Innovation – Exploitation vs Exploration and Hollywood
I’ve been complaining a lot about SOPA/PIPA here and on the chatty webs. It bothers me, mainly because it’s not the culmination of a bunch of bad policy from the MPAA/RIAA, but just the beginning in the long awaited storm, leading to what Cory Doctorow has called the coming war on general purpose computing. But the gist of the problems with SOPA/PIPA can be hard to understand, not just for the layman (always read people dumber than me, but I’m actually suggesting me too), but also for people who keep up with these debates.
The underlying problem with all of this, however, is not just copyright or piracy or anything else that people will tell you. The real reason for this battle is that many incumbent players feel threatened by everything that’s going on and can’t innovate and join the rising tide, so they are using the one weapon available to them – their influence over that maddening body of nitwits we call our Congress.
Piracy is such the maguffin here. As I’ve said many times, big media is scared because we all like watching some baby bite his brother’s finger as much as we do the Dark Knight. The disintermediation and democratization of media means that anyone can make something as good (or actually, just good enough) and as popular as some hit made by the majors. Unfortunately, when some 10 year old makes a viral sensation, she doesn’t have to pay rent, pay union wages, pay for lunch at Cipriani, pay for six assistants…you get the drift. That kid in her basement, not to mention the legions of freshly minted Film MFA’s with no paying job, can innovate a lot quicker and with less risk than some Studio. But they sure don’t have Chuck Schumer in their back pocket because they didn’t donate millions to him this year alone, now did they.
This is called disruptive innovation. Some kid, some Film MFA, some small company, can adapt more quickly because they don’t have the legacy to contend with. Hollywood has known the content purchase business model is going away for quite some time. They aren’t stupid. But getting rid of it quicker and pushing into new business models was too painful, and they won’t do it until they’re forced to, but by then it will be too late. Or it would be without that special nuclear option called the Congress.
Now none of this analysis is new, and none of it should be controversial to anyone with a working brain and a sense of honesty and decency. The other day, however, I found myself down a digital rabbit hole by the name of Macroeconomic Resilience, by way of a Tweet from Clay Shirky. One Ashwin Parameswaran writes this blog and it’s a good one…if you like delving into macroeconomic theories, that is (and I do), and it expanded my argument a bit.
My initial foray into his blog had nothing to do with film. I started reading a post about the current problems with the Euro, but I soon found my way to a post called Innovation, Stagnation and Unemployment, and while not directly about the current fights over “piracy,” it did bring me to recognize the bigger problem, which is that the negative economic impact of implementing SOPA/PIPA will be far greater than its proponents claim is lost to piracy.
To understand why, we have to dig a bit into his argument, or as he says, “we need a deeper understanding of the dynamics of innovation in a capitalist economy.” (Note, everything henceforth is a paraphrase of his argument). As Ashwin puts it so well (bold his):
“The primary objective of incumbent rent-earners” (think studios) “is to build a moat around their existing rents whereas the primary objective of competition from new entrants is not to drive rents down to zero, but to displace the incumbent rent-earner. It is not the absence of rents but the continuous threat to the survival of the incumbent rent-earner that defines a truly vibrant capitalist economy i.e. each niche must be continually contested by new entrants.”…”This emphasis on disequilibrium points to the fact that the ‘optimum’ state for a dynamically competitive capitalist economy is one of constant competitive discomfort and disorder.”
Innovation occurs as a result of this constant tug of war – with the incumbent innovating to keep off the competition, and the competition innovating to unseat the incumbent. The types of innovation, however, are quite different. As Ashwin explains it, there are two types of innovation: “exploitation and exploration.” Incumbents usually turn to exploitation – tweaking their processes to drive down costs or make a product better (or at least make it seem better). In our case, this would be Studios turning to digital distribution in order to cut the costs of P&A, for example (but not using it to fundamentally alter how we see movies in theaters beyond the image). Competitors usually turn to exploration – looking for a game-changing new way of doing business, and that usually requires a healthy stomach for disequilibrium. In our world, this would be things like how Netflix changed the game for DVD distribution (but not, importantly, how they’re moving forward in streaming, which is largely for cost-savings, or a process innovation). Or, more radically, how Vo.Do is using Bittorrent to build a new business model around using P2P for both free and fee-based distribution.
Stepping back from our industry and looking at the broader economy (and back to Ashwin’s argument), the current economic malaise has led incumbent powers to exploitative innovation – using technology to cut costs, make a product more appealing (3D), doing everything to protect your business model. This has lead to the seemingly odd situation where we’re having more and more technical innovation but not more jobs. Why? Because the bulk of the investment (by companies, not VC’s) has been in process innovation (exploitation) which doesn’t lead to job creation, but rather job destruction. As Ashwin puts it (bold his): “My fundamental assertion is that a constant and high level of uncertain, exploratory investment is required to maintain a sustainable and resilient state of full employment. And as I mentioned earlier, exploratory investment driven by product innovation requires a constant threat from new entrants.”
Thus the importance of ongoing, disruptive innovation to our economy, and to our chance of ever getting out of the jobless mess that is the state of the American economy today. We need to create demand for new things, so people get hired to make them, but that causes a problem for incumbents. Ashwin summarizes it perfectly here:
“Eventually, a successful reorganisation back to full employment entails creating demand for new products. If such new products were simply an addition to the set of products that we consumed, disruption would be minimal. But almost any significant new product that arises from exploratory investment also destroys an old product. The tablet cannibalises the netbook, the smartphone cannibalises the camera etc. This of course is the destruction in Schumpeter’s creative destruction. It is precisely because of this cannibalistic nature of exploratory innovation that established incumbents rarely engage in it, unless compelled to do so by the force of new entrant.”
Or, as he puts it much later: “The aim of full employment is made even harder with the acceleration of process innovation due to advances in artificial intelligence and computerisation. Process innovation gives us technological unemployment while at the same time the absence of exploratory product innovation leaves us stuck in the Great Stagnation.”
Now, that’s precisely what we have from the (VC backed) competitors to the status-quo, and we can see that the incumbents aren’t too happy about it. Ashwin goes on to explore how our monetary and fiscal policy has attempted to address this problem, and in short, we’ve failed at this. It’s worth reading, but for our sake, I think we can summarize it by saying that government policies have allowed incumbent players to prosper by way of exploitative innovation (including cutting labor costs) without incentivizing them to invest in exploratory investment (which they probably won’t do anyway), or by letting them face the fear of true failure (think bank bailouts), and without making it easier for competition to flourish. In regards to banking and big business, Ashwin notes that we have severe limits to such competition by way of things like our patent system and licensing rules and that we should let the big guys fail and the little guys take over. Now, he’s talking about banks and big institutions, but all of this applies equally well to the media industry, and that brings us back to the piracy fight.
Hollywood Studios are loathe to change. They’ll talk at fancy conferences about innovation, but don’t forget, they’re mainly talking about innovation by exploitation. What we need, as an industry and as a society, is more exploratory investment, and that’s not coming from the incumbents. We can see a world, in what Ashwin brilliantly calls the ‘adjacent possible’, where upstarts are re-shaping the media world. It is leading to jobs, it is leading to exploratory innovation and it is the best possible future for us as independents, and as members of society.
That world, however, will be built by those doing the exploratory innovation, and that’s not Hollywood. So Hollywood has brought up the fear of piracy, equating it with theft (which it is not), and have gotten their friends in high places to use legislation to hold onto their power. It has been ever thus. This I know. But it is shocking to me that our Congress would so cynically support this legislation at a time when our Nation is so threatened by an anemic economy, a world-economy on the brink and an unemployment rate unlike any we’ve seen for quite some time. SOPA/PIPA will stifle innovation. More importantly, it will stifle our most ambitious entrepreneurs, the people who might actually turn around our economy, all for the sake of making sure that you spend what little money you have on the products of a dying industry.
That’s why I’m so opposed to SOPA/PIPA. It’s sad that it takes this many words for me to get the point across, but if you made it this far and agree even slightly, it’s why you should help spread the word that SOPA/PIPA are bad for the adjacent possible future of the (next) entertainment industry, and for our country.
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