Are existing laws, existing education and existing understanding of consumer behaviour insufficient to deal with ‘piracy’?

Recently a UK Government advisory body – the Strategic Advisory Board for Intellectual Property (SABIP) – has bucked the trend by calling for an urgent investigation into consumers’ attitudes and behaviour in relation to offline copyright infringement. It says that too much focus has been placed on looking into online peer-to-peer file-sharing. SABIP is concerned that physical copying by swapping hard drives and memory sticks has been overlooked and may pose a greater threat of piracy than online copying. Although SABIP believes that there is a lot of offline copying taking place in this way, it says that further research is needed to establish the extent of it. Initial SABIP research (conducted by BOP Consulting) shows that consumers are more interested in price, quality and availability of material than whether it is legal or illegal. The natural implication seems to be that if legal material happens to be better quality than unlawful copies, that will influence consumers to buy legally. That is food for thought, particularly in light of the following survey of legal purchasers – who break the law.

73% of 2000 people surveyed by Consumer Focus in the UK admitted to being confused by what they were legally permitted to copy or record. Most of the consumers did not know that it was illegal to copy something that they have legitimately paid for (such as a CD) over onto another medium (such as a computer) for their own personal use. Consumer Focus accused the current copyright laws of being outdated and not reflecting what consumers reasonably believe to be the case when using music just for themselves to listen to. Indeed, it seems clear that many people who are not illegal peer-to-peer file-sharers are still clearly breaking the UK’s copyright laws, despite not realising it. The congruence between the law and what people believe to be the law seems to be in a bit of a mess.

Turning to online protection, in the UK, initial steps to enforce the law seem to have failed. The first prosecution in the UK of a person charged with illegal peer-to-peer file-sharing ended with a not guilty verdict. A man ran an unauthorised music-sharing web site called Oink from his home in the North East. The site allowed members to share files. From its launch in 2004 until police closed it down in 2007, over 20 million music files were shared. Users had to make a donation to the site so that they could invite friends to become members too. The site operator made a considerable amount of money – some £10,000 a month, in donations. However, the site operator was found not guilty of the offence of conspiracy to defraud by Teesside Crown Court.

In Australia, a court ruled that an Internet Service Provider (ISP) was not liable for the unauthorised peer-to-peer file-sharing habits of users to whom that ISP merely provided access. Roadshow Films claimed that iiNet (an ISP) had authorised copyright infringement by its users, but the Australian Federal Court disagreed. The judge said that the fact that copyright infringement was occurring on a wide scale across the ISP’s network did not mean that the ISP had authorised the wrong-doing as it was not compelled to stop the infringements. Mere knowledge that infringement was taking place was not enough. As with English law, Australian copyright law forbids the doing or authorisation of the doing of anything which infringes someone else’s copyright. The two legal systems have common roots, and the decision may therefore be persuasive (although not binding) on similar English court cases.

Over the past few months, the UK government has turned to a different approach with its Digital Economy Bill. When passed, the Digital Economy Bill will see file-sharers being identified, warned and ultimately stopped from having full Internet access. There is some recent uncertainty whether the Government has shifted its position in the Digital Economy Bill and adopted a more lenient line in respect of illegal peer-to-peer file-sharers. Instead of cutting off persistent file-sharers from the Internet, the Government now says that their accounts will be temporarily suspended – although it is unclear what this means. It is not clear if this is a change or not. According to Jim Killock, of the Open Rights Group – a body against the proposed legislation – nothing has really changed. He says that temporary account suspension still means that families will be stopped from using the Internet.

As to cost – the Government has announced that rights-holders will have to pay 75% of the cost of dealing with Internet pirates under the proposed Digital Economy Bill and ISPs will be required to foot the balance of 25% of the cost – although the entertainment industry had hoped for a 50/50 split.

However, the law may say (or be about to say) one thing but the technical ability to identify file-sharers is far from fool-proof. Indeed it would seem to be a pre-requisite to any enforcement under the Digital Economy Bill that file-sharers are identifiable. Recently, Virgin Media announced that it is planning to trial new software called CView which will analyse file-sharing by its customers. However, Privacy International – a privacy rights watchdog – has taken issue with the ISP’s actions and has asked the European Commission to report on the legality of the proposed software use. Privacy International claims that the trial would breach the Regulation of Investigatory Powers Act, under which it is a criminal offence to intercept communications without consent unless certain exemptions apply. However, Virgin Media counters that it is not actually identifying individual users. Instead, it is conducting the trial to see how much of the traffic through its service is illegal file-sharing. It wants to find out what it can do to reduce illegal file-sharing and the trial will give it useful information to help to achieve that. Virgin Media has admitted that it would be possible technically to use the deep packet inspection software to identify Internet protocol addresses (from which individual users could be identified) but has announced that this is not currently its plan.

Importantly, Virgin Media claims that CView will not help with the proposed Digital Economy Bill precisely because it says that CView does not actually identify anyone.

It seems that the ability to identify file-sharers as file-sharers beyond a reasonable doubt (the criminal standard of proof) or even on a balance of probabilities (the civil standard of proof) remains in doubt at present. That must surely put the utility of the proposed Digital Economy Bill in doubt too.

Ways to deal with file-sharing seem to be in state of flux. It is not just files that are being shared – the problem is being shared as well – between those responsible for the legal aspects, the technical aspects and the educational aspects of this modern problem. And, of course, by those losing money as a result.

This blog entry was written by Mark Weston, who is a partner at Matthew Arnold and Baldwin LLP. There he heads the Commercial/IP/IT team. He joined in 2004 after many years in the Magic Circle law firms. Although Mark’s team deals with non-contentious and contentious matters, Mark’s own practice has primarily evolved focus on non-contentious matters in all areas of commercial law, information technology law, intellectual property law and Internet and on-line commerce law.

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

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.

Is anyone making any money from streaming?

There seems to be a considerable debate at the moment about whether or not artists and rights holders are earning significant revenues from streaming. The debate was started by an analysis by Billboard magazine on the worth of online streaming to artists. It described the earnings by the top artists from on-demand and non-interactive streams as being “shockingly low”. One notable finding was that only 10 out of the 100 artists analyzed earned above US$2,000 from non-interactive streams last year. Beyonce was top with just US$5,000. Billboard concluded by saying that it was understandable that artists and music companies were nervous when it comes to supporting streaming as the future of the music industry.

Earlier this week the Billboard findings were picked apart by the Radio and Internet Newsletter (RAIN). It contacted US digital-recording-rights-collection body SoundExchange to try and verify the Billboard analysis. SoundExchange gave a very different view to Billboard, with its spokesperson describing some of the findings as being “wildly off the mark”. SoundExchange was also quoted as saying that “more than a thousand artists received more than US$2,000 from SoundExchange for non-interactive webcasting only”. In addition to this revenue source, SoundExchange also collects royalties from other non-interactive streaming services via satellite and cable. One other interesting statistic provided to RAIN by SoundExchange was that the top earner from Internet radio made a six figure sum.

One figure Music & Copyright can add to the pot is that the online radio service Pandora made a payment to SoundExchange last year of around US$30 million. We have calculated that Pandora accounts for about 1% of all US Internet radio, so although the total sum paid is still small, it would be wrong to dismiss it altogether.

RAIN was quite right to conclude that Internet radio “benefits artists in many ways beyond simply the royalties it pays”. It also suggested that it should not be judged simply by its worth “on the royalty revenue it generates for artists”. There seems to be a clamor at the moment for digital music services to make large sums of money for artists and music companies quickly. Such demands are, on one hand, understandable, with music companies having lost so much through online file sharing. But to decry a new service as not worth supporting just as it is becoming established, and at a time when large numbers of consumers are still downloading music through P2P with artists and music companies receiving no returns, is surely a mistake.

Comparing the Billboard/RAIN findings with other countries around the world is difficult. Most European collection societies publish online revenues as one figure. In the UK, for example, total online revenues increased by 81% between 2007 and 2008. However, it should be noted that this was from a low base (£9.7 million to £17.6 million). No details are available for the different online revenue streams. But, although it is safe to conclude that no one is going to become super rich on streaming alone, the important thing at this stage is that services are being licensed and are contributing to the legal mix.

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

Nokia stands by Comes With Music despite lack of convincing figures; Vodafone champions DRM-free bundle

A little over 12 months after its Comes With Music service launched in the UK, Nokia is mute when it comes to just how many people actively use the bundled music offering. Comes With Music effectively requires a customer – be it a mobile user or network provider – to pay for over a year’s worth of unlimited music downloads at the point of purchase.

While much of the Comes With Music business model remains shrouded in mystery to market observers such as myself, it has clearly met with the approval of the major record labels, which have given Nokia access to almost the entirety of their music catalogs. Music-industry insiders suggest that the labels’ willingness to work with Nokia – and accept its undisclosed revenue-share deal – is motivated by a desire to break Apple’s stranglehold on the global digital market, since Apple is reputed to account for over 90% of global paid-for digital music downloads. But few mobile carrier groups have been convinced enough by the Comes With Music model to launch it.

Nokia made much of its rollouts in Australia, Brazil, Singapore and elsewhere in 2009 but has yet to offer quantitative evidence that Comes With Music has been a success, suggesting that its original marketing has been something of a botched job. One speaker at the MIDEM trade fair earlier this year even suggested that the “hidden music charge” – which is how money is made in the Comes With Music model – was the way forward for the music industry and that Nokia was sadly guilty of “cocking up” what is on paper a really good idea.

Nokia accepts that there had been some initial problems in getting operators to communicate the idea of Comes With Music effectively to subscribers and that there can be resistance from operators when Nokia attempts to intervene by showing them how best to sell the service to a customer. This is a little reminiscent of the “who owns the customer” debate, a frequent topic of discussion in analyst circles when Nokia first attempted to launch Ovi two-and-a-half years ago.

In contrast, Vodafone used the MIDEM conference to trumpet the success of its “all-you-can-eat subscription music service,” which enables users to download and keep 10 DRM-free MP3 tracks from the Vodafone music store for about €3 (US$4.19) a month. The carrier publicly announced that the service was now the biggest repeat paid-for music service in Europe, with 450,000 monthly subscribers in eight countries. This seems to have validated Vodafone Group’s decision to take Kevin Houghton from his far-flung New Zealand post to helm its global music offering. Houghton made such a success of Vodafone’s New Zealand music offering that it regularly featured on the list of the group’s 10 highest-grossing music stores. And now he appears to be producing similar results in Europe.

Vodafone’s announcement of such lofty figures only months after getting all of the major record labels on board will inspire the rest of Europe’s major carrier groups to follow its lead and adopt a similar model at a similar price point, dealing another blow to Comes With Music.

Will Comes With Music go the way of Nokia’s doomed premium N-Gage gaming platform? It’s hard to tell. In the meantime, Nokia has been touting its services strategy in emerging markets – Nokia’s CEO used his keynote speech at last month’s CES event to talk up the firm’s effort in that area – leading some to speculate that Ovi could become the iTunes of the developing world. Right now it seems unlikely, but 10 years ago who’d have thought that Apple would be in the position it’s in today?

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

Online music services need to appeal more to people that like music

Having now fully digested all of the happenings at Midem, the music industry’s annual trade event held in Cannes, we are all now in a better position to gauge the health of the music industry. The mood was a mix of pessimism and optimism, which is becoming ever more common at such events.

On one hand, Spotify has broken through the symbolic figure of 250,000 premium subscribers, and labels in Sweden at least are reaping the rewards of the Swedish service’s success. Digital sales have also helped power UK label Beggars to a US No. 1 album – the first in 25 years from any UK independent label – courtesy of indie band Vampire Weekend.

On the other hand, the growth of digital-music revenues is slowing, as it becomes clear that the a la carte offering will not come close to replacing the losses in physical sales that the recording industry has experienced. And several countries are still going down the route of disconnecting or suing users caught illegally sharing files, something that in this day and age seems woefully short-sighted.

Inevitably, there were a lot of well-worn cliches on display at the event, but they were punctuated by the occasional moment of real clarity. One of these was provided by Vincent Castaignet, CEO of French music-discovery service Musicovery. He said that “all music services are made by geeks, for geeks.” Although an amusing assessment, is he right?

Consider Last.fm. The site has done a lot of things right, and has more-or-less nailed the social aspect of the service, but simple it is not. The home page is crowded, it’s difficult to immediately grasp what all the different parts of the service do, and even getting to the music is not completely straightforward.

This isn’t necessarily a problem for Last.fm, which has always been a service for people who want to interact with their music. But other services that do profess to serve the mainstream have similar failings in simplicity. Apple has won plaudits for its hardware design, but iTunes and the iTunes Store frankly leave a lot to be desired. Transferring music from your computer to your iTunes library and to your device is nowhere near as simple as it should be. And Apple operates in so many different content verticals – TV shows, movies and, now, applications – that the iTunes storefront is a crowded beast indeed. Why has Apple not solved this problem? The simple answer is because it has not had to, and because iTunes has not been a high priority for the company (though its recent acquisition of Lala means this is likely to change).

TDC’s Play service, something of a child prodigy among music services, also falls into the trap. In under 18 months, it racked up 20 downloads for every man, woman and child in Denmark. But not every man, woman and child uses the service. Those that use it do so heavily, but TDC privately admits that it has struggled to get some of its users to sign up for the music offering.

There are several reasons for this. DRM on the service means that you cannot use it outside your house, unless you are a TDC mobile consumer. And its main problem, say many Danes, is that the user experience is not good. The service is cluttered, complicated and visually unappealing, they say, and people simply don’t like that.

The take-up rate for TDC Play shows that giving away music for free alone is not enough for many people. But a more fundamental question is whether people actually want free, unlimited music. The notion almost seems perverse. We live in an age of always-on broadband access and unlimited consumer choice. In this context, a service such as TDC Play should be a music-lover’s dream. And it is. But what about music likers?

Although many people are diving head-first into services such as TDC Play and Last.fm, many more still have fairly conservative music-listening and -buying habits. Radio is still a popular way of consuming content. “Best of” albums and compilations still sell extremely well. And a service such as TDC Play won’t necessarily appeal to music likers – those who enjoy music but for whom it is not a life-defining activity – particularly if the trade-off for having unlimited access to music is that they cannot take their music with them.

It’s clear that the next big challenge for the music industry should not be how to “solve” the problem of piracy, or even how to make the advertising/subscription/freemium/unlimited-download model work. It should be to come up with a product, offer or experience that addresses the needs of the music likers. At the moment, they are under-represented in the field of online music. Address this large group, and you have a very exciting prospect indeed.

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

Volume of music-subscription services grows… as does discord over business models

Four main types of broadband operator online music service have emerged since the first ones launched in the early part of this decade: pay-per-track, subscription-based, pay-per-track/subscription-based, and bundled.

Unsurprisingly, the first services were pay-per-track, as operators attempted to ape the phenomenal success of Apple’s iTunes. But over time, many of these operators and others new to the market have embraced pay-per-track/subscription models, and a handful have launched bundled services.

There are two main reasons for this shift. For one, many operators have become pessimistic about their ability to compete purely with pay-per-track services, given the spread and success of iTunes and the recent entrance of Amazon and other major retail brands into the market. Second, they find subscription models to be a better fit with the telecoms industry’s heritage, which lies largely in selling services for monthly fees.

In addition, some have began to view music and other value-added services less as a source of extra revenue and more as a means to reduce churn, particularly as the online-content market becomes more competitive. By bundling their music services, they hope to at least give customers a reason to keep subscribing to their telecoms packages, even if they continue to use iTunes, Amazon or others for music as well.

Despite the overall shift to subscription and bundled models, each operator is taking a slightly different approach. In some instances, operators’ choices have been influenced by the competitive conditions in their domestic telecoms and online-content markets. But in all cases, there is a strong sense that there is more experimentation is to be had – by both operators and content providers – before the right model is discovered.

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