Introduction

Of all the industries that have been revolutionized by the rise of digital technology and the global Internet, few have been hit as hard as the "content" industries -- the producers of music, movies, television programs, interactive software, books, photos, and periodicals. The Internet has made global distribution of content easier than ever, with the ultimate promise of slashing costs by reducing the role of middlemen who produce, distribute, and sell the physical copies. Unfortunately, the digital era also has a serious downside for content producers: It has made it easier than ever for consumers to get access to content without paying for it.

There is no doubt that digital copying and transmission of intellectual property is poised to do major damage to the content industries. The recording industry has been hardest hit thus far, because digital song files are small enough to transmit quickly: Global sales of music fell 8 percent in 2002 alone, due in part to online piracy. The peer-to-peer networks that allow individuals to download pirated material anonymously cover every conceivable kind of content: films, television programs, software, even the latest Harry Potter novel. The vexing part of the problem is that this piracy is not a massive criminal conspiracy, but rather the collective actions of millions of otherwise law-abiding Internet users of all ages who have grown accustomed to the culture of free content that is the hallmark of the Internet. Many people have a hard time distinguishing between the vast amount of music, video games, and other content available legitimately for free and the illegal pirated content.

This is not merely a battle between giant media conglomerates and a group of cyberlibertarians who want to rethink copyright law. Widespread piracy over the Internet seriously harms the artists, both the famous and struggling, who create content, as well as the technicians -- sound engineers, editors, set designers, game programmers -- who produce it. In the music industry, artists ranging from Eminem to Luciano Pavarotti have joined forces to protect their livelihood against the new digital threat. As the popular band Barenaked Ladies points out, "When the Gap went online, T-shirts didn't become free."

This rampant piracy has serious economic implications reaching far beyond the lost revenue of the stealing itself. Many content providers have resisted embracing digital distribution and online business models in part because of fear that digital piracy will eventually destroy their businesses -- as they say, it is impossible to compete with free. But is that really so? The degree to which that assumption is true will form the basis of many public policy decisions.

Of course, virtually every product sold to consumers is vulnerable to theft, which is why retail stores spend money to prevent shoplifting. Content is particularly vulnerable in the digital environment, however, because an infinite number of perfect copies can be made from just one original and because those copies can be distributed cheaply around the globe using the Internet. Completely eliminating this kind of piracy is impossible. Once one copy of a song or film is created free of copy protection measures, it can multiply like a virus until it is widely available. Until now, this has been a problem confined mostly to the music and software industries, but with the growth of high-speed Internet connections, virtually every content industry is affected.

At the same time, if the content industries are not able to achieve some degree of protection for their intellectual property, there are two likely scenarios. One is a marked decrease in the production of high-quality content (along with the attendant trade and employment implications). The other possibility is a tighter lockdown of content through encryption and other technologies that greatly restrict consumer uses of content (along with the implications for consumers, device manufacturers, web portals, and other industries). Reaching an acceptable level of protection, of course, will have costs and inconveniences; the goal should be to place those burdens, to the greatest extent possible, on the pirates themselves rather than on the content or technology industries or law-abiding consumers as a whole.

We believe it is possible, however, to keep piracy to a low and manageable level if two things happen. First, the inconvenience of piracy must increase, including the difficulty in finding and downloading pirated content, and the risk of getting caught and punished for doing so. Second, both public and private measures must be taken to make it easier for consumers to acquire content legally, by paying for the content that they download. The recent stunning success of the iTunes service, which sold over one million songs in its first week of operation alone, proves that consumers are willing to pay for content if it is easy to find, flexible to use, and reasonably priced. (Prices are poised to fall even more since printing and distribution of physical media can account for one-half the price consumers pay -- costs that can be eliminated with digital distribution.)

This report argues that if content piracy is made more difficult and content purchasing is made easier, content providers will be able to maintain viable business models even when competing with illegal free downloads on peer-to-peer networks.

Pursuing a public policy agenda that facilitates these two changes will have immense economic impacts as content providers stop resisting the digital revolution and embrace the Internet to sell music, movies, software, and other content directly to consumers. This will move us toward the ultimate goal: an environment in which digitally transmitted content is widely available and the creators of the content are fairly compensated for their efforts. To reach this goal PPI recommends that: