KUHN CAPITAL Saturday, February 24, 2018
Dispatches from the front

EMI's "Bet Your Company" Decision

Itís big news.

EMI has decided to sell its music without DRM (or without protection from unlicensed, unlimited duplication).

We suppose this latest gambit to salvage the free-falling music business will please Steve Jobs who several months ago argued that the music industry do precisely this. In fact, Jobs must be doubly pleased: EMIís first retailer of its DRM-free music files is Appleís iTunes.

But we donít see Jobs giving away his intellectual property, or even opening up the iPodís operating system. Rather the opposite: Jobs is famously proprietary, suing even those who guess about what heís up to next. So that begs the question: is EMIís decision the best one for EMI? We think not.

We agree that DRM has alienated music buyers and, as bad, has proven ineffective. Thatís because traditional DRM addresses an unsolvable problem. Itís been clear for years that whatever lock is put on the safe, hackers will crack it.

Instead, the problem isnít how to lock the local safe, itís how to control distribution. That is, the problem is the Internet, with its ability to transfer anybodyís data to anybody without attribution.

Henry Juszkiewicz, Chairman of Gibson Guitar, has an intriguing idea that heís promoting to the music industry. He argues that the Internet creates a ďproblem of the CommonsĒ. The phrase refers to what happened to American colonists who found that -- when everybody was allowed to graze their cows in the Boston Commons at no cost -- the grassy fields were quickly turned to mud. In other words, without property rights, any valuable resource will soon evaporate.

Juszkiewicz claims that it is possible to impose property rights on the Wild West Internet. Hereís how: at the time of purchase, the seller licenses unlimited song use to the buyerís local environment. That means the buyer can play music anywhere on his system without fuss, change system components at will, or even rip countless audio files to CDís.

But if he transmits the sellerís music via the Net, those files carry the buyerís serial number and they are driven through a central monitoring service. Many PC processors already embed a unique serial number. If not, the seller can assign one to the buyer.

When the file hits the monitoring service, if it violates certain triggers (bad serial number, excessive number of file transfers, etc.), thereís a virtual knock on the door. In the case of software vendors like Microsoft, who currently use a variation of this system, if the serial number is not validated by the monitoring site, it wonít download updates.

What about those music files that are duplicated on physical media like CDís? Who cares? In comparison to the wholesale theft enabled by the Internet, these ďhard copyĒ numbers are relatively miniscule.

Juszkiewicz isnít saying that his approach is without its own flaws and cost overhead. For instance, it may prove difficult to protect the integrity of the application sending music files to the monitoring service. Or setting up the system may require large fixed costs, though these could be shared by a consortium of music publishers.

In fact, the practicality of this approach may not be known until a real-world test. But if we were running a business that saw a 20% drop in sales last quarter, as the music business has, weíd be trying nearly everything before trusting buyers across the globe to honor our property rights.

Ryan Kuhn

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