Fear of piracy can be more damaging than piracy itself

According to information presented at a recent U.S. International Trade Commission hearing, piracy may be hurting companies less than previously though.

Fritz Foley, an associate professor at Harvard Business School, told the commission that content producers often assume that a pirated copy of a product blocks the sale of an authorized copy, when that may not be the case.

“It seems a bit crazy to me to assume that someone who would pay some low amount for a pirated product would be the type of customer who’d pay some amount that’s six or 10 times that amount for a real one,” he said during the first day of a two-day USITC hearing on the impact of Chinese intellectual property infringement on the U.S. economy. “Be careful about using information the multinational [companies] provide you. I would imagine they have an incentive to make the losses seem very, very large.”

Source: IDG News Service report

He was talking about software and movie piracy in China, but the same principle can be applied to the virtual worlds, as well.

For virtual content manufacturers, OpenSim is the new China. Production costs are low, but illegal copying is widespread, and copyright protections are in their infancy.

Now, I am not a proponent of copyright violations. I do my best to ensure that all content my company uses is of legitimate provenance, and I monitor my employees to make sure they do the same. And we take steps to protect the content that we produce, and monitor continuously for potential violations.

For example, another website recently began reprinting articles about OpenSim without attribution. We immediately complained, and the copyright infringement ceased. If we had allowed the infringement to continue, despite knowing about it, we might have given the false impression that we were allowing our content to be reused, that it was in the public domain.  So there was a legitimate business reason to shut down the infringement.

But did we lose any money? No. The website would not have bought the content from us. They would have simply run an excerpt and linked back to us for the full article (which is what they did after we pointed out the infringement). Did any of our advertisers switch to advertising on their site, instead? No. In fact, the website probably brought in some extra traffic for us (and still does).

There are three kinds of potential harm involved here: moral harm, potential harm of setting a precedent, and actual economic harm. The moral harm, in this case, was minimal — the actions were probably an unintentional mistake and our feelings of violation were quickly abated by the corrective action. The potential harm of setting a precedent was also quickly abated as a result our response. The only economic harm was the effort spent on recruiting the issue, effort that could have been spent on other activities.

The moral impact of a piracy breach is often very high, the potential harm of setting a precedent moderate, and the actual business impact much, much lower.

In fact, it is fear of piracy that can do much more damage to a company, by shutting it off from potential markets, than piracy itself. For example, music distributors were slow to embrace Internet distribution because they feared piracy and feared cannibalizing their existing channels — a stance, which, ironically, allowed piracy to grow free from competition from legitimate alternatives. It took iTunes to show that this policy was misguided. Similarly, it is hard to find legitimate low-cost or free movies and television shows online, but easy to find pirated copies. Hulu and the networks only post selected episodes of a limited selection of shows and movies.

The thing is, it doesn’t serve your customers any purpose to force them into a channel they don’t want. I don’t go to see movies in the theater because they’re not out on DVD yet. I go because I enjoy the theater experience. After all, I can watch them for free online. I’m not saying that I do, or that I don’t, but that the option is there. Just hypothetically-like. In fact, given the choice, I’d rather watch a legitimate online movie, with commercial breaks — or a small subscription fee — than watch a pirated movie free and uninterrupted.

Similarly, by staying out of China, companies do nothing to combat piracy there — but cut themselves off from that entire potential market. Yes, having production facilities in China makes it slightly easier for pirates to steal your products — some will even get access to your production line at night or on weekends and produce fakes that are identical to the real thing.

Instead, successful companies engage with the new market, offering legitimate distribution channels, working with enforcement authorities to reduce violations, and contributing to public education efforts.

Similarly, by staying away from OpenSim, content developers aren’t reducing the amount of copyright theft on the startup grids. Instead, they are allowing illegitimate distribution networks to develop in a vacuum.

It’s still early enough in OpenSim development for content distributors to create legal alternatives to copyright infringement and cut the pirates off at their knees. After all, if Pandora, iTunes, and Hulu had been available ten years ago, would Napster, BitTorrent and other illegal content distribution networks become as widespread as they did?

There are three kinds of potential users of intellectual property:

The law-abiding citizens. These are guys who will always use a legitimate product. When one is not available, or not in the budget, they will use an inferior product, make their own, or do without. They can often be found working in companies and educational institutions.

The sneaky thieves. These are guys who prefer to steal even if they can afford a legitimate copy of the product. They may be driven by politics, by hatred of the content provider, by the thrill of the chase, or by the feeling of getting something over someone. They often don’t even use the products they steal, but collect them as trophies.

The fair-weather friends. These are guys who will buy a product legitimately if it’s convenient and affordable, and will use a pirated copy otherwise. They don’t go out of their way to find pirated content and often adopt a “don’t ask, don’t tell” attitude about provenance.

Few of us are one or the other. Most of us move between these three roles.

For example, during the day, at work, I’m a law-abiding citizen. At night, watching YouTube videos, I take a “don’t ask, don’t tell” approach. After all, YouTube has a take-down policy — and they’ve made deals with a lot of content providers. Who’s to say that the video I’m watching isn’t one of the legitimate ones? And — I admit it — I’ve been a sneaky thief. I had purchased a Windows computer and had to wipe the harddrive and reinstall Windows. I was in China, there were no original disks (do computers even come with them these days?) and I let the repair shop install a pirated copy of of the operating system and all the software I had on it. (Note: This was many years ago, and the statute of limitations has long expired.) Okay, this was a mild case of theft — but then, I wouldn’t be admitting anything really egregious in a public forum, would I?

As a content producer, I need to keep the first group of customers — the law-abiding citizens — very, very happy. That means giving them the support they need, and making products available in different price ranges, so that they can buy from me no matter what their budget.

For the sneaky-thieves, the best I can do is offer them a way back into the fold.

And the fair-weather friends — for my company, this is not a significant group at all. But for other kinds of content producers, this is their biggest challenge. Hulu and iTunes have proved that people will use legitimate content, and even pay for it, if its convenient and reasonably priced. For example, with Hulu, the price is simply time spent watching commercials — and I’m more than happy to pay it.

Awareness

Are your customers aware that they can buy legitimate copies of your product? For example, in OpenSim, Ellis Island Shops on Grid4Us is home to many merchants offering clothing and other virtual goods, legitimately. These products can be purchased using the multi-grid OMC currency, and then used on any other hypergrid-accessible grid. Not too shabby. But most people in OpenSim probably don’t know that legitimate stores even exist, and are forced to use shady freebie stores where the content may — or may not be — legitimately acquired.

Distribution

This is the biggest single problem on both the Second Life and OpenSim grids. There are few legitimate retail outlets, they are hard to find, and hard to distinguish from illegitimate ones. There are no well-known chain stores. No Amazon. There’s a great market opportunity here for someone to get in early and make a big impact.

Marketing

Say you build a legitimate store, sign up content providers, enable PayPal and OMC, and turn on hypergrid, and wait for customers to come. Will they show up? Probably not. OpenSim traffic is fragmented between thousands of grids, most running quietly inside schools and companies. How will they find out about your store? And many large public grids are closed to hypergrid traffic — you will have to rent space on the individual grids, or forget about those customers entirely.  Finally, if you decide to market just to customers located on the hypergrid-enabled grids, you will still have to reach them. And there are no in-world advertising networks. You can add your store to the hypergate networks, but they’ll be buried among all the other destinations. The best you can hope for is random traffic from curious surfers, combined with word-of-mouth.

The best marketing channel for hypergrid commerce today is the Web. It’s not surprising. The best marketing channel for the Internet in the early days was television, newspapers, magazines — the traditional media. In fact, I’m still seeing ads for websites on TV — most recently, for the Bing search engine.

Just remember: it normally takes at least a year for a new company to become profitable. When you launch your marketing strategy, expect it to take some time to build brand awareness.

Shutting down the crooks

Fortunately, the lack of in-world marketing channels makes things as difficult for crooks as it does for legitimate businesses. If a crook sets up shop on a large, public grid like OSGrid, a few complaints from content providers will quickly shut them down. The last thing a non-profit like OSGrid — or a small for-profit grid — needs is a copyright infringement lawsuit. All major grids have take-down policies in place, and most will even search their asset databases and remove all copies of offending content. It might take a little persistence to get through to grid administrators, and to follow up and make sure that the offending content is gone, but it’s not particularly difficult.

That leaves crooks with two other distribution options. They can pass content to their friends, and have their friends pass it on to their friends. These kinds of informal networks are hard to shut down, but also difficult to access. If they were easy to find, then grid administrators or content creators could find them as well, and shut them down. In addition, they can’t make any money by distributing goods person-to-person (well, avatar-to-avatar).

And crooks can get up their own grids. This is easier than it sounds. The Diva Distro, for example, is a free download, hypergrid-enabled, with a four-region standalone grid. Plus, it’s a megaregion, so no border crossings. A crook could use this to set up their own grid and sell anything they want. For extra security, they could run it on private servers somewhere in Uzbekistan. But if they try to bring in traffic by adding themselves to hypergrid directories or hypergate systems, a copyright takedown notice will shut them down. Being criminals, they’re not likely to buy ads, either. They’ll have to rely on word-of-mouth to bring in business. Will they be able to do so? Sure. Word about free or low-cost alternatives to pricy, in-demand products spreads quickly.

Can we eliminate piracy completely? Of course not. Every single industry — from car parts to clothing to purses to pharmaceuticals — has piracy problems. After the first guy invented the wheel, some pirate probably copied it and passed it off as his own.

But if fear of piracy is keeping a company from entering a new market altogether, then the consequences can be severe.

maria@hypergridbusiness.com'

Maria Korolov

Maria Korolov is editor and publisher of Hypergrid Business. She has been a journalist for more than twenty years and has worked for the Chicago Tribune, Reuters, and Computerworld and has reported from over a dozen countries, including Russia and China.

  • Cath

    Hi Maria, Most of the times I read your blogs with pleasure, but this time it makes me a bit sad.. First of all: Piracy is a war-like act committed by private parties that engage in acts of robbery and/or criminal violence at sea.

    Copyright infringement is a whole other story and because the maker still has the original, you can not even call it theft, because nothing is stolen. .

    In my opinion the current copyright laws are higly outdated and mainly benefit the industries, in stead of the makers. In this digital age there is also no way that copying and remixing can be stopped, unless we are prepared to loose out digital freedom and criminilize about everyone..

    in stead of fighting a battle that can not be won, it would be more wise I think, to concentrate on other business models. There are already many inspiring examples, like Cory Doctorow, who releases all his books under a Creative Commons license and for free as e-book and for money in print. And Nina Paley who gives her movies away, like Sita sings the Blues. More and more musicians see there music as their marketing-instrument and earn money from selling merchandise and doing performances. Others use a pay-what-you-like policy.

    This Free Culture movement derrives from the Free Software movement. Many people now make money from free software, just not by selling the software but by services. There are opportunites if you look at the future and not just stick to something that has been..