Pirates Are Consumers, Too!

With anti-piracy and copyright infringement bills SOPA and PIPA indefinitely shelved after the wave of online protests earlier this month, the general consensus around the interwebs is we won!  Sure, illegal IP distribution is still running rampant, and there is not much IP owners can do about it, but we do not have to worry about the government treading on our internets!  Okay, so I admit—after a nice, long debate with a well-informed friend—I am actually glad these bills did not pass in their current forms.  While I still believe their ultimate goals are worthwhile, there were some issues with being a little too broad which could lead to trouble.  I am not yet ready to admit they would lead us to government censorship of the internet on a ridiculous scale like they have in China, but I can see the concern of some clever lawyers using the “slippery” wording to shut down undeserving sites.

 It is bad enough they already have the Chewbacca Defense!

(Warning:  Clip of said defense contains a wee bit of profanity; hence

the look of shock on Chewy’s face as it sullies his good, nonsensical name.)

Nevertheless, the issue still stands.  Companies lose millions to piracy every year, and they spend millions try to fight it.  I am sure we all have had to deal with ill-conceived (or, worse yet, poorly implemented) digital rights management (DRM) software on our legally purchases products.  As an avid gamer, I have seen some of the worst policies and software first hand.  Some have been so bad they actually stopped legitimate users from using the products.  I have to admit, all the hassles of these devices to thwart piracy have actually made me want to pirate IP just to spite some of these companies for making me work so hard just to use something I paid for.  Judging from online conversations I have seen or participated in, I am not the only consumer who is fed up with all this nonsense, even though we agree IP owners deserve to get paid for what they create and sell.  It just does not seem right to punish those of us who pay for the products when the pirates are just going to pirate anyway.

So, what is the real solution to the issue of piracy?  Everyone loves getting things for free, but there must be something identifiable which leads people who would never shoplift a physical item in a brick-and-mortar store to justify stealing thousands of songs, movies, games, software, etc. online.  Is it because it is easier and less public?  There is an illusion of anonymity online (truthfully, if someone wanted to find you, they could with minimum knowledge, tools, and effort), there is no need to hide the items you are taking, and there are no security guards to dodge.  That might be a factor, but it cannot be the determining one or else we would all be pirates.  I think the one thing the majority online pirates have in common is the fact they feel there is not enough value in what they are pirating to pay what the manufacturers/retailers are asking for it.  It is not they do not have interest in the products (or else they would not bother to even steal them), or they are not willing to pay anything at it; it is the fact these products are overpriced, underserviced, and/or a hassle to use (likely due to DRM).  On top of that, the vast majority of digital IP products have a “no refunds” policy.  Entertainment products, ironically enough, also happen to have a highly subjective level of value to consumers, so the risk seems dauntingly high when one cannot return an unwanted piece of IP.  All of these factors push consumers to piracy if only as a means to mitigate the risk of buyer’s remorse.

 It’s probably more shame than remorse for N-Gage owners.  All 4 of them.

It would seem apparent then the solution to the problem is to raise perceived value.  The most obvious way to do this is to lower the price of the product.  How do you compete with free, though?  As it turns out, one way is to fight fire with fire, and give away some of your product offerings for free.  This might sound counterproductive or downright crazy, but Valve Corp. co-found Gabe Newell does not think so.  In fact, he and his company have been experimenting with pricing via their digital game distribution service, Steam, for years now, and have seen incredible revenue increases (40 fold) both by heavily marking down products (75% off) and by giving away some for free.  The free-to-play games keep users online longer (which has shown to make them more prone to buy more often), and also adds to the overall value of Steam as a whole, in turn increasing the perceived value of all the games sold through it.  Just to make it perfectly clear, they did not see a 40% increase in revenue on the marked down games; they saw an increase by a factor of 40, or 4000%.  While these methods are indeed nontraditional, the results make Mr. Newell seem not so crazy after all.

 The face of crazy…like a fox.

Of course, it cannot be that simple, can it?  Even Newell concedes there is a lot going on with these experiments we do not understand as these results simply do not fit into traditional pricing models.  However, he realizes his customers are trying to tell him something, so Valve will keep working on getting the message right.  What is really interesting, though, is these experiments have shown what Newell has been saying for years:  piracy is not the real issue.  It is merely the result of poor service and value.  Pirates do not just pirate for the sake of pirating; they are underserved customers who can be won back.  They key is to give them a better experience (service) than they can get through piracy.  Personally, I would start with removing all the intrusive, frustrating, and overbearing DRM software from digital media.  Newell even noted DRM tends to increase piracy because it diminished the value of the service.  That is what digital content really is, after all:  a service.  As a service, the focus needs to be on continual value, and DRM often removes most, if not all, lasting value.

Another interesting way to win pirates back purchasing is by implementing a “pay what you want” system.  It is exactly what it sounds like:  you let consumers pick the price they pay for your service.  I would venture to say it is probably the best way to gauge the actual, unadulterated value consumers place on your products.  That said, there are ways to influence the price points people are willing to pay.  You definitely do not want to give the option of paying nothing, as—like I said before—we love free stuff, and will jump on the opportunity to get something for nothing.  However, while people may not be inherently generous, appealing to their sense of charity along with allowing them to freely choose how generous they want to be is an effective way to increase revenue.  One study showed flat rates had the lowest value, an adding the stipulation half would go to charity did little to increase the perceived value.  Allowing customers to pay what they want significantly increased total purchases, but the low purchase prices negated any increase in revenue.  Finally, when people were told half of their chosen price would go to charity the increase in purchases was only half as much, but the price per purchase was significantly increased to the point where overall revenue was triple that of the non-charity pay what you want option.  It turns out customers can be quite generous when they feel the value is high.

A great example of the pay what you want system with charity can be seen with the Humble Indie Bundle (Tweet @humble).  These guys there have done an incredible job raising money for charity as well as contributing to high sales and recognition for many small-time (indie) game developers who have an excessively hard time competing with all the large game companies out there.  Once again, we can see social responsibility saving the day for modern business!

Social Responsibility Part 2 (aka It’s Called ‘Giving Back’ For a Reason)

To borrow a line from one of my favorite games of the current generation, BioShock, “Is a man not entitled to the sweat of his brow?”  This iconic question was posed by Andrew Ryan, the antagonist of the story, and was the opening to a speech urging people to work only for their own success with no regard for those around them.  To Ryan, “petty morality” only served to stifle progress.  He went so far as to build a fantastical underwater city wherein “the greatest minds” could do as they pleased in order to achieve their own measures of success for their own glory, supposedly realizing the ultimate capitalist’s dream.  In the end, though, lack of regard for their fellow dreamers led the citizens of Rapture to destroy each other, themselves, and their society, leaving the streets to be overrun by murderous psychopaths and scientific abominations.

 It would actually be less scary if he used that drill for dental work.

Okay, so that might be an extremely unlikely outcome of throwing social responsibility to the wind (even barring underwater cities and gene-splicing crazies), but it does paint a fittingly grim picture of doing so.  Last week I talked about the business merits of social responsibility.  Now I would like to focus on a common counterpoint to the subject; that is, “I worked hard, and I succeeded on my own!  Nobody helped me, so why should I help everyone else?”  I will be the first to admit this point seems like a valid one on the surface, and very much irrefutable outside of moral reasoning.  However, from a logical perspective, it is fundamentally flawed when you consider how our economic system, business in general, and society on the whole operates.  Success, by and large, is often measured by financial wealth, which can only be obtained by some practice of business (even at its basest form of simple buying and selling).  Business, by its nature, requires society.  It requires other people, to sell to, to buy from, and appeal to.  Like I said last week, we are all businesspeople.  Therefore, no matter what, you owe your success to society.

This is not to take away from those who made significant sacrifices to their social lives and mental health and risks to their financial stability in order to become successful—I am only pointing out you really were not alone in your success.  It is rarely an easy road to success, no matter how you define it, and it takes copious dedication and determination.  Entrepreneurs and business visionaries keep the world going ‘round.  There is no doubt they are invaluable to society, but yet they would have achieved nothing without society.  So, when you think about it, social responsibility is really social accountability.  A company is accountable to its stakeholders, and it just so happens we all have a stake in the business oils that makes the societal cogs turn.

Hamster wheel analogies just seem irrelevant now that they all drive Kias.

Of course, there will always be those who abuse the system.  Not every person is going to be a productive member of society, and some will gladly leech off the sweat of others their entire lives.  The savvy businessperson understands people who do this are like defective units at your production plant in that they are an inevitability given an imperfect manufacturing process (in this case, the great many variables of life experiences which may produce such perspectives), work against you by being expensive (by leeching off society) and unprofitable (by not contributing), and require you to always be working on ways to minimize their occurrence.  Since we have already established society and business are one in the same, the logical solution to reduce the amount of unproductive people is to make society better.  This, of course, is done by increasing quality of life through social responsibility programs.  Giving back to society to educate people, as well as keeping them healthy and happy, will only make them more productive and successful.  As we talked about last week, this creates wealth, which leads to increased spending, which leads to the creation of more wealth, and so on.

So, there you have it:  a logical reason why we should all care about each other, if only because we care about ourselves.  I tried to be impartial when presenting this argument, but the reality is I am not only a businessperson, but also a proponent of progress.  What else is the ultimate goal of life other than progress, anyway?  Be it for our own progeny or the mankind as a whole, really everything we do is to make life better.  Progress stems from innovation, and innovation is an organizational process these days.  That is a good thing, too, as I think working as a team generally makes things easier.  Besides, like all worthwhile things in life, success means nothing without people to share it with.  In the words of Albert Pike, “What we have done for ourselves alone dies with us; what we have done for others and the world remains and is immortal.”  We are all in this together, people, and it is in all our best interest to work together to be successful together so we stay successful together.

Social Responsibility Part 1 (aka Nice Guys Finish Wealthy)

As the Holidays wrap up, and the proverbial “season of giving” is over, I cannot help but think of all the times I have debated the merits of social programs, higher taxes for the wealthy, and general social responsibility.  Unfortunately, said debates are rarely constructive since these issues are often attached to deep-seeded politics, bloated egos, and misinformed sentiments of self-entitlement.  Some people believe you are only allowed to what you earn through your own labor, while others feel they deserve just as much as everyone else regardless of their own successes, and others still think we should all work together for the greater good of the species.  Regardless of your own thoughts on the subject, I will now present why social responsibility is a good thing from a simple business perspective.

 Makes every topic more exciting!

Social responsibility is a popular cornerstone of modern business, but it is not really a new concept.  Adam Smith—considered by many to be the father of capitalism and modern economics—observed the idea in action way back in 1776 in his quintessential socioeconomic study An Inquiry into the Nature and Causes of the Wealth of Nations (or The Wealth of Nations, for short), wherein he introduced the world to his famous concept of the “Invisible Hand.”  Simply put, the concept states businesspeople, as agents of the creation of wealth, usually promote the best interest of the community they operate in, regardless of whether or not they intend to, as if some benevolent “invisible hand” was secretly guiding their actions.  In other words, even the greediest business owner/operator serves the community with his successes, if only because his success creates jobs, which, in turn, create wealth for those workers to spend elsewhere in the market.  Of course, what they spend creates wealth for others who get to go spend it and create wealth for others, and so on, thus creating the endless cycle which drives our economy.  On a side note, this is exactly why you should never be afraid to spend money during a recession, as this only serves to exacerbate the issue.

Now, you are probably thinking to yourself the default positive side effects of some jerk’s narcissistic actions do not seem much like any sort of social responsibility, and you would be right.  The fact is, though, you can only really be a jerk for so long before the people rise up to smite thee, or, worse yet, wallop your brand image.  I know it seems like sometimes there is no justice for those who take advantage, but we live in the glorious Information Age.  People tend to take notice more of when businesses do wrong than when they do right, and with the advent of social media these wrongs will become public knowledge faster than the best PR department would even know something is amiss, which is why successful companies know it is much more profitable in the long run to invest in and protect their image than it is to repair it.  More so, if you treat your employees poorly, their morale will plummet and they will perform poorly.  Poor performance leads to low product quality and lackluster customer service, both of which leads to consumers going elsewhere and the downfall of your business.  The same result is yielded from cheating your customers, destroying the environment, or taking advantage of citizens of developing nations.  Sooner or later, the truth will hit the Internet and the aforementioned smiting will commence.  No matter what, the jerk businessperson will not last.

 Although merely looking like a pompous jerk makes you unstoppable, apparently.

Smith’s “invisible hand” theory alludes to the importance of social responsibility in business.  It points out how the two concepts naturally go hand-in-hand.  Even when a business is operated in a selfish manner, it still does the community well.  However, since society and business essentially feed each other, it makes sense to purposefully incorporate social responsibility into your business strategy to keep the cycle going strong.  Successful companies recognize this connection, and this is why we see multimillion dollar campaigns by corporations to increase education and literacy, fund charities for the sick and research cures for diseases, develop infrastructure in budding industrialized nations, keep kids off the streets, or even to simply provide some entertainment for families.  You can argue until you are blue in the face about whether or not these companies have altruistic motives, but either way they know it is in their best interest to increase the quality of life of the people living in the markets they service and plan to expand into.  Education leads to more productive members of society, both as employees and as consumers (because unemployed people have little money to spend).  Healthy people are also more productive, and have fewer bills (particularly medical bills) to worry about, again leaving them with more money to spend on consumer goods and services.  Humanitarian programs serve as positive public relations, and a strong brand image leads to more sales.  Developing the infrastructure of nations opens the doors for whole new markets of consumers.  It all leads to more revenue, regardless of more “noble” intentions.  It just so happens it also leads to a higher quality of life for everyone involved, again regardless of intent, much like Adam Smith noticed some 235 or so years ago.  Maybe it is just me, but I could always use a little bit of improvement in the Quality of Life department.

Seriously, I should hire this guy to run my QoL department.

Now, to bring this back to my original point, it really does not matter what your personal politics are; as members of society, we are all businesspeople.  We all depend on the successes of those who comprise our communities, both small and large, because we all use each other to reach our success.  Subsequently, it makes good business sense to support social programs which help put those in your community in the position to help ensure your personal long-term success.  We need to stop thinking of these programs as handouts, and look at them as what they really are:  investments into our collective, personally successful futures.