Techdirt's Mike Masnick On Pandora, Spotify, The Supreme Court & More [INTERVIEW]

Guest post by Chris Borchert of kickshuffle.

Mike Masnick is the CEO and founder of Techdirt, a news blog that reports on technology trends and related business and economic policy issues. Techdirt was named among the favorite blogs of PC Magazine and has been praised for its “sharp, pithy analysis of current tech issues.” Masnick is also the founder and CEO of the company Floor64 and a contributor at BusinessWeek’s Business Exchange.

In The Sky is Rising, you argue that the entertainment industry is booming, and that more people are producing more content and making more money than ever before. Yet, we often hear the opposite about the state of the entertainment industry – and the music industry specifically. Why are there such conflicting outlooks on the entertainment market, and why is yours seldom heard?

I think a lot of it comes from how you define those markets. When you hear talk of “the music industry collapsing” or whatever, what they really are talking about is the *sale of recorded music* which is just a subsection of the wider music industry. What we found in looking through all of the data, is that while it’s absolutely true that the money the *recording industry* makes has dropped significantly over the past decade, most (if not all) of that money has ended up in other parts of the wider music industry, so that it continues to grow. Now, there may be arguments if the new distribution is fair or equitable, but you could also argue that the old way wasn’t particularly fair or equitable either.

Honestly, what we thought was a lot more interesting than that data was two other key pieces of data: The first, showing a MASSIVE increase in the amount of content being created today and over the past decade. If all the claims about how all this infringement is stifling the incentive to create were true, we wouldn’t be seeing that. We’d be seeing a wasteland. Instead, it’s the exact opposite. Now is the most creative time in history, with greater and greater output of all kinds of creative works each year.

Admittedly, that *does* mean that there are interesting challenges for content creators, because they face much greater competition than before in the marketplace, but we also believe it presents much greater opportunity, since there are many more paths they can take to connect with their fans.

The second point that we found really interesting was the fact that over the past decade, consumer spending on entertainment has increased as well. If we believe the claim that all the money is going away or that people just want stuff for free, we shouldn’t be seeing that.

Can you talk a little bit about Floor64 and how it was formed?

Floor64 is the parent company for the Techdirt blog as well as for our research and consulting efforts and our crowdsourcing platform, the Insight Community. In many ways the whole company was built in reverse. I started Techdirt as a fun hobby/side project in 1997 as an email newsletter. It became a webpage in 1998, a “blog” (before that word existed) in 1999 and a business in 2001. We added the consulting and research side then (in 2001) to pay the bills. We didn’t have any advertising at all on the blog until 2006 so we survived for five years entirely off of research revenue. We added the Insight Community five or six years ago to expand the research/consulting side of the company. And *then* we actually renamed the overall company Floor64 instead of Techdirt, because there was some confusion about the difference between everything the company was doing and the blog itself.

I’ve spoken with Tim Westergren, Founder and Chief Strategy Officer of Pandora, about the advantages of operating under a single radio license, as opposed to direct licenses for each artist, like Spotify. Do you see this as a major advantage for online radio platforms.

I think it definitely makes the negotiations easier, though I think the end products actually serve pretty different markets. Pandora and Spotify certainly compete in some areas, but Spotify has much more ability to offer different services that Pandora can’t really get into with its licenses. On top of that, Pandora is somewhat more at risk from the whims of the Copyright Royalty Board, which the company should be worried about.

Of course, on the flipside, Spotify couldn’t even enter the US for years because of the difficulty of negotiating deals.

I think the summary is really that licensing is a huge mess that really holds back a ton of possible innovation, which is disappointing.

Louis CK has been getting a lot of press for selling his stand-up tickets directly to fans and bypassing the traditional industry “gatekeepers” (Ticketmaster, LiveNation, etc.). Do you see traditional gatekeepers continuing to play a role in services like ticket purchasing, or has the advent of digital and mobile media changed the landscape entirely? Is there an aspect of this that can be crowdsourced?

I always try to make a distinction when talking about middlemen. Some people automatically assume that “middlemen” are a bad thing, but I don’t think that’s the case. I think it’s important to understand that there are different kinds of middlemen, and I loosely lump them into two categories: gatekeepers and enablers.

Gatekeepers are the middlemen that people generally have the biggest problem with. Those are the ones who put *themselves* — rather than the creators — at the center of the marketplace, they limit who can even be in the market, and they tend to take a disproportionate percentage of any money made.

Enablers, on the other hand, keep the creator at the center of the market, and just provide them with the tools and services that enable them to do more of what they want to do… and do it better. So those are the companies who enable a content creator to create, to distribute, to promote and to monetize… without having to take control over the whole process.

So I think what we’re seeing with Louis CK’s experiment on the tour side of things is that he’s shifting who the middleman he works with is going to be: from a gatekeeper to an enabler, and his fans love it. It’s worth noting that Louis *does* have a middleman handling the ticket sales. It’s just that the middleman is in the background and doesn’t “own” either the process or the customer. That’s a major difference and one we see happening all over the place.

Let’s turn to the Kirtsaeng case. As I understand it, the Supreme Court will be deciding whether the first sale doctrine applies to overseas purchases of digital music. How do you see the case resolving?

In the Kirtsaeng case, the Supreme Court has to decide if, when you buy a product overseas that has a copyright component — a book, a painting, a CD, a DVD, etc.– do you then have the right to resell it in the US without permission. The law for products in the US is already clear. When you buy a book or a CD in the US you can resell it. That’s part of the concept of “first sale” rights or “copyright exhaustion,” meaning that the copyright holder loses the ability to control the sale *of that single copy* once it’s in the market. But mainly because of an oddity in how US Copyright Law is worded, it’s not entirely clear if such rights apply to goods purchased outside the US, then imported into the US, since technically they aren’t “made under” US Copyright law, as required for First Sale rights.

The end result of that, however, seems kind of absurd. The idea that you could buy a product from outside the US and potentially not be allowed to resell it is frightening.

As for how it will turn out, that’s tough to predict. The Supreme Court is not all that predictable on this stuff. It did have a similar (though slightly different) case not too long ago involving Costco & Omega, and that ended up with a split court, because Justice Kagan had to recuse herself, since in her prior role, as Solicitor General, she had been a part of the case. It’s worth noting that, in that role, she actually supported Omega’s interpretation that said products made outside the US *do not* get first sale rights. So if she stays true to that and the other eight justices stick to how they ruled in the Costco case, then the appeals court ruling could stand.

Personally, I think that could be a disaster. Depending on the ruling, it could drive a lot more manufacturing offshore, as companies seek to remove first sale rights (this would very much depend on the specifics — as the appeals court ruling in the Omega case would limit the ability to do this, but the appeals court ruling in Kirtsaeng would almost certainly create massive incentives to move manufacturing out of the US).

The real issue is that Congress should step in and clarify its vaguely worded statute, and make it clear that first sale rights apply to goods in the US, no matter where they were originally purchased. I hope that the Supreme Court takes this position as well, meaning Congress won’t have to clarify — but if the Supreme Court upholds the appeals court ruling, then Congress really ought to step in and fix it.

Techpresident.com recently profiled you and wrote the following: “Perhaps more than anyone else, [Masnick] represents the growing awareness in Silicon Valley that entrepreneurs can’t just ignore Capitol Hill — and how far removed their views are from those of the people who have long held the clout in D.C. media and tech policy.” How accurate is this? Has Silicon Valley done a better job of working with legislators since the January 18th Internet blackout protesting SOPA?

I think that there is definitely a lot more awareness of tech policy issues and how government can have an impact. I would say it’s still not a main topic of interest, but we’re starting from a position of almost no interest at all, so any growth is growth. I think that there have been a number of efforts to better connect DC and Silicon Valley, however, and more on the way. It’s still early, but I’m excited about a variety of groups and initiatives that have sprung up in just the last few months. Personally, I’ve been involved with a lot more meetings on both coasts, and seen a lot more cross-pollination of ideas. But there’s still plenty more that needs to be done.

In response to Hollywood super agent Ari Emanuel’s proposal to fix the digital content market through greater IP protection, you suggested that Mr. Emanuel was operating under a flawed premise. You said:

“The problem, of course, is that his very premise is wrong. He’s taking the position that we need to “protect” first, rather than just fix our business models. This is a very mercantilist viewpoint: where protectionism beats innovation. But we’ve got centuries of economic proof that that’s not how you evolve and it’s not how you innovate and compete. What you do is you figure out ways to add value and to embrace new business models. Any effort that starts from the default position that what we need is more “protection” rather than greater innovation is doomed to fail — because that innovation is an unstoppable train, and the “protection” aspect doesn’t work.”

Yet, couldn’t it be argued that the framers started from the default position of protecting artists when they drafted the Constitution’s Copyright Clause? And shouldn’t protection at least be part of the conversation?

The framers started from the default position that they wanted to benefit the public — specifically to “promote the progress of science and the useful arts.” The *mechanism* they chose, under the belief that it would work best, was protection. Though, to be fair, it wasn’t originally for “artists.” Originally copyright law was supposed to be to encourage “learning,” not wider culture. That has certainly changed over time, which is fine.

But, I think the key point is that the framers wanted what would create the best results — the progress of science and the useful arts (for what it’s worth, the “science” part refers to copyright and “useful arts” to patents, even though many incorrectly assume the reverse). There certainly was some concern at the time of drafting the Constitution as to how well such protectionism would work. Both Thomas Jefferson and James Madison expressed skepticism at points, but eventually were won over.

However, I’d argue that they were making those decisions based on gut feelings, rather than data, because such data didn’t exist. And, actually, at the same time they were debating that, across the Atlantic, Adam Smith’s “The Wealth of Nations” was first being published, creating the field of economics. So, prior to that, the framers of the Constitution didn’t even have the tools (economics) to measure if these kinds of proposals work.

That’s no longer the case.

We have tools available to us to measure if changes to copyright or patent laws actually create the desired outcome: benefiting the public. And so we should be looking at that.

Concerning Ari Emanuel’s specific comments, my argument was that we’ve now seen plenty of data that shows greater enforcement *does not increase sales*. What has increased the ability to make money is (a) new innovations and services and (b) new business models. So my response to Emanuel actually had little to do with the Constitutional underpinnings of copyright law, but with the reality on the ground and how you deal with it. Even if I believed that stronger copyright was the best thing ever, the simple fact is that everywhere that the focus has been on greater enforcement and protectionism (as Emanuel is seeking), sales have continued to drop (and infringement tends to keep growing). But when you stop focusing on the enforcement side, but focus on innovating and providing something better, something that people want to pay for, you see people go and pay. You see it with Spotify. You see it with Netflix. There are ways to compete that we know work. We’ve yet to see a system of greater enforcement that actually works to get people to buy more.

I’ve read that artists and musicians often leave comments on your posts, and that you like to follow up with them and even meet with them to discuss the issues further. Can you talk a little bit about a time when you met with an artist or musician to talk about music and IP issues?

I don’t want to betray the confidence of those I’ve met with/talked to over the years, but it really depends on the artists in many cases. Sometimes I’ve just helped them brainstorm ideas for business models, or ways to connect with fans. Sometimes it’s involved actually trying to plot out entirely new ideas and plans for “creating something wonderful.” I really enjoy spending time talking and brainstorming with content creators, because it’s great when they can be creative about how they connect with fans and even how they make money.

What advice would you give to up-and-coming bands – whether it’s in terms of IP protection or how best to capitalize on digital media?

The simplest advice there is: focus on building up as many true, committed fans as you possibly can. Connect with them however you can and day by day by day keep doing what you can to build their loyalty and build the support. If you do that, the IP protection issue fades away as unimportant. We see this with artists like Amanda Palmer, Jonathan Coulton and many, many more. What they find is that, even if they don’t approve of infringement, the issue becomes a meaningless one over time, because their fans are more than happy to support them to massive levels (way higher than they could ever get under the old system). So, as Amanda Palmer wrote in a guest blog post for us a few months ago, just focus on “building your army,” every single day.

The second bit of advice: give them a reason to buy. And that’s more than just “well, here’s my music, that’s your reason to buy.” As we’ve seen, fans have no problem giving the artists they love money when the opportunities to do so present themselves. But one of the great things is that artists who are more creative in the ways they give people reasons to buy see immense benefits. We’ve seen data from companies like TopSpin and Bandzoogle, who provide tools that make it easier for artists to offer lots of ways to give fans “reasons to buy,” in which the average sales numbers are way way way higher than a typical album. Give people all sorts of ways to give you money, and if you have that army, they’ll support you to amazing levels.

How do you prefer to consume digital music?

For the longest time, I stuck with buying CDs, which I’d then rip and listen to via my computer/mp3 player/phone. It was really only about two years ago that I finally got over my mental block that said I don’t need to buy the CD itself — and started buying digital downloads as well. If possible, I prefer to buy direct from the artist on their website, or using something like Kickstarter. Otherwise, I’ll buy via something like CDBaby or Amazon.

In the last year, I’ve used Spotify (I pay for a premium account), though I find that I actually probably end up listening more to music that isn’t available in Spotify than to the music that’s accessible through Spotify. However, thanks to the way Spotify works, in integrating all of your local music, I use Spotify as my app of choice for both my computer and mobile (though I also like Google Music for mobile). I’ve just started playing around with Tomahawk as well, though I need to get more comfortable with it.

Other than that, like many people, I got hooked on Turntable FM last year and used that for a while, but it sucked up so much productivity that I quit cold turkey. I still think about going back, though. Also, I listen to a few music podcasts, which I find is a pretty great way of discovering new music these days. That and a couple of long-term friends who know my tastes better than anyone else and who every so often tell me “hey, you have to check out….”

Kickshuffle is an online news source dedicated to covering the impact of new media on music and music business. Like us on Facebook and Follow us on Twitter.