Tuesday, January 17, 2012

PIPA and SOPA -- FairPay and the Death of Piracy

[Update 9/13/16 -- PIPA and SOPA are long dead, but this issue of piracy and related issues of ad-blocking remain at the center of the content industry.  The larger points here are as relevant as ever.]

Sabers are rattling this week with the consideration of seemingly draconian measures to stop Internet piracy of copyrighted materials.  The FairPay model for monetizing content puts this issue into interesting perspective. It suggests the way to end piracy is not to reduce the supply, but to reduce the demand.

Basic objectives:

First, let's get back to basics. What is the real objective here?  Copyright and ownership of intellectual property are not ends in themselves, but means to a larger end.  This larger end, is clear in the Constitution: "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."

  • Thus copyright is clearly only a means "To promote the Progress of Science and useful Arts." 
  • It would be foolish to apply measures to protect copyright that impede "the Progress of Science and useful Arts" more than they promote it.
The problem with PIPA and SOPA is that they seem to overstep the objective, and to enhance a means at potentially high cost to the desired end.
  • The real issue is that the Internet has facilitated piracy to the point that it threatens the ability of creators of writings and other arts to earn reasonable compensation for their work, and thus threatens the progress we seek for society.  If creators lack fair compensation, fewer will create, and society will lose.
  • We (society) support IP ownership to the extent that it is good for society, not the other way around. 
So the challenge is to find better ways to ensure the fair compensation of creators for the good of society. The Internet is a tidal change, and we must learn to channel the tide, and harness it, not try to stop it.

Fairness and Piracy:

Robert Levine's "Free Ride" provides a nice summary of many of the issues of piracy, and makes it clear that some level of piracy is inevitable, with a level that depends on a number of factors, including:
  1. The ease and effectiveness of piracy relative to any issues of quality and risk.
  2. The ease and effectiveness of legitimate sources.
  3. The cost of legitimate access (relative to piracy)
  4. Social and ethical factors relating to the legitimacy of the IP owner, and the fairness of stealing from them (stealing service, not bits).
It is well known that the Internet has shifted at least #1 and #4 toward piracy.

I suggest the real solution is not laws and other efforts to shift #1 (although some modest improvement may be gained), but to shift #2-4, and especially #4.  The value of shifting #2 and #3 are well known, and summarized by Levine.  What is less clear is how important #4, fairness, is.

Robin Hood, FairPay, and the death of piracy

As described elsewhere on this blog, FairPay is a new model for transactions related to copyrighted content that lets buyers pay what they think fair, within limits.
  • When buyers can buy legitimately for a price they accept as fair, the cost becomes a non-issue.  Those who have limited means or get little value can still buy for a price that considers those factors fairly.
  • When buyers can buy legitimately for a price they accept as fair, the fairness of piracy becomes clearly insupportable for all but the most sociopathic. It is hard to argue that "information wants to be free" (as in free beer), when it is free enough.
Piracy is a tax imposed by the people on sellers of IP, a Robin Hood tax. When the price of content seems onerous, people feel they should not have to pay for it, and piracy appears justified. It is seen as noble for the poor to steal from the oppressive rich.

Killing the demand for piracy, not the supply

As with any illegitimate product, it is generally easier and more effective to reduce demand, not to choke off supply.  That is best done not by legislation, but by making the legitimate alternative more attractive.

There are a number of interrelated levers to move in that direction:
  • FairPay pricing is a significant step in the right direction, one that also supports the following steps. It makes prices more suited to individual buyers needs, values, and ability to pay. Copyright owners are given the right to extract "monopoly rents," but must balance that with the quid pro quo of society's desire to benefit from their creations.
  • Making sellers more legitimate in the eyes of consumers is also a major factor. To the extent the IP owners are seen as evil and rigid, faceless corporations that exploit their consumers (and their creators), it is easy to justify stealing from them. Showing that they listen to consumers and can be flexible in pricing will greatly increase perceived legitimacy and deservedness.
  • Getting sellers to be more clearly respectful of creators can also have a big effect. Many studios (such as music labels) are perceived as sharing little of their profit with their artists. While they do have real costs of nurturing, marketing, and managing, clearly the Internet is shifting that toward what Seth Godin calls "skinnier" models. IP aggregators must either get skinny, or demonstrate why they deserve the share they get, and be transparent about how much they share with the creators.
FairPay is not essential to all of these levers, but it can contribute significantly to all of them.

When buyers set prices, no man will be a pirate. That may not be true in every case, but it is true enough.

Monday, January 9, 2012

Price Discrimination Can Be Good!

An interesting NYTimes report by Nick Bilton talks about the Uber online service for ordering a car service, and how the workings of supply and demand can seriously disrupt customer relationships. The issue was a "surge pricing" feature that raised the cost of a ride to a New Years party, which cost $27 to get there, to make the ride home cost $135. Bilton nicely summarizes the issues in dynamic pricing.

I posted a comment on that article suggesting that FairPay provides a solution to this problem -- a solution based on using the Internet to facilitate a relationship view of price negotiation, instead of a single transaction view. This post elaborates a bit on my comments, and highlights one of the major advantages of FairPay that make it more attractive and more economically efficient than conventional methods.

The real problem of dynamic pricing (described in the article) is one that can now be fixed in a “post-modern” economy. The problem with dynamic pricing is that it is set unilaterally by the seller, and imposed on the buyer  on a take it or leave it basis. This is also called price discrimination (and in some cases, price discrimination is actually illegal). But as Bilton says, such discrimination is economically optimal. That is why it is widely used in the hotel, airline, and car rental businesses. There buyers do live with it -- but still with considerable resentment. I suggest the way to make it acceptable to buyers is to involve them in the pricing decision.

That is one of the key features of FairPay.  FairPay sets prices based on a dialog with the customer, and uses Internet tracking of such prices to manage fairness over a long-term customer relationship.  The long term relationship view is as suggested by Liran Einav (a Stanford economist) in the article). With FairPay, customers have significant participation in pricing, and can be asked by sellers to include a dynamic premium (such as for peak time surges) -- but they can decide just how extreme that premium should be. Sellers get to determine if the buyer is generally being fair about that, and continue to allow FairPay pricing in the future to those who are reasonably fair. True, few buyers might accept a price of $135, but many might accept $50-75 and some even more. The seller can also be more restrictive during peak times, offering surge period FairPay pricing only to those who who have a history of agreeing to a reasonable level of surge premium, while let less flexible users might be permitted to use FairPay pricing only during times of normal demand. Thus "discrimination" can be good, when done within reason, at agreed-upon levels, based on mutually understood reasons.

Another factor in customer acceptance is predictability, as in the cited quote of Dirk Bergemann (economist from Yale). I suggest this is really a problem with unpleasant surprises, and with price changes that seem unfair.  The perceived unfairness of dynamic prices and discrimination, such as with the New Year's surge, or for snow shovels or flashlights after a storm, is the "unfair" external imposition of higher prices. Here again, when the customer gets to set the level of dynamic premium, that changes it to a fair process.

Of course dynamic discrimination should also apply in the other direction, to provide discounts at slow times, as well! That is an equal part of fairness, and FairPay can provide that too. When there is lots of supply and little demand, the customer should be given the freedom to set a lower price (within reason). FairPay brings that kind of sensibility back into pricing. The time-honored practice of individual negotiation allowed such issues to be factored in as appropriate and agreeable. We lost that in 20th century mass-marketing, but the Internet now lets us regain that in a new and better way. That is described more fully elsewhere in this blog, and the Web site.

I suggest FairPay could be a very effective solution for Uber, and for many others like them.

[UPDATE 8/1/16:] See additional comments in this newer post:  Price Discrimination for the Good!