TCS Daily

Is Los Angeles the Next Manaus?

By James Pinkerton - December 31, 2003 12:00 AM

Is Los Angeles going to be the next Manaus, Brazil -- a place of glorious but ghostly monuments to long-ago lost wealth? And is Silicon Valley the next candidate for tumbleweed-ization? Don't laugh. Two new court decisions, one in the US and one in Holland, will accelerate the trend of downloaded wealth-disappearance from America's best and brightest industries. And while nothing about the future is certain, a cautionary tale from the Latin American past may be instructive; once the economic heart of an industry flees, the area that's left behind never recovers.

So what about this Manaus? Today, it is just another Brazilian city, population 1.5 million, the capital of Amazonas state. But in the late 19th and early 20th centuries, it was one of the great boom cities of the world, based on a single product: rubber. People had known for eons that a viscous substance, latex, could be tapped from the Hevea brasiliensis tree; they had found occasional uses for it when it dried into rubber. But since natural rubber invariably turned gooey in the summer and brittle in the winter, there weren't many practical uses for it. But all that changed after 1839, when the American inventor Charles Goodyear figured out how to "vulcanize" -- permanently weatherproof -- rubber.


And so attention -- and money -- turned to the Amazon rain forest, centered around Manaus. A new group of land-owners -- who might be called "Rubber Barons" -- got rich quick, and then some. These "capitalists" were little better than slave-owners and flora-plunderers; they simply sent work gangs out into the forest to tap the trees, export the raw product to rubber-hungry industries in North America and Europe, and collect huge profits. Amidst the riotous debauchery of life at the top--Manaus was said to lead the world in both diamond-purchasing and brothel-patronizing--a few noble and lasting edifices were created, such as the Manaus Opera House.


But just as in the economics textbooks, with windfall profits came cut-throat competition. Indeed, just as the opera house was opening up, the wealth-creation was closing down. In 1876 a British planter, Henry Wickham, carried away 70,000 Hevea seeds, first to Britain, then to British colonies; the goal was to create new centers of rubber production under the Union Jack. After decades of difficulty and false starts, British planters finally succeeded in growing rubber in Ceylon and Malaya. But whereas the Brazilians simply went into the wild to tap rubber, the British established vastly more efficient rubber plantations. The Brazilians failed at similar plantation-ification efforts, and so they lost their monopoly -- and their monopoly profits. By 1910, Brazilian production had fallen to 50 percent of the world market; by 1918, it was down to 20 percent, and in 1940, it was barely more than 1 percent. Manaus' opera-house-building days were over.


To be sure, no exact equivalence between Brazil then and America today is possible. No US industry operates on such brutal exploitation and extraction. And yet one can't help but wonder if some elements of historical and economic parallelism are playing out again in our time.


The recent opening of the new Walt Disney Concert Hall in Los Angeles, designed by Frank Gehry, has been an occasion for celebration. But as one thinks about the fate of the Walt Disney company, which has been under siege for now for a decade, and of the larger entertainment industry, one sees similarities between the concert house that Mickey Mouse paid for in the 21st century and the opera house in Manaus in the 19th century -- that is, a civic-minded masterpiece built just before the fall of the industry that generated all the landmark-making money.


A century ago, the Brazilian rubber tycoons couldn't solve the problem of protecting their property, of keeping the seeds of wealth production from heading overseas. In America today, nobody but a hardcore Marxist would say that the creators of intellectual property -- music, movies, software, pharmaceuticals -- made their money from resource-ripping or physical coercion; in fact, the IP-rich industries are as free and clean as any on earth. And yet in part because they are so nimble and transportable, it has always been relatively easy to counterfeit them. And now, in the age of the digitalization, they can all be downloaded and "Napstered," too.


The music industry gained new wealth from recent new technology, as customers shifted from LPs to CDs, oftentimes repurchasing their entire music library. But now the latest technology, online file-sharing -- or file-pirating -- threatens to download away not only industry profits, but maybe its equity, too. The New York Times reported on November 24 that "what was a $40-billion-a-year global business is expected to fall to about $30 billion this year."


And that downward arrow is likely to continue in the wake of two new court decisions. Recently a US appeals court in Washington ruled that the Recording Industry Association of America (RIAA) can no longer use its favored legal method of tracking down file-sharers. According to the court, RIAA must now file a formal lawsuit in order to compel Internet providers to turn over the names of customers who may be copying music illegally. This decision will not stop Big Music from its legal effort to kill off file-sharing networks such as Kazaa, but it will slow those efforts down. And of course, file-sharing is a lightning-fast phenomenon, backed up by offshore companies, such as Kazaa, which is based in the Pacific Island of Vanuatu.


On the same day as the US appeals court decision, the supreme court of The Netherlands ruled that Kazaa could not be held liable for the copyright violations of its users -- yet another reminder that the file-sharing networks are bootlegging furiously across the planet. More litigation, and more appeals are inevitable in these and other cases. But in the meantime, illegal file-sharing will continue. To be sure, millions of people use iTunes, the new Napster, and other legal services, in which copyrights are respected and royalties paid, but the overall numbers for the industry tell a tale of steep decline.


And maybe Hollywood movies are next, especially as broadband makes mega-file sharing feasible. The cover of the July 14 Business Week reads, "Stealing Hollywood: Can the movie biz avoid the piracy that has crippled the music industry?" The article offers some hope for Tinseltown, such as pre-assessed royalties collected from blank CDs and DVDs, but the reality seems to be bleaker: in a private meeting in Washington, MPAA chief Jack Valenti said that his industry will be able to build "a two-year moat" around movies. After that, he seemed to be saying, Hollywood's walls will be breached, and the file-sharing hordes will run rampant through movies, too. In which case, the Walt Disney Center really will be remembered as another Manaus Opera House.


Next up, software. A headline in the December 3 Financial Times offers this bleak news: "Asian software pirates ahead of Microsoft." The article estimates that 95 percent of PC users in China use illicit Windows.


According to Greg Piccionelli, an intellectual property lawyer in Los Angeles, the content-distributing technology is out of the bag. "In the long run," he declares, "the price of most digital content is going to go down to zero."


Zero, which is to say, not very much money at all. So what happens when the billions dry up, as neo-Napster technologies drain away wealth? Such sudden wealth droughts have happened in the past; technological change, for example, forced those who once captained such industries as whaling, men's hats, and telegrams to find new ways to earn a living. And of course, for awhile, Manaus was mostly a ghost town, before it made a modest comeback as a hub for tourism. Where else can one see a beaux-arts opera house and a rain forest in the same trip?


Meanwhile, other IP industries might be goners, too. A University of Michigan health expert, Hanns Kuttner, has noted the growing potential for the "Napsterization" of pharmaceuticals. Kuttner, who served in the Department of Health and Human Services and the White House under the Reagan and Bush 41 administrations, sees ominous times ahead for Pharma as its key formulas and processes are digitalized, exported, and reconstituted somewhere far away, beyond the reach of American or even international laws.


Is this too much doom and gloom? Some say that the American economy wins in times of wide-open, even corner-cutting, entrepreneurial capitalism. And maybe so, although when the "creative destruction" tradeoff inherent in Schumpeterianism gets too far out of whack -- that is, way more destruction than creation -- it might be time to revisit the premise.


The visionaries and hackers always said that "information wants to be free." And that may be true, but the work that goes into information-production is not free. And so when the value of such info is cut to zero, somebody loses out, big time.


That can be a painful and disheartening process, as anyone from Manaus can tell you. And this nation, which gets its power from knowledge, might wish to think about what will happen to its power if its knowledge can be duplicated and replicated by friend and foe alike.



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