Original URL: http://www.theregister.co.uk/2004/09/23/orlowski_interactive_keynote/

How the music biz can live forever, get even richer, and be loved

A modest proposal

By Andrew Orlowski

Posted in Media, 23rd September 2004 14:37 GMT

[Earlier this week Register San Francisco bureau chief Andrew Orlowski spoke at the In the City convention in the UK, telling the cream of the music industry it's never had it so good, that it's been swindled by the technologists, and that it should dump DRM and embrace freedom. As, to our knowledge, he got out alive, we think it's possible they listened just a little. What follows is the text of his speech. -Editors]

You're very lucky people.

Like the sex industry, you're in a business where demand is guaranteed. A lot of other people wish they had your problems. What a stroke of good fortune!

Think about it - you're in a happier situation than the Peterloo demonstrators who rioted here, and the imperialists who later built this hall. Trade routes and markets disappear. You're also in a better position than any technology company I know. Even IBM and Microsoft - two official monopolies - need to invest a lot of money to keep their captive customers happy, and neither can be sure they'll be here in twenty years, without a lot of stoking and a lot of stroking. Meanwhile, you're sitting on a goldmine, and no one is going to take it away from you.

Why?

We create music in order to share it.

We've been sharing it for thousands of years. And people pay to hear it. Since the invention of transmission and recording technology you've been able to monetize this desire, and build an industry on it.

But your anxieties about monetizing music in the future are justified. Things are going to get a lot worse. Most of you know how bad. I'm talking today because in five years of reporting from Silicon Valley on these issues, the technology people have failed to tackle the issues. For me, they lost the moral authority when they argued that Napster should be legalized and when asked "How do you pay the rights holders?" answered, "That's not our problem". All scientists bear some responsibility for what they create. Secondly the music industry has now started to sue people for enjoying music. It needs to remember that it's in the music business. And thirdly, no one believes in the "cure" that's supposed to solve these problems. It isn't sustainable.

The Silver Dollar model - 99 cents a song downloads - assumes that there's next to no leakage from ripping, that everyone is going to pay for every song they listen to.

I can see why you like that. I can see why you've signed up to a model in which the online retailer takes four cents out of that 99 cents - so only you or the device manufacturers can afford to be retailers. That's very clever. But good luck trying to stop today's leakage, because tomorrow's will be even worse. It's a bump in the road - because in five or ten years you'll still own the recordings.

Why will the current Apple/Napster model fail?

For a start, and assuming everything I say in a moment is false, it unpicks the bundle that you've depended on since the LP format became popular. If people pick and choose the tracks they want, and reject LP length bundles, you're looking at an industry the size it was in 1965 - when it wasn't much more than a cottage industry. But that's not the biggest reason.

It costs £10,000 to fill an iPod today. Some of us might have spent something like that over the years on music, you're thinking. But if you're 25, and most of your music has been free, then the psychology is very different: an iPod is an empty beer glass waiting to be filled. Why else can it hold so much music?

In five years' time, iPods will fill themselves, like a TiVO, 24 hours a day. Apple might not build an iPod that does, but someone else will. Compared to the self-filling iPod, the Peer to Peer problems you have today will look trivial. We've already got the Bug - a digital radio with record and rewind facilities that transfers CD-quality MP3 files to another digital device. It doesn't have a hard disk, but next year it will. There's no reason why I wouldn't leave that on day and night, flick through for "Britney" songs and delete the rest, say. That's three clicks.

In five years' time the Bug will be in my phone. So in the time it took me to eat lunch today, my phone will have leeched dozens of CDs, and simultaneously recorded CD quality sound from the radio.

Do you think you can turn that tap off? Even if you can turn that tap off, do you think you can justify that to your customers? For the current plans to work you're going to need a change in social behaviour on the same scale as Stalin's collectivization of agriculture, Mao's Great Leap Forward or BF Skinner's Walden Two. All of these attempts caused a lot of misery before they were abandoned. Prohibition lasted thirteen years.

Now I don't know if this social coercion that you plan, this huge sea change in behavior, using DRM, will be successful or not, and neither do you. But I can guess.

In ten years' time this will be moot. Digital distribution will make almost everyone in this room richer; publishers, songwriters, network providers. You'll discover that technology is a tool that monetizes the consumption of music, rather than a tool for preventing people from listening to music. In ten years, you'll have CDs that play themselves. The electronics will by then be so cheap that the thing you hold in your hand - a book, for example, or whatever package those songs are in - will be able to transmit its contents to the nearest speakers. If you're around then, it will get very interesting - because the technology will do what all good technology does, and have made itself invisible. You won't have Steve Jobs to complain about any more - or any other technologist. You should start thinking about that and maybe I'll see you next year to talk about it. But that's another reason to be optimistic. You have the recordings.

Now back to the near future

See, the upside of people not changing their behaviour so very much, is that a large number of people will still want a Cliff Richard record this Christmas. So the winners will be the guys with the largest resources. Yup, EMI, Universal and Warners: that's you.

But you must leave the denial phase. Only then will you be able to remember how to make money.

There's a very simple model: raise a pool of money and divide it up.

So how did we get here?

You all know digital distribution can save you a lot of money. The marginal cost of production is almost zero. I think the public has rumbled it, too.

You make money in three ways; you charge for physical product, you grant licenses so people can hear the music, and you sell a lot of stuff associated with music. Only one of these may pose a problem in the future: there's still a lot of stuff to sell.

Your problem has been that you've allowed yourselves to be swindled by the Internet lobby and the PC lobby. The Internet was a distraction. Compared to the Internet, where everyone has a number, it's really hard preventing file sharing on networks that are created ad hoc, like the n-squared networks that last for the duration of a bus journey: one to one, one to many, many to many. This is the world of file sharing we're talking about.

You've been dealing with a lot of self-interested parties. I'm arguing that you need to think about technology on your terms, not theirs. You've been seduced by locks and keys companies who promise you the content is safe. But such a technology hasn't been invented yet. Locked-down songs are available on the P2P networks within minutes of appearing on iTunes.

You can make life awkward for your users, but I'm not going to bet that it's enough to protect your business. Technology succeeds when it gives people something they didn't have before.

If you take stuff away from people, the chances are it won't succeed. I'll sketch the future, briefly.

The lonely iPod user

Why do you think those people in the iPod posters are dancing away on their own?

Don't they have any friends?

Let's help them find some friends!

An iPod is simply a hard disk, and socially, it's a very limited gadget without wireless. It's as stupid as having hot running water, but not plumbing it up to a bath or a shower.

The social, self-filling iPod: more music, and more friends

We're at a very brief moment in human history. After thousands of years, recording and transmission technologies have been introduced: there's now a music business. The technology allowed a great audience for music and this could be monetized. In the first, recording and transmission technologies - wax and radio - were the revolution; Peer to Peer networks, the iPod, and what we'll see next, are incremental. The music business has successfully monetized all of these.

Eventually we'll think that we were incredibly stupid that we once had music players that couldn't talk to each other, and radios that couldn't record.

So there's two technologies that are being integrated together: storage and wireless.

With today's iPods, you can hijack a party, or share an earphone with a friend, and look a dork - that's about it. With wireless it starts to be useful.

On the bus, your iPod will be a personal, short range radio station. Click the "What am I listening to?" menu. Tune in to everyone else's iPod. Like what you hear? Then record it!

Today's biggest iPod, with 802.11 WLAN, could fill itself up in half an hour. These speeds and these disks are increasing every year, as you know.

What happens when you approach this from the other direction, and add disk storage to a wireless device? It's already happened: the Bug records CD-quality digital radio and has a record and rewind button. The Bug doesn't have a hard disk, so it's still a bit fiddly. But via an SD card you can take that recorded MP3 file and add it to your PC collection.

What happens when people want to share music? They find a way of doing it. Since it costs next to nothing to leave an iPod broadcasting, each clothes stall or launderette will leave one running. Down the street you go, collecting music. Now, iPods are pretty expensive. What if people had these capabilities for free? They will.

In a few years phones will have much more processing power and the storage of today's iPods. Today WLAN drains the batteries, but there will be lower-power short range wireless technology that does the job, Ultra Wide Band. That's a T1 pipe over a few feet. There are still technical issues: its effectiveness diminishes as more devices are in use, range is quite short, but it's potentially hundreds of times faster than Bluetooth.

The carriers subsidize phones by hundreds of pounds. They're more interested in driving up the ARPU (average revenue per user) once they've got you as a customer. What would you rather have, a phone with a built-in iPod, or not? Or one with sharing, or not? Tough decision.

Put another way, do you think they'll even be able to shift a phone without these capabilities?

So you don't need an iPod. But you might not even need something as sophisticated as a phone. Here's something else to think about. In 1997 IBM demonstrated two men shaking hands, and exchanging an electronic business card. The body is a natural electricity conductor, and where there's electricity, you can transmit bits. It's still in the laboratory but speeds are increasing.

So hello, [Universal UK boss] John Kennedy. Nice to meet you. Thanks for the CD you've just given me!

Now what most of you are thinking are that the DMCA, and the EUCD will prevent such phones and players ever being sold. But remember most of this technology is legitimate. Only a small software hack or dongle will be needed to turn a legitimate mp3 phone into a pocket p2p network. Batteries included.

You're also underestimating China. If Nokia doesn't make such a device, then someone else will. Or they'll make a dongle. Then you're back to square one. Does China have the will to do this? Ask Qualcomm or Ericsson. Or Intel or Texas Instruments.

The most popular form of 3G has a very complicated royalty structure and most of the world's 3G networks must pay a few dollars back to the companies who hold most of the patents: Qualcomm and Ericsson. They developed the CDMA technology which is what 3G is based on. Now China has developed its own 3G technology and isn't in a rush to pay royalties to the IP holders. Qualcomm and Ericsson are very upset about this. China is also developing its own microprocessor - so we'll finally see a PC that costs what it should, around a fifty quid, and its own digital signal processor, which is an important part in every mobile phone handset. We know the PRC has the will to ignore WIPO because it's doing so now. Do you think you can persuade the US to retaliate economically? Not with the amount of dollars China holds. The US economy can't afford to.

All this personal sharing technology - this social hardware - will dwarf the peer to peer networks. But they won't go away either. I think the legal and technical approaches so far against P2P have had some effect, but not very much. When you're arresting 12 year-old girls, there's a cost too. There are cryptographic techniques that haven't been deployed yet that split a file up amongst hundreds or thousands of computers and hide each piece on a hard drive, so that even the owner doesn't know what he or she is harboring.

You really know that P2P doesn't have a ghost's chance of being prevented until everyone is using a TCPA (locked-down) computer, and all recorded material is protected with a compliant DRM scheme. Bill Gates has promised you he'll be able to deliver his part of the answer.

But do you really want to bet your business that he can deliver? Windows Longhorn with Palladium, its part of the deal, was originally supposed to ship this year. The version that ships in 2006 won't have everything that Microsoft you promised in it. And do you really want to bet your business that it won't leak? That the CD manufacturers have got it leakproof. And the BIOS people, too?

And do you really want to bet your business that anyone will buy these machines? PC makers want to sell you a PC. If it doesn't play music the way people expect, they'll sell one with Linux that does.

That's a big gamble.

So in addition to the portable sharing, we're looking at ten years of P2P file sharing and a lot of ifs.

So how are you going to monetize your rights, then? You need to be paid and you have shareholders to answer to. When file sharing becomes ubiquitous, and unstoppable, that's the question they'll be asking.

But this is an opportunity.

So here's a modest proposal. Stop trying to prevent file sharing, and start counting it. Lobby to raise some money from somewhere. It could be a tax, it could be a fee on your phone bill, it could be a broadband tax, it could be an hifi or iPod tax. (Germany taxes CD burners) But the figures for these are very low. The United States alone could subsidize its movie and recording industries for two dollars a week per household out of general taxation. That's everything. Permanent income for life - assuming people watch or listen to the stuff - for a rounding error.

If we compensate only a small part of what you say you're losing - say twenty per cent of your revenues, then that's $27 (£15.25) a year; 51 (28p) cents a week. For less than a bag of crisps per household per week, the record industry's piracy problem will have disappeared. Many people think that's fair - certainly in Europe! But there are deep ideological objections associated with general taxation in the USA, and few Americans would share the view that they pay for the rest of the world to get a free ride.

Yes, there'll be shareholder lawsuits. Your shareholders may sue that your business won't grow. You'll win this one, because it's all about selling stuff: these aren't commies going to steal your property. Governments don't even need to get involved, here.

But you will need to remember how to sell music again. That's what you're supposed to be good at, and it's what I hope you'll do.

Let's go through the options. Anyone not on the Internet isn't doing a lot of file sharing. So why should they pay, either? A broadband tax on US users of around $5 a month would compensate both the recording and movie industries 20 per cent of 2000 revenues. Since CD sales are going up, and the link between p2p sharing and is contentious at best that would be a fair figure.

But in the future, most file sharing will be done between people in an ad hoc, personal network.

What happens then?

Things get complicated. You'll argue that the figure will rise if CD sales fall by significantly more than 20 per cent. But maybe they won't.

Do I hear any objections? I think I do.

HOW DO WE MAKE MONEY? - You have to start thinking really big. Media ownership laws, or regulations about horizontal integration will be vulnerable. The Big Five can each host a decent 24 by 7 radio station. But isn't that giving your back catalog away? It might be, but there's a lot missing from digital downloads. For a start:

- Downloads don't have a cover. 92 per cent of downloaders in a recent poll said they'd buy more CDs. So make the package fun again. Hire some writers. Remember that CDs will be able to play themselves. Or the book will be able to play a soundtrack. You're suddenly in the book soundtrack business! Record companies only think of packaging when Christmas is coming. Start thinking that every day is Christmas - and give people something nice. Music is the soundtrack to human activity from birth to death, so if you can't make money from it, then there shouldn't be a business. As the recording owners, you have to prove that isn't the case.

- Sell Insurance CDs break. Hard disks crash. Phones are stolen. Sell them access to a permanent collection. You're then in the services business. That's where all computer companies want to be. A permanent fixture of everyday life.

- Stopped diversifying yet? Starbucks is a public company. It's also a distribution channel. Buy or strike a deal with them before they realize how much they're really going to be worth. They're still cheap. You might have realized why the phone networks are hanging onto these expensive retail outlets in every town. You'll need some of your own. People object to an EMI store now because they want choice, and an EMI store is a cheesy proposition. That stops being the case the second flat fees are introduced. At that moment you become Tony Benn - a loveable brand, a source and archive of great music. Flat fees and ubiquitous wireless give people unlimited choice - but a good store saves people a lot of tramping around, because we're all lazy, and it lets you add a lot of value once they're indoors.

- Pools are us The LP gave the music business it's golden years. It's true lots of LPs have stinkers. But another way of looking at it is that I've spent $3 instead of $1, and I'm still not that unhappy. iTunes and Napster destroy this model because they let people pick and choose the tunes they like within 15 seconds of hearing them. My sympathies are with you guys, because you're actually right from every point of view I can imagine. The world works on bundles: a newspaper is a bundle of stories; a TV channel is a bundle of programs; a satellite channel is a bundle of TV channels; economically the world only works through bundles. The stuff you don't want pays for the stuff you do. There are sound actuarial reasons for this. It works. And artistically, we wouldn't have had The Beatles or Joy Division without the bundle.

Objections

- PUBLIC: No job is guaranteed. Why should I give the pigopolists a job for life? - A: Record companies simply own the recording rights: they've paid for them, after all. So buy the recording rights from the record companies. That market is open for business.

- PUBLIC: I never listen to music. Why should I pay for it? - A: I don't have a car or children, but I pay for your schools and roads. Knowing roads and schools are there is an incentive to join you. It's a public good, so you might want to start enjoying music now.

- PUBLIC: I don't download music. Why should I pay for it? I'm not having this on my phone bill! - A: See above.

- RECORD CO: This will expand the music market, but you're fixing it at Year 200n levels. That's not fair. - A: Very, very few business people complain about increased demand for their product. Under flat fees, only the gross revenues from rights royalties will be fixed. So extracting dollars and squids from people in lots of creative ways carries on as before.

- ARTIST: We're one swapping set of tyrants - the Recording Industry Ass. Of America - for another: Vodafone, T-Mobile, Orange - A: The carriers want to sell you more than phones. Why do you think they've maintained all those high street retail outlets, when they could sell stuff much cheaper without a shop front? But you can do more about it, as the networks are better regulated.

- RECORD CO: You'll never be able to introduce it internationally, and with cross border leakage, you'll never get it to work - A: Cross border leakage is a fact, but it's lower than you think.

- SONGWRITER: It perpetuates inequities over composition and recording royalties - A: Then write the future. Copyright works: either make a case for more granular copyright terms, or insist on fairer contracts. It's all up for grabs.

- FAN/ANYONE WHO ISN'T PAUL McCARTNEY: It isn't fair because it doesn't reflect how much I like an artist who doesn't sell many copies. - A: About the only thing that can be guaranteed about a flat fee model: it isn't perfect. I think it will be the least unfair, the most culturally enriching, and probably the only one that works. But it's a great question. Is one transaction, one file exchange, equal to one "vote"? What if you play a song 100 times? Can't you express satisfaction in some other way? Peter Eckersley, an academic lawyer at the University of Melbourne in Australia, has written about alternative reward systems in depth. The Blur/Banff proposals which came out of a digital media conference in 2002 also discussed where some of this pot of money could go: a pension fund for blues artists, or creators whose work has fallen out of copyright. But that's another question.

CD sales are increasing; it's very hard to plead the victim now. If you're going to arrest 12 year old girls when sales are going up, you need to do better. You've let technologists bleed your confidence dry and you've lost your way.

A packaged thing that has music - your music - piping to some speakers is something that people will pay for. It's extra cents. If you had the choice of the Factory Records Story with just the words, and the Factory Records Story with the music, for a quid extra, what would you choose?

I'll finish with a quote.

"We will advance science and education, enrich culture, foster greater social harmony and upgrade the texture of life for the people." - Tony Blair

Tony Blair said that?

Of course he didn't. That's the Chinese President, Hu Jintao, earlier this year. I can't imagine any New Labour wonk talking about "the texture of life". It's not in the vocabulary.

It's a reminder of how much culture can be enriched by music, and a reminder that under WIPO Treaties governments can be permitted to impose compulsory licenses themselves, so long as they provide suitable compensation. Countries have done this for expensive brand name drugs. As I said earlier, governments don't need to be involved here, because the music industry already knows how to write such a license, and it has the collection agencies to distribute the money. But the People's Republic of China could become so fed up with the greedy American entertainment industry lobby, that it could unilaterally introduce a flat fee model itself.

We are coming full circle to a process that started with the first recording and transmission technologies.

To sum up, then: because of digital technology, you think your rights are worthless. They aren't. You need to monetize them in two ways: by ensuring that there's a revenue stream for things you can't count, and finding new bottles that you can count.

Acknowledgements: Much of this cites and draws on earlier work from the Blur Digital Media conference workshops in 2002 ("Blur/Banff" - Jamie Love, Ted Byfield et al); by former Geffen CTO Jim Griffin at Cherrylane Digital, and Professor Terry Fisher at the Berkman Law School. Thanks to Tony Wilson for the invitation and suggesting the title, and Momoko for the wireless iPod graphic.