Midem In an interview from the music business annual Midem, we speak to John Kennedy, chairman and CEO of the IPFI, the international trade group representing record labels. (Later in the week we'll hear the view from the independent sector – presenting a very different picture.) Here he talks about the new ISP strategy, and the future of the big label.

Is your goal with the networks just to get them to "clean up" – so people buy legal digital – or is it that you feel some of that revenue is morally, correctly yours?

There's three things.

It would be good if they engaged in good commercial business, I think, that makes sense to them. I would like them to take a share of the revenues that we've contributed to them. The third is to clean things up.

On a daily basis we see people consuming more music than ever before, and yet the music industry is seen as parasites and idiots – all the worst words we can think of. So we need to turn the corner. The digital music online business now takes three times as much as the newspaper industry, five times as much as the film industry... so why aren't things getting better?

Two things have happened. Firstly people have loaded their iPods and music players with CDs – so they're going to back catalogues for the moment. Now they're thinking "well we need some new music". And either they're going to take it for free, because it's so tempting, or they're going to buy. And I need them to buy. And the only way that's going to happen is by the ISPs making it tougher.

We've put kids into focus groups, and we say to them: do you know what you're doing is wrong, and they say absolutely. Well why do you it then? They say, it's too easy. You've got to make it more difficult for us or you've got to make so there are consequences for us. We say, OK if you're in charge, what would you do? They say: well your lawsuits aren't bad, but none of our friends have been sued. We've heard you talk about disconnection – well, now you're getting scary for us, because none of us want to lose our internet connection. If you can deliver on disconnection then in fact there may be a solution – because there's a risk.

I'm sure you've heard my story about my kids – there's a 19-year-old girl, a 15-year-old boy and nine-year-old girl. In my house. If the boy got them disconnected, his sisters would kill him. I started telling this story a year ago. Now it's the parents who would because the parents can't manage without the article. So the prospect of losing your interconnection is going to change behaviour – there's no doubt about it.

But how do you get more of that wallet share back that is going to live music? Or games?

You talk about people valuing music - I've noticed something recently. When you want one song from an artist, you download their whole catalogue on BitTorrent, it's there as one download. Then you get the song you want, and throw the rest away! You'd have to be a real fan to collect someone's life work once – but now people routinely throw away their life's work, as if you never had it. To me that's incredible. So isn't the "value" going down all the time you don't license music?

There's no doubt in people's minds the value of music has gone down.

There's the bundling problem – where people pick one song from an album they like. But the first step is to actually get people back into the habit of buying, and 99c or 79c [Euro] is not a problem for people once they don't have the choice of free.

Again, if you give any of my kids a pound to go down the sweetshop they look at you as if you're mad. So 79p has to be a good deal. Then you have to scale up to what volumes people are going to buy.

But isn't so much of this traffic disappearing behind encryption? When we last met six months ago that wasn't the case – now the clients turn on encryption by default. So it's difficult for an ISP to tell what's legitimate and what's infringing? Aren't you going to end up in a position much like now where most people know it's something they don't have to worry about.

I don't think it is. It's incredibly difficult, but we have two choices. We give up, and go away, and let things get worse, or we fight in very difficult terrain. Filtering can deal with encrypted material. When I started talking about filtering three years ago, it was difficult and cumbersome and not 100 per cent reliable. Now filtering is effective, it's really cheap and it works including dealing with encrypted streams.

Now we've always dealt in the real world where there's an 80:20 rule: 80 per cent legal and 20 per cent pirate. In the online world we may never get to 100 per cent legal, and we may never even get to 20 per cent illegal, but it's a question of people getting into the habit of buying, and now even parents have got into the habit of following their kids onto P2P networks. So we need that change of behaviour on the ISPs. I fervently believe that will make a dramatic difference.

And I think you're right, we need to increase the share of wallet in that context. But at the moment trying to increase the share of wallet against free is virtually impossible.

Filtering vendors can't cope with encryption

[Editor's note: Filtering equipment vendors, for example, Sandvine say they do not have the ability to look inside an encrypted stream. However, unless a BitTorrent user has taken steps to conceal their IP address, the IP address is visible to other users sharing the same Torrent.]

I expected when I went to our technology guys for them to tell us that they we're completely done for with encryption. But that's not what they're tell us. So I'm not an expert in the field, but if our technology guys say they can deal with it then they have to deliver.

You can decrypt a stream if you throw enough computer resources at it, but that leaves you with one or two people you can make examples of. Which is making a moral statement rather than an effective real world deterrent, which you seem to want.

That's not a bad end in itself. It sends the message to people that P2P file-sharing is wrong. I think a large percentage of people will stop.

Certainly parents in the main think, "If this is so easy, then it can't be wrong. I heard that Kennedy guy going on about this, but I'm on AOL, I'm on BT – it must be OK."

Now I accept that this is an arms race, but if we can improve the terrain we will do much better. But frankly, if we don't, it's a disaster for everybody.

Your logic, just to make it clear, is that if P2P goes they will go to legal?

A large percentage of the population will, I think, yes. The damage has been done to the physical market on the way here, and we're in a bad position.

But isn't that the point, it's just accelerating the decline? Even if everyone went to the licensed digital model, iTunes, it's still a smaller pot of money when music's never been so popular.

No, but we can't complain about unbundling. We complain not about technology but about the abuse of technology. What technology has done is give people the ability to take a single rather than an album. But we can't complain about that – that's the law of supply and demand.

I have four jukeboxes in my house, I've always loved singles. I consume almost all my music as singles then dip back into albums. We just have to find ways to make it more attractive.

The model that enables you to buy two tracks and then upgrade to the album and get credit for two tracks is a very good model. I think ten per cent of the album market in the US is now digital, that's a good sign. So the pressure comes back on the artist that you've got to deliver an opus of work that makes people to want it as a whole album.

Unbundling isn't anybody doing anything wrong, we have to accept it.

It's also a fact that some people find all kinds of justification for not paying. People who say they boycott major labels will still avoid paying for a an indie album by downloading it.

The Radiohead example is in some ways even more depressing. They come up with this wonderful, flexible model and people still go onto P2P and BitTorrent to download it. That's scary.

I've had greater brains than me go in there and try to monetise P2P, like Snocap, and there's no indication that it's worked.

There's money in that chain – between producer and the public – you've identified in the IFPI report. If P2P is licensed and legal, then you can get some back, surely.

I've said we're 80 per cent of the way there, but the last 20 per cent is going to be incredibly difficult.

Subscription models are going to come more and more in 2008 and 2009, and if there is a P2P subscription model, then great. But if there is money in the chain it's no good if all these things are going to produce just a billion dollars, and we're replacing an $18bn industry that's going down.

We can meet somewhere in the middle before it concertinas in the one place – but it's got to be a sensible model.

So to be clear, the objection is just that people will instantly get the world's music on their machines – and never buy anything again?

Once you get into the subscription model you have to decide when it will time out.

Nokia came to me a couple of years ago and said we want you to license the music for our customers, and they said if we can get ten per cent of our customers to buy in, we can provide ten percent of the revenues of the music industry. So a few things occurred to me.

Fifteen customers like Nokia gives me 150 per cent of where we are now. That's just fantastic, and where I want to go. I asked does this subscription time out, and they said no, it can never time out for people but they said people change their phones all the time, so effectively, it times out.

That's a good model. You can't have a subscription model where somebody on a monthly model of say $10, go on in January, download 6m tracks, and leave in February.

None of this easy, but we've got to $3bn. The FT was giving me a hard time because in year one digital revenue went up 200 percent, in year two it went up 100 per cent, and this year they went up by 40 per cent. I said, "surely that's what happens?". I've got a really big number against me and that's five per cent legal and 95 per cent illegal. For all the shortcomings in the ISP strategy, I believe that will dramatically affect it.

People are spending on music in different forms. It's becoming a received wisdom with a certain number of people – with what Fake Steve Jobs coined "freetards" - that sound recordings shouldn't have any value and that artists should just perform for a living.

I heard that less in 2007 and 2008 than before. In this week that's just gone I've done interviews with the business press, and there was just one that was "old school" as far as I was concerned, and that was The Guardian. All the others are prepared to have better conversations than a few years ago.

Well, somebody will be extracting value, making money from around that sound recording - it just won't be the creator.

But if you or your readers think the ISP strategy won't work – I'd love to hear one that does work, and if someone's got a better solution for me then I want to hear it.

This is a tough problem. Nobody wakes up in the morning and thinks, "Great, I have to sue two kids or an ISP today."

It's lovely being Professor Lessig - to have the academic argument and to be a hero, and put up these fun videos - but he's working in a bubble. He doesn't have to work in the real world.

And Google puts millions into his little department...

Well, there you go. And he's changed his position. Before, if you signed for a licence you gave everything up for free. I think he realized it's incredibly flawed. So now he's got a commercial license. At least he's learned along the way – something we all have to do. So even he's moved to realize that people are motivated by getting a return on their creative works.

There's plenty of amateurs. My daughter's just learning the flute – I can put her up on the internet for free and nobody need ever pay for it, and nobody wants to listen to it. Eventually if she puts enough effort into it, and makes a career, she's going to want to have records to sell.

Well, let's look at subscriptions. Short of people paying one month's fee for every song in the world, then buggering off, and between the other model where people feel it's a tax, isn't there some kind of middle ground? Tiers of service?

Absolutely, no problem. But what we learned from Radiohead is that so many people won't pay for anything. It would have been really clever of the P2P community to show that when music is for free, there's zero piracy. They should all have paid something sensible, two pounds for the album, and look at what a message that would have sent. When I rang record companies to make savings, we never cut back on A&R investment – but now you're beginning to feel it. There's not enough new music around.

I always threatened this would happen, I hoped it wouldn't, but it just feels like it, and there's a scarcity now.

Or a super-abundance?

It's not bad quality stuff that's around, but you do want marketing, you do want promotion; people do want filtering when there's so much choice out there.

I see things being good for the amateur now – and great for the millionaire artists. In fact we have millionaire artists telling us we should all get poorer, like Radiohead's Thom Yorke. But they can cut 360 degree deals, they can cut the record company out. Radiohead made a lot of money with people paying twice.

The physical release they'll have made a lot of money from.

They made a lot of money from the digital preview release, too – especially from overseas sales which they kept a larger proportion of than with a traditional deal.

Yes, absolutely.

But if you're in the middle, then what?

I have a history on this.

Years ago, I represented the Stone Roses to get them out of their contract. Having got them out of their contract, when George Michael wanted to get out of his contract, he wanted me to help him. And I had a choice in two days whether I would help the artist or the record company. And to everybody's astonishment, I chose to give evidence for the record company. The reason I gave was this.

I was representing artists on a daily basis who were coming from tenement buildings in Glasgow, and were getting record deals and touring the world, and making money, and having a career out of this. If every contract could be broken when it suited the artist, then record companies weren't going to do this anymore. So to my mind, the Stone Roses should get out of an unfair contract, but George Michael shouldn't be able to get out of a contract for which he got a £10m advance, and which had been renegotiated four times. Because that's not the way this deal works.

Record companies have to get a return, and the people in between need big investments. One of the unfortunate things with the way the music market has gone is that companies spent all this money but only took a return on one stream, the recorded stream. And now the 360 degree model, which is a necessity of the current market, means that artists will have to share all these streams to get the investment. But that's always a healthy choice - they can do it, or not do it.

But I can picture myself now, representing an artist, and he's asked to share all those revenue streams. He'll say, "what's the alternative? That I go back to the tenement and play in the pub every night? Or I have this chance to make a career." That's a fact that the market has become so much tougher.

[EMI owner] Guy Hands is saying we can't afford to splurge so much money on so many artists. What does that mean for the future?

When I first put out a record, I found we'd typically pay a fortune for tour support for a UK guitar band to tour Germany, even with the local record company wanting the band to go there. So I cut back on those monies.

One of the things Guy Hands has said was that we should market research products more before they go to market. In the film industry this has always been done. When you see a film you do it on the basis of one viewing. With music, almost everybody hates things they hear for the first time, likes things a bit more the second time, and by the third time, they're hooked. So you've got to be very careful when you market research music and make sure you do so over a sustained period of time – radio has been very good at that. Not discovering new music, but taking it to their listeners. You should do more market research, look at your demographic, and reduce your marketing to make it more focussed. That's been a weakness.

But if all EMI will be doing is looking at Facebook, which he said they should be doing, where's the A&R expertise in that? Everybody's looking at Facebook!

The great A&R men are just fantastic, but there was never a serious number of great A&R men.

If you want a lesson in the great extreme A&R-ing, take a look at the Atlantic Story - the DVD is a work of art. Ahmet Ertegun was a pure genius at finding talent and respecting talent. There are talented A&R people out there, a few, but too many people were given big salaries when they weren't that talented and didn't have that track record. So what Guy Hands is doing is absolutely right in pruning, and you need that expertise. ®

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