Maximizing Value in the Digital World

The information age has created a host of digitized products — in the realms of software, databases, music, videos and electronic books — that can be produced and distributed with low variable costs, resulting in high gross margins. The key to profitability for creators of these products is to generate enough unit sales to offset their high development costs. But the ability to produce and distribute these products quickly and cheaply is not limited to the original content creator, and the potential for piracy, defined as duplication and distribution of a product without the permission of or payment to the content owner, is extremely high. One of the greatest challenges to digital business is figuring out how to maintain a profitable model in the face of widespread unauthorized competition.

Up to now, efforts to control piracy have relied on the assumption that creators of digital products have absolute ownership rights to the digital content they create. For example, on the basis of that assumption, recording companies and their artists have pursued an aggressive, allegedly successful legal challenge against the file-sharing sites MP3.com and Napster. Under the same assumption, several software firms have sought to limit piracy with contractual as well as technological safeguards such as click-wrap contracts, encryption, password-limited access to distribution sites and copy proofing.

However, because the belief in absolute ownership of digital content is incorrect from a legal standpoint, antipiracy tactics that rely upon it will ultimately prove ineffective. What’s more, these tactics can risk the profitability of the business model by actually reducing authorized usage by paying customers. A far better solution is to recognize the dynamics of the marketplace, segment that market into innovators (potential pirates) and the mainstream (potential paying customers), and address each segment differently to gather information and establish market leadership.

The Case Against Absolute Ownership

A single-minded emphasis on enforcing absolute ownership rights not only raises serious practical impediments to effective enforcement, but also the very assertion of those rights rests on a misunderstanding of the objectives of copyright law.

Even in 1789 the nation’s founders recognized intellectual products such as writings or inventions as “public goods,” products that take considerable time and resources to create, but can subsequently be cheaply and quickly appropriated in an unfettered free market. Consequently, the framers added the “intellectual property clause” to the U.S. Constitution, expressly authorizing the U.S.

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References

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15. G.M. Moore, “Crossing the Chasm” (New York: Harper Business, 1991), 17–21. Note that this gap or “chasm” using the Moore terminology is a definitional and a relative difference, not an absolute one. There are very few absolute innovators or members of the majority. Thus, managers attempting to utilize the suggestions must carefully assess the relative gaps in their particular circumstances as well as the size of innovator and majority populations.

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22. P. Keegan, “Lego: Intellectual Property Is Not a Toy,” Business 2.0 (October 2001): 90–99.