Distribution revolution

Stan Correy: This week on Rear Vision, media mergers and the digital distribution revolution.

Journalist [archival]: Rupert Murdoch's 21st Century Fox confirming it made an offer to buy Time Warner…

Journalist [archival]: Time Warner has officially rejected an $80 billion formal offer that they received last month from 21st Century Fox…

Journalist [archival]: A proposal to unite two of the world's most powerful media conglomerates set Time Warner's stock surging and the business world buzzing…

Man [archival]: Can there be synergies in a Fox…who are they buying, Time Warner? I can't remember the names, my head is spinning so much…

Journalist [archival]: A merger would create a media colossus…

Stan Correy: Hello, this is Rear Vision on RN and via the web, I'm Stan Correy.

Soon, if media conglomerates keep merging, there might only be one big media entertainment corporation controlling content and distribution in the United States. And that possible future will in turn affect how Australians use the internet, what film and television programs they can access online and how much they pay.

Audiences in the US and Australia have plenty of choice, say the big media companies, there's online video and subscription or pay television. And the media companies also say there's plenty of legitimate competition from new digital giants like Apple, Amazon and Netflix.

But in reality, if consumers don't pay the high prices demanded by the media companies, they are treated as pirates. It's a political nightmare.

Chris Uhlmann [archival]: This is the internet age. I don't know enormous amounts about it but I can't imagine it costs any more to do it.

Malcolm Turnbull [archival]: No, but Chris, look, anyone is entitled, people are entitled to sell their products for whatever price they like. That's their right. My only…and I'm not suggesting that the government should be setting prices here, but I'm just saying that if you want to discourage piracy, the best thing you can do, and the music industry is a very good example of this, the way they've responded, the best thing you can do is to make your content available globally, universally and affordably.

Stan Correy: Digital distribution is causing havoc in the courts, the marketplace and in government. Multibillion dollar mergers excite the market, but audiences are increasingly captive to a system that looks more like the US railway industry of the late 19th century, dominated by very powerful railway barons. That's the view of Harvard law professor and former technology adviser to President Obama, Susan Crawford.

Susan Crawford: The media conglomerates in America have a pretty good thing in the consolidation of the distribution networks so far because it's a system that's perfectly engineered to raise revenues for both sides. Online video at the moment is not affecting the popularity of the media conglomerates' very shiny bundles of programming and they are able to force those bundles through a guaranteed distribution chain and pass those costs along to consumers. It's all been working out quite well so far. The problem is that the distribution networks can shape that marketplace now because they've become so powerful.

Stan Correy: Digital technology just makes it so easy to find, copy and transmit information.

The Distribution Revolution is the title of a new book to be published next month in the United States. One of the authors is Associate Professor Jennifer Holt from the University of California, Santa Barbara.

Jennifer Holt: These legacy companies that are built primarily on content, they have been trying to adapt their distribution networks but I don't think they quite have the formula figured out. So we are at this pivotal moment when we've been there before and there's this long history of is content king or is distribution king? And the way these original empires of entertainment were built was to combine content and distribution. They didn't have to make those choices. It's the same way that the old studios consolidated their power; they bought up all the theatres so that everybody had to go and see what they were producing, you didn't really have a choice. They expanded that model with the new media conglomerates that were built in the '80s and '90s, and now there is a moment where they are trying to determine what the most efficient, effective, and important avenues of distribution are and how to control them.

[Music: Game of Thrones theme]

Stan Correy: Every day there are more and more stories of consumers who want to use digital technology in creative ways and the media conglomerates who want to stop them. The media companies' historical preference is called windowing, literally dividing up the content and presenting it in an array of digital windows to get top dollar.

Rupert Murdoch's on again/off again bid to take over Time Warner wasn't about providing more consumer choice but getting control of distribution networks and sports rights. And 21st Century Fox isn't the only company bidding for Time Warner, the giant telco Comcast owns the distribution pipelines as well as content and it has a merger proposal on the table and it's causing concern in Washington DC.

Journalist [archival]: At the first public hearing of the proposed $45 billion merger between Comcast and Time Warner cable, lawmakers on the Senate Judiciary Committee voiced concern about higher prices for consumers and too much power over what Americans watch on TV and online.

Charles Grassley [archival]: Consumers want to know whether a combined Comcast-Time Warner will be in a better position to expand high-speed internet access. Will consumers have higher cable bills? Will they have more or less content choices?

Stan Correy: The companies that provide our news and entertainment are getting bigger every day. But Rupert Murdoch still describes his company as a swift-footed new economy entrepreneur.

Rupert Murdoch [archival]: 21st Century Fox is an amazing company and our future has never been brighter. While we remain opportunistic and nimble, we are strategically a complete company and have a clear sense of where we are going.

Jack Shafer: It's always difficult to predict technological change but what we've seen over the last 100 years of media is that media has become increasingly cheaper to produce and increasingly cheaper to distribute and increasingly easier for new entrants to come in and create what's being created already.

Stan Correy: Jack Shafer, media analyst for Reuters Business.

Jack Shafer: There have been a couple of cases where that has not been true. There hasn't been a new genuine successful motion picture studio created. Steven Spielberg and his partners tried to create the Dreamworks studio to have their own independent production and distribution business, and they were unable to really knock that door down. But that was probably like trying to enter the newspaper business as the newspaper business is beginning its slide. I think it is a truism that everything becomes faster, everything becomes less expensive, and this is a real threat to the companies that are deeply invested in old technology and very expensive technology.

Stan Correy: For over 30 years, journalist Frank Rose has been following how digital technology has changed the media. He thinks that most of the people running media business today are products of the couch potato era of television. The natural laws of consumption that media conglomerates often talk about are products of another age.

From his office in New York, Frank Rose:

Frank Rose: The industrial age mindset of mass media is really no accident, it's just how things evolved, starting actually in the mid 19th century with high-speed steam-powered printing presses that made it possible to produce very large numbers of newspapers and railroads and other distribution mechanisms that enabled you to get them to people pretty quickly. And from there it just evolved, from movies and radio and television, all of which worked on what's essentially a broadcasting model, that is mainly from one to many. And it was a very efficient way of distributing information but really at the cost of turning information into a product rather than a service, and treating everyone the same, creating huge masses of people or at least imagining huge masses of people. And digital is fundamentally different, it does not encourage you to look at people as masses, it encourages you to look at individuals.

Stan Correy: As Frank Rose explained, wars between old media and new technologies aren't new. In the 1930s, the new broadcast medium of radio challenged the old mass media of newspapers. In the US, it was called the press/radio war. In Australia the battle lasted throughout the 1930s and into the 1940s and it was between the ABC and the newspapers led by Sir Keith Murdoch.

Here's a reading from a report from ABC archives describing a meeting between the Newspaper Association and ABC management over the right of the ABC to collect its own news.

Reading: I would particularly invite your attention to the last page of Mr Holtz's letter with its display of power, its claim to monopoly and its threat of action against the Commission if the latter dared to exercise its right to collect its services independently of the Combine. The last page is of a piece with a remark by Sir Keith in course of a conversation with Mr Moses that the 'Commission's proper function is to entertain people, and not to encroach on the newspapers' sphere' and that 'if you people think you are going to usurp the functions of a newspaper you will get your wings clipped'.

Excerpt from War of the Worlds:

Orson Wells: On this particular evening, October 30, the Crosley service estimated that 32 million people were listening in on radios.

Announcer: Ladies and gentlemen, we interrupt our program of dance music to bring you a special bulletin from the Intercontinental Radio News. At twenty minutes before eight, central time, Professor Farrell of the Mount Jennings Observatory, Chicago, Illinois, reports observing several explosions of incandescent gas, occurring at regular intervals on the planet Mars…

Stan Correy: In the US press/radio war of the 1930s, it wasn't Martians the newspapers feared but radio, and they used the panic caused by Orson Welles' radio drama to warn of the dangers of the new broadcast technology.

Frank Rose: The example of newspapers versus radio in the '30s is certainly historically apt. And if you recall in 1938 Orson Welles did this famous or infamous radio broadcast of War of the Worlds, the HG Wells novel about invaders from Mars, and he did this as a radio program, and people tuning in in the middle of it thought that Martians were actually invading and there were scenes of mass panic all across the US. It was unbelievable.

And part of it, part of the reason this was played up so much in the news media was because newspapers viewed radio as an interloper and as a dangerous new technology, so therefore they were eager to give play to a story like this one. Today what we're seeing is certainly a case of new technology threatening and ultimately I think it's going to trump older technologies, but the fundamental difference is that until now in the 20th century…whatever the technology, whether it was movies or print or radio or television they were mass media, they operated on a one-to-many broadcast model, and that's just not the case anymore. What digital technology does is that it breaks that up completely, and it means that distributors of news and entertainment have to fundamentally rethink how they're going to interact with the public.

Stan Correy: You're with Rear Vision on RN and via the web. I'm Stan Correy, and today we're looking at the recent history of the digital distribution revolution and how it's causing havoc in the courts, the marketplace and in government.

The new digital technology hasn't yet trumped the old way of doing business in the US. Hollywood entertainment companies like Rupert Murdoch's 21st Century Fox are worried about audiences stealing their content by using new digital technologies. But they are even more concerned about other media distribution companies like Comcast.

Susan Crawford is now Professor of Law at Harvard University, and Rear Vision spoke to her via Skype.

Susan Crawford: So at this point if Comcast is permitted to merge with the number two cable distributor, Time Warner cable, that combination will pass 70% of American households. So Hollywood is quite worried actually. In order to reach the people who love their content, they're going to have to figure out how to get through the door of a single gatekeeper who controls access to most American households. And the only thing that beats scale is scale. So on the programming side we're going to see even more consolidation than we have already experienced. There are only about six media conglomerates in the United States that serve up 90% of programming, and now we're going to see fewer, they are going to consolidate.

Stan Correy: It's common to hear of old entertainment empires fading as the new digital based companies take control. That's not exactly what's happening, says Jennifer Holt.

Jennifer Holt: Well, I see that they are under siege in some ways and not in others. These companies, as they were amassing during the late '80s and '90s, were bringing together various strands of media, film and broadcast television and cable television, and now they're all trying to adapt to an entirely new delivery method for all of these media forms. So in some ways they are under siege in the sense that they are subject to the kind of tyranny of data-driven production that is going on right now, which is all very much oriented around what various digital platforms are able to glean from their users and their viewers and how much emphasis is being put on those various elements of data and translating that into our entertainment. So big data has really started to take on a very prominent role in our entertainment universe in ways that we are both aware of and often unaware of. And also the growing contingency of very tech-savvy audiences have them on their toes because now audiences are able to find content in a host of ways—illegal and legal—which don't necessarily funnel into the conglomerate coffers.

Stan Correy: Tech-savvy audiences all around the world are adept at an annoying media companies. In recent weeks, the Times and the Sun newspapers, owned by News Corp, have been warning British football fans not to replay premier league goals using the social media technology Vine. Here's how Channel 4 in Britain reported the story:

Journalist [archival]: See it, tweet it, repeat it. But fans who share unofficial videos of goals on the internet might be breaking the law, and the premier league has vowed to clamp down.

Journalist [archival]: Fans can basically self-published their own instant replays online. So if I'm watching a game and I see a particularly good goal or a good save, all I have to do is this; I wait for the instant replay and I use an app called Vine. Once I hit the screen, Vine starts recording. It records six seconds of gameplay, and once I'm done I can publish it instantly to Twitter.

Stan Correy: That report about the social media video technology Vine by Channel 4's technology writer, Geoff White. And it's a classic illustration of what digital expert Frank Rose calls the clueless attitude of many content providers to what's happening in the digital universe. The audience may not own the content, but in the digital world their behaviour counts more than it did in the old mass media days.

Frank Rose: The first moment really was the introduction of the remote control which happened back in the '70s, and until then you had to literally get up and walk across the room to change your TV channel, and that really started to revolutionise the way people watched TV. And then of course Sony introduced the video cassette recorder, Sony and Philips both. And then of course you had eventually digital video recorders which did the same thing without bothering with a cassette. And now you have high speed internet and the emergence of companies like Netflix that distribute programming over the internet, and that just leads to more and more audience control.

Now the audience not only doesn't have to watch a TV show when it's aired, they don't even have to subscribe to the cable package that distributes the TV show in many cases. So I think that's a fundamental development. But a big problem I think that the media companies have is that they are generally sort of clueless when it comes to new technologies and they kind of simultaneously rush to embrace them before they really understand them and resist their implications.

Stan Correy: And the media companies resist via copyright law. And very punitive copyright law. Here's James Murdoch, currently co-chief operating officer of 21st Century Fox, speaking in 2010:

James Murdoch [archival]: You need governments to play ball. These are property rights. These are basic property rights. There is no difference from going into a store and stealing a packet of Pringles or a handbag and stealing something online, right? And the idea that there is this new consumer class that somehow are thieves but we call them consumers, and we say we have to be customer friendly when they're stealing stuff, is lunacy, right? This is the basic condition for investment and economic growth, is some level of sanctity around property rights, whether it's my house or a movie I've made, okay? And there's no difference, and I think it's crazy, frankly, if people say, 'Oh, it's different, these kids, you know, these crazy kids…' No, punish them.

Stan Correy: Murdoch might be annoyed and surprised at the views of one of Hollywood's new power brokers. Ted Sarandos is the chief content officer for streaming video giant Netflix and a Fox competitor in the video streaming business. He told the authors of the book Distribution Revolution that a lot of anti-piracy efforts are just sport. For every technological solution to piracy, a counter-technology emerges.

Here's Sarandos speaking last year:

Ted Sarandos [archival]: There is a problem when I mentioned piracy on movies around the world, but television is also driving a tonne of that piracy now and, again, not because people are becoming increasingly dishonest, I don't believe that, I think it's because the internet is this enormous global unfragmented platform. In every other form of distribution besides the internet there's a physical need for distribution to be fragmented, you know, the satellite signal only covers half the Earth at the same time, wires have to be run, prints have to be delivered. But on the internet there's no reason that you can't push play anywhere in the world and watch the same thing and watch whatever you want, whenever you want. And everyone is using this a marketing platform.

Frank Rose: I call piracy market failure because it fundamentally happens…I mean, there are certainly exceptions, but most of it happens when people can't get what they want legitimately.

Stan Correy: Frank Rose covers the digital business world for Wired magazine. He says most media companies invariably blame consumers. To admit fault would mean that their media business is based on industrial era economic models that no longer work.

Frank Rose: There have been a number of studies that have shown this, studies all over the world, and they show that when people are able to get something, when they are able to buy something or rent it, you know, some media property, they will do so. When it's not available they will turn to other means of distribution, which is to say piracy. So if media companies give the market what it wants, piracy goes down. If they don't, piracy goes up. It's pretty much as simple as that.

Stan Correy: Over the past decade in the US and in Australia there have been quite vicious legal and media campaigns where traditional content providers have challenged consumer use of digital technology. There are winners and losers on both sides. In Australia at the moment there's an intense lobbying campaign by Rupert Murdoch's Foxtel and the movie distributors to change federal copyright laws in their favour.

Associate Professor of Law Matthew Rimmer is a copyright expert from the ANU. Like Frank Rose in the US, he thinks copyright owners are using out-dated business models to fight their campaigns.

Matthew Rimmer: It's entirely true that copyright owners have been given a range of rights through successive reforms but often have not been very good at innovating to make their works widely and flexibly accessible to consumers. So there is a great deal of frustration that copyright owners have been very much focused upon protecting and defending old business models, rather than innovating with new business models, and as a result they have lost a lot of the opportunities.

So Steve Jobs with Apple saw a real opportunity with the battles breaking out between Napster and the music industry for a legitimate player to come in and provide access to digital files at a relatively fair price. And as a result, Apple was able to kind of insert itself into the relationship between the music industry and creators and consumers, and really now has something of a chokehold in terms of that relationship.

Similarly Amazon.com has shown a great deal of innovation in terms of building up its publishing empire and offers a great marketplace in the net. Really publishers had the opportunity to do that themselves but they missed that opportunity. And in relation to Netflix you can see that Netflix is satisfying a very definite consumer demand in the United States for access to a wide range of copyright content on a subscription basis, and that seems to be much more attractive than the very expensive packages that are being offered by some of the pay television providers like Foxtel. So there's a real tension there in terms of whether or not copyright owners are best off spending their money trying to defend their old business models and chasing after pirates, or whether they should be engaging in research and development to be ensure that they are not left behind by the next wave of disruptive technologies.

Stan Correy: Matthew Rimmer.

You would expect Susan Crawford to have strong opinions on the copyright issue and how it's affecting consumers in accessing the internet. Crawford is now Visiting Professor in Intellectual Property at Harvard University. She thinks the copyright wars may be distracting people from the bigger problem; the concentration of corporate control of the internet.

Susan Crawford: The whole industry is so concentrated that they've been able to make a deal. Right now Hollywood is not that worried about piracy online because they're cooperating with the distribution networks on something called the six strikes scheme that allows the content industry to complain about piracy and people who are pirating long-form intellectual property to the distribution networks and have those people or subscribers removed from the network if they're pirates. So in fact these guys are frenemies in a sense, that Hollywood and the distribution networks are in cahoots working together and are able now to defeat piracy in a way that would have been more difficult if there was greater competition in the distribution network side.

Stan Correy: Some people looking at digital distribution say that this is breaking down old models, but your book was called Captive Audience. Some people say the power is moving to the audience, but in a sense that's not your opinion, is it?

Susan Crawford: Well, the audience only gets to get online if they have a wire going into their home. This is just what some people call a natural monopoly, it's quite expensive to build two sets of wires to homes and nobody is stepping up to claim this market from the cable operators here in the United States. So they pretty much reign without constraint from either competition or oversight in this country. And so only so much a user can do if their distributor has complete power over their connection.

Stan Correy: So the power is with the distributors rather than…digital is not giving audiences power, only if they are connected do they have that power to, I suppose…via decisions about programs and things like that.

Susan Crawford: That's right. So the first step is getting online and for that first step we have a very few actors in the United States who have enormous market power.

Stan Correy: Professor Susan Crawford from Harvard Law School. My other guests: Associate Professor Jennifer Holt from film and television studies at the University of California, Santa Barbara; Jack Shafer, media commentator with Reuters Business; Frank Rose, digital business correspondent with Wired magazine; and Matthew Rimmer from the ANU College of Law.

Today's sound engineer is Simon Branthwaite. I'm Stan Correy, thanks for listening.