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Music industry
How to sink pirates
From The Economist print edition
The decline of music piracy holds lessons for other industries
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YOU open a window on your computer’s screen. You type in the name of a cheesy song from the 1980s. A list of results appears. You double-click on one of them, and within a few seconds the song is playing. This is what it was like to use Napster a decade ago; and it is also how Spotify, another free online-music service, works today. The difference? Napster was an illegal file-sharing service that was shut down by the courts. Spotify, by contrast, is an entirely legal, free service supported by advertising. This shows how much things have changed in the world of online music in the past decade. It also explains why online music piracy may at last be in decline.
For most of the past decade the music industry focused on litigation to try to prevent piracy. Over the years the Recording Industry Association of America (RIAA) has accused 18,000 internet users of engaging in illegal file-sharing. Most of them settled, though two cases went to court this year. In both cases the defendants (a single mother and a student) lost and were ordered to pay damages (of $1.92m and $675,000 respectively). But the industry has realised that such cases encourage the publication of embarrassing headlines more than they discourage piracy, for as each network was shut down, another would sprout in its place.
Yet as piracy flourished on illegal networks, legal alternatives also started to appear. Apple launched its iTunes Music Store, offering downloads at $0.99 per track, in 2003. Many others have followed, including a new, above-board version of Napster. And in the past two years new music sites and services have proliferated. Spotify offers free, advertising-supported streams; paying customers are spared the ads and can use the service on smart-phones. Nokia’s Comes With Music scheme includes a year’s unlimited downloads in the price of some mobile phones. TDC, a Danish telecoms operator, bundles access to a music service with its broadband packages.
All of these different, legal music services offer the “celestial jukebox”—whatever you want, right away, from the internet—that made Napster so compelling when it appeared on the scene. True, revenue from these services will be less than from CD sales, but it is much better than nothing. The recorded-music industry will get smaller—but it will not disappear.
That is because there is growing evidence that this plethora of new services adds up to an attractive alternative to piracy for many (see article). In June a poll of Swedish users of file-sharing software found that 60% had cut back or stopped using it; of those, half had switched to advertising-supported streaming services like Spotify. In Denmark, over 40% of subscribers to TDC’s broadband-plus-music package also said they were making fewer illegal downloads as a result. In a British poll published in July, 17% of consumers said they used file-sharing services, down from 22% in December 2007. Music executives reckon people are moving from file-sharing networks to Spotify, though they may continue to download some music illegally.
To be sure, the carrots of more attractive legal services are being accompanied by innovative forms of stick. In particular, a new approach called “graduated response” is gaining momentum. As its name indicates, it involves ratcheting up the pressure on users of file-sharing software by sending them warnings by e-mail and letter and then cutting off or throttling their internet access if they fail to respond after three requests. Graduated-response laws were introduced earlier this year in Taiwan and South Korea, and were enacted in France last month. Other countries are expected to follow suit.
Yet in Britain music file-sharing seems to be in decline even though a graduated-response law has yet to be introduced. The country also boasts one of the broadest selections of legal music services: Spotify and Comes With Music were both launched there before most other countries, and two of Britain’s biggest internet-service providers have borrowed TDC’s bundled-music model. This suggests that when it comes to discouraging music piracy, carrots may in fact be more important than sticks.
All of this offers a lesson for other types of media, such as films and video games. Piracy thrives because it satisfies an unmet demand. The best way to discourage it is to offer a diverse range of attractive, legal alternatives. The music industry has taken a decade to work this out, but it has now done so. Other industries should benefit from its experience—and follow its example.
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Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved. |
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Music piracy
Singing a different tune
From The Economist print edition
The battle against online music piracy is turning. A return to growth will take a good deal longer
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“ROCK and roll is dead,” sang Lenny Kravitz. It is certainly poorly. Music was the first media business to be seriously affected by piracy and has suffered most severely. Yet the prognosis is improving. While it is by no means over, the struggle against music piracy is going better than at any point since the appearance of Napster, a file-sharing service, ten years ago.
It has been a brutal decade. In many countries music sales to consumers have fallen by more than a third. Even Apple’s popular digital iTunes store is little more than a niche service: fully 95% of downloads are illegal, according to the International Federation of the Phonographic Industry (IFPI), a trade group. Established bands have been able to raise ticket prices in response. But by reducing the money available to sign and tout new artists, file-sharing has made it harder for bands to become established. Paul McGuinness, who manages the band U2, says the whole “starmaking apparatus” is damaged.
The music business is now doing two things right. First, it has built a better stick. Most countries have virtually abandoned the practice of suing people for downloading copyrighted files. The favoured approach these days is known as “graduated response” or “three strikes and you’re out”. People who are suspected of trading media illegally are sent warnings. If they fail to stop, their internet-service provider (ISP) may slow their connection. If that fails to deter, they may be temporarily cut off.
Graduated-response laws appeared this spring in Taiwan and South Korea—an advanced market where digital music has overtaken sales of CDs and DVDs. In October, following many political and legal hitches, they were enacted in France. The British government is expected to announce similar measures on November 18th. Almost everywhere in the developed world, such laws are being debated. Even where they are not (America, for example), ISPs are working quietly with the record industry to similar ends.
The trouble with the old practice of suing people for swapping music is that it is slow, expensive and limited. In most countries, being prosecuted for file-sharing is a little like being struck by lightning. The exception is Germany, where a cheap, efficient legal system has made it possible to launch some 100,000 prosecutions. In the past two years the proportion of German internet users who share files illegally has dropped significantly. It now stands at 6%, according to Jupiter Research—less than in any other big European country. Graduated response ought to make it possible to reach many more people, reckons Steven Marks, general counsel for the Recording Industry Association of America.
The second change is that the industry is offering tastier carrots. These days the music associations talk less about lawsuits and more about cultivating alternatives to piracy. The past year has seen rapid growth of digital music services that accept the post-Napster consensus that music should be free, or at least appear to be free. The companies involved range from Google, which now facilitates music streaming from its search page in America, to Nokia, which bundles access to a music-download service with some of its mobile phones. “The next big thing is a dozen different things,” says Thomas Hesse of Sony Music Entertainment.
The hottest product is Spotify, which has been downloaded to 6m computers in Europe. Spotify streams tracks free, interrupted by minimal advertising. Customers can pay a monthly fee to get rid of the advertisements or to install the application on iPhones and other mobile devices. Although streaming a song is not the same as owning it, Spotify has proved a compelling alternative to illegal file-sharing.
The effect is clearest in Sweden. That country incubated Spotify and The Pirate Bay, a popular website that allowed people to find pirated files easily. In April four people associated with the website were found guilty of copyright infringement. At about the same time Sweden enacted a law forcing ISPs to reveal more information about their subscribers. In the past, such legal actions have led music fans to find new ways of sharing files. Not so this time. In June a poll carried out by GfK, a market-research firm, found that 60% of Swedish file-sharers had cut back or stopped altogether. Of that group half had resorted to advertising-supported streaming.
Potentially more important are the efforts of ISPs, such as Virgin and BSkyB in Britain, to sell subscriptions to broadband and music together. Internet bills are often paid by parents who may wish to remove the temptation for their children to use peer-to-peer services. Such deals should also prod ISPs into a more active role in discouraging file-sharing. They are likely to become more involved if video piracy continues to grow, in any case. Many broadband suppliers are also in the pay-television business. If Comcast ends up buying NBC Universal (see article) a broadband supplier will own a film studio.
The pioneer of this model is Denmark’s incumbent telecoms firm, TDC, which offers more than 5m songs. Some 120m tracks have been downloaded so far, which works out at 22 per Dane. The tracks self-destruct shortly after a consumer lets his subscription lapse. Yet they seem to be a good enough substitute. Earlier this year more than two-fifths of TDC Play users told Megafon, a pollster, that they were downloading fewer illegal files. TDC likes the arrangement, too, because it makes customers more loyal.
The recorded-music business is not about to lurch into growth. A big proportion of revenues—more than half just about everywhere—still comes from CD albums, which are gradually falling out of favour. Start-ups like Spotify need to turn more freeloaders into paying subscribers if they are to survive and start providing a serious income stream to record companies and artists. And there are still plenty of ways of sneakily copying music.
John Kennedy, head of the IFPI, points out that piracy was rife even before file-sharing. The goal is not to eradicate it—that is impossible—but to tilt the playing field towards legitimate services. That finally seems to be happening.
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Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved. |
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