I'm Going To Forecast The Death Of The American Recording And Video Industries

Yep. Time to stick my neck out again. By my calculations 2+2=15, and I want to tell you about it.

First off, this has nothing to do with file sharing, nothing at all. And it has nothing to do with my dislike of the industry for their past actions. I’m coming at this from a different direction, one that I don’t believe that the industry has really considered. At least if they have, they don’t seem to have done anything about it.

First, you must have money to buy things. This is a basic economics that even a four-year old can understand. At least my kids could when they were four years old. To have money, you must have a job, which pays you enough money that you can cover housing, food, transport, and other essentials, and then have money left over for luxuries, like internet access and entertainment. For those who don’t think internet access is a luxury, consider this – would you prefer to eat or surf the web? Surfing the web while starving isn’t fun, especially when you run into things like Cooks Source <EVIL GRIN>.

Financially difficult times, like the current Recession, cause people to cut back on spending. If you aren’t working, taking the family to the theater to see the newest Harry Potter movie really isn’t a practical choice. Instead you’ll wait until someone you know buys the DVD, and borrow it. You’d prefer to own your own copy, but if you don’t have the money, well, you don’t buy it. This is a simple extension of why most of the population doesn’t drive Corvettes. A Corvette is a luxury. Watching Harry Potter at the cinema is a luxury. Going to a Neil Young concert is a luxury, listening to Neil Young on Q107 is affordable.

Let’s consider the Republic of Ireland, Eire, or Southern Ireland as us old folks still think of it. The Irish Times, a major Irish newspaper has reported that Ireland is insolvent. To quote the first two paragraphs of the article:

WHEN I wrote in The Irish Times last May showing how the bank guarantee would lead to national insolvency, I did not expect the financial collapse to be anywhere near as swift or as deep as has now occurred. During September, the Irish Republic quietly ceased to exist as an autonomous fiscal entity, and became a ward of the European Central Bank.

It is a testament to the cool and resolute handling of the crisis over the last six months by the Government and Central Bank that markets now put Irish sovereign debt in the same risk group as Ukraine and Pakistan, two notches above the junk level of Argentina, Greece and Venezuela.

I suspect that you didn’t hear of this. The newspapers wasted a lot of ink covering Greece and Iceland, while ignoring Ireland almost completely. Maybe it’s because unlike the Greeks, the Irish haven’t been rioting in the streets. Maybe it’s because unlike in Iceland, the Irish bankers haven’t been charged for criminal acts. The problem is that the Irish State is in deep financial trouble (for further details see the Irish Economy blog).

There was no single issue that caused Ireland’s problems. In fact there were too many issues, including banks that issued mortgages that the mortgagee had no hope of repaying (sound familiar?) The banks knew that they were doing this. In many cases they deliberately forced customers who qualified for lower interest rate mortgages into higher interest rate mortgages so that the bank could make more money. When the recession caused cash flow problems for the customer, it caused problems for the bank. If the customers had have been at the lower rates, a significant number of them would not have had cash flow problems. The banks action quite possibly was criminal. In any case it left many Irish families with little or no discretionary spending money, money that they might have spent on luxuries like concerts.

And then to top it off, the government panicked, and decided on an austerity program. Rather than raise taxes on industry, and use the money for infrastructure projects, they did what industry wanted. Keep the taxes low, and cut spending. When they cut spending, they put people out of work, which meant that tax income dropped, so they cut spending further, which put more people out of work, so tax income dropped further, implementing a classical feedback loop. The country is now effectively insolvent, even though the government has some money left, money which will be gone by early in the new year.

Their next door neighbors, Britain, have now decided to take the same course. Curiously, all the spending cuts affect the poor and the middle class. The Toffs make out just fine, thank you very much.

Now the Americans want to do the same thing. They will do the same thing. And will suffer the same fallout. Massive unemployment, massive underemployment. The entire audience that the RIAA/MPAA companies depend upon for their sales will be in the poorhouse, and unable to afford to buy entertainment. After all, food and housing come first. You can survive without entertainment. Life is more fun with it, but life is impossible without food.

Possibly this is the reason that the Entertainment Distributors have been so interested in pushing ACTA, in the hope that they’ll be able to increase their sales outside of the United States. Other countries are pushing their creative industries too, so competition will be fierce.

Things look desperate for the Entertainment Distributors in the United States. It looks like only a miracle can save them.

Regards

Wayne Borean

Monday November 8, 2010

The Intellectual Property Bubble – The Next Danger To The World Economy?

Do companies no longer compete on price and features? Is it all about competing with competitors in the courtroom rather than the marketplace? Is this an economic model economists understand? Do patent trolls contribute anything to the well being of anyone but themselves? Does Paul Allen suffer if someone copies one of ‘his’ ideas?

I am not an economist. From my naive perspective it works like this. I make more of something than I need but there are things I need that I do not have so I am quite happy to swap some butter for some honey. Sooner or later the swapping got a bit cumbersome as there were more and more articles that needed to be traded to get what you wanted. Hence money was invented. A brilliant labor saving invention (I believe the patent may have run out but don’t quote me).

Now people want money not for producing things but by thinking about a way to produce things. In other words, through the sweat of my brow, I make stuff that other people are prepared to pay me for and then part of my income has to go to people who provide me with nothing apart from ‘we thought of that also’. That last sentence didn’t come out right. I’m not personally paying patent trolls, we all are and what do we get in exchange? Nothing. They don’t actually make anything that we want!

Grrrr!

Every Time You Buy Something

Manufacturers include legal fees as part of their costs, so whenever you go to buy something, say the USB stick at your corner store, the cost of legal fees is included. I personally believe that if the USPTO was shut down, and all patents invalidated, that this would jump start the United States economy, and help get a lot of people back to work. In addition to the ‘Housing Bubble’, and the ‘Sub Prime Mortgage Bubble’, and the ‘Internet Bubble’ we are currently facing an ‘Intellectual Property Bubble’, and when it blows up, the United States is going to be hurt – badly.

The Intellectual Property Bubble

Sorry folks, but it’s definition time. A ‘Bubble’ happens when trade in an item exceeds it’s intrinsic value. A good basic indication that a bubble is occurring is when the words ‘market prices will continue to rise’ are heard. There are certain cases when this may not be an indication of a bubble. But generally when a majority think that prices will not come down, and there are no structural reasons for the price rise, a bubble is occurring.

Bubbles are destructive, i.e. they destroy wealth. If, at the height of the United States housing bubble you paid $500,000.00 for a house, and the house is now worth $300,000.00, the bubble would have destroyed $200,000.00 of your personal wealth. Destruction of wealth  on this sort of a scale is damaging not only to the person involved, it is also devastating to the economy as a whole, as the money you have lost would have most likely been used for other goods and/or services.

While I’ve said that Bubbles destroy wealth, this is not accurate. What Bubbles do is transfer wealth, but unlike in a normal transaction, the transfer is effected without the buyer gaining any value in return. In effect a Bubble is a legalized form of theft.

Let’s consider another example, the Dot Com Boom. During the Dot Com Boom, there was a huge run up in share prices for technology companies. In many cases the companies in question had no product or business plan. So why did anyone buy shares in them?

Simple – there was a huge push by investment banks, who earned fees for taking companies public. It didn’t matter to the investment bank if the investment was good or not, just as long as they earned their fees.

And of course there is an immense amount of money worldwide which is looking for a place to be invested. This money flowed into these companies, pushing up share prices, which attracted other investors, who bought from the initial investors. When the prices crashed as reality sank in, the later investors suffered catastrophic losses.

This also poisoned the market for new Initial Public Offerings, so the money flowed elsewhere. The 20th century suffered a series of bubbles, which culminated in real estate bubble.

So Where Is The Money Now?

That’s a damned good question, and one that I can’t answer for sure, however I can make some guesses. Let’s look at Intellectual Ventures. Intellectual Ventures is a patent holding company. From their website:

Intellectual Ventures is the global leader in the business of invention. We collaborate with leading inventors, partner with pioneering companies, and invest both expertise and capital in the development and monetization of inventions and patent portfolios. Our mission is to energize and streamline an invention economy that will drive innovation around the world.

Intellectual Ventures is one of many companies that is investing in Innovation according their their press releases. Another is Acacia Technologies. These companies are buying up patents, and attempting to license them.

If you check the business news pages, there have been a series of articles about patents, and their value to the economy. Articles that seem more like cheer leading, than rational thought.

But patents aren’t the only issue. There have been enormous pushes to strengthen copyright laws worldwide. There have also been attempts to push Trademark law into places where it has never been used before.

I believe that what we are seeing is money looking for a place to go, and finding it. And I think that when the immediate profits are made, the money will go somewhere else, and the move will once again pull value out of the system for everyone else.

Now I could be totally wrong. In effect this article is me thinking out loud, and looking for feedback. It’s based on things that I’ve been seeing over the last four or five years, which disturb me.

So if you have any comments, please leave them.

Regards

Wayne Borean

Tuesday January 18, 2011

Microsoft Death Watch – Libre Office Drives Another Nail Into The Coffin

In the earlier articles in this series, Microsoft Death Watch and Microsoft Death Watch – Confirmation From Dave, one of the main points that I mentioned is that most of Microsoft’s profits come from what they call their ‘Microsoft Business Division.’ Microsoft Business Division includes several products, the most important of which is Microsoft Office.

I usually use Canadian dollars, but for this article I’m going to be using American dollars. Microsoft offers three versions of Office, and they’ve very nicely produced a graph to compare them.

Currently the cheapest version of Office, the Home and Student version retails between $104.99 and $149.99. The middle version, Home and Business, retails between $213.99 and $279.99. The premium ‘Professional’ version retails for between $408.99 and $499.99.

In my opinion Office is Microsoft’s best product, far better than Windows. Oh, it has it’s kinks. Formatting a large Word document can be an exercise in frustration. But Office overall is a damned good product.

Microsoft’s big problem is basic economics. Their competition may not be able to match Office in all of the details, but each has it’s own specialties, and none of them are anywhere near as expensive. Let’s look at some of the major competitors.

Google Docs, while it has some limitations is free, and it’s collaboration features are far better than what Microsoft offers. One major problem is that you have to be online to use it, but it also is Operating System independent. As long as you have a modern web browser, you could use Google Docs on any computer, or for that matter, on your smart phone.

Word Perfect Office has formatting capabilities in it’s word processor that Microsoft has never been able to match. Many law offices use it, because it has formatting that is designed specifically for the legal profession. It is also less expensive than Microsoft Office. Word Perfect Office is Windows only, so in effect Corel has tied their future to that of their main competitor. Is this wise?

OpenOfficeOrg is free! Not only is Microsoft incapable of matching the price, OOO has a plug in system that allows programmers to customize it, something that Microsoft Office lacks. Oh, and versions of it are available for most operating systems. You could be using a Windows PC at work, and a Mac at home, but have the same office suite installed on both. Professional writers often use OOO. In many ways it’s the most reliable office suite on the market.

KOffice is another freebie. While it does offer Windows and Mac versions, they often lag behind the Linux version, which is the important one, and it offers a wide list of features that Office doesn’t have.

IWork is Apple’s Office Suite. As with OS X, the Apple operating system, there’s only one version of IWork. Apple has apparently decided that rather than attempt to offer several versions of it’s two main software packages with artificial distinctions, it would offer one, and give it all of the features of competitor’s ‘Professional’ versions. As a result IWork matches Microsoft Office on features. Oh, and it’s far less expensive.

Basic economic theory indicates that the price of a product should:

  1. Be competitive.
  2. Be based on the materials used.

Microsoft’s price isn’t competitive. While Microsoft tries to claim Office is far superior to all of the competition, it isn’t. It has some abilities that it’s competitors don’t have, but they have abilities it doesn’t have either. Admittedly Microsoft has a bigger advertising budget, which does give it some advantages, but competitive pressures are going to force Microsoft to reduce the price of Office, sooner rather than later.

Also Microsoft’s price isn’t based on the materials used. The other night I bought a copy of ‘The Rocky Horror Picture Show‘ on DVD for $20.00. If you were to buy a copy yourself, and compare it to the materials in a boxed set of Microsoft Office, there would be very little difference, definitely not enough difference in packaging to make up an $80.00 dollar difference (to the most basic version of Office).

So economic pressures should force Microsoft to reduce the price of Office. One option, and one that they should seriously consider, is killing the ‘Student’ version, making the ‘Home’ version the new ‘Student’ version, and making the ‘Professional’ version into a ‘Home-Professional Ultimate’ version. If they priced the new ‘Student’ version for the same price as the old ‘Student’ version, and the new ‘Home-Professional Ultimate’ at the same price as the old ‘Home’ version, they would probably be able to sell more copies, in the short run.

But in the long run, they have serious problems. According to Steve Jobs in Apple’s last quarterly report, Apple has now gained 20% market share on new computers in North America. While Microsoft does make a version of Office for the Mac, it’s limited compared to Office for Windows, and it faces competition from IWork, which is a fifth of the price.

And the OpenOfficeOrg project has forked. OpenOfficeOrg has always been a corporate project, and while Sun did a decent job with it, it was a sideline. When Oracle purchased Sun, Oracle didn’t seem to know what to do with OpenOffice and several of the other projects that it now controlled. This caused a lot of frustration among the contributors. A group of them decided to fork the project, so that they could control their own destiny, and The Document Foundation was born. The Document Foundation fork will be known as Libre Office, and if the Foundation is able to follow through on their initial plans, it appears that Libre Office could be a game changer. In fact if they can do half of what they want to do, they will end up with a product that will cause a huge upset in the market. Open Office’s target was always Microsoft Office, and the features that Sun needed for their own internal use. Libre Office’s target isn’t Microsoft Office. Libre Office’s target is the Libre Office of a hundred years in the future. This change in focus should allow the Libre Office team to leapfrog the competing Office Suites. It’s going to be interesting to watch where it goes over the next two years.

Any change in sales of Microsoft Office will have a huge effect on Microsoft’s profitability, and the corporation’s ability to develop new products. Remember my prediction that Microsoft would be in Chapter 11 Bankruptcy Protection within five years? A large part of that prediction was based on the growth in market share of IWork, OpenOfficeOrg, and Google Docs, and the economic pressures on end users of the recession.

What does a company with a thousand seats (installations) of Microsoft Office do when money runs low, and it’s not possible to renew the licenses? At this point OpenOfficeOrg looks like a great deal. Sure, it’s not completely compatible with Microsoft Office, but the cost factor can’t be ignored.

Or for that matter what do you do personally, if you’ve been laid off, and your new job doesn’t pay as well? Yes, you could keep using that old copy of Microsoft Office, assuming that the installation CD/DVD still works. Or you could go for something free, and use the money you’ve saved for gorceries.

And that’s Microsoft’s problem. Office has always been overpriced. The company used it’s monopoly position to damage competitors, and for a while, with little or no competition, they could charge what they wanted. Now they have competition, and the competition is charging less, in several cases giving the product away. So the margins that the company has depended upon for years are no longer sustainable, and if they don’t react soon, there will be a full scale stampede to the competition. But if they do react, they still take a hit on their margins. They are in a lose, lose situation. It should be interesting seeing what their response is.

Regards

Wayne Borean

Sunday October 31, 2010

Smart like a fox or dumb like an ox – Rupert Murdoch

It’s been all over the news, and the blogosphere. Rupert Murdoch plans to put all of his News Corp. assets behind pay walls. Wikipedia describes News Corp as one of the world’s largest media conglomerates. It includes Books, Newspapers, Magazines, Music and radio, Film Studios, Broadcast TV, Satellite TV, Cable TV, Internet sites, and Other assets. This years sales will probably be around $30 Billion US.

The question is – what does he hope to accomplish by doing this? He says that its to increase sales. The problem is that he’s got competition that isn’t going pay. So what does he have to offer that will make his value proposition such that he can compete with free?

We don’t know. We do know that Rupert Murdoch is a very rich man. He didn’t get that way by being stupid. Either he’s got some plan to add value, or he deliberately wants to Chapter 11 all of his businesses that currently are offering free online content.

Time will tell.