Digital Media and Capitalism

My unpopular idea for today is going to shock some of my fans, for I’m arguing that capitalism may have its limits, that whatever its merits, seemingly bad long term outcomes are still possible. Specifically, I’ll explain why I think market forces doom my own industry and most creative professional fields. What we create is increasingly 100% digital. Software, literature, news, music, movies and indeed all sorts of artistic endeavor are headed for an entirely digital future. But at the same time, the march of technology means it is becoming virtually free to make copies of digital works. 100% digital media cost nothing to reproduce, which reduces the perceived value. When we paid for entertainment, news, computer applications and other information in the past, we mostly thought we were purchasing the medium, the physical book, magazine or disc which cost something to make. Cheap computers and digital content mean zero variable costs plus low fixed and entry costs. So most intellectual pursuits are headed toward a digital future with much lower rewards.

Q. It is clear to me that you are onto something. I mean, a future with free music and movies sounds dreadful, not to mention all the poor starving software engineers. Whatever shall we do?

A. What is needed are wise elite thinkers such as myself, who can step in and set things right. People with compassion for the underdog, liberal humanitarians with the best interests of all mankind (and of course womankind too) at heart, those with a keen understanding of the problems and how we can fix them through benign government administration and incentives. Yea, an entirely new and thoroughly modern dictatorship of the proletariat (with a few humble administrators like myself).

Q. Great idea! Why didn’t I think of that?

A. Such things are best left to intellectuals. Fortunately, I am here to serve, wisely advancing the interests of all you little people.

Q. And how should we address your excellency?

A. Wise Helpful Operator Of Public Systems. WHOOPS for short.

As you probably guessed, I will not argue we should scrap capitalism. While I see some possibly bad consequences that capitalism has in store for people, it is still a far better system that any alternative I know. For one thing, you may not share my values so and so a future constructed in my best interests probably would not be in your best interests. But even if our interests align, never forget that power corrupts and that absolute power corrupts absolutely. Give anyone enough power, even someone as obviously kind, thoughtful and fair as myself, and you are in deep trouble. Put anyone in charge of the economy, no matter how intelligent and well meaning, and they will inevitably if unconsciously squander a good portion of your wealth.

What I will argue is that market forces are working to lessen the value of at least some creative pursuits. It is possible to predict things heading down that road, but it is probably impossible to predict whether we will reach some new equilibrium before we reach the the apparent destination. Economic dictatorship cannot help us, but possible future changes in public values and opinions might eventually restore some economic power to creators of digital content. Along the way, I will also describe how some anti-piracy software works and explain why it does not work very well.

Copy Protection

I lost an old customer recently. Like many commercial software vendors, we use an “activation” system that can stop people from installing a purchased copy on multiple computers. Our system is quite lenient in an attempt not to unnecessarily inconvenience our customers. When our automated system stops a customer from installing on a new computer, we manually allow it as long as the user guarantees they are complying with the license agreement. So in the end, we trust our customers, though the automated system is an act of distrust.

Here’s how software activation works. When a customer installs our software on a new computer, they must enter their “registration number”, which in our case is a string of sixteen numbers and letters that they purchase. When they enter their registration, our FxFoto software checks their computer for certain hardware characteristics and composes a second number which is a scrambled version of a few pieces of information about the computer hardware. This second number is sent over the Internet to our online activation database. Being scrambled and fairly small, this number tells us nothing about their computer. But if they install on a different computer, the new activation number will virtually always be different from ones we recorded when they installed before.

Our activation server uses a proprietary but fairly simple algorithm to make a decision about whether the customer’s registration number may possibly be installed on too many computers. “Too many” is a legal concept as defined by our license agreement. Most software vendors have license agreements which only allows users to install a single purchased copy on one computer at a time. We allow purely personal copies to be installed on two computers. In other words, if you are the only person who ever uses our software, you are welcome to install it on a second computer making it easier to use FxFoto wherever you go without buying an extra registration. Of course it is fine if more than one person uses your software, but in that case you much purchase a separate copy for each computer, just as with most other software. When multiple people use software, it necessarily must be sold per computer since otherwise a single sale might suffice for all of humanity.

Some vendors have activation systems less lenient than ours, where once you have installed on one computer, it is very difficult to get permission to install on another without buying another copy, even if the first computer is no longer in use. Other vendors allow you to move from computer to computer by monitoring when you uninstall their software as well as when you install it. We don’t do it that way because I fear sending information over the Internet when people are uninstalling our software might really make some people angry, for they are likely to be unhappy already.

Moreover, monitoring uninstalls for copy protection reminds me of gun control. If your computer dies, there is no way to uninstall software. So if our activation system forced you to first uninstall before re-installing on your new or repaired computer, then it would not work very well when people most need it. Plus people need to install on their new computer and make sure everything is okay before they can risk removing things from the old one. People trying to comply with the license agreement would make every effort to uninstall when moving to a new computer. People intentionally trying to make unlicensed copies of our software on multiple computers can just falsely claim that the old computer died so they could not uninstall. The unintended consequence of gun control laws is that when guns are illegal, only criminals have guns, an outcome possibly at conflict with the goal of keeping guns out of criminal hands. The probable unintended consequence if we tried to monitor uninstalls is that the only people not angry with us would be the software pirates, who would be no more inconvenienced than if we just monitored when they install. So we just monitor installs.

One more side note. That we have an activation system to monitor possible software piracy is mostly the legacy of a failed attempt to sell our FxFoto software in retail stores, specifically scrapbooking outlets. Selling over the Internet means that people who want to obey our license agreement generally will. And people bent on pirating copies of our software are often sophisticated enough to get around whatever barriers we may use. So you can probably argue that we should not use software activation at all given we currently sell almost 100% from our www.FxFoto.com web site. But to sell in stores means distributing mass produced shrink wrapped CD’s. And it is trivial for virtually anyone to copy a CD-ROM using a PC, no mater how unsophisticated they may be. More importantly, when we sell over the Internet, we know our customers and we include the purchaser’s name as part of the required registration. So it is obvious when you are installing a pirated registration since the name you are typing is not your own. But shrink wrapped store copies are necessarily anonymous, with only a random number. It is also trivial to make a photocopy of the printed registration number that differs from package to package. So without software activation, retail software can be easily pirated by virtually anyone and not just sophisticated professional criminals. Unfortunately for us, it turned out that paper scrapbooking is a shrinking industry with fewer and fewer stores. It also turned out that most customers and proprietors of such paper scrapbooking stores have little interest in the digital paper-free equivalent offered via our FxFoto software. But like old laws, old software seldom goes away. So activation lives on in our software. It is easier to write new software and laws than it is to abolish or amend old software and laws. That’s why in my view, both should often be treated with suspicion. (Unfortunately for me, most people are more suspicious of changing their software than they are of changing our laws even though both can often have dire outcomes. See Unintended Consequences for more on this.)

Copyrights and Justice

The mere existence of such copy protection is an anathema to some, though we encounter few such people since they are unlikely to purchase our software in the first place. Others have no great moral objection, but do believe they should be able to share our software with other family members. In my unpopular opinion, absolutely everyone out there is a good person. Evil is always what other people do. So when my old customer was stopped by our automated system from installing his FxFoto software on a fifth computer (some of which he may no longer be using), he contacted us and indicated that he and his wife were only using it on two laptops, which he assumed was fine since our license allows him to install on two computers. But not when other people use our software on either computer, since we do not sell a family or site license (and if we did, it would of course cost more).

Our unhappy customer is right that our system is not just, but not for the reasons he thinks. And he is right that we are being unfairly inflexible, given he has probably been sharing our software with his wife for over five years. But again the real reasons are somewhat different than he imagined.

Is our license agreement just? Of course it is, since customers need not purchase if they don’t like the terms. It is even pretty short and easy to read, with the important stuff about not being allowed to install on multiple computers appearing within the first two short paragraphs. Plus it is fairly standard (except that it allows two computers for purely personal copies) so people more or less know the rules without reading it.

The injustice lies in the fact that we have no way to enforce the agreement fairly. Technical solutions like our activation system simply cannot work very well. So we necessarily rely on technology only as a first line of defense and depend on people’s promise that they have not broken the rules when they run into problems. Unfortunately that means that we cannot know when dishonest people guarantee they are in compliance. We must accept their word even if it seems possible they are not telling the whole truth. So in comparison, people like our unhappy customer are penalized unfairly when they are honest about how many people and/or computers use the software.

Are we also being unfairly inflexible? Yes, but again not for the reasons customers imagine. We are not really expecting the customer to purchase another copy when they contact us with activation problems. I understand that when you have been using something for years and see yourself as a good person, it seems unfair to have to pay again and most will not. They are more likely to get angry and stop using our product entirely, as happened in the case I’ve been describing.

So why do it? One problem is that we choose to keep our automated activation system fairly flexible so that we do not inconvenience most customers if they get a new computer once in a while. But the flip side of this benign policy is that when the automated system does finally decide the user may have made too many copies, it may be years after they first broke the rules. As any student of psychology knows, punishment must immediately follow an undesired behavior to be effective. Delaying things just causes confusion and anger, the very thing our lenient policy aimed to avoid.

So technological limitations play a role in our seeming inflexibility. But the real problem is legal. We are not enforcing our license agreement in a quixotic attempt to get old customers to purchase another copy. We are enforcing it to avoid loosing ownership of our software. I am no lawyer, so those readers with legal training are welcome to correct me. But with most forms of ownership, if you do not enforce your rights you can loose them. I believe the principal comes from English common law. In ancient places like England, there are ancient paths through private property that have been used for years. English courts long ago decided that it is unfair to suddenly prevent trespass on old paths that people have long used without objection, and I agree. I believe this same principal applies to most other types of ownership, including copyrights. So if we make no attempt to stop people from freely copying software, we could eventually loose ownership and effectively place our software in the public domain. As I see it, we must be inflexible about enforcing our copyright. If we knowingly allow people to copy the software without permission, someone might eventually maintain that FxFoto is in the public domain and start giving it away or selling it without compensating us.

The Wider Problem

“Software as a Service” (SaaS) works differently, because the software mostly runs on the vendor’s server not on your personal computer. SaaS avoids many piracy concerns since the vendor controls the server and who can use it. This may be the real reason new software is SaaS whenever possible. SaaS vendors talk about automatic free updates, lower maintenance costs and better support. But I suppose the real goal is to reduce theft, since services are more difficult to steal than products. However, high bandwidth applications like FxFoto’s image editing are problematic for SaaS, at least for the current state of the art. And SaaS is no panacea against piracy since user names and passwords can still be stolen or duplicated.

Using software activation schemes like ours or even SaaS to limit unpurchased copies is only possible due to a happy coincidence that does not apply to most other creative endeavors. For most media there is no good way to limit piracy in an increasingly digital world. Fortunately for us, we create not only the content (in this case software to organize, edit and layout photos), we also create the “player” responsible for presenting our creation, intrinsically linked in the same software program. Authors of most literature, music and film must create content compatible with some “player” technology (book, CD, DVD, etc) they cannot control, usually created by separate companies whose interests do not necessarily align with theirs. The other lucky break for software vendors is that our software almost always runs on computers that can contact us over the Internet. Technical anti-piracy measures do not work very well for PC software, but they are hardly possible at all for other endeavors. So most other creative industries are mostly out of luck when it comes to copy protection.

I may be wrong, but I do not believe there will ever be a good technical solution to digital piracy. I think social values would need to change for creators of digital content to be able make a living rather than devolve to starving artists or hobbyists with a day job.

Right now, it does not appear such change will happen. There are plenty of creative people who are willing to work with little or no pay, purely for the glory of it. Where barriers to entry are low, such as with software, novels and music, where only an inexpensive computer is needed to create professional grade content, supply can easily outstrip demand and drive down prices even without piracy. Because there is a large and increasing amount of inexpensive or free content around, users naturally come to expect all offerings to be free. So attempts to sell digital creations are viewed as being unfair by a population grown accustomed to free content. Rules and even laws that most people do not believe are fair are not very enforceable. Digital copyrights are clearly headed in that direction.

Unless both producers and consumers of intellectual property value it, there can be no market. It is not just that consumers have come to expect free information and entertainment over the Internet. Producers’ view of their value is also in decline. It is not just that people copy intellectual property without permission because that is not considered much of a sin. The more fundamental change is that decreasing production costs mean supply is outstripping demand, which is a good thing for society in general if not for all participants. But the ultimate result could be a future devoid of intellectual wealth with a dramatically different kind of economy. Of course, values may change, with starving producers shrinking the quality and supply of digital information, along with a concurrent shift in consumer morality so that digital theft has the same social stigma as activities like shoplifting.

Software Socialism

Maybe not everyone can be a starving artist with a day job. Right now in my field, the typical day job is writing software for a large corporation or university. Indeed Richard Stallman, the founder of the GNU free software movement, was employed as a programmer at MIT, where I studied computer science. He and many other people strongly believe that most or all software should be free. They are software socialists, and as far as I can see, software socialism is winning.

What if at some point software engineers can no longer make a reasonable living working at large organizations? After all, if all software is free, then even (formerly) large corporations will not sell much. As systems get easier to use and maintain, even software support services should be worth less and less. That leaves us with universities and the government for day jobs. Maybe we can all work for universities and write free software in the evenings like Richard Stallman. Or maybe not, since universities depend on paying students to partially fund their activities. If people can no longer make a living writing software, they are unlikely to pay for a university education in the field, so computer science departments could shrink or die. What about government funding? Grants, often from the government, also fund computer research and that could continue. But of course governments mostly tax economic profits and if the economy shrinks there is eventually less federal grant money.

Maybe we will all end up working at restaurants and fast food joints to make ends meet. The problem is that someone must be creating value somewhere in order to pay for all that food. If intellectual pursuits no longer pay because almost all intellectual property becomes free, then there is not much value creation and not much wealth around for eating out.

It seems to me that the ultimate logical result of free digital works may be either that the economy collapses to the point we all grow our own food because nothing else pays, or we all work for a socialist government. And of course, the socialist government would necessarily try to recreate some kind of economy via centralized planning. So ultimately, a government of free thinking socialists, created because almost everyone agrees that all art and information should be free, must still end up charging for art and information. Only they will do it a lot less efficiently than a free market and we will almost all be a lot poorer as a result.

It seems to me that what people like Richard Stallman are really advocating is that we all must ultimately work for the government. That is an idea that many socialists may find appealing, but probably only because they have not experienced the joys of living in 20th century Russia. (Not that I have either, my grand parents having escaped before the communist revolution.)

My guess is that Richard Stallman would probably support free software even if he believes in capitalism (or thinks he does), for he achieved fame and probably at least a little wealth by promoting free software early in the process when there is still lots of wealth around to fund it. The beauty of his system is that it makes economic sense, as long as enough creative people are willing and able to work merely for fun or fame. I think things will probably eventually reach an equilibrium where software engineers and other creative technical people are as poor as other artists, and while that is not fine with me, it may be the way the world works.

You may argue that hardware will always have value, so we can all make or sell computers, media players and other physical technology. But as the digital revolution progresses, what seems like hardware will be mostly software. Hardware increasingly uses embedded software. Even if it did not, digital designs are just computer data that can become free commodities.

A Possible Alterative Future

There is a chance that society will change its mind about the value of digital content. With people increasingly addicted to video entertainment, the turning point might come when the television and movie industries start to really suffer. Digital video requires huge amount of data relative to other media and it is only now becoming easy to make copies of movies and TV shows. With technology and bandwidth still rapidly advancing, it will soon be easier to copy a movie than it was to copy a song in 2000, about when it stopped being very profitable to create and publish music.

Movies require a lot more money to create than songs or words. They are even more expensive than almost all software. Stay seated at the end of a film and count the number of people appearing in the credits. There are many hundreds being paid to create the typical feature length film and at least some of them work for years on the project. That is one big reason why budgets can exceed $100 million per picture. Stars can demand many millions of dollars per film. It is difficult to imagine all of those people working together without pay.

So when movie and television producers start to feel the squeeze from digital piracy, the availability and quality of our most popular form of entertainment will suffer. That may even be happening right now, since there seemed to be almost no good new movies during most of 2009. Maybe everyone will start reading again, though I doubt it. So it seems possible that popular opinion may eventually tip in favor of digital creators, and some new equilibrium will be reached were at least some digital content is not free. We can hope it is not only soap operas.