Wednesday, March 2, 2011

The Apple Strategy Tax

John Siracusa:

The essence of a “strategy tax” is something that keeps a company from reaching its full potential. Fielding an inferior product to avoid stepping on the toes of another one of your own products is one example.

Perhaps an Apple unencumbered by the strategy tax would have made iTunes able to rip DVDs just as easily as CDs. If there were DMCA concerns, iTunes could have ensured fair use, applying DRM to ensure that movies ripped from your DVDs would only play on your Macs and iPods. However, iTunes’s mandate is not to be the best media player and manager, but rather to help sell Apple hardware and digital content. At least that’s how it’s perceived outside of Apple.

Apple’s recent App Store changes, however logical and empirically justifiable they may seem, all point strongly to a company that has started to believe that what’s good for Apple is good for America. And indeed, this may be the only way to reconcile the inherent conflict of interest. The alternative is philosophically and practically untenable. Apple can try to be a good platform owner and ensure that popular apps like Kindle and Netflix thrive on iOS, and it can also try to advance its own competing services, but both efforts cannot succeed to their fullest potential.

There’s a similar conflict of interest for us consumers. I want to vote with my dollars, choosing hardware and software that work well. Short-term, I want to use the best products that are currently available. But, longer-term, I want to act in a way that encourages the development of an open platform, where developers and publishers can thrive, where the platform owner doesn’t determine which apps will be available and how they’ll work.

15 Comments

I'm afraid I'm going to have to object to the first paragraph. Several companies have tried and failed to create legal DVD ripping tools - notably Roxio. Regardless of what DRM is applied, the studios will have none of it and sue it into oblivion under DMCA.

Don't take your fight to Apple on that one - take it to Congress.

@Joshua Ochs Do you have an example of a company that tried to do it with DRM?

"Several companies have tried and failed to create legal DVD ripping tools - notably Roxio. Regardless of what DRM is applied, the studios will have none of it and sue it into oblivion under DMCA."

Yup. I will second you on that specific point. It's legal to make money off ripping CD's, since there is no DRM in the standard. But it's not legal to make money off ripping DVD's or Blu-Ray's. (And I've actually got no problem with the law on that.)

"If there were DMCA concerns, iTunes could have ensured fair use, applying DRM to ensure that movies ripped from your DVDs would only play on your Macs and iPods."

I'm not a lawyer, but if I were on Apple's legal staff, I'd have advised them against pursuing such a path, since I think it would have lost the case in court. The content companies would have to explicitly agree to such a scheme.

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On the broader topic:

I agree with much of Siracusa's post. He makes some crucial points.

But I strongly disagree with his conclusion that Apple faces an either/or choice. That only holds up if your time horizon ends in a year or two. Once you get past that time horizon, Apple's own services will make the most money on the path where Apple creates a dominant platform precisely by being a good platform owner. It stops being a zero-sum game decision quite soon into the future.

Except that the DMCA wasn't always there and they could have established that business model beforehand - creating a different climate.

"Except that the DMCA wasn't always there and they could have established that business model beforehand - creating a different climate."

DMCA got made law in 1998. iTunes didn't exist in '98. SoundJam didn't even exist in '98.

The iTunes music ripping phenomenon was only possible because the audio industry designed the CD standard without thinking through the future.

Ironically enough, Apple now is actually behaving like the audio industry in their decision-making process regarding iOS. They're not thinking through the future...

@Chucky I could totally understand not wanting to go to court and take the risk, but on what grounds do you think they would they lose if their software really did enforce fair use?

I agree with your broader point about being a good platform owner long-term, as I said a while ago. But I’m not sure that Siracusa means it to be an either/or choice; he writes of “balance.”

“The iTunes music ripping phenomenon was only possible because the audio industry designed the CD standard without thinking through the future.”

@Chucky Given that there was no DMCA then, I don’t see what difference an alternate format design would have made.

With the DMCA, DRM trumps fair use. It's illegal to bypass DRM without the consent of the content owner, or even to provide tools to do so, fair use be damned. The US is pressuring other countries to adopt this draconian model through various means, with mitigated success. In many places, including here in Canada, it is perfectly legal to rip a DVD for personal use. Not so in the US.

@Michel Fortin Thanks for the info. I was going by the Wikipedia article, which seemed to imply otherwise.

WRT your closing sentences, I choose the best product available (i.e. in my best short-term interest) among the companies that I know are non-shitty, trusting them that, since they'll want to be around and stronger in 5-10 years time, they will worry about the long-term impact of their choices. It's something that Apple has always clearly claimed to care about: long-term performance. For instance, in the iPhone 4 antenna press conference, answering a question that Apple should maybe apologize to the shareholders for share price decrease, and thus the (quote-unquote) lost shareholder value (urk), Steve Jobs was rightly unapologetic, saying they expected shareholders to be in there for the long run (paraphrasing from memory, I may have some details wrong).

I can't imagine these policies being tenable in a real competition context, two or three years down the line at the latest. At that time, they may change the policies, but won't it be too late then? Regardless of their current “victor” status right now, content heavyweights will see Apple as abusing its position (“We can't avoid Apple's terms even by doing our own application!”), and even if we adhere to the theory that those incumbents are doomed long term (and that the new disintermediated actors may not mind Apple's policies as much, though I personally doubt that), they will still be here in two-three years when they will have a choice of platforms. I don't see how this is good for Apple. I think they actually do care about long-term performance, but have not put “not pissing off content partners” (nor “not pissing off developers”) in their capitalization/amortization sheet so far. They should, not out of kindness for these guys, but because they won't always be able to count on them supporting the platform for the single reason that the platform is the only viable game in town. That will stop being the case eventually.

(P.S.: All the above is about the new rules being applied to non-subscription content apps. I do not offer any opinion on these policies being applied to apps that are actually on a subscription basis. Neither one way or another)

"@Michel Fortin Thanks for the info. I was going by the Wikipedia article, which seemed to imply otherwise."

Sorry I lost the thread in real-time, but Michael Fortin touches on part of the issue here.

The de facto state of law enforcement of DMCA is that fair use means that if I rip a DVD for my personal use, no one is going to prosecute me. I can even publish the methods for doing so and not be prosecuted. But I can't make and sell tools to do so. That's the de facto state of fair use in the US under the DMCA.

And nothing in the DMCA lets a company profit by unilaterally circumventing DRM and re-implementing a different DRM scheme, even if it all technically worked in an air-tight fashion. I believe there have been a couple of court cases directly along those lines where those methods were found to be illegal.

"I can't imagine these policies being tenable in a real competition context, two or three years down the line at the latest. At that time, they may change the policies, but won't it be too late then?"

Yup. That's where I think Siracusa's conclusion is wrong.

By maximizing short-term profit over long-term platform dominance, Apple is reducing its total profit stream. It's not an either/or choice between maximizing service profit and maximizing platform stewardship. If they did the latter, they'd accomplish the former, as long as their time horizon stretches past the next year or two.

Instead, they're eating their seed-corn. They won't be the only game in town for too much longer. Either Google or Microsoft will produce a 'good enough' platform in relatively short-order. Too much money is at stake for them not to. And then, the Mothership will be screwed in terms of service profitability.

"@Chucky Given that there was no DMCA then, I don’t see what difference an alternate format design would have made."

Ah. But DMCA was passed in 1998 directly in response to the first real stirrings of the CD-ripping phenomenon.

Had the audio industry thought through the foreseeable future when they designed the CD format, (or even had they taken a step back in the early 90's, looked at the by then incredibly obvious future, taken the very real short-term hit to kill the CD format and re-introduce a new CD format with rudimentary DRM), they could have been protected once DMCA inevitably passed.

If the audio industry had taken the basic steps to protect itself in the early 90's, the DMCA in 1998 would have then covered the CD DRM, there would have been no SoundJam, no iTunes, no iPod, and the audio industry wouldn't have suffered the totally crippling blow they underwent.

I mean, fewgawdsakes. I ripped my first CD in 1993 or so, and I could see the future back then...

@Chucky My point is that, technically, a more protected audio format wouldn’t have helped them. It would have been just as easy to bypass as DVD. Rudimentary DRM only becomes useful if you expect a future law like the DMCA to afford legal protection, in essence making it illegal to build a digital lockpick. It was a while ago, but my recollection is that this type of law was unprecedented.

"@Chucky My point is that, technically, a more protected audio format wouldn’t have helped them. It would have been just as easy to bypass as DVD."

But now we're back to your original point. DVD's are rippable, but no one can commercialize an iTunes for ripped DVD's.

"Rudimentary DRM only becomes useful if you expect a future law like the DMCA to afford legal protection, in essence making it illegal to build a digital lockpick. It was a while ago, but my recollection is that this type of law was unprecedented."

The DMCA was indeed unprecedented. But that's only because the Age of Digitally Reproducible Arts was unprecedented. (The Age of Mechanically Reproducible Arts was a fundamentally different thing from these points of view.)

But legislation like the DMCA was not unforeseeable by any means in the early 1990's. I could see something like it coming back when I first ripped a CD in the early '90's. I don't think the audio industry was unaware of the contours of the coming era at that point. But they were in the midst of the CD rollout boom, and they just made a (bad) business decision not to take a very real short-term hit right then and there in order to ensure the long-term vitality of their industry. They ate their seed-corn.

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