Not yet time for record labels to be smug about the end of piracy

Analysis There is an increasingly smug feeling among the big record companies and their various agents, that has been brought about by the supposed demise of music piracy.

There are three related important points to establish about music piracy. Firstly it is illegal and also morally wrong to obtain copies of music or film or other entertainment without some form of payment. Secondly the process has been stimulated by the perception that record companies neither have the interests of the artists at heart, and they have in the past made huge profits by overpricing music.

Thirdly music companies have been slow to realize that digital music requires a rights regime that allows various personal copies of music to be moved between different personal types of players.

Quite simply, young people would rather break a law than pay the current prices, and certainly break the law to copy tracks they have already bought for one player, which won’t play on another.

It is only one third of this equation that may have been addressed so far, that of stopping piracy, and Faultline would argue that this has not been finally or successfully addressed, despite claims to the contrary, made throughout this week.

An annual online music report out this week from the International Federation of the Phonographic Industry (IFPI) said this week that the arrival of the legitimate online music services will take a large market share against the illegal use of peer-to-peer file sharing networks like Kazaa, during the coming year.

There are two pieces of evidence that it cites. It says that the imminent arrival of iTunes, Rapsody and Napster, the more successful of the online music services offered in the US, will see a healthy rise in paid for, online sales. IFPI also says that US buyers have bought 30 million songs through these services, and while Europe has only, so far, purchased 3 million, this is set to rise. Online music supplier OD2 said this week that its sales are rising at the rate of 25 per cent per month.

IFPI points out that there are already 30 existing online services and credits part of their growing success to the awareness growing that not only is file sharing of a copyrighted work illegal, but it is now becoming obvious that people that do it can get caught. The number of music files available on the Internet has fallen by 20 per cent to 800 million over the last year, after peaking at one billion at the start of 2003.

IFPI finished with: “For everyone working to create a successful legitimate online music business, this report reflects a new sense of optimism and evidence of real change,” this from IFPI chairman and CEO Jay Berman. He added: "We believe the music industry's Internet strategy is now turning the corner, and that in 2004 there will be, for the first time, a substantial migration of consumers from unauthorized free services to legitimate alternatives."

However three million downloads in a year are not enough to turn the tide, even if those downloads are growing at 25 per cent a month (as OD2 claims in a statement this week), because there have been four years of declining CD sales, and during 2002 EMI lost 11 per cent of its revenue, down by some $460 million, and for 2003, although it has yet to publish its final figures, it is likely to be flat for the year, at best.

At the current price for European downloads (generally 99p a track, almost double the US prices for the same music) three million downloads yields £3 million, or $5.4 million. Even if 50 per cent of that money was due to EMI’s catalog, this would only be $2.7 million, and after delivery database OD2’s take and the take from etailers HMV etc… this would be reduced to about $1.3 million. It is hardly going to replace $460 million in lost revenues.

If these three million paid-for downloads were increasing at 25 per cent per month through 2003, then they began on about 55,000 downloads in January 2003 and ended on 640,000 in December 2003. Taking the number on from there, growing at 25% per month, this 3 million will go up to 43 million downloads in 2004, and if that same growth continued through 2005, this would take paid music downloads in Europe to 631 million, grossing some $1.1 billion. Once again if half of that belonged to EMI (and it won’t) and half of that was taken by the distribution process (which it will) then that might add up to $250 million, about half of what EMI has lost. Hardly time for dancing in the streets at the EMI shareholders meeting.

And we have more problems with this. No growth, including the original take up of browser technology on the internet, sustains a growth rate of 25% per month (the world wide web once had 15 per cent a month growth for about two years, but nothing else has come close). So this growth rate will not be sustained. Also it was not gradual and linear in the first place. Digging between the lines among OD2’s statements this growth was mostly in one huge leap when Microsoft added the service to MSN, and then more modest movement month to month.

So expect perhaps 25 per cent growth per month for a few more months and then seasonal variation and tailing off to perhaps 10 per cent growth for the rest of the year. Also expect a price war. This is a land grab market and already there is the announcement of Coca Cola entering the online music wars, again off the back of the OD2 delivery network, to launch its own music site next month. While they all use the same delivery mechanism it is likely that prices must be the same. But yet to come to Europe are music services from Apple, RealNetwork’s Rhapsody, Walmart, Musicmatch, the company that powers both Dell and Hewlett-Packard’s forthcoming online music web sites and of course Sony, that will tightly integrate its site with its own electronic players.

It will be strange if all of these charge almost double the price in parts of Europe, that they do in the US, given that many of the artists are European, and in EMI and Universal and Bertelsmann, the music companies are owned in Europe. Online services generally tend to flatten global pricing, and the resentment of the European youth will continue until they can see that they are being charged the same as their US counterparts, and while they are resenting overcharging, they will continue to indulge in piracy. So either price cuts, or more piracy.

Already Playstation and Xbox games, often written by European companies, are sold online in the US by Amazon for instance, for a fraction of European prices but cannot be shipped over to Europe. And DVDs are also the same, with a grey importer of Far East DVD movies being forced last week, in a settlement with US studios, to charge more in Europe than either the US or the Far East.

It is these inequalities that bedevil the operations of the troubled music companies, as much as piracy. There is a feeling still in the minds of aging executives, that one day the industry will all go back to being the same as it was before, once they’ve “fixed” the piracy question. But the internet has changed forever the global cross communication over pricing, and this has still to be addressed.

And yet EMI’s share price has gained over 40 per cent since 2004 started. Surely for EMI to recover we must see a return to the retail environment to buy CDs, not just an acceptance that online music is here to stay.

More likely to put the recording studio mess to rights is an announcement from Macrovision this week that it has a new release of its CD copy-protection system. This version will use the full Microsoft DRM system; Macrovision says the CDS-300 will offer multi-level protection and rights management for music CDs. CDs made with this system can seamlessly create playlists, export to portable devices and makes authorized burns to another CD, and offers one-click access to bonus content on the disc, or premium content via web links.

The company claims that the average consumer should not even notice that their CD is copy protected and says that content owners can set usage rights, for example, allowing consumers the ability to export to compliant portable devices (with a specified number of exports), as well as burn CDs (with specified number of burns). Copied files will not play if emailed or distributed via the Internet.

But will the content companies actually set these kinds of rights? We don’t think so. They have shown themselves to be solely interested in returning the industry to where it was before piracy took off, and will only use innovative and intricate rights regimes to combat other music companies that offer the same, not to tempt people away from piracy. At least not so far. Almost all the OD2 tracks for sale in Europe are not for sale to burn to CDs or to play on a PC, and yet this system uses the very same DRM protection that Macrovision is just introducing and the facility to do so is supported by OD2.

It will be a long battle before music companies start experimenting with attractive rights, long after piracy is under control. But this is a chicken and egg argument. No rights experiments and people will continue to pirate.

In the meantime the main game in reducing piracy, the messy public legal actions that are designed to scare customers out of file sharing, continue. In Europe we are told that the first suits are about to be filed, but as yet there are no named individuals coming to trial, while in the US the Recording Industry Association of America (RIAA) filed another 532 suits this week.

These new filings serve two purposes. One to keep the pressure up on reducing file sharing, but secondly also to clarify that the RIAA has not given up on its legal actions just because Verizon, just prior to Christmas, convinced a US judge that the fast subpoena process that the RIAA was pursuing was not legal. Now every suit has to be filed as a “John Doe,” action against someone with no known name, and will have to go to a judge in order to force the ISP to name their customer.

Would that put the RIAA off? Will the judge always agree to grant a motion to discover the name? These two questions need answering quickly and in the RIAA’s favour and need to be made public very loudly, or file sharing would immediately go back on the increase. November figures released last week shows that file sharing has already risen by 1 million individuals from October. Another rise and it could mean that all of the RIAA’s prior legal work would all be wasted. Finally the RIAA will find itself on the receiving end of a copyright legal action any day, now that a US federal judge has given leave to Kazaa to sue them. The Kazaa case rests on the fact that the RIAA is alleged to have used unlicensed versions of Kazaa to monitor the internet for copyright infringers. This amounts to a violation of the Kazaa license and Kazaa wants it stopped.

And if the RIAA is blocked from using this software to find pirates, then it is back to the drawing room for the RIAA, EMI, the IFPI and a move back to rampant piracy once again. Like we said, it is far too early for the music companies to be smug about the demise of piracy. ®

© Copyright 2004 Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of events that have happened each week in the world of digital media. Faultline is where media meets technology. Subscription details here.

Sponsored: Minds Mastering Machines - Call for papers now open

Biting the hand that feeds IT © 1998–2018