Breaking Down Peter Chernin's Comdex Keynote

Originally written November 23, 2002. Reposted here without updates.

Declan McCullagh’s Politech has a transcription of Peter Chernin’s (CEO of Fox) Comdex keynote speech, which is so full of false truths and misstatements that I spent much of the weekend breaking it down. At a very fundamental level, the Big Content companies don’t understand the revolution that is happening in the digital media realm. They still see us as consumers only capable of digesting their offerings and handing over money. They really don’t seem to understand that the reason we are buying PCs, video cameras, digital cameras, broadband connections and the like is that we want to create and share our creations. The quality of “amateur” content is exploding at the same time that Big Media companies are going through one of their all-time lows in music and television creativity. No wonder we’re spending more time with our PCs than we are with our TVs.

Thank you very much, Fred, and thanks for inviting me.

I’m glad to have the opportunity to speak here at Comdex although I have to admit I’m a little nervous as well. To stand up and represent the media industry before the biggest technology crowd in the world, while it’s certainly a great honor, is also the kind of death-defying stunt that’s featured in Jackass: The Movie. While I feel privileged to be the first media executive to take this stage, I can’t help wondering whether there might have been media executives in previous years who didn’t quite make it as far as the stage.

But in reality I’m a lot less intimidated than excited at the opportunity to forge greater understanding between media providers and the technology community. Undoubtedly there is a real communication gap between our industries — a gap that at times looks impassable. There are people in the media business who think Comdex is a cold medicine, and who are looking forward to closer relationships with technology companies about as much as Thanksgiving turkeys are looking forward to next week. There are people in technology businesses that think the global media industry consists of four or five overpaid CEOs, a thousand overrated celebrities, and one guy to hold the camera. But there are many more people of greater intelligence and longer vision who see that both of our industries are dynamic, diverse and deeply interdependent.

The media industries certainly aren’t diverse and they are getting more consolidated all the time — much to the detriment of American popular culture.

Certainly we have more common ground than contentious issues between us. We are both in the business of creating and distributing original digital products. We are both working to market our programs worldwide. We both seek to provide consumers with digital entertainment whether it’s computer games on an X-Box or X-Men on DVD, whether on web sites or in e-books, on iPods or iTV. Our industries already inspire and rely on each other in all kinds of ways and all kinds of businesses. I’m here to suggest that, beginning today, we turn that relationship into a partnership.

It’s all about consumers, not customers of course. Perhaps the fundamental difference between the Big Content and technology industries is that Big Content has no interest in active participation by its customers. This dichotomy runs deep and underlies the entire keynote. The technology industry would not exist if it wasn’t for hands-on hobbyists creating things with the tools they’ve purchased or even built themselves — a distinction that the technology industry hasn’t yet completely forgotten.

I propose that we do so in order to combat the rash of stealing that currently and seriously threatens us both. Because of all the things that unify technology and media companies, we have nothing more urgently in common than the escalating theft of our products. The piracy of software is responsible for annual global revenue losses of more than $4 billion.

The assumption that every pirated piece of content equates to lost sales is obviously false. Many pirated CDs sold on third-world streets for pennies on the dollar are being bought by people who simply could not afford to pay for the product at its retail price.

This is not to say that piracy isn’t illegal or that there are no real dollar losses — only that the numbers that Big Content and the software industry throw around are specious. I am unaware of anyone who has done a serious academic study of the “real” costs of piracy.

The piracy of computer games cheats the gaming industry out of more than a billion dollars a year. And the piracy of songs has left the music industry fighting for its digital life, thanks to a pillaging that reached levels of more than a billion songs a month. Now the motion picture business is facing the same threat as hundreds of thousands of movies are digitally hijacked every day. The unauthorized downloading and illegal redistribution of copyrighted content has become a looting epidemic. And the rapid spread of this digital robbery is not only damaging; it’s wrong.

It’s wrong because it’s a crime. Copyrights are protected by the U.S. Constitution and guarded by the laws of virtually every developed country in the world. The outright stealing of creative products is no more legal through your computer than it is with your bare hands. It’s wrong because it debilitates legitimate businesses. When illegal versions of Windows XP are made internationally available two months before its launch; when 50 computer games can be bought on the Asian black market for the equivalent of 75 cents; and when motion picture files are stolen and shared online as soon as the movies hit theaters — and often before then — legal digital trade simply doesn’t stand a chance.

Here are some interesting numbers for the movie industry: “U.S. box office hit $8.4 billion in 2001, a 9.8% increase over the previous year. Worldwide box office receipts for feature motion pictures have grown from $1.2 billion in 1970 and $2.8 billion in 1980 to over $15 billion in 2001. This increase is all the more remarkable because ancillary markets such as home video, cable and television markets have undergone explosive growth during this same period.” Hardly an industry in crisis.

But more than anything else, digital copyright theft is wrong because it’s destroying the ability of the technology industry to evolve. Without basic protections for digital content, and without some control over the casual crime that now rules the Web, the emergence of the next generation of digital businesses will be crippled as the promise of our Digital Revolution dissolves into petty theft.

This is a strong claim to make without any supporting information. I have never heard an argument that the lack of DRM has anything to do with technology evolution. Microsoft’s products are certainly the most widely pirated technology products, but the company’s market share and stock price continue to be the envy of every other technology company, and the pace of technology product development has been startling over the last couple of decades.

It is this danger, and this challenge, that has brought me to Comdex. I’ve come to call for a partnership of content and technology providers in order to create explosive long-term businesses in place of unrewarding theft. The value of such a partnership is frankly beyond question; the only question is why it hasn’t happened before now. How has it taken years of robbery in broad daylight and annual copyright losses of around $8 billion to bring the interests of media and technology companies together in the same room? How can the daily theft of hundreds of thousands of creative products be wholly ignored and even technologically enabled while the theft of even one product in the undigital world is publicly condemned?

If hundreds of thousands of dresses were stolen from a Wal-Mart, the police would mount a task force that would make Winona Ryder quake in her boots.

(a) It’s not nice to pick people when they’re down, especially when they’re obviously sick. (b) Winona Ryder would never shop at Wal-Mart. (c) Wal-Mart does lose hundreds of thousands of dresses each year due to “shrinkage,” a retail industry euphemism for internal and external theft, administrative screw-ups, and vendor fraud. According to the 2001 National Retail Security Survey, U.S. retailers lost 1.75% of their total annual sales — over $32 billion in the U.S. alone — to shrinkage. The music industry has, of course, lost $0 since they’ve only been denied potential CD sales.

P.S. Please let me know of any corrections or additions in the comments. I’m frankly a bit beat after digging through lots of old postings, emails and Google searching all weekend to pull this together.