Tuesday, January 17, 2012

Watching Open Source Destroy Capitalism

About twenty years ago one of my college housemates, Jerry, had an idea.

“What if you could send music over the internet?”

This was the age of 2400 baud modems that made crazy high pitched noised while they tried to connect to the internet. My 20 megabyte external hard drive for my MacPlus computer had set my parents back about five hundred bucks. High quality digital audio files were about the same size as they are now (about ten megabytes per minute of audio). In other words, I couldn’t even fit a single digital audio track on my expensive hard drive — I worked exclusively in MIDI.

So I forgive myself for my lack of vision at the time. I thought Jerry’s idea was ridiculous, and I let him know. Digital audio files were way too big, bandwidth was way too narrow. It would never happen.

Jerry persisted. What if a music file could be compressed? What if bandwidth increased? He pointed out that it would change everything about the way music was distributed, maybe even the way it was made.

Jerry didn’t go on to invent Napster, but he was absolutely right. Sending digital files over the internet would change everything. It would radically disrupt the music industry. It would also make producing, distributing, publishing, and even promoting music more accessible to the average musician and music producer. For the consumer, it would make music essentially free (illegally at first [early Napster], and now legally [YouTube, Spotify, etc.]). And a computer company would become the biggest music distributor.

Jerry saw it coming early on, but I actually lived through it. I co-founded Loöq Records with Spesh in 1998. For years we made and sold vinyl records and CDs. As soon as we could sell our music in digital download format, we jumped on the opportunity. Good thing, because dance music vinyl sales crashed (everywhere except Germany, but that’s another story). We never made much money selling vinyl, but we had to stop entirely when average sales dropped from the low thousands to the low hundreds.

Selling music digitally turned out to be more profitable, because production costs were so low. Also, we never ran out of inventory. On the down side, sales were much lower. People could easily make copies and share the music. In addition, the number of small independent music labels ballooned massivelybecause the financial risk of putting out music was so low. In our vinyl days we were risking at least two grand on each release, often closer to four. Putting out a digital release costs, well … nothing. So the competition, and choices for the consumer, increased dramatically. As a record label, we had to completely reevaluate the reasons for our existence as a company.

Recently, we’ve seen streaming services (like Spotify and Pandora) and sharing services (like SoundCloud) cut into digital download sales the same way digital downloads cut into vinyl and CD sales. Music is now free, legally, for any reasonably tech-savvy consumer (less costs of internet and/or phone service).

Strangely, Loöq Records is more profitable than ever. Even as sales continue to plummet, other income sources increase or stay steady. We were lucky enough to enroll some of our catalog very early in YouTube’s AudioSwap program, and we’ve seen tens of thousands in revenue from AudioSwap shared ad revenue. We receive performance royalties from ASCAP for the dozens of tracks we’ve licensed to TV shows like CSI. Once in awhile we license a track to a videogame or film. So even though sales are terrible, business is good. I don’t know if this is due to good business acumen or freakish good luck, but I suspect the latter.

For the most part, file sharing (voluntary and involuntary) and music streaming have destroyed music sales revenue.

Open Source and Capitalism are Incompatible Systems

Pretty much.

According to wikipedia, open source is a philosophy or pragmatic methodology that promotes free redistribution and access to an end product’s design and implementation details. It is usually used to describe the development process for large collaborative software projects, like Linux. More recently, the use of term has broadened to include any project where the methods and means of production are publicly shared. TheOpen Source Ecology project, which provides blueprints and detailed instructions for building heavy-duty farm and construction equipment from commonly available, inexpensive parts, is a great example.

So, a few bullet points to describe open-source in plain language:

  • the means of production, both material (stuff) and intellectual (techniques or methods) are free/cheap/easily obtainable
  • distribution is wide and decentralized (peer-to-peer or multi-node, not controlled by a single party)
  • the end-product is often free, or radically less expensive than proprietary options

The music industry still consists of proprietary players (including my company, Loöq Records), but music culture has been open-sourced, and this spirit now pervades the more enlightened aspects of the music industry. Music is radically less expensive to produce (a laptop with good software in capable hands can now compete, in terms of sound quality, with a multi-million dollar studio). For most musicians and producers (and many labels), getting their music heard and appreciated is more important than making money. To this end, artists are willing to share streams or files directly with their peers and fans. Many artists are also willing to share “remix parts” (the source sounds that make up a recording).

Does this reduce the amount of money exchanged? Yes, drastically. While open-source culture is great for the consumer, and even good for the artist in some ways, it’s terrible for the business of selling music.

Capitalism is based on scarcity. In order for the principles of supply and demand and “self-regulating” markets to function as expected, production and distribution channels need to be privately owned and tightly controlled.

Open-source destroys scarcity. When the means of production are free or very cheap, when distribution is free, and when producers prioritize values other than profit (things like social value, or status/bragging rights), then prices move quickly towards zero.

This is great for users. It’s terrible for capitalism.

Open Source Will Affect Everything

Open-source only applies to sectors where content can be digitally replicated and shared over the internet, right?

Wrong, it applies to everything.

When I shared this idea with a friend, he said “What about gasoline? Obviously open-source production and distribution methods don’t apply to extracting, refining, and distributing gasoline.”

True enough, but open-source can easily be applied to energy production. For example, here’s a video that demonstrates how to make your own solar panels. For now, this kind of thing only appeals to hardcore DIY nerds, off-grid survivalist types, and the like.

But imagine a scenario like this. Your neighbor knocks on your door.

“Hey J.D., do you want to join the local neighborhood energy co-op? We already have enough panels (made from an open-source design), so all you have to do is pay a $200 connect fee. At that point your electric bill will drop to about half of what it is now, and if you later decide to add some panels to your property the co-op might start paying you.”

It’s already happening. Both small and large-scale energy cooperatives already exist.

A single high-quality open-source product or service can invade and dominate a sector, like kudzu or Asian carp. It has a combination of traits that is lethal to its native, proprietary competitors. Consider:

  • radically less expensive to buy or implement, often free
  • ubiquitous availability
  • free to use in any way the user wishes
  • free to modify and customize
  • well-tested in the field
  • a community of active developers eager to respond to feedback and improve the product

Eventually, 100% of the global economy will feel the impact of open-source. I think it will play out something like this:

2000: Easy to download free music, many free software options for tech nerds/programmers, philosophies of both Open Source and Free Software movements are well-developed, Creative Commons founded in 2001

2010: Free music becomes industry norm, blogs share content freely, many creative works (music, photographs, books) published under Creative Commons, big chunk of entertainment is user-generated, high-quality free and/or open-source options for many types of software (OpenOffice.org,Firefox, Twitter, etc.), dozens of non-profit/non-proprietary energy co-ops,KhanAcademy.org provides over 2,500 free educational videos and helps tutor millions of kids, unlimited amateur/user-generated free porn

2020: High quality open-source and/or free options will exist for every type of software (open-source equivalents of Photoshop, Cubase, Logic, CAD, Facebook, search, mapping, etc.). Open Source Ecology will succeed in publishing production kits for at least 50 industrial machines, including a 3D scanner, 3D printer, wind turbine, bioplastic extruder, laser cutter, cement mixer, tractor, hay baler, induction furnace, robot arm, etc. Food production will become less centralized, with large numbers of small farmers and urban farmers sharing open-source agriculture techniques, and using non-proprietary seed stock.

2030: Consumer electronics will feel the hit as 3D printers allow consumers to print out their own circuit boards (pulling from a database of open-source blueprints) and make their own electronic stuff.

2040: Open-source AI’s will be available to do complex design, analytical, programming, managerial, organizational, research, and other intellectual work.

2050: Star Trek replicator technology. “Earl Grey, hot.”

Economic Effects (Massive Disruption)

The spread of open-source options doesn’t mean the end of economic activity. I suspect people will always be willing to pay for a sparkling brand, or the very highest quality, or things made carefully by hand.

But many industries are going to experience severe and rapid revenueshrinkage, and they may not see it coming.

To some extent, the internet, digital replication, and plummeting costs of production just shuffle revenue. Apple Computer steals revenue from the major labels. Google steals advertising revenue from newspapers and television networks. People pay AT&T and Comcast for bandwidth instead of paying for music and movies.

But it’s more than a shuffle. Revenue is actually going away. More and more stuff is becoming free, and the trend is just getting stronger.

So is that a good thing or a bad thing? I think it depends on where you live, and what your skills are.

Open Source Will Disrupt Your Life

Open-source culture creates wealth (less expensive, often higher quality goods and services for consumers), but it also destroys jobs. College kids can download all the music they want for free and thumb their noses at greedy record executives, but the record industry isn’t hiring those college graduates anymore.

Apple, Google, and Facebook employ half of Silicon Valley, but what’s to prevent users adopting an open-source version of social networking (one with no advertising, where you fully control your own data), or using BandCampinstead of iTunes? These things can happen quickly. Friendster, anyone?

If your job isn’t yet threatened by open-source methodology, consider what will happen when home 3D printing becomes a reality (of functioning devices, not just plastic models). Consider an open-source version of Siri, version 10, an AI that can not only program your appointments, but can write software, compose music, make money management decisions, supervise a team of robot farmers, etc. Will your job be safe then?

Incease Civic Wealth, or Else

If I lived in a country that valued civic wealth, one that offered universal health care, free public education (including early childhood and four-year college), a great public transportation system, solid energy infrastructure, and other civic perks, I’d be saying “bring it on!”

Open source/free may disrupt revenue streams, but it provides an enormous boon to the average citizen. High-quality products and services are suddenly much less expensive, easier to use and modify, etc.

The problem is, the open-source/free movement tends to concentrate revenue streams, not spread them out. There is less need for labor, and less revenue to pay employees. Business owners do fine if they run lean, but there are fewer jobs. The rich get richer and the poor get poorer.

Maybe the open source/free movement is also a solution to this problem (you might not need a job if most stuff is free), but I suspect that the economic disruptions caused by open source/free, and recent technological innovation in general, will lead to increasing income equality, social unrest, class warfare, and possibly even fascism, unless balanced by more progressive taxation policies and increased civic wealth (social democracy, or something better).

In the long run, we need to remodel our economy so that we are providing for each other instead of exploiting each other.

What Should You Do About It?

So, I’ve been riffing here. Some of you might think I’ve used the term “open source” too loosely, too interchangeably with “free software” or “peer-to-peer” or even “digital economy.” Maybe I have, but I hope my main points have come through:

  • the means of production and distribution of practically everything are becoming more and more open and accessible
  • people are creating and sharing non-proprietary solutions, designs, and works that are often of equal or greater quality than the proprietary options
  • these trends will disrupt every sector of the global economy by shattering scarcity and centralized monopolistic control
  • these disruptions will result in many benefits for the average person, but they may also destroy your job

On the last point especially, what can you do about it?

One final note … SOPA (Stop Online Piracy Act) can be seen as an attempt to slow down some of the trends I discussed in this post, but it is in fact a step towards fascism. On a social level, the correct response towards the open-source/peer-to-peer/free trend is not censorship and centralized control, but rather increasing civic/public wealth.

(Sources - http://jdmoyer.com)

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