Copyright and Fixing File Sharing

As I'm a writer, I have an interest in strong copyright protection, and understand why the music labels and others dependant on content for income object to passing files around. It would be as though a farmer grew corn and then someone could magically make copies of the corn, complete in every detail, which elminates most of the potential revenue. The market is discounting the value of all the risks the farmer makes and decides that no one should have to pay. Evne if you sell a few ears, that doesn't help when most of the market becomes closed to you and others essentially profit from your work by not having to pay for it.

But why do we have to look at file sharing as the inevitable multiplication of copies? What if there were a system in which people could register copies that they had bought or otherwise legally had and then trade them with others for some period of time. While you swapped, you could enjoy the other person's music or writing or video or what have you, but you'd surrender the copy you originally had. And then, when you were tired of the deal, it could revert.

This obviously isn't a perfect solution, but I think it offers an interesting approach to comehow reducing the draconian approaches taken by so many in the creative industries while protecting legitimate interests. If you and I buy CDs, we can legally swap them, whether temporarily or permanently. No music label can preven that because they are our property. Couldn't there be a way to enforce the same sort of activity over the Internet? Sure, I could have made a tape of teh CD, or a photocopy of the book or what have you. There will be some people who figure out how to abuse the system. But I wonder if many more wouldn't stick with the deal, because they want the freedom to listen to new things and let their friends listen/read/view what they have. The online distributors could possibly act as referees and facilitators for the process, which would only reinforce the vendor-customer relationship and improve their businesses in the long run.

Radiohead Continues Free Agent Tango

UK band Radiohead has been doing pretty well, from what outsiders can see, in its bid to sell an online version of its album under a "name your own price" scheme. In fact, I touched on this in my WriterBiz blog.

Now it seems, according to the New York Times, that the online wonder will come out in CD format, but without the help of a major label. The band will license the album, but not to "suitors like Warner Brothers Records, Columbia Records and, at one point, Starbucks, whose corporate label has signed artists including Paul McCartney."

This is potentially a turning point in the music industry. Many musicians have said how they hate the traditional system, because it really feeds on their work and doesn't directly provide a reasonable compensation for it. If music can go this way, why not television? Books? Magazines?

More on the Radiohead "Set Your Own Price" Experiment

There's a bit more information now - of varying quality - on Radiohead's experiment in letting people set their own price for the group's new album. Anyone in the information business - and that's content of any type - has to be keeping a close on on this story. It could offer some insights into how to make the Internet work as a commercial distribution mechanism.

According to a Forbes article, many people are still pirating the new Radiohead album, even though they could go to the site and get a legitimate copy for free if they wanted to:

On the first day that Radiohead's latest became available, around 240,000 users downloaded the album from copyright-infringing peer-to-peer BitTorrent sources, according to Big Champagne, a Los-Angeles-based company that tracks illegal downloading on the Internet. Over the following days, the file was downloaded about 100,000 more times each day—adding up to more than 500,000 total illegal downloads.

That's less than the 1.2 million legitimate online sales of the album reported by the British Web site Gigwise.com. But Eric Garland, Big Champagne's chief executive, says illegal file-sharing is likely to overtake legal downloads in the coming weeks, given that many of those 1.2 million legitimate sales were pre-orders taken during the 10 days between when the band announced the album and its actual release last Thursday.

Garland suggests that the real culprit is habit - they go to their favorite BitTorrent sites and download in the way they're used to doing.

However, even with lots of pirating, consider the economics. According to a London Times article (and we'll get to the main part of the article in a minute), an Internet survey of about 3,000 people who bought the Radiohead album suggested that most paid an average of £4. Although this won't be particularly accurate, it's the best numbers possible: a rough total of £4.8 million on the album, all going to the band. Given the economics of regular record deals and distribution, I think they made a whole lot more this way.

The real test will be whether they do the same on their next album. I also wonder whether a variation on the approach might have worked even better: pay money to get the album, or pay nothing and get some audio ads thrown in, like the free online music streaming sites. That would have increased the perceived value of the paid version and also increased revenue for the group.

Do Tracks Make Up for Albums?

According to an AP story, music album sales - 229 million - in the first half of the year were down 15 percent over the same period last year, according to Nielsen SoundScan. Over the same months the industry sold 417.3 million digital music tracks, which was up 49 percent.

Yet the numbers are deceiving on the surface. Assuming that albums go for $12 each, that would be roughly $2.75 billion in sales. Since the number of albums is down about 15 percent, that would mean a loss from the previous year of 40 million albums, or about $480 million.

But even at 99 cents each, the digital tracks would total about $417.3 million in sales, and they had roughly doubled. So offsetting the $480 million album loss is just over $200 million in digital sales. Clearly what we're seeing is not a 1-to-1 replacement, and so the industry is making less money overall. So what's the real story? I really don't think it's pirating so much as consumers often find albums padded out and are only interested in a few cuts.

Digital tracks become an efficient way of getting just what you wanted. If music labels want to retail the same profit levels, they'll have to address issues of quality and customer demand. Otherwise, no one will have an incentive to go back to albums. Unless the labels start to understand what it is people want, rather than using a "me too" approach, following all the other labels around in a circle, they'll have to tighten their belts quite a bit.

Apple Not Universal-ly Liked

Back in April I mentioned how EMI was going to license non-protected music to Apple. Now, according to the New York Times, it looks as though Apple isn't on Universal's play list - and that the reverse could be true at a moment's notice. Apparently Universal Music Group isn't going to renew its annual contract to sell music through Apple's iTunes service. Instead, it has chosen an at-will arrangement which would let it pull its wares on short notice, should the companies not agree about something or other. Or, as the story says:

In particular, Mr. Jobs’s stance on song pricing and the iPod’s lack of compatibility with music services other than iTunes have become points of contention.

Sony has recently renewed a one-year agreement, but this shows some significant resistance to Apple's insistence on not letting the iPod work with any service other than iTunes as well as on pricing issues.

It seems that lots of music industry insiders are warning the labels against antagonizing Apple, as it has such a huge market share. But I'd point out that the danger ultimately faces Apple. Should Universal walk, that would still leave other large labels, but they'd all be paying attention. Without content, iTunes is unimportant from a business view. People will go where they can find the music, and that's up to the labels, not to stores, whether online or real-world. Then there was this other point:

Mr. Jobs, in February, noted that less than 3 percent of the music on the average iPod was bought from iTunes, leading music executives to speculate that the devices in many instances are used to store pirated songs. (Of course, users can also fill their players with songs copied from their own CD collections.)

If less than 3 percent comes from iTunes, and since iTunes has overwhelming market share, you have to wonder whether music executives are wondering whether Apple is necessary at all. There is this factor:

The iTunes service accounts for 76 percent of digital music sales, and the contract talks come as it is on the rise — Apple recently surpassed Amazon.com to become the third-biggest seller of music over all, behind Wal-Mart and Best Buy, according to data from the market research firm NPD.

But there's something incongruous here. If Apple is so big in selling music, why do iPods have relatively so little? And do these figures count CD sales from people who want more than a few cuts of a given release?

If the labels walk, though, I think it would be bad judgment on their part - not becuase they make that much on digital music, but because when it comes to marketing, Steve Jobs is way smarter than any of the music companies. He is the one who insisted on low flat pricing to get people to start buying. That was smart. Unfortunately, the music companies want to be able to charge more for popular tunes. I can see the rationale - get what you can when the properties are hot. But consumers are already ticked at all the ways music companies have gouged them over the years. Jobs wants to build long-term relationships. That's smart marketnig.

Where Jobs misses the boat, I think, is that he also refuses to license the digital rights management scheme to other companies, which harkens back to how Apple has always approached business: be the sole supplier. Yes, it's built a viable company, and yet, at the same time, Apple's market capitalization is far lower than any of the PC-centric hardware companies, let alone Microsoft and its Windows juggernaut. Jobs and company never learned the lesson that sometimes letting go is the only way to get more, even though that's what he ironically urges the record companies to do - sell unrestricted music. His argument is that spreading the use of the DRM code would make it more likely that someone could crack the system. Please. People have been able to break virtually any digital protection scheme they've wanted to. Not putting it on other machines won't offer significant protection - other than market protection.

Hmm. Maybe even Steve Jobs could do well to listen to Steve Jobs.

For Music Labels, Distribution Is the New Worry

There's an interesting article in the Wall Street Journal of April 27, 2007 about the problems that music labels face from the big box stores. According to the reporting:

big-box chains are now responsible in the U.S. for at least 65% of music sales (including online and physical recordings), according to estimates by distribution executives, up from 20% a decade ago.

Having that much potential distribution and sales tied up with a limited set of customers is a scary concept for any company for a few reasons that I learned in my time in business and in writing about business. One is that with so much ability to exert pressure, you can bet that prices to the retailers will eventually be coming down. Another, you now have narrower demographic segments dictating what will be commercially acceptable music.

Third, big producers need small producers to create new niches and open fresh areas for production, and that gets much tougher when the large stores are going to be less likely to pick up the work of small labels because it becomes too much trouble to maintain a vendor that supplies a small amount of what the retailer sells.

The kiss of death is, as the story mentions, is that the stores will find the category unprofitable compared to other areas:

That's partly because, with CD sales falling steeply, the discs aren't as hot as other products the stores sell. Also in the wake of the Don Imus controversy, the debate over the lyrical content of rap, rock and pop has flared up again. Oprah Winfrey recently has focused on rap lyrics on her talk show.

Best Buy has apparently reduced the space devoted to CDs, and Wal-Mart has given a quiet heads-up to the big music distribution industry that it will cut back space for music by as much as 20%.

What's a record label to do? Learn a lesson about non-traditional distribution. Some book publishers have been smart, putting their books for years into places where their natural customers might appear but that aren't the usual independent and chain stores. Most publishers don't get it, which is why so many are having problems. You have to meet the consumer where the consumer wants to be. So look at what Starbucks has done and start moving in that direction. Popular music labels could experiment with selling CDs through various fashion outlets, specialty interest stores, and other places where they could receive impulse buys - if music isn't a life style purchase, I don't know what would be. Put it in in the Gap, in Williams-Sonoma, at news stands, in gas stations, in craft stores. It doesn't matter where so long as the people who go to those places are the sort who buy the music. When things get tough, it's time to start thinking outside of the big box.