KAPA Seminar, October 31, 2000

Music on the Internet - Opportunities, Hype, Politics and Real Life

It is interesting to see, that now more than ever, music performers are faced with identical very complex problems and questions all around the world. This, of course, is mainly due to the rapidly advancing digital technology and specifically, the Internet.

During the time I have I will try to describe some of the driving forces and realities that are playing a role in the developing cybermusic market.

The emergence of new business models and platforms is usually a very active phase where many will engage in hope for fast profits. Some have already made their millions with online music, although the money most certainly did not come from music-buying customers, but rather from advertisers and risk investors. The luckier ones of them may have taken their money out just in time to escape the legal action taken by rightsholders. Also, we have already seen the first scenes of the probably unavoidable court battles in the middle of a legal uncertainty and exciting business opportunities.

Then, there are the performing artists who simply see cybermusic as a fresh opportunity for getting their art across to a wider public, with perhaps a little fewer middlemen than before. Some performers may be frustrated by the narrow chances to see any substantial income from records through traditional channels. If we look at music performers as a whole, record royalties are not a very significant source of income. That is a fact we to take as it is. With this in mind, it is understandable that performers seem to hope for a more motivating share of the cyber-profits.

Visions

Let me first draw a highly optimistic and, maybe, a little naive picture of what could be achieved with the aid of modern technology and the Internet in a perfect world. Now, I'm painfully aware of the fact that many of us have already been subjected to perhaps one too many of these technology-driven visions, but, for the sake of argument, let's just do it once more.

Music and other software, be it "content" or "tools", is readily available for anyone to use anywhere and anytime. There is no need anymore to circulate tangible copies of music while anyone can make them privately in any desirable form to be used in any playback device or environment, if it is necessary or practical. Music, like any downloadable or donwstreamable data, is pure content, and the modalities of use are entirely up to the consumer.

Wired and wireless communication technologies provide consumers with sufficient bandwidth for all required applications anywhere. Multipurpose mobile terminals have replaced mobile phones, and they can be used, among other things, in purchasing and consuming music in full integration with existing audio and multimedia devices. There is actually no need to download anything, when there is plenty of bandwidth to listen to music directly from a music server.

An automated flow of electronic money travels smoothly and reliably from consumers to service providers and rightsholders with the invisible aid of their collecting organisations.

Music production is totally computerized and seamlessly integrated with electronic distribution. Once a recording has been finalized, it can be made instantly available to a worldwide public.

Encryption and watermarking technologies as well as integrated consumer devices allow content providers to precisely track and control the circulation and use of their products.

Finely tuned marketing systems make it possible to offer a wider variety of music to satisfy a larger public with more than just mainstream music. Even marginal styles and forms of music that never before reached the shops flourish when audiences once too small and too scattered can be accurately and profitably reached.

This is probably a good place to stop the daydreaming part, because we all know this is nowhere near the reality of today. However, let's take a closer look at some of the issues.

Private copying in the digital age

Traditionally, the recording industry has relied heavily on the ability to control - at least to a degree - the distribution market of tangible copies, such as CD's. The sense of control seems to be gradually growing weaker with the increase of piracy and the emergence of consumer devices capable of making identical digital copies of records. Piracy is an enormously complicated issue as a whole, and I think it is best to leave it beyond the scope of my presentation.

As for legitimate private copying, it seems realistic to expect that blank tape or blank media levy systems already in place in some countries could compensate for only a fraction of the economic losses caused by private copying. The obvious requirement of media neutrality presents new types of problems to blank media levy systems. They would have to deal with a multitude of media types as well as tackle the question of memory and hard disks in various devices. To introduce a blank media levy to harddisks and memory is bound to raise some serious resistance in the information technology world.

From the beginning of this year we, however, actually succeeded in establishing a blank media levy for hardware MP3 players in Finland. I can't say that this is absolutely the right way to go, but for existing blank tape levy systems, it's a question of life and death to react fast enough to the digital means of private copying.

One model is to leave digital copying as such outside of the scope of acceptable private copying. With the strong tradition of this basic exception to copyright, however, it is rather unlikely that this route would be followed everywhere.

An organisation of European consumer electronics manufacturers (EACEM) recently made a survey in five EU countries with the obvious aim to prove that private home copying is harmless to the entertainment industry. The leading argument was that the reason for most of this type of home copying is "time shifting" or "place shifting", which were categorized as harmless forms of private copying. What was totally and intentionally forgotten is that if you own a music CD, there is no real need today to copy it in order to listen to it at a more convenient time or in another place. There are CD players practically everywhere, and many of them are portable.

Now, somebody may wonder, what has private copying to do with Cybermusic? If a consumer has a legal right to make a copy of a music file available on the Internet, why pay anything for it? In the Napster case, as we heard from Mr. Kim, private copying was one of the foundations of argument by Napster.

The ratio behind the private copying exception to copyright has been to allow a few copies of legally purchased copyright items to be made for use basically within the family circle. However odd it may sound, there are loud voices on the international copyright battleground speaking for a specific consumer right to take a look - i.e. to copy - for example a downloadable music file before you buy a download license. I've never understood the logic of this.

Modalities of music use

Before a critical mass of consumers have in their hands easy-to-use tools to enjoy music with essentially at least the same degree of freedom and control they are already used to having now, it is hard to believe in any significant success for download sales of music. I'm not a pessimist, I just try to be realistic.

When I took a walk yesterday at the Yongsan Electronics Market here in Seoul I noticed there were several makes and models of MP3 players available. Even though the prices were quite good, I didn't buy one, yet. When I asked one of the salesmen where I could get music for these devices, he smiled happily and said in a very honest and enthusiastic manner: "The Internet. It's all free. You have everything there."

I think it's clear that a market is developing for these devices, and I also think the industry must hurry in order to have any part of that market.

The Bandwidth Issue

Somebody may, again, wonder why we should worry about the development of the infrastructure that is available to Internet users. Isn't that a purely technical issue?

To be able to understand the online music business, it is necessary to examine the single most restricting factor in any online business model dealing with data-intensive contents. The more details and resolution a content includes, the more data is generally required to represent it. Moving images and audio have traditionally been among the most challenging types of digital content to be compressed without disturbing side-effects and deterioration of quality. As long as consumer bandwidth is quite low, compression is necessary in order to be able to transmit these contents through the Internet.

In optimal conditions - which, unfortunately, almost never seem to exist while you are online - it takes about 9 minutes to download a 4-minute MP3 song with an analog 56 kbps modem, which pretty much represents the average bandwidth consumers have at the moment and probably for some time, at least as long as Internet connections use telephone lines with time rates. In real life conditions, the download time for an MP3 song is perhaps somewhere between 15 - 30 minutes, depending on where the server is located in relation to the downloading computer. The narrowest point on the route from a service provider to a customer will dictate the maximum speed of the download. If this route crosses national borders, for example, the bandwidth is often likely to be substantially lower than the nominal bandwidth consumers are getting from their Internet operators, i.e. from home to the operator. Operators are usually unwilling to give any bandwidth guarantees beyond that, and if you insist, it will cost you some real money.

If you get the music for free, it may compensate somehow for the time and money it takes to download a music file. But if you already pay for the provider of the music, you may not have as much patience, especially, if you realize that you are paying for the operator, too.

Some governments, like in Sweden, regard it as their task to provide citizens with broadband acces to the information highways, just as they would provide cars a smooth access to public highways. Other governments, such as Finland and many others, are of the opinion that free competition will eventually ensure a sufficient consumer bandwidth for e-commerce and other applications.

Now, arguments supporting both approaches can of course be found, but I'm pretty sure that if broadband consumer access to the Internet is left for free competition alone to provide, it will certainly take more time and probably result in serious disadvantage for the less populated areas outside the big cities. Especially in countries where the Internet was adopted early, it has proven difficult to have the average consumer bandwidth actually increase. If we look at the rapid development of, for example, PC processing power and storage capacity, we can see how slow the relative increase in consumer bandwidth has really been.

While this is equally frustrating to consumers and e-commerce pioneers, narrow consumer bandwidth may also prove to be a good thing from a rightsholder viewpoint. There may still be some time left to find working solutions to technical protection questions.

The reasons for the slow development of consumer bandwidth are in many cases almost too obvious. Internet operators hurry to sell as many low bandwidth analog modem connections as possible, because that way they will not have to build or buy more bandwidth for themselves. In areas where phone lines are still the main method of connecting to the Internet, phone operators have been and are using their often monopolistic position, although in some countries this problem has been solved by legislation. The lower the bandwidth, the longer one has to be online, and the higher the phone bill. Simple and beautiful. This is the situation, for example, in Finland, where Internet connections are numerous but the actual use of the Internet is much lower than in many countries where connections per population are fewer. I understood from Mr Kimura that the cost of bandwidth is very high in Japan, too.

In Europe, we should be getting specific EU legislation to force European operators to allow the existing cables to be used by others at competitive prices. We are, fortunately, beginning to see a slow shift towards cable modems, ADSL and wireless LANs (Local Area Networks). With increasing competition, bandwidth price should eventually fall to a more acceptable level. This should, in time, create real possibilities for the cybermusic business.

MP3

So much already being said about MP3, I think that, for my part, it is probably sufficient just to point out that it depends on a variety of factors whether we are going to be stuck with this overly notorious file format. For the moment, MP3 music seems to be regarded almost as a free commodity, that you are somehow born with the right to use it for free. With improving bandwidth, however, any compressed audio format may become yesterdays news, if the initial need to compress disappears. Audio quality might also become a pricing issue, since not everybody is happy with even the so-called "full CD quality".

The consumer will have the final say as to which audio format will survive and which will not. With CD, MiniDisc, Super Audio CD, MP3, Liquid Audio, WMT etc. we may, at least for some time, have to learn to live with co-existing multiple audio formats and scalable quality.

The Impact of Self-Production.

This issue has been taken up by performers' organisations not only because of the implications on rights issues, but also because self-production is seen as an important device of preserving and increasing cultural diversity.

Music performers have been engaged in the actual production of their performances or recordings for as long as such production has existed. As performing artists go, it can be seen as a manifestation of the artist's constant strive for artistic freedom. In most cases, artistic and economic freedom seem to go hand in hand.

The need for capital investment in the production of master recordings has clearly decreased today with affordable digital audio technology. At the same time, the request by record companies to get all rights from performers in return for their investment may be losing credibility in this sense.

We can also look at these investments from another perspective. As long as effective distribution channels are controlled by the record industry, it's almost too good to be true for the industry to have performers produce the content themselves - at their own cost, if possible. However, if distribution control would be lost, even partially, turning production over to performers may prove to have been a miscalculation on the part of the industry. Of course, there's marketing and promotion, distribution and a number of other things that record companies do, but still, in the cybermarket, I think nobody can afford to take any of the old structures of the business for granted.

The development of self-production could also have an effect on rights ownership. It can and has been questioned, whether a record company that merely gives money to be recouped from royalties to produce a master, should be legally entitled to have all - or for that matter - any of the producers' rights to begin with. There was an interesting case about this in Norway where an artist was successful in claiming back rights from a record company, as a producer, not as a performer.

A typical contractual approach is that record company gives the artist a royalty advance to produce the master. However, I'm sure we know enough about record contracts to understand that it would make more economic sense for the artist to walk to the nearest bank to get a loan. When the loan is paid back with interest, the rights would still be owned by the artist, as opposed to how things work with record contracts: all rights remain property of the company. In the cybermusic market it makes all the difference for performers to possess the rights to begin with. Then, they can start to bargain for the best deals in the rights market.

When a performer or a group of perfomers have in their hands a master recording ready to be web-delivered to consumers through, it poses a challenge to record companies. To survive in the long run, they must prove that they still have a place in the food chain. However, as Ms Gu Quan so wisely pointed out, the record industry will not be easily overthrown, for a multitude of reasons. For professional performers, that couldn't be the objective, either.

For some time, existing contracts will, of course, bind a great number of recording artists to quite, should I say, modest shares of the profits of the business. In these old contracts, royalties may even be lower as regards cybersales than CD sales. Record companies are, of course, trying their best to hold on to royalty clauses that have been typical to a business model based on distribution of tangible goods. There is, luckily, also a trend towards a more even sharing of profits, which is driven, among other things, by these new online "record" companies. These companies often offer artists a 50/50 deal. This development is partly a result of increasing self- production, and probably some genuine new thinking, and partly, of course, it's due to the struggle of these new companies to sign artists.

The Web as a marketing and promotion tool

The possibilities offered by the Internet in marketing and promotion are important and numerous. It is, however, by now generally recognized that web-promotion is not by any means easier than any of the more traditional methods. It may even be harder. The ability to create complex customer profile databases and to crosslink such databases as regards some strategic variables in order to find the right target groups and web communities for different types of music sounds exiting - and it is - but it may be also very expensive.

Effective promotion on the web - and anywhere - usually requires a lot of money and effort. However, many of the cybermusic services operating on the web today give artists and musicians a seriously misleading picture of their resources, possibilities and real intentions as regards promotion. The greater number of artists and repertoire a service has to offer, the smaller the chances to promote any one of them effectively. In fact, the only way to stand out from the crowd in a massive web service is eventually money. You pay for visibility. And there we go again, back to the real world.

The benefits of online distribution

Online distribution is ecologically sound, cost-effective, worldwide and direct. Eventually, it will hopefully also be fast and it is expected to give the consumer a choice of practically all recorded repertoire in the world, to buy just the song they want from an artist they like.

Cost-effectiveness and efficiency in online delivery comes not only from being able to get rid of the cost of manufacturing and logistics. Online delivery makes it also possible to release material to a smaller audience in the first place. It also allows for the material to be online for as long as there is a suitable information network in place. The lifespan of any recording - not just the hits or evergreens - is practically without limits. Once a music file is placed on a server, the cost of keeping it there, available to the public, is marginal.

Rights and profit splits

Now, a word of caution for the performer who plans to conquer the world tomorrow or next week with the aid of any of the so-called Internet record companies. Compared to traditional record contracts, a 50/50 profit split, that seems to be the standard offer today, sounds almost too good to be true. I've seen even higher shares for the artist. This, of course, can be seen as a step in the right direction. As the relative value of pure content increases and the cost of manufacturing, logistics and retail decreases or disappears entirely, so must the share of the performers who in fact provide the actual content be proportionally higher. Of course, I understand, that however logical and convincing I try to sound, someone, especially from the record industry, may disagree totally.

In any case, it is important to understand that in Cybermusic contracts, exclusive rights should never be given up by performers in respect of distribution services the effectiveness of which remains to be seen. Fortunately, and after some action from performers' organisations, the latest generation of these web contracts seems to be of the non-exclusive type. In a dynamic business environment, where many of the services could still be categorized as pilot projects, there is no point for performers to make exclusive commitments.

It is possible that for some time music sites make more money on advertising than on selling music. This brings about a new challenge for recording artists and those who look after their interests, to be able to collect a fair share of this "secondary" income. With no or almost no real sales there would be no or almost no royalties for artists.

Another important issue is that artists need to make sure that when record companies win millions in damages from illegal online users of their music, part of this "secondary" income should go to the artists, whose performances were illegally used as well. Recording contracts will usually dictate how the money that is collected as damages should be split between company and artist.

Security

Several companies around the world struggle as I speak to provide working security solutions for the online music business. Some claim they have them already, others can only come up with promises. There are collective efforts, such as SDMI (Secure Digital Media Initiative) and the efforts of individual companies such as Sony and Microsoft.

There are different approaches to this extremely complex problem. One is to cover the whole chain from the master to the consumer media and devices with protection measures. This ambitious approach taken by SDMI, for example, is definitely up for some big challenges. How to convince the consumer that the unavoidable inconveniences and added cost attached to these new ways and technologies of consuming music are a good thing? Music already submits very flexibly to every imaginable way or environment one might want to consume it in. If this sense of "ownership" of music is to be diminished, how could the public see it as something positive? Another challenge is that in order for such a system to be effective, alternative sources of acquiring the music would have to be cut off. This would mean, for example, the end of the CD as it is now, an unprotected source. Also, a critical mass of consumer devices would have to be distributed.

Let's take two real examples of how the entertainment industry is trying to deal with the security issue.

First, let's look at how Hollywood is doing with their digital products. The software protection of DVD that was intended to prevent copying movies into harddisks was cracked long ago, and the software can be easily found on the Internet. Recently, we've seen the emergence of MPEG 4, the new generation of video compression. It compresses a 5 gigabyte DVD video file onto a regular CD of 650 MB with quite acceptable quality. Knowing that the capacity of the next generation of CDRs will probably be twice that much, sounds like the film industry just got their own "MP3".

Then, another example, SDMI. It's a group of 200 music, telecommunications and consumer electronics companies. In September, SDMI offered a prize to anyone who could break various security measures designed to prevent illegal copies of songs sent over the Internet from being played on a computer or a portable player. The challenge ended three weeks ago.

Despite of the boycott that the online community of experts and hackers organized against the challenge, in order not to help SDMI in its efforts, some researchers recently announced that they were able to remove all four invisible watermarks placed on music files by SDMI. They said that any reasonably sophisticated computer pirate could do the same. Even unconfirmed by SDMI, this information strikes hard at the efforts to protect copyrights and prevent people from listening to music for free.

What can we learn from this? For the time being, available security schemes are not yet up to the task of protecting copyrights online. There will probably never be a 100 percent protection. The strongest available 512-bit encryption was also broken a while ago by a group of Swedish computer scientists. Even though they had to use an enormous amount of processor time to break the encryption, it is a clear message again. Obviously, we will have to settle for a realistic level of security, with an aim to reduce and control the level of piracy.

My obvious reservations towards SDMI are also based on competition concerns. Why would a system like SDMI, which is controlled essentially by the multinational media conglomerates, ever allow outsiders - independent companies or performing artists - to utilize it on equal or fair terms? The doubts that have been cast on SDMI as an attempt to return distribution control to the record industry in the online market may not be entirely unfounded. If such a scenario would become reality, the performers who have been hoping for a break in the download business would not stand a chance, I'm afraid.

Is there a future for Copyright on the Internet?

The Web as we know it today is a mirror of the human society. It contains a lot of what we think is good and useful as well as many things that are considered bad or destructive. For the governments, it's at least as difficult to control the cyberspace as the real world, which, of course, is already often close to impossible to control. It is very unfortunate, that copyright on the Internet is to many, a joke. Internet piracy of music and other copyright objects is both widespread and commonplace.

When we define "cybermusic" as music circulated in "cyberspace", we mean digital delivery of music on the Internet. We are not actually speaking of the music itself but rather of the way it is circulated. This is an important notion. The music as such is legally as protected as ever. More than a question of mere legislation, this boils down to implementation and synchronizing technical measures with legislation.

The scope of the problem presents itself in Napster and other highly decentralized systems still operating on the Internet, such as Freenet. It is a complex task to locate millions of illegal music files scattered on private harddisks all over the world. Very understandably, the threshold is quite high for most legislators to extend control to what is happening in the home, in someone's personal computer, and to communication between private persons. At the moment, file sharing systems designed to allow private persons to share their archives with others seem to pose the greatest threat to any legal forms of online music sales. In these systems, once a consumer gets the merchandise, he almost automatically becomes a distributor.

Finally, however complex the issues that rightsholders face in the cyberworld, one must not give up in front of them by saying, for example, that if current legislation is not effective, we don't need legislation at all. With proper laws in place there is a good chance that we may eventually be able to come up with satisfying and balanced practical solutions that will reasonably protect creative talent and investment in the cyberworld.