Digital Music Lacks Behind in Europe

(IPRinfo 2/2011)

Petteri Günther
LL.M., LL.M. (Law and IT), M.Sc. (Econ.)
Associate, Lexia Ltd

Despite harmonization efforts, the European online market has not become a functioning single market.

Technological developments related to music distribution have contributed to the development of business models based on distribution of tangible products, which has restricted music sharing and reproduction. Today, the ease of producing perfect copies has resulted in calls for increased protection for music. Technological protection measures and digital rights management (DRM) systems have been employed to protect and enforce intellectual property rights as the recording industry is in the process of adjusting to digital music markets.

According to the IFPI 2011 Digital Music Report figures, physical sales continue to decline. Digital channels now account for some 29 percent of global music industry revenues, which was up 6 percent in 2010. The decline in music sales has largely been linked to peer-to-peer (P2P) file-sharing. Initially, when record companies began making their catalogues available online, users typically had to purchase music from several sources depending on which record label owned the rights to certain artists’ music. P2P file sharing systems like Napster, on the other hand, enabled users to get music from various record labels from one place and usually as non-DRMed mp3 files. Different file formats and other factors have made acquiring music legally a rather cumbersome exercise compared to being able to get practically all music from one single place – and without any usage restrictions.

To some extent, this has probably contributed to the popularity of file-sharing. Recent estimates published in a study by the University of Ballarat suggest that 89 percent of all torrents infringe copyright.

The European online market is not functioning
The Commission has, in the Digital Agenda for Europe, indentified fragmented digital markets as one of the key problems in Europe. Despite harmonization endeavors, the European online market has not become a functioning single market. The Commission has opined that the lack of legal offerings and fragmented markets result in the EU markets falling behind the digital music markets in the US.

In the EU, consumers are generally unable to purchase music across the EU because the rights are licensed separately for each member state. Before digital music, product-based distribution and logistics challenges contributed to the development of geographically limited markets, whereas now, it is at least technologically feasible to provide services and deliver content online in a single market. One of the goals outlined in the agenda is to create a new single market for digital services and content in Europe.

A study conducted by researchers from the University of Hertfordshire (2009) surveyed the music consumption of 14-24 year-olds and concluded that the primary reason for file-sharing is the zero cost. But besides getting music for free, they found that people also use P2P to, e.g., find music that is not commercially available. Further, some 85 percent of P2P downloaders would be willing to pay for an unlimited mp3 download service.

The discussion around P2P is rarely neutral, but P2P technology as such is a neutral concept; a dual-use technology which can be used for both infringing and non-infringing purposes.

The volume of piracy is not the whole picture either. A 2010 report from the US Government Accountability Office concluded that one-to-one substitution rate is not likely to exist, meaning that not all shared files translate to lost sales. But even though the negative effects of piracy could be to some extent overstated, they still outweigh the positive effects. However, the inconclusive data does not allow for drawing any definitive conclusions on the net effect of P2P use.

Legislative Changes and Embedded Protection
Changes in copyright law have generally taken place in response to external pressures – often technological changes. Trying to prevent unauthorized file-sharing has resulted in the introduction of the DMCA in the United States and the InfoSoc Directive in the EU. These include provisions on technological protection measures that can be used, e.g., to enable right holders to offer different ways to consume media, such as downloading and streaming.

Despite the enabling factors, DRM is also viewed negatively and referred to as “digital restrictions management” as consumers commonly perceive digital objects acquired by them as “theirs”, especially if the delivery model or usage replicates examples from the physical world. Many online music stores have moved to non-DRMed mp3 files in the download model.

A so called “graduated response” has also been introduced in some countries to deter file sharing. In France this meant enacting the HADOPI law and creating a government agency to monitor that internet subscribers do not share copyrighted content. A team of French researchers suggested in 2010 that while infringements are down on P2P networks, they are up in areas the HADOPI law does not cover, such as streaming.

The University of Ballarat study, as well as data from Arbor Networks indicating that P2P traffic in relation to overall internet traffic may be declining, also support the conclusion that users are moving away from the tracker based model. As distributed technologies like distributed hash tables and peer exchange do not require a tracker server, there is no one location or operator to be targeted to shut the network down. In 2007, P2P traffic accounted for some 40 percent of all internet traffic, but in 2009 it only accounted for 18 percent. Further, the proportion of, e.g., streaming is increasing.

Right content to right consumers over the right platform
Content consumption is increasingly on-demand based, and picking just the desired tracks seems to be favored by consumers. Cloud computing may have the potential to make an impact, as streaming services like Spotify and Rdio provide an affordable and convenient way to enjoy music, which may also make using P2P a less desirable alternative.

Spotify, for example, adds a social layer to music listening and lets users share playlists online so that consuming music becomes a more social experience. These experiences can be characterized as the next step in the progression of economic value, and the experience of consuming the media could be more valuable to the customers than the service of being merely delivered the media. The 2009 Accenture Global Content Study also concludes that future revenue growth depends on delivering the right content to the right consumers over the right platform.

According to a Forrester study (360-Degree Music Experiences, 2010), business models and rights issues have distorted and fragmented the digital music experience. This view on rights issues is shared by the European Commission, which intends to improve the European content sector by simplifying copyright clearance and cross-border licensing.

A competitive marketplace should make sure that online services will offer flexibility and allow users to choose between acquiring individual songs or the whole album. Also, the price must stay at an affordable level and consumers’ reasonable fair use expectations have to be met. This is likely to tip the scale in favor of legal services.

Emphasis on the rights management system
To avoid inefficiencies in the commercial use of creative content, the emphasis should be put on making the current rights management system function more efficiently – i.e. leveraging the potential of a digital single-market within the EU to increase the use of copyrighted works – instead of increasing the level of copyright protection.

If online music services fail to live up to consumers’ expectations and deliver the value and experiences that they desire, the level of protection alone may well prove an insufficient answer to declining revenues if the products and services do not attract users.

This article is based upon the author’s M.Sc. (Econ.) thesis, entitled “Digital Music Distribution – Technology Driven Changes in Copyright Law and Diversification of Business Models” (Hanken School of Economics, 2010).

Legislation
Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society, Official Journal of the European Communities, 22.6.2001, L 167/10 (Info Soc Directive)

Loi favorisant la diffusion et la protection de la création sur Internet (The HADOPI law)

The Digital Millennium Copyright Act of 1998 (DCMA)

Other information sources:
Bahanovich, David & Collopy, Dennis (2009) Music experience and behaviour in young people, University of Hertfordshire.

Forrester study (2010) 360-Degree Music Experiences: Use the Cloud to Target Device-Use Orbits.

Communication from the commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: A Digital Agenda for Europe, 26.8.2010 COM(2010) 245 final/2.

IFPI Digital Music Report 2011.

Layton, Robert & Watter, Paul (2010) Investigation into the extent of infringing content on BitTorrent networks, ICLS – Internet Commerce Security Laboratory, University of Ballarat.