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Lawsuits Cripple Capitalism

Consumers are the best people to choose which technologies live and die, not lobbyists, lawyers, and judges. Rather than spending all their time fighting breakthrough technology like cassette tapes, the VCR, and now digitally downloadable music and video, organizations like the Motion Picture Association of America and the Recording Industry Association of America should run with the tide of capitalism.

By Rob Landley (TMF Oak)
September 7, 2000

I've been inflicting my strange opinions on intellectual property upon readers of the Fool On The Hill column recently, since it's designed to handle opinions that not everybody agrees with. But a lot of this stuff is so amazingly obvious I don't think it falls under the category of "opinion" anymore. Here's a few examples.

This excellent New York Times piece, "Is Litigation the Best Way to Tame New Technology?" starts with a long quote from Jack Valenti, president of the Motion Picture Association of America (the guy's suing because their DVD encryption was weak enough to be broken by a 16-year-old). He said that, "The growing and dangerous intrusion of this new technology" threatened the entire industry's "economic vitality and future security," and further that the new technology "is to the American film producer and the American public as the Boston Strangler is to the woman alone."

This speech was given in 1982, and he was referring to the invention of the video cassette recorder, without which none of us would be renting movies. Video rentals are a SIGNIFICANT portion of a modern movie's overall revenue, and they fought tooth and nail to keep it from happening.

The Recording Industry Association of America (RIAA) fought similarly against the invention of recordable cassette tapes, which they sold a ton of once they stopped fighting it. The Motion Picture Association of American (MPAA) is currently fighting to tighten laws around digital programs that consumers can record on DVD players and VCRs.

Of course, if you have enough money to manipulate the legal system, you can create laws to suit your tastes. And I'm not just talking about lobbying. How about picking a judge who used to work for you? Judge Lewis Kaplan (who presided over the first DVD trial and ruled in favor of the MPAA) provided counseling services for Time Warner (NYSE: TWX) on DVD issues before he became a judge, according to this story from the Electronic Frontier Federation, a nonprofit civil liberties organization. His various publicly stated opinions include the belief that "commerce trumps the first amendment," which apparently means that magazines that publish negative product reviews should be sued out of business.

People who agree with this mindset must hate the PC industry. It succeeded because IBM's (NYSE: IBM) original PC was cloned by competitors who offered faster, stronger, and cheaper versions than IBM had. IBM's original offering couldn't even displace the Apple II. These days IBM's PC division is barely a factor in the vibrant and thriving marketplace that grew up through capitalist competition.

When the Internet threatened telephone companies' long distance plans (because customers could talk to each other for a flat monthly fee and phone companies insisted on charging by the minute), the knee-jerk reaction was to sue and lobby for protective legislation. I'm sure horse stables sued the first automobile manufacturers, and lobbied to make cars illegal. (Nasty smelly noisy things, dangerous. They run people over. Shouldn't be allowed.) It's almost a reflex action.

Officials at Germany's Justice are pushing for legislation so that computers, printers, modems, CD burners, and anything else that could conceivably be used to copy something copyrighted will be taxed, with the proceeds going to (of course) the large music and film companies that did the lobbying, according to this story. The frightening part is that legislation similar to this already exists in the United States (which is why standalone CD burners cost so much more than computers, which weren't included in the legislation). And in Canada, they tax blank burnable CDs.

Where in this scheme is the free market's invisible hand, allocating capital to things consumers want and starving things that nobody wants to buy? CD distribution has competition now: digital music transferred through the Internet. This legislation fights directly AGAINST the actions of the free market, where millions of consumers simply decide they prefer the new way over the old. The old digital media companies have chosen NOT to participate in the new revolution, and thus are getting creamed in that space.

Imagine a record company that never allowed its songs to be played on the radio because people could tape them off the radio and that would kill record sales. The reality is quite clearly the reverse: radio play drastically increases record sales. But the tired old men circling the wagons around the old technology can't wrap their heads around that concept in a new context.

What any producer has to do is provide a product consumers want. We're capable of selling bottled water in this country (something that comes out of the tap by the gallon, virtually for free). An industry that feels it needs to tax POTENTIAL customers to guarantee its future revenue stream has serious problems, and it ignores the fact that revenue has never been guaranteed in the free market. What the MPAA and RIAA are afraid of is that customers will choose not to buy its products, and it responds by taking the choice away from them and replacing it with a tax.

Didn't the Soviet Union try an economic plan along these lines for most of last century? I'm sure it sounded like a good idea at the time. I think Jack Valenti seriously needs to go read Adam Smith's "The Wealth of Nations." But that's just my opinion.

For more along the same vein today, see Nico Detourn's article about Seagram's lawsuit against MP3.com.

Finally, bad news for Rule Maker Land today. Quintessential Rule Maker Bill Gates was the first to be kicked off the island in Fool Survivor. You can vote who will be the next to go!

Related Links:

  • Motion Picture Association of America
  • Recording Industry Association of America

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    Rule Maker Portfolio

    9/7/2000 as of ~5:30:00 PM EDT
    Ticker Company Day Chg % Chg Price
    AXPAMER EXPRESS-11/16-1.15%$59.31
    CSCOCISCO SYSTEMS23.11%$66.25
    GPSGAP INC-3/8-1.61%$22.94
    INTCINTEL CORP3/42.66%$67.44
    JDSUJDS UNIPHASE CORP1/82.68%$119.88
    KOCOCA-COLA CO-5/16-0.58%$54.00
    MSFTMICROSOFT CORP5/80.90%$70.06
    NOKNOKIA CORP ADS7/82.02%$44.25
    PFEPFIZER, INC3/80.94%$40.25
    SGPSCHERING-PLOUGH7/163.68%$40.50
    TROWT.ROWE PRICE ASSOC-3/8-0.80%$46.56
    YHOOYAHOO INC-5 1/8-4.57%$106.94

      Day Week Month Year
    To Date
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    Annualized
    Rule Maker .99% -3.83% -4.11% -2.72% 60.77% 20.05%
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    Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
    6/23/1998182CSCO24.719$66.25168.01%
    2/13/1998130INTC26.881$67.44150.87%
    5/26/199866AXP35.999$59.3164.76%
    2/3/199866PFE27.433$40.2546.72%
    2/3/199859MSFT49.352$70.0641.96%
    2/17/199939YHOO76.196$106.9440.35%
    2/3/199856TROW33.673$46.5638.28%
    2/15/200032JDSU100.750$119.8818.98%
    5/1/199882GPS22.708$22.941.01%
    2/15/200068NOK47.500$44.25-6.84%
    8/21/199844SGP47.993$40.50-15.61%
    2/27/199827KO69.107$54.00-21.86%

    Trade Date # Shares Ticker Cost Value LT $ Val Ch
    6/23/1998182CSCO$4,498.87$12,057.50$7,558.63
    2/13/1998130INTC$3,494.54$8,766.88$5,272.34
    5/26/199866AXP$2,375.95$3,914.63$1,538.68
    2/3/199859MSFT$2,911.79$4,133.69$1,221.90
    2/17/199939YHOO$2,971.64$4,170.56$1,198.92
    2/3/199866PFE$1,810.58$2,656.50$845.93
    2/3/199856TROW$1,885.70$2,607.50$721.80
    2/15/200032JDSU$3,224.00$3,836.00$612.00
    5/1/199882GPS$1,862.06$1,880.88$18.81
    2/15/200068NOK$3,230.00$3,009.00($221.00)
    8/21/199844SGP$2,111.70$1,782.00($329.70)
    2/27/199827KO$1,865.89$1,458.00($407.89)
      Cash: $47.58  
      Total: $50,320.71  


    Notes
    The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it added $2,000 in August 1998 and February 1999. Beginning in July 1999, $500 in cash (which is soon invested in stocks) is added every month.