Original URL: http://www.theregister.co.uk/2006/12/12/will_cds_get_cheaper/

With a blanket license, will CDs get cheaper?

Or dearer. Or disappear?

By Andrew Orlowski

Posted in Financial News, 12th December 2006 20:00 GMT

So last year's " Future of Music™", the DRM-encumbered digital downloads model pioneered by Apple, has stalled. What now?

After reading our take on it, Sava Zxivanovich has a very good question.

"Does blanket licensing mean that CDs and DVDs will be cheaper? We buy them a lot."

A blanket license for digital music, now being considered by labels (big and small), songwriters and performers, gives you the right to exchange music freely over computer networks - for a small fee. The pool of money is then divided up according to the exchanges, and returned to rights holders. The model operates today in many situations where it's too onerous to count, let alone restrict the exchanges taking place: such as for radio, and music played in pubs and shopping malls, for example.

When it's introduced, it will result in some pretty dramatic transformations, as you'll be able to walk past a cafe or store and "collect" the music on your phone, and carry on using P2P networks legally - without the nuisance of DRM or threat of RIAA stormtroopers.

It won't, however, mean you can embark on a trolley dash through the nearest Virgin Records megastore. But with such an abundance of music available on tap digitally, who'd even want to go near one? From what we know, how can we predict a future for physical product - what it will look like, and what it will cost?

Speaking to us recently, blanket license advocate Peter Jenner suggested that CDs will go up in price as a consequence of a P2P flat fee. The thinking is that most people will get most of the musical satisfaction via a phone or their PC (some other form of "broadband" service, such as interactive cable, recordable radio, or IPTV) - leaving physical "things" as a market niche. As the mass market for CDs dries up, so the logic goes, producing CDs becomes more expensive - increasing the cost, and therefore the price.

That's certainly one way of looking at it. But one observation we can make about the last decade is how actually resilient CD sales have been. First let's tackle the scale of physical and digital music.

The IFPI pegs the size of the global music market at $33.6bn last year, down from $40.6bn in 1999. But the biggest fall took place between 2002 and 2003, when the USA, Japan and the Eurozone were enduring stagnant economies. Overall, that's 17.6 per cent down.

Legal digital downloads will gross around $500m this year in the US. But "illegal" digital downloads, according to Big Champagne, which analyses P2P exchanges, exceed DRM downloads by a factor of 10:1.

Now not every P2P download is a foregone purchase. Many are acts of "exploration", as Jenner described it recently. But the industry extrapolates that if every P2P exchange was monetized, it would be where we left it in 1999, before the growth of broadband and 3G.

We caution against making that calculation, and add an obvious caveat. If the big four labels had set the agenda by introducing a blanket license a decade ago, rather than being dragged to the table because all other options have been exhausted, they might be in a rather better position than they are now to exploit digital exchanges. In other words, they've incurred opportunity costs over and above what they claim to have lost through P2P. This is a side note, but it's worth remembering in the months ahead.

So we know how big the market it is, and we roughly know how many downloads take place with no compensation to rights holders. What emerges is that the CD, so long marked for death, remains extremely enduring.

Apple itself now seems to acknowledge the enduring world of the physical, by reminding us of its value. It made an interesting addition to its iTunes software jukebox this year, giving users the ability to browser their music collections as if flicking through a stack of records. When the album art stops moving, click to play. This is a tacit admission that browsing through long lists of textual information isn't always a lot of fun - even if you're an accountant. It's also a reminder that music has physical associations - the object stirs the visual imagination.

And although the music industry has appeared at times to make its physical product as unappealing as the product inside - with cheap and nasty jewel cases locked by strategically-placed adhesive wrapping - there are signs it's learning.

Two obvious kinds of customer will continue to value what physical product - and they're not mutual exclusive: people who want the music to look and feel good, and people who want the music to sound good. More box sets than ever before will be sold this Christmas, and great written material and booklets help turn what would otherwise be a cynical rehash into something worth having. Then there's the audio quality.

Your reporter sometimes wonders if the compression (both analog and digital) that Bob Dylan castigated on the launch of his most recent album - ("atrocious... like static", said the Zimmerman) was preparing us for the lo-fi wonders of digital downloads. But that would credit the labels with too much foresight.

Nevertheless, we only tend to notice how much we're missing from lo-fi compression once we move the music away from the computer. When Verizon, and BT begin to attach hard disks and wireless chips to their set-top boxes as a matter of course, and the music is piped over a superior hi-fi, the dismal quality of today's downloads will be cruelly exposed. In other words, once digital downloads move away from the PC and into the living room, the sound quality will have nowhere to hide.

Now cable companies will some day wake up to the fact that they're music dispensers, but given their track record of innovation, it may not be for some time. And given their reputation for pioneering good taste, they're bound to make a lousy job of it too. All of which makes the "convenience" of a superior audio physical product not too much of a burden to support. The CD breathes again.

Or something like a CD.

We need to remind ourselves that physical product is merely a container for rights - and this container may take many formats. Looking at the rise of superior quality packaging, the book may well be the container that record companies adopt for premium product.

Two years ago in Manchester, I reminded music executives of this simple fact, and gave a practical example. In a few years wireless chips will be so cheap they'll be easily embedded in books. Add that to a discovery system such as UPnP, Jini or Bonjour (formerly Rendezvous) and the book will be able to find the nearest pair of speakers, and start playing the book.

Rights holders are typically the last to innovate like this, but after the introduction of a blanket license, they'll really have no choice. They'll be obliged to make the art valuable and attractive - so we keep buying those containers.

So to answer Sava's question with a cop-out, the answer is: "We don't know." But there's every reason to believe the convenience and attractiveness of physical product will continue to find a market. How it's priced will depend on how much we want it. ®