In this article, we will explore the legal side of open-source. This article was inspired by a rather heated debate on open-source licensing with The Schlossnagle. Theo is probably one of the best system engineers and architects I have met. He is the author of a book on building scalable Internet applications, and founded and runs the consulting firm OmniTI.

Open-source creates an interesting and unique series of challenges for its creators.

• Copying: In the closed-source world, while someone else can potentially reverse-engineer your product, or duplicate its functionality, in the open-source world, the original source is available right there for anyone to take. Thus, the only protection you have as to how your code is used is legal in the form of copyright.
• Usage: In the closed-source world, you have the option of using code inside your software to restrict its usage and functionality, based on, for example, license keys, which you control. In the open-source world, such an option does not exist. Since the code is open-source, it is easy for anyone to see how the usage controls work and bypass them.

Unsurprisingly, most open-source products allow for unlimited usage. For example, anyone can download and run as many copies of Apache, Linux or OpenBSD that they want. It is almost a truism that open-source and unlimited usage are the same. Obviously, they are not, but they essentially go hand-in-hand.

Where it gets interesting is in redistribution or repackaging. To understand this, we need to delve a little bit into the arcana of copyright law.

In most modern developed countries, copyrights give the author of some creative work the exclusive right to decide how his or her work may be redistributed. This does not include an original, depending on the laws of a country in question and sometimes the particular sales agreement, but duplicates. Thus, if I create a painting, and you (for some unknown reason, given my artistic talents) purchase it, in most cases you may then resell that painting to whomever you want and for whatever price makes you happy. However, under copyright law, you do not have the right to duplicate or copy (hence rights to copy or “copy-right”) that exact painting and sell it off. In doing so, you are violating my copyright. I, and only I, have the right to decide how my work gets duplicated.

All of this is particularly relevant in the world of open-source code. If I create an open-source product, when you download it, you have already created a copy. You are welcome to use it for your own use as you see fit. However, if you distribute it to someone else, especially for some form of compensation, and you have not received my permission to do so, you have violated my copyright.

Given all of the above, it is crucially important to decide exactly how the creator of open-source software will license that software. There are, essentially, two schools of thought in open-source licensing: GPL and BSD/Apache/MIT, which, for brevity, we will call BSD.

• GPL: The Gnu General Public License, based on the Gnu project by Richard Stallman, is a restrictive distribution license. While it has many details, its philosophy is, essentially, “I made this for free, you can use and distribute it for free. If you want to make money off of it, you cannot since I did not.” The GPL restricts distribution of the software to inclusion in any other software or product that is also GPL (or compatible). For many open-source developers, this makes a lot of sense. They are more than happy to contribute their work product to the good of the community, but do not want someone using that work product to make money unless they do. There really is one downside to the GPL: it restricts adoption. If what you have is unique, or used only in GPL-type products, then adoption will be high. But given the choice between a GPL product and an unrestricted one, a new product developer will always prefer to incorporate an unrestricted one.
• BSD: This is a class of license that says, essentially, do what you want with my product. There are variants on the BSD (not taking into account who was first) incorporated in the BSD, Apache, MIT and several other licenses, each of which contain legally important differences, such as limitations of liability, requirements of attribution, and other legalities, but essentially all of these licenses let someone use and redistribute the product largely at will. Thus, if I am building a commercial product, I am unable to use a GPL-licensed product in mine, but I can use a BSD one.

The battles between the BSD and the GPL camps can get fierce at times. The GPL was created by a “religious extremist,” the BSD is an “invitiation to legal piracy,” the list goes on. When a very powerful Web 2.0 rich client library, ExtJS, converted from a less restrictive version of the GPL (LGPL) to the full GPL, criticism by users was severe. In the end, both of these philosophies are valid, and are entirely subject to developer’s choice. If you created a product, you really do have three choices:

1. Keep it closed-source and sell it commercially. Microsoft and Oracle have built huge business on this, as have countless other companies. There is nothing wrong with reaping the financial benefits of your financial investment.
2. Open-source it and make it completely available, i.e. BSD. Again, there is nothing wrong with being fully community-focused, and either making no money on the product, or making money through ancillary services, such as consulting and support arrangements.
3. Open-source it and restrict it only to similar products, i.e. GPL. If there is nothing wrong with making money off of your labour and investment, and it is certainly commendable to contribute to the community, it is certainly acceptable to take a middle road that says, “I want to make money, but am willing to be altruistic towards others who are also altruistic.” Many products in the GPL world are dual-licensed, wherein the GPL applies to other GPL products, but if you want to embed it into a commercial product, you need to buy a typical commercial license.

Theo did raise one interesting objection to my middle-of-the-road argument in favour of GPL and/or dual licensing. He said that commercial and BSD-style are very clean and clear, black and white. One has a very clear picture where one stands. The GPL and dual-licensing, on the other hand, are much more in the middle, a shade of grey, and can be confusing. While I understand that objection, I am not convinced it holds for several reasons.

1. Life is grey. Very rarely is life, or business, black and white. Humans work quite well on the middle ground, codified as Maimonides’ “golden mean.”
2. If it works, use it. If the philosophy applies well to the situation at hand, then it should be used.

Which does this author prefer? None. Each license – commercial, BSD, GPL – has its time and place.

We begin with a caveat. “The future is unknowable.” The entire rationale behind free-market economics is that the millions or billions of people making individual decisions will do so far better than a select few or one. The corollary to this insight is that whatever one person predicts, it is unlikely to match the future precisely, since it is only one person, not the market as a whole. For a more interesting look at why some people do seem to predict the future fairly well, have a look at Nassim Taleb’s books in the “Recommended Reading” list (on the right).

We are making several assumptions as to the behaviours of consumers in the music industry.

1. People want music and are willing to pay reasonable prices for it. In a year when pirated music is easy to come by, and you can even buy DRM-free music on Amazon and iTunes and redistribute it, the fact that the industry sold $10.4BN of music in 2007 indicates that people will pay for music they like.
2. People will pay what they believe is reasonable, while either not paying or pirating what they believe is unreasonable. This is the “carrot and stick” method. It is not enough to say, “we will sue you if you pirate,” or to use ads comparing casual copiers to Blackbeard the Pirate or the Enron perpetrators (let alone Fannie Mae); you need to make it as easy and cost-effective for them (or reasonably close) to do something legally as illegally.
3. Most people do not view casual copying as piracy, and never will. Their perspective is that they enjoy the music, they want to share it with a few friends, or perhaps use a small clip of it on their Website / MySpace / Facebook page (which relates to the Fair Use Doctrine, out of scope here).
4. People have gotten used to social networking, as well as mobile media. They expect it to be reasonable to take pictures at a concert with their mobile phone, or even stream it live to their Website. “Look at the great concert I am attending, listen to it!” 
5. The people who do the most casual “piracy,” e.g. the streamer and sharer above, are likely the most passionate about the artist, and most willing to expend energy to spread the word. 

The industry can either fight these trends – they have been attempting to do so for years, with little success – or embrace it. As Jeff Pulver pointed out at his recent Web 2.0 NY keynote, several artists and/or labels have actually encouraged live attendee Webcasting of concerts. The question becomes, if they embrace it, and thus remove the last barriers to people doing casual copying, how do they make money off of it?

The labels need to recognize that without the old barriers to reproduction (see Part I), music content is largely commoditized. The source is still special – very few have the talent of Billy Joel – but once it is recorded and distributed just once, it is reproduced infinite times. Thus, the music itself must be sold at prices that are almost as cheap as piracy, in other words, near-zero or actual zero. $0.99 per track on iTunes or Amazon will have to be replaced by a fraction of that price. Of course, music industry revenues then apparently evaporate. Where do they make it up? Here are just a few of the possibilities.

• Concerts: Someone who owns an MP3 of Natasha Bedingfield can reproduce it and redistribute it infinitely, but they cannot reproduce the concert experience. The music itself – the MP3 file – becomes advertising, an investment, in getting individuals to buy non-reproducible services, like the concert. Concert ticket prices, however, have gone through the roof as well. In order to make up the revenue losses, ticket prices would need to come down, while the number of concerts would need to go up (revenue = number of tickets x price per ticket). I am currently working with a software start-up that is dealing with an identical issue: can we avoid fighting piracy entirely by essentially giving away the software, but only selling the ancillary online services?
• Memberships: Most music fans – certainly those who currently or until recently paid for music – tend to be fanatical about their fan-hood (pun intended). Very few who were around or have seen videos of teenagers flocking by the many thousands or more to see the Beatles in the 60s can doubt that, and the trend is only stronger since then. Labels can essentially give away the music as advertising, but sell club memberships, or sell the music with membership and special benefits embedded. For a long time, media celebrities have viewed fan clubs as a loss-leader, advertising to drive music/movie sales. In an era when music/movie sales are low and getting lower, they need to explore the other way around.
• Frequent Flyer: Although this has rarely, if ever, been applied in the entertainment industry, it has worked quite well in many others. The story of American Express haughtily turning down American Airlines’ AAdvantage for their members is legendary and taught in just about every business school. Someone can download 100 MP3s of Kate Perry from EMI or Alicia Keys from Sony Music (the label formerly known as Sony BMG), but actually buying 10 or 20 can get a free concert discount, signed copy, special release, etc. 
• Volume: It turned out, much to the music industry’s surprise, that the entertainment business is very price-elastic: when they raise prices on CDs, concerts and movies, fewer people attend. But there is another side to this price-elasticity: if prices are lowered, more music will be sold. Can it sell 10 times the amount to make up for it? I doubt the industry produces enough music per year to get to that volume. However, people were very skeptical that, following telecom deregulation, people would make enough long-distance calls to make up in volume what was lost in per-minute profit, and we were all quite wrong. Volume will definitely make up for a lot of the reduced price, although unlikely to do so entirely. Total direct sales of music will likely come down, but overall profit margins can actually go up. Where will the volume come from?
  • Increased sales of existing artists. Plenty of people who love Madonna will not buy Coldplay or vice-versa at $0.99 per track. On the other hand, plenty will be willing to pay a dime or a quarter to try a few and see if they can expand their tastes.
  • Increased artists. The industry will need to expand its pool of artists to go beyond superstars into those who can “only” sell a few tens of thousands or hundreds of thousands of tracks (not albums). The Indies are already doing that, and will continue to eat into the major labels unless they restructure for it. The restructuring will need to include lower-cost methods of finding talent, producing it and promoting it.

There are many other possibilities…

Note that all of the above require not only serious and fundamental strategic rethinking, but also a hard look at the operations side, likely leading to major changes to support new business models. 

What impact will all of this have on the industry in general and artists in particular?

1. Likely greater competition for moderately talented artists, leading to greater revenue for those who do not hit superstar status.
2. Reduced gross profits (but possibly higher profit margins) for the industry, or at least those who adapt.
3. Reduced compensation and harder work for superstars, who will no longer be able to get wealthy on percentages of sales, but rather on ongoing labor, such as working with fan clubs, signings, concerts, etc., and greater competition from the next tier.
4. A more mobile growth and ranking system. A good but not superstar artist will be able to make a living, or at least supplement one, through labels, while possibly moving up the ladder as they get better. Conversely, it will also be easier for superstars to fall down the rankings as their star wanes.
5. Greater availability of varied music.
6. Possibly a dilution of culture. I am unsure if this will happen, or if it matters, but fewer superstars and more music means fewer shared elements among everyone in society. I am not worried about this, but a recent piece by Elizabeth Wurtzel, author of Prozac Nation, did worry about this. Personally, I cannot believe that greater consumer choice or competition is ever damaging.

Short form: lots of challenges to the industry. I see a number of failing players, consolidation, and rising Indies. Whether or not even one of the major labels can rise to the challenge is a question time will tell.

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Avi