Napsternomics: What's the Most Effective Way to Protect Intellectual Property?

The critics of Napster argued that Napster was theft. And even though lovers of music loved Napster,
the critics argued that a thriving, legal, accessible Napster would ultimately punish music lovers. If
Napster were legal and widespread, sales of recorded music would go to zero. That would destroy the
incentive to be a musician. So Napster would mean the end of the professional music community. In
this view, the only reason anyone bought CDs in the heyday of Napster was because they didn’t know
about it or didn’t have access to broadband. The critics triumphed in the courts and Napster is twisting
in the cyberwind, dying a slow death.

Was the old world where Napster operated freely a world of theft? I don’t know. But I will argue here
that the decision to shut down Napster via the courts may ultimately harm music lovers, even those like
myself who never used Napster. In other words, I will argue that allowing the theft of music via
Napster could have actually increased revenue for the music industry benefiting music lovers and the
creators of music.

I’m going to make this claim even while accepting the view that Napster was a form of theft. How
could it possibly be that theft is good for the music industry?

Theft via Napster would seem to destroy the music industry. People respond to incentives. Surely free
music will crowd out costly music. If it’s cheaper to steal music than to pay for it, people will steal it.
But that story is too simple.

We know that the threat of being caught and punished isn’t the only reason that people pay legally for
something rather than stealing it. There are costs of theft other than monetary costs. Some people feel
guilty taking something for nothing. Culture and norms can be used to encourage socially beneficial
behavior. After all, people leave tips even in restaurants and in taxis where repeat visits cannot
explain such generosity. People choose not to litter even on a deserted mountain trail. People vote
even though economists persist in claiming that voting is not rational.

In all of these cases, people act according to a wider range of costs and benefits than the direct
monetary costs. (And of course, some people tip poorly or not at all, litter still exists and voter turnout
is not 100% in a free society.)

So while it is possible that widespread use of Napster would severely hurt music sales, the reductions
might be mitigated by social norms and culture. The result would be some lost income for music
creators because some people would never pay. But some sales would be gained as people used
Napster to sample music before they bought it.

Social norms are not always effective. Maybe they would fail to deter music thieves sufficiently. After all, the social norms in
Napster’s heyday went in the opposite direction. People claimed an entitlement to free music.

But it’s possible that even if the social norm solution failed completely, music creators and the music
business would thrive if Napster were allowed to operate freely. If Napster had been allowed to flourish, it’s possible that new technologies would have been
created to allow music producers to charge for their work at the same time that listeners would have
benefited from the access opportunities provided by Napster.

What might those technologies have looked like? There is no way of knowing. But the greater the threat of
Napster to music creators, the greater the incentive to create those technologies. In that sense, the
threat of Napster might have been self-correcting.

To see how this might work in practice, consider the theft of physical property. You would think that
the higher the penalty and probability of being caught stealing car stereos, the fewer car stereos would
be stolen. You would also think that making it legal to steal car stereos would maximize the amount of
theft.

But it’s not true, at least after a while. In fact, making it legal to steal a car stereo might result in
minimizing the number of stereos stolen.

How can that be? When police and the courts ignore car stereo theft, thieves are bolder. In Boston and
New York in the 1980s and 1990s, we essentially lived in such a world. Car stereo theft was so
common that owners put signs in their car windows saying “CAR HAS NO STEREO” or “STEREO
ALREADY STOLEN” to discourage having windows broken by thieves who failed to check first to
see if there was a stereo in the car. My guess is that the police and the courts didn’t spend a lot of time
catching or punishing people who stole car stereos.

But when the thieves got bolder, the market responded in turn. Competition drove the makers of stereos
and cars to find ways to please the customer. The first attempts were rather primitive. Manufactures
developed stereos that could be removed from the car and carried around. You may remember seeing
people in the grocery carrying around their tape deck by a handle.

The next technology was more convenient. Expensive car stereos had a removable face plate.
Removing the face plate and slipping it into your pocket when you left the car made the stereo
worthless to a thief.

The final step and the ultimate convenience was the design of stereos that wouldn’t work when
removed from the car. That essentially reduces car stereo theft to zero.

Similarly, technologies are constantly being developed to deter the theft of the car itself. Door locks,
recessed door locks and now technology that lets police track stolen cars via GPS are all ways the
market has responded to the fact that in a world of finite resources, the police and courts cannot devote
enough resources to deter all thieves.

As weird as it seems, car owners can actually be better off, at least in the long run, in a world where
car stereo theft is ignored by the law. That produces a profit opportunity for manufacturers to create
technologies that are cheaper for car owners to use to protect their stereos compared to the resource
costs and higher taxes of using police and the courts.

This is essentially an application of Ronald Coase’s classic paper, “The Problem of Social Cost.” In a
world where my behavior and yours affect each other, the morality may be clear. It’s wrong to steal a
stereo. But using this morality as the basis for assigning property rights may be very costly. In the case
of car stereos, even though the morality says we should give the property rights to the car owner and
put car stereo thieves in jail, it is probably better for the car owners to leave the property rights
essentially in the hands of the thieves. Ultimately, that amoral solution can actually benefit car stereo
owners by reducing car stereo theft to virtually zero.

Some might falsely conclude that it is moral to steal to create the demand for technologies that can deter theft. But the best world is a world of no theft where no resources, either technological or legal need to be devoted to eliminating theft.

No one could have predicted which technologies would be developed to prevent car stereo theft.
Similarly, we can’t anticipate the tools creative people might have come up with that might have
allowed Napster to thrive while still compensating music makers.

The lesson is that we should be careful in assigning property rights in a dynamic setting. The decision
to shut down Napster has unforeseen consequences that may ultimately harm both the lovers of music
and those who profit from that love.

Is this all a moot point because Napster has lost its case in the courts? In his new book, The Future of
Ideas, Lawrence Lessig argues that many new technologies that expand access to creative material
such as video and text are under attack in the courts. Lessig argues that we should wait and see how
the uses and abuses of these technologies unfold in practice before allowing the courts to shut them
down immediately. This argument suggests giving the market time to come up with
ways to protect the creators of creative ideas from theft rather than adopting the most restrictive
definition of property.

Finally, it is important to remember that physical and intellectual property are different. We may want
to have different moralities and laws protecting each. When you steal my car stereo, I can no longer
enjoy it. When you steal my song via your hard drive, you may be reducing the flow of revenue from
my CD sales. These are not the same. Whether this difference should affect how we treat such theft in
the courts and in legislation is the key question for the future.