazon’s strategic reasons for being in the tablet game.

As I stated in a previous post, Amazon and Apple are 2 of Digital Music’s Triple A (Android making up the third).  Both have in their respective ways shaped online music more than any other company (Apple with iTunes, Amazon with online CD sales).  Both willplay a major role in digital music’s, at the very least, mid-term future.  But they are in digital music, and digital content more broadly, for mirror opposite reasons (see figure).

Put simply, Apple is in the business of selling content to help sell devices whereas Amazon is in the business of selling devices to help sell content.  There is a poetic symmetry the identical yet polar opposite strategies of the two companies.

The differences have direct implications that are also mirror opposites:

  • Apple can happily ‘just about break even’ on music downloads because of the way it helps sales of their high margin i-devices
  • Amazon can happily price the Kindle Fire so aggressively that it is priced more like an MP3 player (and expect to lose money for the near term at least) because of the volume of sales of content it expects / hopes it will drive

Perhaps most importantly music, video, games, books and all other forms of content are crucial to the success of both.  20th century media business models may be tumbling around our ears but the fact that the future of the tablet market depends so heavily upon media products will be among the foundations for future growth.