Digital Music - An Industry In Transition
The production, distribution, and sale of recorded music are undergoing dramatic changes driven by the impacts of disruptive technologies. From the perspective of the legacy recorded music industry, there is an expanding crisis that justifies draconian measures to protect its legacy control over the recorded music market. It has sued network services, college students, little old ladies, and even children in its efforts to enforce its copyrights. But there are still millions of individuals estimated to be sharing copyrighted music files over P2P networks on the Internet - far more than the industry could ever sue individually. The industry is now seeking substantially enhanced powers to detect unauthorized file sharing, and investigate the individuals suspected of being involved.
The problems of the record labels should concern all citizens because most of the measures being demanded by the legacy recording industry involve serious impacts on the rights and wallets of all citizens.
The recording industry has put a lot of effort into defining the problem as widespread criminality by the general public that deprives artists of proper compensation by sharing files over the Internet. However, there are significant flaws in the industry view regarding who is causing it, who is being harmed, and the adverse effects of the extraordinary measures they claim to be needed and justified.
There are important distinctions between the creation of an artistic work, the performance of that work, and the commercial reproduction and distribution of the recording of an individual performance.
For the purposes of this discussion, those who write music and the artists who perform it can be considered collectively as "creators". Both possess rights that transcend the individual expression of a recorded performance. The writer may grant the right to perform his song to multiple artists. An artist may repeatedly perform the same song, as well as songs by other writers. These rights are only tangentially related to the commercial exploitation of an individual recorded performance.
The recording industry is largely focused on the commercial reproduction and distribution of the recordings of individual performances. While creators provide the "raw feedstock", the commercial exploitation of recorded performances has become largely separate from those who wrote and performed them. Those whose primary participation in the process is the reproduction of existing works will be collectively labeled "reproducers".
At the core of the controversy is an historical misconception regarding the nature and purpose of copyrights that continues today. The popular myth is that copyrights protect the rights and ownership of creators. The idea of protecting the rights of creators has always been more acceptable to the public than protecting the monopoly rights of reproducers.
The popular misconception of the purpose of copyrights was encouraged centuries ago for much the same reasons that it continues today. Those currently seeking to expand and extend the scope and duration of copyrights haven't gone out of their way to dispel the popular misconception since it also serves their purposes.
The name is far more accurate than the myth implies - copyright: the right to copy. The first copyrights were essentially non-compete agreements within a cartel of English printers. A copyright established a printer's monopoly right to print a particular book. The original objective of copyrights was to protect the printer's investment in the manufacture of a book by eliminating competition from other printers. The authors of the books weren't involved or considered at all. Then as now, the reproducers effectively owned the works they produced, and copyrights had no direct beneficial effects on authors.
The writing of books was generally considered to be a work for hire, with the only compensation paid to authors (if any) being a one time purchase of their work. The aggressive suppression of competition in the printing business included the violent intimidation of competitors, and the physical destruction of their printing presses. This constraint of trade also artificially restricted the alternatives for authors. The power of the printers allowed them to minimize the costs of purchasing content for books by minimizing the rights and compensation of authors. Control over access to the only means of publishing books allowed the printers' cartel to force authors to accept onerous conditions including constraints on their future works.
The only persistent right authors were generally considered to possess was the moral expectation that their works wouldn't be altered by the printer who reproduced them. It was only much later that the concept of paying ongoing royalties to creators appeared.
Seeking to expand their ability to control their market, the printers convinced the government to make their cartel's restraint of trade agreements official policy. The English crown recognized that the power to grant monopoly rights to printers would also increase their ability to control those printers. They were particularly interested in using the printers' cartel to attack their opposition while suppressing adverse information. The crown switched hands between Catholics and Protestants several times during this period, with the printers' cartel compliantly serving the agendas of whoever was in power at the moment.
In order to make the creation of government protected monopolies more palatable to the masses, the myth of copyrights protecting the rights of creators was wrapped around the real objective of protecting the monopolies of printers. As a concession to appearances, copyright statutes started "recognizing" the initial ownership of creators. The early printers eliminated this minor complication the same way modern record labels do today - by requiring creators to sign all of their rights over to the reproducer as a condition for producing their works.
Copyrights were seen as a necessary evil given the limitations of the production and transportation technologies of the time. Publishing a book and distributing it to consumers required substantial capital investments, and an established distribution infrastructure. A monopoly right to produce a book for a limited time allowed the reproducer to recover his investment before the book became public domain. Note that there was always the intention that copyrighted books would eventually become public domain. The benefit to the public good was the trade-off for tolerating the limited duration market abuses of copyright monopolies.
The early copyright monopolies were limited to relatively short periods. It's hardly a surprise that reproducers have been lobbying for centuries to incrementally increase the duration of copyright monopolies. By the American Revolution, the typical copyright monopoly period was around 14 years. The latest increases extend copyright monopolies to over four generations beyond the lifetime of the original creator - effectively turning a limited duration market abuse into a perpetual special right.
Enforcing extended copyrights will be very difficult, and will require extraordinary privacy intrusions and disruptions of society to be effective. On the other hand, enabling creators to receive fair value for their works on completion, followed by timely release to the public domain as originally intended, would eliminate the music piracy problem without any enforcement costs, privacy intrusions, or disruptions of society.
The real value of copyrights to creators can be measured by how much they typically earn from their copyrighted works. The hard reality in the music industry is that artists typically earn little or nothing from "their" recordings. It's distressingly common for artists to publicly complain that they haven't received a dime of the millions of dollars their creative works generated for the reproducers and sellers. For the vast majority of artists, the promotional value in selling tickets to their live performances is the primary benefit of having a recording in retail stores. The production and sale of recordings has become essentially a separate industry that has only an incidental connection with the creation and performance of music. [ref1] [ref2] [ref3] [ref4] [ref5] [ref6] [ref7]
The power of the reproducers has always been based on their control over the capital intensive means of producing and distributing physical media. They've expanded the range of services they provide in support of their distribution channels, adding functions like image grooming, market analysis, and advertising. They've sought to increase their profit margins, and extend their reach beyond the roles of production and distribution by expanding the original first sale principle of traditional books into variations of per-use fees. They've also lobbied governments to incrementally constrict the post-sale rights of consumers.
Much of the recording industry's current crisis is due to the popular perception that the industry has failed to serve the needs of its customers, and has been reluctant to adapt to changing conditions. Retail prices have continued to rise even as new technologies cut the costs of production. Old products that have already paid back their development costs are priced the same as new works when re-released on new types of media.
The consolidation of retail stores into big box mega stores has further limited the range of alternatives for both artists and consumers. Instead of the 60,000 titles of a large dedicated music outlet like the former Tower Records, a big box store like Walmart might only stock the most heavily promoted 5,000 titles. This artificial concentration of demand likely benefits the relatively few titles that are offered, but effectively shuts the vast majority of artists out of the market. Consumers wanting to buy recordings outside of the narrow range of titles with a high enough turnover to interest the big box management, aren't going to find them in the major brick and mortar retail outlets.
The transition to digital distribution arguably began with the appearance of on-line retail outlets like Amazon and Borders. These virtual stores provide a partial solution to the shrinking shelf space of the legacy brick and mortar retail distribution channels. While they offer larger selections than the big box stores, that selection is still constricted by legacy control over the means of production, and ultimately by extended copyright monopolies.
The recording industry has been slow to incorporate new technologies beyond re-releasing albums on new media. Citing fears that new technologies that facilitate end user duplication and manipulation of digital data will result in the illegal modification and distribution of copyrighted products, the industry has sought to impose artificial constraints. These artificial constraints often interfere with legitimate uses, causing resentment and hostility toward the industry.
When the industry has been unable to require limitations on the capabilities of new technologies, it has sought to recover lost revenues in other ways. For example, citing lost revenues due to illegal copying of copyrighted CDs, the industry was able to establish a special tax on blank CDs and CD recorders in many countries.
One of the latest proposed "solutions" to Internet file sharing is to impose a tax on Internet service, based on the assumption that the majority of Internet traffic is copyrighted music being shared over P2P networks. This arbitrary redefinition of the Internet, as being primarily used to distribute copyrighted music, will come as something of a surprise to the pornographers and spammers who have previously been the primary traffic generators. This tax would force all Internet users to contribute to the claimed lost revenues of the legacy record labels, even though only an estimated 20% of Internet users participate in file sharing.
One of the most dangerous aspects of the current situation is the demand for monitoring the content of all Internet traffic in order to detect those transmissions containing copyrighted music.
Detecting the transmission of copyrighted music would require the interception and analysis of all content. This would eliminate the privacy of all users just to protect the legacy recording labels from undefinable lost revenues to a minority of users who might be sharing files instead of purchasing multiple copies. Once justified for use in detecting copyrighted music, is there any real doubt that there would quickly follow other "crisis" requiring expanding the monitoring of Internet traffic?
While such "solutions" might partially achieve the short term objectives of the industry, they would almost certainly do substantial long term harm to society.
One of the primary functions of free markets is to create alternatives to inefficient industries. The inherent costs and constraints of the traditional recording industry have created strong incentives for the market to find better alternatives.
Computers, digital media, and the Internet are the free market's answer to the inherent costs and constraints of the legacy recorded music industry. The services offered by legacy record labels are increasingly being offered directly to artists by independents at substantially lower costs. For example, low cost commodity computer hardware and software are now capable of producing high quality recordings, greatly reducing the capital investment required to equip a professional quality recording studio. High performance computers have also lowered the costs of post-recording mixing and mastering.
Digital media makes it possible to create distributable products without the need for capital intensive manufacturing facilities. The Internet makes it possible to distribute recordings without requiring an extensive capital intensive brick and mortar distribution network. The dynamics of public participation on the Internet makes it possible to "spread the word" about new creative works without employing the traditional capital intensive forms of advertising and promotion.
Other less technology dependent support services should benefit from a larger competitive market for their services outside of the legacy recording labels. Artists are typically charged premium rates for these services by record labels through "recoverable expense" deductions from their royalties. The substantially lower costs of digital production and distribution should make it easier for artists to produce their own recordings without needing the financial support of a record label.
In terms of the real value to artists, the distribution and discussion of digital copies of their music over the Internet has the potential to provide far more cost effective exposure and promotion than traditional record labels. Artists have little to lose since the alternative is to sign away all of the rights to their creative works to a record label in order to get a recording contract. [ref8]
One of the beneficial functions attributed to the legacy record labels is providing a filter that selects the "best" music to make available to the public. There is conjecture that making it possible for anyone to record music and make it available on-line will open the floodgates to so much inferior quality music that any good music will be lost in the flood.
This may be true in the short run, but the dynamic will quickly rationalize itself. Consider that paint, brushes, and canvas have been easily available, and amateur painting has been a popular hobby, for a long time. There have been a lot of people applying a lot of paint to a lot of canvas for a lot of years. However, real artistic talent remains a relatively rare commodity. The market continues to place very different values on what different people can achieve using the same brushes to apply the same paints. Every child in kindergarten knows how to "paint", but except for doting parents and grandparents, art connoisseurs are unlikely to find many Michelangelos hanging on refrigerator doors.
The art market long ago evolved a voluntary system of reviews and recommendations to help consumers cope with the wide range of art works available. A variation of this evolution is already underway in the digital music market. On-line forums and virtual communities are already providing effective sorting and filtering using much the same collective processes as are employed to rate and filter the large volumes of news and information flowing through sites like Slashdot and Digg.
There may well be a role for the legacy record labels in providing "name brand" filtered selections and consistent quality control to specific market segments. Providing support and promotion packages, and developing artists for certain markets, could be a viable future for restructured record labels in the digital future.
The effects of the explosion of digital music on the Internet haven't been uniformly beneficial.
The transition to digital media and Internet distribution has been most beneficial for those artists who were previously denied market access by the limitations of the legacy distribution system. The natural predisposition of the legacy recording industry has been to seek to concentrate market demand on high profit stars and minimize competition to their flagship products. The application of this conventional business logic to the music industry has produced high profits for the labels, but the results have been less than optimal for artists and consumers. The legacy system has effectively shut large numbers of artists out of the market, while limiting the selections available to consumers to the sometimes less than stellar performances of the record labels' designated "stars".
The tiny minority of artists who have benefited from the current market dominance of the record labels are understandably opposed to the ongoing changes in the traditional production and distribution monopolies. This is especially true of the hype and shock artists whose only claim to fame is the image manufactured for them by a record label's promotion department. Those few artists who have acquired enough leverage to negotiate highly favorable deals with their labels also have good reason to want to preserve the current system.
Those artists who have long wanted to be able to compete for fans on the basis of artistic ability tend to support the lower barriers to participation of the digital music market. Those whose success has largely been the result of the artificial suppression of more talented artists tend to want to preserve the current artificially restricted music market dominated by the major record labels.
The core problem with nearly all of the current proposed solutions is that they are all based on preserving the market dominance of obsolete and unnecessary technology. They tend to involve artificially crippling the functional capabilities of new technologies in order to obstruct their usefulness in replacing the obsolete technology on which the current recording industry is based.
Simplistic encryption and copy protection schemes have proven to be ineffective in accomplishing much beyond interfering with legitimate customers. The commercial software industry learned this lesson the hard way back in the 1980's when the primary results of employing copy protection schemes were the loss of market share, and the creation of a market for copy protection breaking software.
The recording industry's response has been to seek artificial legal restrictions on the means of overcoming their efforts to interfere with the use of new technologies. They have sought to criminalize possession of even the knowledge of how their obstructive hardware and software works. Outlawing knowledge tends to be ineffective - otherwise we'd still believe that the sun goes around the earth, and DVD decryption libraries wouldn't be available for download from servers around the world. Attempting to artificially restrict knowledge does tend to be very effective at causing substantial harm as collateral damage. But past failures haven't discouraged those who are willing to inflict any cost on society in order to preserve their obsolete advantages.
It's obvious why the legacy recording industry wants to protect a highly profitable status-quo and preserve its control over consumer access to the creative works of artists. It's much less obvious why artists and consumers would want to cooperate with the creation of artificial market distortions and restrictions whose only purpose is to preserve the legacy limitations of obsolete technologies.
The reason the myth of copyrights protecting artists has been so politically useful for centuries is because the idea, that creators should benefit from their creative works, resonates with the public. The transition to digital media and distribution could well make it possible to convert the myth into reality. Eliminating the ability of reproducers to abuse their control over the means of production and distribution will liberate artists to retain ownership of their creative works even after releasing certain rights to the public domain.
Another problem that should become obsolete is the concept of music piracy. The core concept of copyrights has always been to provide a limited period of monopoly protection in exchange for the work becoming public domain. Once a recording enters the public domain, piracy becomes a moot issue.
The legacy business model of the recording labels is based on incremental sales over an extended period. This business model directly contradicts the original intentions of copyrights - that creative works should become public domain after a limited period. Enforcing long term copyrights is problematic and imposes substantial overhead on the process. It also creates a number of unnecessary complications, and converts what would otherwise be normal activities into problems claimed to require infringements on the rights of all citizens.
The much publicized piracy problem is a case in point. File sharing is only a problem because the release of recorded performances to the public domain has been delayed. Shortening the period of time required for creators to recover fair value for their recorded performances would allow music to be released to public domain sooner, eliminating the problem of piracy - and along with it all of the related costs and alleged need to infringe on the rights of citizens in the name of enforcing copyrights.
The last piece of the puzzle is a mechanism for artists to be fairly compensated for contributing their recorded performances to the public domain. Propagate Ltd has developed a unique form of dutch auction designed to solve this last piece of the puzzle. A Propagate auction allows an artist to receive the fair value for a recorded performance as an up-front lump-sum in return for releasing certain of their rights to the public domain.
In a Propagate Ltd auction, the fair value compensation of the creator is collected from many individual bidders. Each bidder receives a special enhanced value copy of the recorded performance, advance possession, and optional visibility (including contact info on Propagate Ltd's website), in return for a modest contribution to the compensation of the creator.
This new revenue model allows artists to earn significantly more from their recorded music than they currently receive over extended periods from the legacy record labels, while substantially shortening the time before a recorded performance becomes public domain. Artists will also be able to retain greater long term rights to their works than the record labels typically allow them to keep today. It also eliminates the problem of music piracy by legitimizing file sharing, eliminating all of the related enforcement overhead and threats to fundamental rights.
Enabling unrestricted file sharing and public discussion of public domain digital music is a far more effective distribution system, and method of advertising and promotion, than the current dependency on the restrictive distribution system and limited advertising budgets of record labels. Even better, these alternatives are self-organizing and self-regulating, eliminating the extended bureaucracies required to administer the equivalent functions of the legacy record labels.
The elimination of these unnecessary overheads allows artists to receive greater direct rewards for their contributions to popular culture, even while lowering the costs of recorded performances to individual consumers.
The greatest benefit from this form of collective purchase of intellectual property rights is that it allows artists to contribute their recorded performances to the public domain long before their copyrights officially expire. This allows copyrights to finally achieve the mythical purposes that the public has long believed they were intended to serve - and accomplish them in spite of all the accumulated extensions and distortions the legacy publishing industries have managed to inject into copyright laws over the last several centuries.
This major evolution in recorded music publishing and distribution serves the interests of the creators, the consumers, and the public. The only remaining obstacle in the way is the desire of the legacy record labels to stop time and perpetuate their monopoly exploitation of creators, consumers, and the public good.
Copyright Kort E Patterson. Permission to copy, distribute, and/or repost granted as long as proper attribution and intended meaning are preserved.