Could blanket licensing for ISPs be the solution to file sharing?

In most developed music markets around the world, associations representing rights holders, music companies and performers are engaged in negotiations and discussions with governments to develop guidelines, and in some cases legislation, to control the level of file sharing across P2P networks. Almost without exception, ISPs have come out against such measures. Whether ISPs have benefitted from illegal file sharing through higher subscription numbers is perhaps an argument for another day. But are ISPs missing an opportunity to cash in on file sharing and at the same time be the solution to a problem they have helped exacerbate?

Several ISPs already offer bundled music services as an extra option on top of their regular subscription price and have reported significant interest. There is also evidence to suggest that bundled services could become popular with consumers. Last year, research from Entertainment Media Research/Wiggin for the 2009 Digital Entertainment Survey revealed that regular downloaders of unauthorized music said they would be willing to pay for legal content if it were bundled with the price of their ISP connection. The problem is, all of these bundled services have concentrated on trying to entice P2P users away from file sharing. Advocates of monetizing file sharing point to the fact that the system has been largely created by consumers, which in the process have formed the largest-ever repository of music. Since music is already a shared medium, why would so much effort be concentrated on changing consumer behavior, particularly since consumers have already given a clear indication of what they want?

Providing a blanket license to an ISP that legitimizes the behavior of file sharers comes with an almost innumerable list of considerations. How payments to rights holders and music companies would be determined and the fairness of imposing a fee for all ISP subscribers regardless of music use are just two of the most obvious. But these are not insurmountable. Applying a fee for a service brings with it issues of quality and service guarantees. If a file shared is substandard – a not-uncommon occurrence in the world of P2P – then whose responsibility is it to rectify the problem? On this issue, perhaps, file sharers would most likely accept this in the knowledge that their actions were not deemed illegal and that rights holders were now receiving a payment for their services, in the same way authors and performers do for use of their content through public performance.

One of the central issues and perhaps the most crucial to the adoption of such a system is price. Establishing a level that is acceptable to Internet subscribers and rights holders is problematic but not impossible. Music & Copyright has crunched several numbers and come up with some simple guidance where the debate surrounding the possible fee level could begin.

Taking France as an example, the trade value of online music sales (excluding streaming) totaled €38.3 million in 2009. That is the equivalent of an average of just over €2 per internet subscriber. To use this figure as a pricing guide is obviously much too simplistic, because it does not take into account physical music purchases or purchases via mobile. It also assumes no shift in music-buying patterns, which would inevitably occur if an ISP fee were added to a broadband subscription. Let’s take the per capita guide to the other extreme, if the total 2009 music-sales figure (online, mobile and physical) were used and all music sales in the year were made via broadband, the per capita trade-value figure for 2009 would be slightly over €31, or €2.60 a month. It’s equally fair to suggest that this guide figure is only slightly less flawed than the previous one, because it does not address the monetization of the considerable amount of music shared via P2P – the whole reason to add a fee in the first place.

Estimating the number of tracks illegally shared online is speculative. At the press launch of the IFPI’s Digital Music Report 2010, published last month, the global trade body estimated that 95% of all downloads are unauthorized. If that figure were accurate for France and the published trade value of online sales were just 5% of possible value, then factoring the 95% into an online-sales-only calculation would put the annual ISP fee at around €40 (€3.40 a month), or €70 (€5.84 a month) if the figure for mobile and physical were included. It should also be noted that these figures are based on trade revenues and do not include author’s/artist royalties or ISP management fees. However, the inclusion of these figures would still result in a surprisingly low figure and one that is comparable with many of the “unlimited” DRM-protected subscription service fees charged by ISPs.

ISPs have resisted any price increases to compensate for file sharing and would most likely see the above as anti-competitive. But if a “P2P monetizing fee” resulted in a reduction in churn, the benefits to an ISP would extend far beyond solving their perceived aiding of file sharing and include the generation of more revenues and lower expenses through greater subscriber retention. Music companies may also have an incentive to pursue such an approach, particularly if the problem of file sharing can be solved without alienating their customers.

Music & Copyright is a fortnightly research service published by Informa Telecoms & Media.