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Online Extra: "Artists Have to Get Paid"

At the heart of Hollywood's struggle with how digitization and the Internet make illegal and rampant copying possible is the loss of control over how people watch movies and TV shows, and what that means for established business models. BusinessWeek's Heather Green recently spoke with Geoffrey Moore, chairman and founder of tech consultancy Chasm Group and a venture partner with Mohr, Davidow Ventures, about Hollywood's approach to the changing digital landscape and who will win and lose. Following are edited excerpts of their conversation:

Q: So how do you think Hollywood is handling the dilemma it's in?

A: When you're thinking about business models, the first thing you look for is what's the scarce resource? In this case, it's the artist. For this model to survive, you must make sure that they get paid. Napster took fair use in music and explored what it would be in the digital world. What we learned was there was no way to pay the artist, and that's why the world self-organized and shut Napster down.

If the artist isn't going to distribute directly, which they aren't, the artist must get paid. It's totally appropriate to use law to protect IP [intellectual property]. When the Napster thing hit, Bertelsmann went on one side, and the other studios were on other side. The economics finally won out, and I think correctly so. Now they have established that the artist must get paid, and they have to protect IP. Once the downside is capped, there's plenty of upside.

Even though I recognize from technology's point of view that the studios look like Luddites in the extreme, I'm back to my first principle: Artists have to get paid.

Q: O.K., so you protect IP -- does that mean the system remains unchanged?

A: No, the next question is: Whose ox will get gored? Who is there in the middle of the value chain whose value has been dependent on an inefficient market? When you think of a Blockbuster, it's not clear what their economic value is. A theater has value, it's social. It's not clear that Blockbuster has a unique position in a world where you have infinite broadband or cable. So what won't work is exploiting inefficiencies to create arbitrage.

Blockbuster has some moves they could make. If they don't make any move, they'll be in jeopardy. At some point they have to migrate their inventory to digital.

Then the next issue is: How do artists get paid? It will be interesting when you have things like TiVo, which allows you to [fast-forward through] the advertising. You'll see the advertising more embedded in the scripts. There will be a blurring of the line between what sponsorship means, and advertising will become increasingly subtle.

Q: So, assuming the consumer pays somehow, how does that play out when content is digital?

A: At that point you're playing a share-of-wallet game. At some point, if cable and satellite become more competitive, there'll be much more pay-per-view and new digital distribution. The good news is there are lots of mechanisms to do this kind of delivery. The technology got ahead of the industry during the bubble, and a lot of money went into digital distribution plans. It's not unexplored. There have been very good digital rights schemes.

It's people who are counting on the physical format who you worry about. DVD becomes the odd man out because of the form factor.

Q: What do you think of the notion of a compulsory license, where content owners have to license their works to anyone for a fee that's set by an industry group or even the government? Then Internet service providers or file-trading networks would collect money from their subscribers based on how much they download each month and pay the content holders depending on how much their works had been used.

A: For the consumer who's thinking "I can get this for free on the radio," that consumer will say "I'll pay a set service fee, like a cell phone." This notion that you can charge them a variable amount depending on what they do each month won't work at all.

Q: What do you think about the idea that Hollywood prefers, which is a levy or piracy tax that everyone who bought a personal video recorder, PC, or DVD recorder would pay?

A: I think maybe that would work in a country or an economy that is more simpatico about taxation, not in the U.S. That would be the Europeanization of the American economy.

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