[Trash-talk] OT: you will never win your market by suing your customers

[Adam i Agnieszka Gasiorowski FNORD]

By G. Richard Shell

The recording industry has a pricing problem.  People do not want 
to pay $15-20 for a compact disc when they can download the same 
music for free over the Internet.  The industry's solution appears 
as novel as the technology that is giving it such headaches: 
launch hundreds of lawsuits against otherwise law-abiding 
consumers who download music.

After all, the music industry has invested billions of dollars 
in its product and thought it had iron-clad intellectual property 
protection for these investments - copyrights in recorded songs 
issued by the United States government.  But having a strong legal 
claim on the merits is only one factor in legal strategy success. 
Indeed, this factor is often the least important one from a 
business point of view.  Other key strategic considerations include 
the public legitimacy of an industry's legal attack (i.e. how the 
move will play in the court of public opinion), the vulnerability 
of an industry's strategic position in its market, the resources 
it has available to sustain a legal war, and the access an 
industry has to important legal decision makers such as 
regulators and legislators who can make new rules in the 
industry's favor.

The recording industry balanced these factors well in its initial 
legal strategy - suing online distribution companies such as 
Napster.  Napster was a direct threat with no legitimacy of its 
own.  Its only appeal was whimsy: Average citizens thought its 
creator, Shawn Fanning, had a neat, new technology.  But they 
also recognized that Fanning was selling the key to somebody else's 
candy store.  Nobody formed a "Free Fanning" committee to bail 
him out of legal trouble.

The recording industry, however, has gone one step too far with 
its latest legal move.  Suing your customers is not a winning 
business strategy.  Industries have a completely different strategic 
relationship with customers than they do with rivals.  And this 
sort of strategy does not play well in the court of public opinion.

But it's hardly the first time an industry has tried to solve 
strategic problems using litigation against its customers.  And the 
strategy is no more likely to work today for the recording industry 
than it did 100 years ago, when the leading automobile manufacturers 
in 1903 tried to put down the threat of cheap, mass-produced cars 
by suing consumers who bought Henry Ford's automobiles.  Napster 
founder Shawn Fanning may have little else in common with Henry Ford, 
but both men sparked a wave of innovation that transformed their 
worlds. And both brought down the wrath of incumbent industry 
associations which tried to stop their new technologies with 
litigation. The story of Henry Ford's eight-year legal battle with 
the "Association of Licensed Automobile Manufacturers" is a 
cautionary tale for today's Recording Industry Association of 
America.

In 1903, when Henry Ford launched the Ford Motor Company, his third 
attempt at making cars, automobiles were high-priced, custom-made 
playthings for the rich.  What's more, the major manufacturers had 
figured out a way to keep it that way.  They had acquired a 
strategic property right very much like the recording industry's 
copyrights on recorded songs.  It was called the Selden Patent and 
it gave its owners the exclusive right to sell a very basic 
invention: self-propelled vehicles powered by internal combustion 
engines.  Many people in the car business thought this patent was 
an outrage - much as some online retailers today are angry that 
Amazon.com received a patent on its "One-Click" checkout system. 
But the U.S. Patent Office had issued the Selden Patent and a 
group of powerful incumbents had purchased it and formed an 
association to enforce it.  Litigation, then as now, was very 
expensive - especially for start-up companies with limited working 
capital.  Nearly every car company fell into line to pay royalties 
to the Association for the privilege of making and selling cars.

Except Henry Ford. The association did not want another competitor 
in Detroit and it did not like his idea of driving prices down 
to where average people could afford a car.  So it refused to 
license him.  For Ford, it was either exit the industry or fight 
the Selden Patent in court.  He decided to raise a legal war chest 
and fight the incumbents.  The litigation lasted from 1903 until 
1911 and along the way, the association launched hundreds of 
lawsuits against Ford's customers to scare them away from his 
showrooms for buying "unlicensed vehicles." 

Most ordinary people of Ford's era had been content to stand 
by and watch the automobile makers slug it out over the Selden 
Patent.  It was just an industry cat fight.  But when the big 
"money men" started suing ordinary people who were just trying 
to buy a cheap car, public sympathy shifted against the 
incumbents.  People rallied to Ford's side against the bullies. 
Editorials weighed in against the industry's heavy-handed lawsuits, 
and Ford helped his own case by purchasing litigation insurance 
for his customers.  By the time the patent litigation was over - 
Ford won on appeal in 1911 when the court ruled that the Selden 
Patent covered only cars made with a special type of engine 
nobody was using anymore - Ford was a hero, and the largest 
car manufacturer in America.

What can the Recording Industry Association of America take from 
Henry Ford's story?  First, you will never win your market by 
suing your customers.  Quite the opposite: you will rally ordinary 
people to your opponents and alienate a generation of buyers. 
Exactly what has the industry gained by suing, among others, a 
12 year-old girl in New York for downloading songs?  A raft of 
bad publicity, a reputation for being a bully, and a new litigation 
insurance scheme devised by peer-to-peer software companies who 
can now cloak themselves in Robin-Hood green. 

Worse still, the RIAA's wholesale use of the Digital Millenium 
Copyright Act to obtain the names of telephone company customers 
for its lawsuit program has sparked a legislative reaction based 
on privacy concerns.  Republican Senator Sam Brownback of Kansas 
recently introduced a new bill in the Senate to require judicial 
review of subpoenas such as those used by the recording industry 
to fuel its downloading cases.  When Kansas Republicans start 
lining up with liberal Democrats against your industry, you've 
got a whole new kind of legal strategy problem.

Second, no legal rule is strong enough to overcome a radical 
technical innovation.  Courts can delay progress but they cannot 
stop it.  Unlike the automobile cartel that tried to stop Henry 
Ford, the recording industry's copyrights are perfectly valid.  
But so are the speed limits on the interstate highway system.  
The fact that cars are designed to go faster than those speed 
limits explains why most people do so, regardless of the law.  
The Internet is designed to transfer data at zero marginal cost, 
so people want to download all kinds of things, including songs.  
Ultimately, no copyrights can stop that.

Third, innovation always drives the prices of yesterday's 
technology into the dirt.  The way to respond to the demise of 
the commercial CD is not to sue Internet users.  It is to 
figure out new ways to make money on music.  Maybe concert 
ticket prices will have to rise.  Perhaps groups should be 
giving more live performances on the Web for premium 
prices.  Innovative companies are beginning to sprout up 
all over the place with new ideas that incorporate digital 
music - such as selling customized CDs with mixes of a consumer's 
favorite songs, video clips, and messages for friends.  An 
Indian company called Saregama India is already doing this with 
music from old Hindi films and classical Indian artists.  
The U.S. music industry should be leading the way toward such 
new concepts, not lashing out at its customers like the 
angry, injured giant that chased Jack down his bean stalk.

As Henry Ford once summed it up, lawsuits against new 
technologies provide "opportunities for little minds...to 
usurp the gains of genuine inventors...and under the smug 
protest of righteousness, work a hold-up game in the most 
approved fashion."  What the recording industry needs now are 
new business models, not outdated legal strategies.

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