Cultural content in the digital arena: toward the hybridization of legal and business models

Literature on online piracy has focused mainly on the legal framework necessary to prevent and punish copyright infringements on both the demand and supply sides. More recently, marketing and psychology studies have tried to understand the behavioral and ethical aspects connected with the consumption of pirated digital goods but little attention has been dedicated to the evolution in the distribution of digital content. This paper will analyze digital business models, isolate the main forms of digital distribution and evaluate the degree of hybridization that these businesses have accomplished in the move away from the traditional brick-and-mortar model. The article presents the results of an empirical study of 597 websites which distribute digital media content. For each website, data have been collected on a range of features including the distribution methods, the technical restrictions imposed on content, the copyright management and licensing systems, and the revenue models adopted. Using a non-linear cluster technique, the data collected reveal unexpected characteristics in the current landscape for online distribution. While it is commonly assumed that the current legislative framework tends to incentivize a system based on strong legal and technological control over content, the cluster analysis reveals that legal factors are not the most relevant ones in shaping a landscape which is mostly determined by technology and organizational solutions. The authors conclude by offering hybridization policies as a possible strategic development for fighting online piracy. Keywords: digital business models, online piracy, hybridization, self-organizing maps Organizational Aesthetics 3(1) 43 Cultural contents in the digital arena: toward the hybridization of legal and business models This paper aims to investigate the processes of hybridization that are currently affecting the business models adopted in the distribution of digital content (or digital business models DBMs). Undertaking an empirical analysis of a significant number of websites distributing digital content, the paper will contribute to filling the gap in the literature dealing with hybridization. The latent hypothesis is that hybrid business models may represent a promising strategy on the supply-side for promoting the legal distribution of copyrighted digital works. The analysis of different hybrid business models shows how companies can adopt business solutions which indirectly prevent the distribution of pirated products. In order to support the diffusion of hybridization, an enabling legal framework should be supported. The paper is structured into five parts. The first section illustrates the boundaries of what is known as the “online piracy phenomenon” and the various tools that have been suggested for tackling it. The second section engages with the theoretical framework regarding the online offering of digital goods, in particular recalling what we have named the “MAK” model, a tool developed by Brousseau and Penard (2007) and based on three main dimensions of DBMs: matching, assembling and knowledge management. Section three presents the analysis of a sample consisting of 597 websites which are classified along 76 variables. Employing a non-linear technique of clustering (SOM), four different clusters emerge; in other words, paradigmatic models of digital distribution – say archetypes – that characterize the current supplying of digital content. Part four reconciles these bottom-up results with the MAK model in order to evaluate the degree of hybridization of each archetype. In part five we are able to conclude that hybridization is a kaleidoscopic phenomenon that affects all DBMs to a different extent. As a result of this analysis each archetype shows a different shade of hybridization. Based on these findings, we offer some policy recommendations as to how copyright law should morph in order to support – or, at least, not discourage – the flourishing of hybrid business models as valid options for fighting online piracy. Hybridization as an alternative means to limit online piracy Public opinion in general tends to agree that policy makers should do whatever they can to defeat online piracy and, thus, remedy the serious harm that it is actually causing to the entertainment and cultural industries. Yet, this thesis hides three ambiguities: the identification of the real boundaries of what is called “online piracy”, the questionability of the empirical methods employed to assess the harm that online piracy is supposed to impose, and the analysis of the array of tools that policy makers could use to fight against it. As a consequence, this paper offers its own definition of online piracy, a simple list of the major negative and positive consequences that online piracy is said to cause, and a preliminary description of the tools suggested for removing the causes and tackling the consequences of online piracy. 44 Maggiolino, Montagnani, & Nuccio Figure 1. The definition of online piracy (personal elaboration) In this paper, the idea of “online piracy” addresses those cases of copyright law infringements that take place in the sole digital environment. The paper shares the simplified idea that, whereas the term “counterfeiting” refers to the unauthorized material reproduction or imitation of physical manufactures bearing a trademark, the word “piracy” stigmatizes the appropriation and reproduction of works protected by copyright law and other related rights (Figure 1). Furthermore, the paper chooses to disregard unlawful behaviors that may happen in the off-line setting in connection with analogue copyrighted works. Rather, it looks at practices involving digital copyrighted materials offered on the web, regardless of whether they are available on a commercial scale – thus making the case for what could be strictly named “digital piracy” – or on an individual (or small) scale – thus making the case for what could be more properly named “cyber piracy”. Although an essential distinction should be drawn between copyright infringements committed on a commercial scale and copyright infringements committed on an individual (small) scale, 1 “Hard goods piracy” (Dejan, 2009: 4-5), i.e. piracy referring to the reproduction of physical products such as CDs and DVDs is not considered in this work. 2 In its general sense the concept of “counterfeiting” may cover all goods (products, processes and services) which are the result of an infringement of intellectual property rights (IPRs). Yet, many statutes use the word “counterfeiting” to refer to goods unlawfully bearing a trademark and the word “piracy” to refer to creative works unlawfully used/copied (see infra for the distinction). For instance, the Council Regulation (EC) No 1383/2003 on customs actions defines “counterfeit goods” as “goods, including packaging, bearing without authorization a trademark identical to the trademark validly registered in respect of the same type of goods, or which cannot be distinguished in its essential aspects from such a trademark” (art. 2(a)(1)), and defines “pirated goods” as “goods which are or contain copies made without the consent of the holder of a copyright or related right or design right” (art. 2(b)). Otherwise these definitions recall the note to art. 51 of TRIPS Agreement as referring “counterfeit trademark” and pirated copyright goods”. 3 Most of the current studies on piracy refer to “digital piracy” as not including infringements committed by individuals, for example through unauthorized downloading. The UK IP Crime Group Report clearly makes this point by stating that individuals’ online infringements are “IP crimes” only where they are “done during the course of a business or carried out on a commercial scale” (IPO, 2010: 7). Similarly, the TNO-IVIR Report (2009: 16) makes a distinction between “commercial piracy”, which profits from the reduced costs of distribution as compared to those of the legitimate copyright holders, and file-sharing by individuals on peer-to-peer networks. However, some authors consider “digital piracy” as including any restricted activity occurring online (Hill, 2007: 10). 4 For the use of the expressions such as “cyber piracy” or “IP infringements” to address individual copyright law infringements see Peitz and Waelbroeck (2006: 450) and TNO-IVIR Report (2009: 15). IP infringements ... ... of trademark law COUNTERFEITING ... of copyright law PIRACY ... in the digital environment ONLINE PIRACY ... on individual scale CYBER PIRACY ... on commercial scale DIGITAL PIRACY ... in the analogue environment Organizational Aesthetics 3(1) 45 currently the word “piracy” addresses the behavior of using someone else’s copyrighted work without paying for it. Therefore, it covers even that range of behaviors which fall on the side of an individual’s unauthorized consumption of copyrighted works. The economic impact of online piracy Many previous empirical studies provide evidence of the impact of online piracy on the entertainment and cultural industries. Yet they do not offer exhaustive analyses, consistent data and comparable frameworks; their results come mainly from case studies, collections of opinions and samples based on questionnaires. Some of these studies consider partially overlapping, but not neatly fitting, categories of users such as internet clients, down-loaders and consumers of digital goods and consumers of digital goods who illegally share digital files. Moreover, they may examine different industries and diverse local, regional or national markets. Furthermore, they may list the technical emergence of online piracy from various net-sources: local sources, P2P, Warez sites, one-click hosting services, online streaming websites and leech sites. Also, many studies may not appear totally impartial since they are developed by industry-related bodies such as the RIAA and the IFPI. Finally, as many have recently acknowledged, if counterfeiting of tangible products can be relatively easily measured, unlawful phenomena that involve intangible goods are very difficult to evaluate. Several academic papers rely on (questionable) proxies to make an educated guess as to the dimensions of online piracy; some of them assess piracy on the basis of the use of the internet, while others do so on the basis of the amount of data transferred in P2P networks (Dejan, 2009; Liebowitz, 2008; Blackburn, 2007; Oberlholzer and Strumpf, 2007; Zentner, 2006; Peitz and Waelbroeck, 2006; Boorstin, 2004). As a consequence of the absence of reliability and comparability in the outcomes of these many empirical analyses, this paper tries to list the major available data by distinguishing between the negative and positive consequences usually associated with online piracy (GAO, 2010; TNO-IVIR, 2009; Peitz and Waelbroeck, 2006; Balestrino, 2008). In terms of the negative consequences, IPO (2010) reports that online piracy causes a notable negative impact on the whole of society because of the costs involved. Such costs range from the legal expenses due to the detection and prosecution of IP infringements to the social harm arising from the proliferation of unauthorized behaviors. Moreover, it is frequently assumed that illegal file sharing and downloading – which mainly refer to what has been herein defined as “cyber piracy” – cause a significant decrease in the demand for traditional entertainment goods and services (TNO-IVIR, 2009; IFPI, 2010). Illegal file sharing and downloading are supposed to both substitute for the purchasing of traditionally recorded music as well as of DVDs, games and or cinema visits, and to defer the purchasing of these products at lower prices and quality (TNO-IVIR, 2009; Curien & Moreau, 2009; Staake, Thiesse and Fleish, 2009; Dejan, 2009; IFPI, 2008; Curien & Moreau, 2007; Zentner, 2006; Liebowitz, 2008). For instance, between 2004 and 2008, EU sales of recorded music dropped by 36% at the retail level, representing losses of close 5 See, e.g., TNO-IVIR Report (2009) and Andersen and Frenz (2007), which use a sample to monitor willingness to pay for pirated goods and the frequency of piracy in order to establish a ratio of illegal digital files to overall digital sharing. 6 The position of the American GAO seems a fair recognition that a lot of work is still needed to gain a clear evaluation of the phenomenon: “There is no single methodology to collect and analyze data that can be applied across industries to estimate the effects of counterfeiting and piracy on the U.S. economy or industry sectors.” (GAO, 2010: 19). Likewise, Dejan (2009: 5-6) observed that, if in hard-goods piracy it is more or less possible to draw up a consumer profile with specific socio-economic characteristics, in digital file sharing still we have to cope with measurement problems that can be referred to as: (i) a decentralized structure of provision, which makes tracking of illegal copies expensive, (ii) the changing of “information” into an intermediate product that makes copyright law disputable, and (iii) the principle of net-neutrality, which forbids discrimination against content. 7 The significant increase – by 126% in 2008 – in the number of infringing goods detained at the European Union external border induces a belief that the total value of pirated digital goods has seriously risen as well. This seems even truer if we consider that only 5% of goods passing through customs are actually checked. 46 Maggiolino, Montagnani, & Nuccio to €4 billion (Price Waterhouse Coopers, 2009), and between 1999 and 2007 US music industry revenues decreased by 28% (IFPI, 2009). On the other hand, although sales of digital music have made notable progress, the 2004-2008 decline of 26% in the overall retail market (Price Waterhouse Coopers, 2009) suggests that DBMs are generating only small revenues. Likewise, in the film industry, during the same timeframe (2004-2008) admissions to European cinemas dropped by 5%, representing 57 million lost entries. Meanwhile, physical DVD sales and rental revenues fell by 14%, causing a drop in revenues of around €2 billion, taking into account sell-through sales and DVD rentals. Simultaneously, a report by BSA (2010: 1-3) states that about 40% of software installed on PCs is unlicensed: as a result, unauthorized software causes losses of revenue, employment and taxes from related sectors totaling about $110 billion. In terms of the positive effects of online piracy, many scholars argue that even if the production sector stands to lose from the existence of copies, the increase in consumer surplus may overcompensate for such a loss, leading to an overall welfare improvement (Staake, Thiesse and Fleish, 2009; Oberholzer-Gee and Strumpf, 2007; Balestrino, 2008; Andersen and Frenz, 2007; Hill, 2007; Liebowitz, 2008; and Shapiro and Varian, 1999). By and large, economists argue that piracy is a welfare-increasing activity, maintaining that it leads to positive network effects (in terms of learning spill-over, lock-in effects and brand awareness) and market expansion. As to this latter effect, which is the most significant, economists claim that piracy may: (a) introduce new consumers to music, films, games, artists and genres, thus creating new niches of demand, (b) allow consumers to pool their demands together so that they achieve sufficient scale to justify the distribution of specific content, (c) enhance the popularity of products, boosting connected demand, and (d) raise willingness to pay for connected services such as concert tickets and related products. Possible tools for removing the causes and fighting the consequences of online piracy: the focus on hybrid models The most recent literature about online piracy establishes a kind of linear relationship between the several factors that may trigger it and the compounded means that could work to significantly reduce it. As to the former, three groups of causes have been selected (OECD, 2009: 29-35), namely: (i) personal reasons which push agents to offer pirated goods (ii) technological tools which make it easier and less expensive to produce and re-produce pirated goods (iii) the institutional environment (i.e. the political, cultural, moral and social context) which allows (or does not actually prevent it) online piracy to occur. In terms of the personal reasons, a premise is due: many individuals are not able to explain why they offer pirated goods and which of their many e-behaviors – for instance, 8 For instance, about 70% of all music consumed in the US, UK, France and Germany – which are the main global markets – came through digital channels. See, in this regard, IFPI (2010), (2009) and (2008). 9 Indeed, according to a report by TERA Consultants (2010), which focused on piracy and counterfeiting in Europe’s music, film, television and software industries, the value added by the creative industries (and their dependent industries) across the EU was €860 billion in 2008 (6.9% GDP), and physical and digital copying caused an estimated revenue loss of €10 billion and 185,000 jobs over that period. Total employment in the creative industries (core creative industries plus non-core creative industries) was approximately 14 million, or 6.5% of the total EU workforce. 10 See, e.g., IFPI (2010), (2009) and (2008); TNO-IVIR Report (2009); Price Waterhouse Coopers (2009). In particular, according to TERA Consultants (2010), extrapolating from the retail losses of five European main markets, piracy in the audio-visual sector accounts for about €5.3 billion and 135,000 jobs. The report provides two scenarios of estimated piracy-driven losses up to l2015, both based on Cisco System’s internet traffic forecasts and assuming that no measures are taken to address piracy. In the worst scenario, the assumption is made that digital piracy growth will follow global consumer IP traffic trends in Europe (i.e., communications made via the Internet Protocol): if this trend continued then up to 1.2 million jobs and €240 billion worth of European commerce could be wiped out by 2015. Organizational Aesthetics 3(1) 47 file sharing or uploading – are unlawful (TNO-IVIR, 2009: 61). Therefore, scholars speculate that profit is not the only, and, perhaps not even the most important, factor that pushes individuals to offer pirated and counterfeited goods, even though their sale may generate large profits. They assume that three non-monetary factors play a major role in determining online piracy: the desire to share, given that collectivism assumes that “sharing” has a moral and social value, the desire to be recognized as a person who allows sharing, and the desire to be a part of a reciprocity mechanism which allows single individuals to obtain products that were not achievable before, as well as to gain from new and better technologies. In relation to the technological security measures (OECD, 2009: 32-33), the literature explains that these limitations often do not exist, and if they do exist (for example, DRM systems) they can be easily cracked. On the contrary, technologies are opportunities that favor the supplying of pirated goods (Theng and al., 2010: 32), not only because they make supplying easy and quick but also because the quality of the pirated and counterfeited goods is almost the same as that of the original goods (TNO-IVIR Report, 2009: 81). In terms of the institutional environment (OECD, 2009: 33-35), scholars seem to support the idea that if institutions developed a better structured online environment, such an environment would/could be a stand-alone shield against online piracy. In addition, the literature stresses that consumers are not well-informed and educated enough to know whether and when they violate IP laws (Chaudhry and Stumpf, 2010: 351; TNO-IVIR, 2009: 61). Most users do not share the view that online piracy is wrongful and immoral (Balestrino, 2008: 465-466; Hill, 2007: 11), especially because many internet communities feed anti-big and pro-equity feelings (Chaudhry and Stumpf, 2010: 351; Hill, 2007: 12). On the other hand, staff members in firms are not skilled enough to defend IP rights (Theng and al., 2010: 33), and IP enforcement is often very expensive and ineffective. In connection to the various and compounded solutions developed to prevent online piracy (OECD, 2009: 42-59), it has to be remarked that they are numerous not only because they address different agents (such as IP holders, firms, business associations, governments, cultural institutions, scholars and cultural intermediaries) but also – and especially – because they deal with different facets of online piracy. In particular, as hinted above, some solutions are linked to those factors that scholars consider the causes of online piracy. For instance, these solutions suggest: 11 Consider, indeed, the indirect profits that come from online advertising and sponsored links, or the fact that pirated and counterfeited goods can be easily offered and purchased from any place where an internet connection is available, regardless of language or geographical limits. See, in this regard, Theng and al. (2010: 32). Turning to direct profits, some scholars assume that making savings via online piracy is one of the monetary reasons that push individuals to consume pirated and counterfeited goods – see, e.g., Chaundry (2010: 351). Yet this clarification moves the discussion to the demand side: it does not give an answer to the question of why individuals upload pirated and counterfeited goods but to the question of why individuals download pirated and counterfeited goods. According to the reciprocity mechanism, individuals would upload pirated and counterfeited goods in order to download pirated and counterfeited goods. 48 Maggiolino, Montagnani, & Nuccio (i) Explaining online piracy and its immorality to people (Chaudhry and Stumpf, 2010: 355; TNO-IVIR, 2009: 122); Hill, 2007: 22) (ii) incentivizing the private and public enforcement of IPRs (iii) increasing the level of deterrence that IP laws can guarantee, possibly even by including criminal sanctions (Chaudhry and Stumpf, 2010: 355; Theng and al., 2010: 43; TNO-IVIR, 2009: 122; Hill, 2007: 22) (iv) making the legal consumption of legal content more appealing (Hill, 2007: 20-21) by reducing the price of legal goods, thus making such content more affordable for lowincome consumers, and by supplying extra services to legal consumers that could work as a kind of “premium for legality”. Other solutions acknowledge the abovementioned positive consequences of online piracy. They suggest, on the one hand, being lenient towards online piracy, so as to somehow trigger and enjoy the demand increase that online piracy produces (Hill, 2007: 20-21) and, on the other hand, transferring the benefits that online piracy produces to those who have been harmed by it. In particular, some scholars believe that this result could be achieved in two ways. Firstly, content providers may vertically integrate with internet service providers so as to oblige the latter to share the extra profits that online piracy produces with the former (Curien & Moreau, 2007: 169-171). Secondly, controlling institutions may oblige concert organizers and other economic agents that see their profits increase because of online piracy to share part of these extra profits with content providers (Curien & Moreau, 2009: 103). Moreover, advocates of online piracy’s benefits further suggest learning from online piracy about how to use new technologies, such as P2P and sampling, to distribute digital content (Hill, 2007:20) and about how to make profits (TNO-IVIR, 2009: 121) by adopting the so-called hybrid business models. By and large, hybrid business models would be able to mix the tools dear to market economies with the tools that altruistic piracy has developed so as to improve the quality of the supply. Theoretical and empirical papers have not provided a full description of them yet. Therefore, in this paper, we examine whether, on the basis of our sample, it is possible to affirm the existence of a single “recipe” for implementing hybrid business models and, thus, ameliorate the supply of digital goods. Analysis of DBMs: the MAK The analysis of hybridization presented in this paper is based on the theoretical framework developed by Brousseau and Penard (2007) for DBMs. This framework balances what the authors described as the main dimensions of digital business: “matching”, “assembling” and “knowledge management”. Dimension Trade-off Measures MATCHING 1. STRUCTURE (competitive/monopolistic) Range of products 2. SERVICE INTEGRATION (high/low) Range of services ASSEMBLING 3. SCOPE (wide/narrow) Universal/proprietary standards 4. VALUE (free/provision) Source of revenue KNOWLEDGE MANAGEMENT 5. ORGANIZATION (hierarchicallow/spontaneous-high) Interaction with the consumer 6. IPR MANAGEMENT (open/closed) IPR regime Table 1. Connection between theoretical framework and possible measures 12 This is likely to be the aim of the project undertaken by some of the Pirate Bay founders, who have launched a new online platform that they say respects the rights of copyright holders (http://www.thelocal.se/35854/20110830/). Organizational Aesthetics 3(1) 49 The combination of these dimensions into what we have named the “MAK model” illustrates the various facets of the kaleidoscopic phenomenon of hybridization. The first dimension – matching – refers to the process of intermediation between demand and supply and focuses on the level of transaction costs. It is commonly recognized (Hawkins et al., 1999) that exchanges in the digital environment have lowered the level of intermediation. Yet this is probably not applicable to all market operators and it presents different degrees of application. An evaluation of matching implies, on the one hand, the range of products exchanged through a digital platform (see structure in Table 1) and, on the other hand, the degree of integration of the services available for the exchange (see service integration in Table 1). A website is considered to reduce transaction costs whenever its platform is open to different products and when the ease of use is enhanced by services integrated all along the value chain (e.g. digital payment, logistics, digital catalogue, etc.). Therefore, the matching dimension is split into two elements: 1. Structure, which runs from competitive to monopolistic and is measured through the range of products. 2. Service integration, which runs from high to low and is measured through the range of services. The second dimension – assembling – deals with the incentives of producers in creating interoperability among functionalities with different standards (see scope in Table 1) and in exploiting the economies of scale available at any level of the value chain as well as identifying different sources of value (see value in Table 1). The wider the technological and economic scope of the platform, the easier it is to offer personalized services to heterogeneous demand and to differentiate the sources of income on the supply side. The depth and span of the offer have a trade-off in the cost of assembling products and making them available to customers. Therefore, the assembling dimension is split into two elements: 1. Scope, which runs from wide to narrow according to the openness of the standards (from universal to proprietary standards). 2. Value, which runs from free to provision on a fee basis and is assessed through the sources of revenues. The third dimension – knowledge management – focuses on content which is mainly knowledge-based (which encompasses copyrighted content) and on the cost of managing information. Firstly, DBMs have to choose whether to centrally control the flow of information through a clear hierarchy or leave it decentralized and spontaneous (see organization in Table 1). Secondly, they have to adopt a specific IPR regime for their product and services and they have to clarify how they intend to manage the information collected from customers (see IPR in Table 1). The definition of privacy policies and IPR regimes implies a certain level of control over the client as well as a degree of regulation of the product in terms of the use of content. Therefore, knowledge management is split into two elements: 1. Organization, which runs from hierarchical and highly organized to spontaneous and un-organized and is assessed through interaction with the consumer. 2. IPR management, which runs from open to closed and is evaluated via analysis of the IPR regime. 50 Maggiolino, Montagnani, & Nuccio Figure 2. Three dimensions of digital business models (DBMs) DBMs can then be drawn as patterns inside the three dimensions and specified by the intensity of each dimension. As noticed by Brousseau and Penard (2009), platforms acting as distributors of digital content are facing strategic dilemmas about these three dimensions and will only be able to successfully compete if they can be positioned in one of the above mentioned sub-markets. Thus, DBMs can choose among or mix the following strategies: -­‐ acquiring a monopolistic or oligopolistic position in the matching dimension(either market segment or niche) -­‐ forecasting the distribution of consumer assembly preferences for customized, highly-integrated services as opposed to free access but lower quality services (containing advertising content while assembly costs are borne by consumers) -­‐ building on the knowledge generation process, for the power of online communities is growing and often not meeting business needs. The dimensions in the MAK model therefore show different corresponding levels of interpretation: components of the DBM, competitive strategies and sub-markets on the demand side. An empirical analysis of DBMs To offer an empirical account of the hybridization phenomenon, we conducted an analysis on a dataset of 597 websites distributing digital content (Borghi et al., 2012). All of these websites were assigned to one or more of the following categories, based on the types of core services offered: “Music Service”: websites distributing mainly (but not necessarily only) musical content, through either downloading or streaming. “Web Radio”: websites that host radio stations and offer streaming or podcasting of editorial content. Most of these websites offer live streaming as well. “Web Television”: websites that host television stations offering streaming or podcasting of editorial video content. Most of these websites offer live streaming as well. “Video Service”: websites that mainly offer streaming or downloading of video material, editorial or user-generated material. “Videogames”: those websites that mainly offer video games to be played online or downloaded and played either offline or on specific platforms. MATCHING (transacLon costs) KNOWLEDGE MANAGEMENT (informaLon costs) ASSEMBLING (assembling costs) Organizational Aesthetics 3(1) 51