Is this what they call creative destruction?

(This is a longer version of an article written for The Guardian) The music and tech industries have been locked in mortal conflict for decades with no resolution in sight. This time around, will the all-powerful rights owners snuff out innovation and consumer choice or will the maverick geeks and their friends in the tech industry impoverish the artists and record labels? Neither.


Hilary Rosen runs the Recording Industry Association of America ? the American music industry?s trade body. She?s become a (Time Magazine, CNN, New York Times, MSNBC etc.) media celebrity because of her practically mediaeval suppression of file sharers, downloaders and other copyright miscreants. This is not an obscure tussle between corporate lawyers but a very public war between the net and the music biz ? involving one of the most powerful corporate lobbies in history, the brightest geeks of their generation and up to 100 million people ? the file sharers themselves. Both sides see this as a battle for survival.

The latest round of hostilities focused on file sharing is the most intense yet. Hilary has upset so many people and created such a poisonous atmosphere between those nearly-friends the net and the music biz that it?s easy to read the episode as a disaster for all involved. Walls have been erected, businesses shut down, millions of customers alienated. Right-thinking people everywhere shake their heads. But why is all this happening? Is there reason in this apparently senseless conflict and could some good come from it? Yes and yes.

The origin of the conflict lies in fundamental differences between the two warring industries: music and the net. The net is a new industry. In new industries almost all value is created by new ventures raising new capital for new projects (let?s ignore the crash for a minute, shall we?). Everything about a new industry is expansive, creative, positive. It attracts innovators and entrepreneurs, creators, people who like new stuff. The psychological profile of the entire industry is up, optimistic, open. Net people don?t understand defensive, negative behaviour. It makes them anxious. But new industries are not a good proxy for the wider economy. Out there, in the older sectors and businesses ? where growth is slower, change more measured ? value is created in a pretty even mixture of creation and protection.

Music businesses produce value in two ways. First, they invest money in new assets. This is the risky part ? most new acts fail, most releases don?t cover their costs. Second, they operate back catalogues from which they hope to wring steadier, longer term returns to balance the high risk stuff. Music businesses have to balance both within one organisation: the hothouse ? producing value in the creation phase, regularly betting the farm on a faint promise ? and the more conservative rights management function ? defending the tail end of an asset?s productive life. Hilary has well-developed defensive instincts: this is an industry where firms employ hundreds of staff solely to defend rights.

So, given the instincts of the rights owners, the battle was always going to get nasty. But can any good come from it? When the dust settles will we be left with the status quo or, worse ? as the net-heads fear ? a compromised net industry and a pumped up music industry newly-empowered by silly new laws everywhere? Probably not.

If music lovers had shunned file sharing when Hilary told them to, it might never have come to this. Unfortunately for Hilary, the consumers aren?t returning her calls. File sharing is now a mainstream habit and new evidence suggests that it?s started to dent record sales. It?s only once sales really start to suffer that the music industry?s attitude will change. This is as it should be. In established businesses, almost all change is resisted at first, often by brutal means. It?s a simple calculation: even an expensive and drawn-out legal battle with a new entrant can prolong the exploitation of an established line of business profitably. It?s almost always a good use of an established industry?s cash pile to mash up the new guys. Only when change is inevitable do the big guys cave in and adapt ? often with surprising enthusiasm ? sometimes turning a new technology from an existential threat to a profitable new line of business over night.

So the bloody battle of the file sharing minnows and the music industry dinosaurs is programmed behaviour. Do not panic. Do not leave your seats. It will soon be over. This also explains why the experienced business people now running the surviving file sharing firms haven?t given up in the face of Hilary?s withering siege. They know that the accommodation is coming. Their bet is that they can stretch their resources and their patience until it does.