Piracy Steals Music Companies' Thunder

The effects of piracy on the economy and the world are just getting started. Music company EMI told investors today that it would miss sales projections for the year by about 9%. Trading in England, the stock took a huge hit on the news, wiping out billions of dollars of value.

Music content sales such as records, tapes and CDs have long trended with the broader economies. With global economies steadily growing the last couple of years, the music business should have been on fire. Alas, that is not the case, and the single biggest reason is piracy.

Initially, the Recording Industry Association of America (RIAA) spent a long time with its head in the sand as the nefarious iteration of Napster (as opposed to today's legal iteration of Napster) began to undermine the entire industry's model. Then, about five or six years ago, the industry decided that it should fight the peer-to-peer (P2P) technologies like Napster that were enabling mass sharing of pirated copies of music. Napster's model was indeed illegal and eventually shut down. However, in a clear victory for both technology and freedom itself, the newer versions of P2P software aren't illegal because they simply enable people to freely trade data files without actually keeping track of what those files are.

It's not even really a fine line in my mind: If the technology provider, such as Napster, is knowingly assisting in the trading of files by keeping a centralized command of what files are being traded, it's illegal. But technology that simply enables blind trading of files isn't. After all, if Gnutella is liable for the illegal activities that users of its software partake in, shouldn't it follow that Microsoft (MSFT - commentary - Cramer's Take) and Intel (INTC - commentary - Cramer's Take) are, too? Heck, so is the power company and the telephone company. And the vendor of the glass in the monitor. Where does it stop?

Let's be clear, though: It's illegal -- and flat-out immoral -- to mass-trade copyrighted material. We all accept that stealing a CD from our local record store is wrong. So, too, is it wrong to steal the content in an MP3 file. Nothing drives me crazier than the hypocrites who say they favor free markets, but who rationalize the theft of music content. Free markets by their nature entail property rights, and music content is a form of property according to our law system. If you're illegally downloading music, stop now!

Likewise, I often hear and read the argument that illegal MP3 downloading actually drives sales. Even if that were true (which, as EMI's and the overall music industry's sales trends obviously show, is decidedly not), that doesn't make it your right to violate the rights of the content's owners. If they, in a free-will choice, decide that it makes financial sense for them to allow their music to be distributed in MP3 form for free, then go crazy and download. But that's simply not the case.

Other shills for content theft like to point to the parallels between the VCR and P2P. Certainly there are similarities, such as the content providers fighting against a technology that is enabling copying of their content. The piracy advocates like to point out what a boon VCR and eventually DVDs ended up becoming to the content owners. Those technologies absolutely did end up generating all kinds of sales of content in the form of video sales and rentals, and I would have blasted the industry for trying to shut down a technology enabler (such as I am doing here, blasting the industry for fighting the legal P2P network enablers), which they clearly didn't have the right to do. But just as making an MP3 copy of CDs that you have purchased isn't illegal today, it also wasn't illegal for people to record television shows. Those recorders didn't enable the mass distribution of that copied content, and that's where the parallels end.

The recording industry is in big trouble because a lot of folks have decided that content rights are meaningless. I applaud the industry for going after those stealing its wares -- whether it's a 12-year-old honor student or a grandmother of eight, who the media like to portray as the "victims" of these lawsuits. Simply put, theft is theft and the industry has a right to pursue those who are stealing it, regardless of age or social status.

I certainly hope there are unforeseen revenue streams that will arise out of the P2P networks that enable this mass theft and wealth destroyer that we are seeing play out before our eyes, embodied in EMI's blowup today. Music is the first to feel this squeeze, but you can rest assured that all content owners will be affected by these thefts in mass. Television and movie studios are next. Books, magazines, news -- all content will eventually be affected by this mass theft movement, and it's going to be ugly for these owners like Time Warner (TWX - commentary - Cramer's Take), Sony (SNE - commentary - Cramer's Take) and others unless the very ownership laws that our quasi-capitalistic economy is based on are enforced.

(On another note, how about we all work on vilifying this theft in a grass roots-type movement, too?)

---

At time of publication, the firm in which Willard is a partner was net long Microsoft and Intel, although positions can change at any time and without notice.

Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney. He also produces a premium product for TheStreet.com called The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback and invites you to send it to [e-mail].