Begging Forgiveness

"It's better to beg for forgiveness than to ask for permission"

One day I'll cover this one in my VC Cliche of the Week series, but today I am going to use it to discuss the dance that is going on between user generated content services and the copywright owners. Bob Lefsetz says in the opening of his post on Doug Morris' comments last week about YouTube:

Call it the Napster effect.  You’ve got to steal the labels’ wares, because you’re never gonna get a license.

That's right. Technology is moving fast. We can use technology to do stuff today that wasn't possible five years ago. We can go to a Flaming Lips show, shoot a video, upload it to YouTube, and share Wayne's wacky crowd surfing move with the world:

We can also record The Flaming Lips and Cat Power covering War Pigs at Austin City Limits and share that with the world.

Or we can upload The Flaming Lips song Yoshimi to our blogs and share that with the world (like I did yesterday).

These are amazing things we can do. We can record and share media with others. We can be the TV network, radio DJ, the record critic. I am convinced that when the audience becomes the media and the distribution system, artists are going to be much better off than when they had to rely on middlemen to do that job.

Technology entrepreneurs are building new services every day that makes stuff like this possible. They have two choices. They can ask for permission or they can beg for forgiveness.

As Bob Lefsetz says in the same post:

Have a good idea for a business employing music?  Try to be reasonable and ask for permission?  You won’t get it.  You’ll spin your wheels, wasting time and money, and eventually be forced to go out of business, or launch on such a limited, hamstrung basis, that you’ll end up with a site/service that no one wants to use.

So act brazenly, steal with impunity.  Maybe, like the principals of Hummer Winblad, you’ll be sued personally for your efforts, but you’ll go down in the history books as bringing the future to the people, as pushing the envelope, as doing a good thing.

Without Napster, there’s no iTunes Music Store.

Without the Rio, there’s no iPod.

Bob is right about this. We've watched the entrepreneurs and VCs who have chosen to work with the RIAA. Where are they? Nowhere for the most part.

We've also watched the entrepreneurs and VCs who have "just done it". They are generally in a much better place.

Many people ask me why I haven't ever invested in a music related technology company. There's your answer right there. I won't invest in a "ask for permission" deal. They don't work. And I haven't had the stomache for "begging for permission", at least yet.

But YouTube is begging for permission and beginning to see the fruits of that effort. Yesterday Warner Brothers cut a deal with YouTube where Warner will give its music video catalog to YouTube on a revenue sharing basis and even more importantly, they will license their songs to YouTube so people like me can upload our favorite Flaming Lips video without breaking the law. Hell Yeah!!!

That's the ticket. Maybe Doug Morris was just negotiating via the media when he made his antagonistic comments about YouTube. Because he ought to know what Edgar Bronfman knows. It's what Bob Lefsetz said at the end of his post (I linked to it three times because I want you to read it).

The key is to get in bed with the enemy, to play along and invest in them, rather than shut them down, because you can’t shut them down.

That's going to happen. That's why YouTube is going to win bigtime. They've built the audience. They've built the value added services that make their service fun to use. And eventually they are going to get the content owners to play ball.

Begging for forgiveness is going to work for YouTube. And when it works for them, its going to work for others too. Precedents are hard to break.

Comments

[scott]

Wow. Fantastic post. B/W you and Lefsetz, y'all got me FIRED UP!

[David Blankley]

So what is an ethical entrepreneur or VC to do?

There is lots of low hanging fruit if you are willing to sacrifice your integrity and twist your moral compass.

Online casinos are an even more challenging moral situation, because at least in that instance you are not stealing the work product of another.

[uday]

flaming lips so flamin hot these days.. I see ;em on TV, hear em on radio and now Fred has them on too !

[David Blankley]

I also dispute the conclusion made by Mr. Lefsetz that theft is necessary for these technologies to move forward.

As a counter I would provide the example of Baen Books. Baen provides free copies of their books for download at their website, www.baensbar.com, and has done so for several years now.

[David Blankley]

I also contend that firms like Napster started in the wrong place, targeting the wrong record labels.

The labels to ask were not the Time Warner's of the world, but the small indie labels, that are hungrier and more forward thinking in their approach.

Years ago, Time Warner was not going to license their music to Napster, when it would cost the $xmm that they could pay out of petty cash to produce their own system.

Alternatively, smaller labels, without the financial wherewithal, would be much more willing to work with partners.

[murray gray]

awesome post and i feel the same way about the world of IM actually.

[steve]

I think the real problem -- which the RIAA and big media companies recognize
all too clearly -- is that new media/distribution, and the impossibility of
DRM that keeps everyone happy, ultimately can only change the market/revenue
opportunity negatively (in their views,) as follows:

a) the vast multitudes will experience an increase in value as the neophyte
or unsigned or casual artist will now have a source of distribution and
revenue (albeit, IMHO, small increments from a small overall pool -- if
super high quality media is cheap and easy, lower quality can only be
cheaper still)

b) the "hits" and "stars" and those who control them will see a radical
decrease in value as the enforcability of IP and copyright protection
decreases while access to media outlets increases and more and more people
think its OK to steal or they'll never get punished

and (sorry chris anderson) the increase in "a" will never even come close to
the decrease in "b", so the overall pie will shrink, and the margins will
shrink more, etc...

this is wildly different than the disruption of the advertising based media
industries -- no one is predicting the end or radical shrinkage of the ad
business model, just its movement from platform to platform (and perhaps its
overall expansion.)

maybe this is inevitable. maybe in the end its a good thing. (after all,
this exactly describes the low-margin, few stars, few hits,
painfully-easy-to-duplicate-content book business) but its hard to fault
people/businesses trying to protect their honeypots, particularly
when nobody can point to new honeypots coming up behind (other than what,
with trepidation, i will call somewhat giddy conjecture and speculation).

but noone i've heard is successfully arguing that the consumer direct pay
for media model is expanding. just the opposite: that consumers will have so
many new ways to get media that -- unless the basic laws of thermodynamics
and physics and economics have changed -- the product and overall markets
value will inevitably decline...

[Grant]

A great excuse to link to a much better Cat Power song...

http://www.youtube.com/watch?v=HawbtsYP_2o&mode=related&search=

Definitely do your ears a favor and go straight back to Moon Pix or What Would the Community Think before slumming in the newer stuff.

[fred]

steve,

as usual, an excellent analysis but maybe missing the one important part of the equation.

in the new model, the cost structure can be much lower so it's possible that lower revnues will be matched with even lower costs and on a multiple of cash flows, the value opportunity for media businesses can be similarly large.

fred

[Chris D]

*SNAP* You beat me to the "Better to beg for forgiveness than to ask permission" punch. I had been thinking about that for the past day.

I think you are making this deal to be bigger than what it really is. Mind you this is just for music related content. The bigger copyright issue is more with Film/TV content and I think there more of a direct competitive nature between YouTube and those rights holders. So, basically, YouTube has eliminated one potential lawsuit threat and is working on some other comparable ones.

While you are enamored of the concept of this WMG/YouTube partnership, you are not addressing the terms of the deal. While YouTube will be cleaning up its inventory to make it more appealing to advertisers, it will now have to cut in the content owners.

Of course, the nitty details are not public, but it begs the question whether YouTube will be able to retain enough margin from the ad sale to cover operational costs. We still don't know what a reasonable CPM rate will be and whether YouTube will have to split those sales with Ad Networks or can do 100% of those as direct sales?

Also, since Sony Pictures has bought Grouper, will YouTube get agreements from BMG? Will we start to see alignments between user generated companies and specific content owners?

In the end, it's actually a low risk experiment for WMG. They might as well try it out and see how it goes. While it's an interesting development, I think we all need to reserve judgement for a few months.

We're still just in the beginning.

[Jim Kerr]

Fred, I can't even begin to say how unethical your recommendation is for companies to ramp up web traffic. Use piracy to build traffic and then leverage that traffic later by going legit? Can you get any more unsavory?

Flickr didn't have to loot the Getty Images vaults to create a wonderful web service. Why does YouTube get a free pass in flaunting copyright law?

Are you really saying that a good business plan for new media companies is to do something illegal and then, once you have the traffic to monetize it, you go legit?

I wrote about this way back in March on our company blog, and my conclusion stands: "I found it troubling because the success of YouTube (and the lack of any real consequences) is an invitation for abuse by web start-ups to do the same thing. It’s the 'ask for forgiveness, not permission' model, if you will ... Or, as I like to call it (with a nod to Google): The Be Evil Before You’re Good strategy."

[fred]

jim,

i am not suggesting that companies steal.

and YouTube didn't steal anything from anyone.

they simply built a web service that allowed users to upload video content.

some users uploaded content they didn't have the rights to upload.

others uploaded home videos.

others made funny videos and uploaded them.

i don't buy the "youtube stole their way to the top" thing.

it doesn't ring true to me.

fred

[Jim Kerr]

I appreciate your point-of-view, Fred, but the Grokster decision kind of puts real life in direct conflict with your perception.

Regardless, you very much imply by using the phrase "asking for forgiveness" that YouTube has done something wrong.

[chunkfunk]

Sorry Fred, but if you're implying that YouTube are wholly innocent in this, I can't get behind it.

They are very much aware of what the service will be partially used for, and let's face it, would never have been able to do the deal with Warners in the first blace had there not been so much unlicenced content uploaded - they gave people an open invitation to do it.

NOW they decide to put a content screening system in place (obviously Warners would insist on this) - why didn't they do that from inception, I wonder?

The thing that pains me most about this is that the common users are getting, well, used. Every unlicenced video on YouTube is money in the pocket of the company's investors, and many of the users are aware of this - making them far more cynical and skeptical about online content developments than ever before. No wonder more and more of them choose to wade into the torrewnt-infested darknet to trade and download - they don't want any company to profit from their sharing.

"If the artists get nothing, why the hell should anyone else" is their thinking, and every Napster (post-sellout model), MySpace and YouTube is reinforcing that situation, damaging those consumer relations beyond repair.

[Chris]

I was among the first 10 employees of Napster 1.0, and YouTube's service is fundamentally different. Direct comparisons with Napster 1.0 fall short on a technical and on a legal basis, some thoughts on why:

- YouTube streams (not downloads) its content, and while this seems nuanced, it's completely defining when it comes to the sense that a COPY has been "stolen."

- YouTube complies with all DMCA-required "takedown" procedures, and acknolwedges it can control and filter its (central) server system. Napster 1.0 in the fall of '99 (pre-RIAA suit) was barely five people and did not have the operational wherewithal to comply with DMCA (but later did).

- A conversation six months ago with a senior YouTube executive made it very clear that YouTube is being highly-compliant with rights holders' takedown requests, and is being proactive in scrubbing content -- I don't buy that they're snickering about infringing content (and neither was Napster 1.0).

Present Tense: I still work with "big rights holders" (including labels), for digital media licensing and I don't agree you have to "ask for forgiveness." All majors have dedicated digital/mobile teams and high interest in working with upstart firms, even if their pace and "asking price" for licenses can be steep. I find a completely different environment than that of 2000.

[Jim Kerr]

"[YouTube] is being proactive in scrubbing content -- I don't buy that they're snickering about infringing content"

With all due respect, Chris, have you ever visited YouTube?

My daughter came to me this morning asking if I had TiVo'd the last Hannah Montana. I did not, so I went to YouTube and did a search. Now I knew that YouTube cuts short video segments so that the episodes would be cut into parts, so I did a search for "hannah montana part." What did I find? 85 results of Hannah Montana episodes, cut into convenient parts so you can watch the full show. You can do this for practically every show on TV. Oh, and look here: There's an ad for Wal-mart on the page. Guess that doesn't exactly help their DMCA defense, does it?

Hell, there are sites like freetvonline that do nothing but aggregate the pirated content on YouTube so that you can compile the parts easier.

If it takes me all of 5 seconds to find 85 infringing works, and some of them have been up for weeks, can you really tell me that YouTube cares about doing anything more than the bare minimum they are required to do via the DMCA?

As to streaming, if it's no big deal, why am I paying $9.95 a month to Rhapsody for my subscription to hear streamed music?

[KidCroesus]

Fred,

I am not sure I would personally embrace the model of doing something that will inevitably be illegal (it was pretty clear to me from day one that Napster was wrong and would be a bad company to join) -- but I do think your post has an interesting corollary if you look at the flip side of the equation: In today's environment, being legal, or licensed, or having protectable IP is almost never a sustainable competitive advantage.

A personal example: When Paypal launched, I was very curious to see how it would fare --I had been involved in a pre-Paypal p2p payments company, and it seemed to us that to be "legal" one would have to either become a bank, a money transmitter, or escrow agent, or *something*. We spent a lot of time thinking and working on that issue, as it seemed like a major competitive advantage (we worked with lobbyists, lawmakers, etc...)
After all, in a p2p payments company, you were performing a fiduciary duty.

Ultimately we became a licensed escrow company, and it turns out that was a waste of time and resources. When Paypal launched, they did none of that -- they just went ahead, and worried about the regulators when they got around to it.

So while starting an illegal online gambling company may not be a great idea, having a hypothetical "legal" online gambling company may not mean you are going to win, because it is very hard to get anyone to crack down on anyone, particularly in a gray area that is rapidly growing. And, as you note, getting that "legal" status will be nearly impossible.

So I think the real message here is not to push the envelope of legality, but rather: Don't try to become "legal" or "licensed" if you think it will give you a competitive advantage. It won't -- and furthermore once you have blazed that (expensive) trail, it becomes very easy for everyone else to follow you.