Success can be deadly

The entertainment industry has struggled to keep up with the pace of technological change. But Nick Denys warns tech entrepreneurs about getting too smug: their industry too is making some foolish errors.

On a balmy Summer’s evening in 2007, I was wandering down Farringdon Street, engaged in deep conversation with a friend, when BANG! He walked straight into a lamp post. After the initial comedy of the moment we realised, soberingly, that this was a job for Accident and Emergency.

I learnt two lessons that day. The first is that, if you need to visit A&E, there is no better time than 6.00 p.m. on Friday. There are plenty of medics around but the drunken hordes have yet to get into trouble. The second lesson is that, no matter how powerful you are, if you go up against immovable or inevitable forces you will get hurt.

As I waited for my friend to be stitched up, I chatted to the only other person in the room, a business analyst for HMV. The conversation turned to digital music. I learnt that HMV had been run by a strong character called Brian McLaughlin, who first understood the importance of the ‘mega-store’ concept and turned HMV from a small provincial record retailer into the biggest music chain in the UK.

Unfortunately, Mr McLaughlin’s decision-making would then lead to HMV’s downfall. When file-sharing and portable MP3 players began to appear in the late nineties, HMV made the strategic decision to give online music outcast status. If any record label made their music available in MP3 format, HMV would refuse to stock the album in their 350 shops. This sounds astonishing now.

HMV was the undisputed monarchy of music retailing, but, as soon as it reached the top, the company’s management did a King Canute. Consumers were given the choice between submitting to this retailer’s view of the world – and paying £16 for a pre-packaged album – or illegally downloading the songs they wanted to listen to in a format that was more convenient.

Consequently, HMV missed a spectacular opportunity. Survey after survey shows that people gravitate towards trusted brands when shopping online. In other words, if HMV had embraced digital music, they could have become Amazon. In the summer of 2007, when I learnt of this, a single share in HMV would set you back £1.30. As I type this article, the same share is worth 3.5p.

History shows us that prohibition fails when a significant minority withdraw their consent. This fact needs to be drilled into every congressman sitting on the Stop Online Piracy Act (SOPA) committee, and into Ministers and Civil Servants in the British Government. SOPA in the US, like the Digital Economy Act in the UK, is a classic example of legislators listening to those who are dominating the present, who have a vested interest in holding back innovation.

During 2010 and 2011, the entertainment industry spent $280 million lobbying Congress on copyright and technology issues, placing all their hopes in a super-national version of the doomed HMV strategy. But how did shutting down Napster in 2001 work out? Everyone moved onto file-sharing sites like Kazaa.

Those sites, too, were closed down in 2005. But, of course, the hordes simply began sharing content on BitTorrent. I could go on.

Attempts to suppress digital consumption of music, films, games and now books have failed. They fail because people make a judgement call. They decide to ignore the law by doing what feels right to them and, crucially, what is more convenient at the moment they want to acquire their content of choice.

Most people do not care about the intricacies of copyright or patent law, but they do want to access cheaper and better products. So politicians need to focus on what is healthy for the market, not any particular businesses. The current trajectory of digital policy in the UK and US is foolish, particularly bearing in mind the global financial position we are in.

That said, the technology industry has no right to feel smug watching the old world grappling with change. Over the past year, it has itself become an ugly place, with barbarians big and small joining the legal scrum for patents. Such behaviour undermines one of the software industry’s greatest strengths: low barriers to entry.

James Gosling, creator of Java, is right when he says the current attitudes stink. “The way the corporate world works is they view intellectual property as a large rock to accumulate mass which they can then start throwing at you. It turns into mutually-assured destruction.”

Every pound spent on lawyers could have been a pound spent on research. All that time consumed with hoarding and acquiring power could have been dedicated to producing products and services that people want.

What happened to HMV is afflicting the entire entertainment industry. But it is starting to afflict the technology world too. Businesses compete to be the best. In effect, they want to become a monopoly. This desire can have great benefits as businesses strive to offer quality services at accessible prices and as they disrupt the old ways of doing things.

But, of course, if businesses ever achieve their monopolistic goal, or come close, then many of the benefits of capitalism disappear. Instead of trying to please consumers, the focus switches to destroying competitors.

It is only in the last half-decade, as the new Web 2.0 generation of technology companies like Facebook start to become powerful, that we are realising how ugly the patent wars in technology are likely to be. Apple blocking a competitor’s tablet from sale in a few European markets doesn’t scratch the surface of what is likely to come.

“The best system you can have for discovering new approaches [is] to have lots and lots of people at the bottom experimenting … and finding their own innovations,” says William Easterly, formally of the World Bank. When studying development, Easterly found that, with regards to copyright and patenting, a radical new system needs to be created: one based on promoting collaboration rather than protecting property.

Technological innovations have enhanced the ability of humans to be free. We have more choice, can access more information and have more potential to create. Those societies and sectors who understand this will flourish, because they will be more willing to negotiate and experiment, while those who don’t risk stagnating until death. You have been warned.