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The rising tide of Piracy,
its effect on the music
industry


                    Kerry Snyder
                  Law & Economics
                        2009
                  Lewis & Clark Law
Copyright law grants certain limited monopolies to the author(s) of
a creative expression fixed in a tangible medium.

For sound recordings:
    • copying — the right of reproduction
    • remixing — the right to create derivative works
    • public release — the right of distribution
    • digital performance rights

Digital piracy, for the most part, infringes the rights of reproduction
and distribution. Newer channels of digital piracy implicate the
digital performance rights (unauthorized streaming) and the
derivative works right (sampling within new compositions).
Share the
                                                                          booty? Shiver
                                                                           me timbers!




• physical media to digital file
• digital file to P2P network
• P2P shared file to physical
media
• Napster, Kazaa, Gnutella,
     Limewire, BitTorrent, Ares,
eDonkey, Usenet
• zShare, RapidShare




    N.B. All images and trademarks reproduced as (hopefully) fair use under 17 U.S.C. § 109 as
    ―criticism, comment, news reporting, teaching (including multiple copies for classroom use),
    scholarship, or research,‖ or the Lanham Act § 43(c)(3).
Digital on the Rise; Physical Media
              Crashing
     16.00
 $
     14.00
i
  12.00
n
     10.00                  All Sales
B
      8.00
i                           Physical Media
l
      6.00
l                           Digital Sales
i     4.00
                            Mobile &
o
                            Others
      2.00
n
s
      0.00



              Year
Digital Sales by Type — ’04 to
              ’08
    3000

$
    2500
i                                            Subscription
n
    2000
                                             Mobile
M                                            SoundExchang
i 1500                                       e
                                             Music Video
l
l
  1000                                       Albums
i
o                                            Singles
n 500
s
      0
       2004      2005   2006   2007   2008
                        Year
Digital Music Sales by Type
            Subscriptio
                                                    2008
                              2007                          Subscriptio
                n
                                                                n
               8%
 Sound-                                                        7%
Exchange                                      Sound-
   2%                                        Exchange
                                                3%


                          Singles
                           34%                                Singles
                                                               38%
       Mobile                                      Mobile
        37%                                         30%




   Music                            Albums       Music
   Videos                            18%
                                                                   Albums
                                                 Videos
     1%
                                                   1%               21%
Physical vs. Digital Recordings in the
                           US
        100%
    Q
        90%
    u
P       80%
    a
e
        70%
    n
r
    t   60%
c
    i   50%
e
    t                                             Physical
n       40%
    y                                             Digital
t       30%
  S     20%
o
  o     10%
f
  l
         0%
  d
           2005      2006          2007   2008
                            Year
Arr, there be
   mutiny
  afoot…
File sharing meets
consumer
demands, formerly
unfulfilled

―[The fact that] the smart
people now also have access
to recorded music represents
a much bigger increase in
economic welfare (and does
not hurt the recording industry
as it is ‗demand without
purchasing power‘ that is
being met).‖
       From a study published recently by TNO, SEO, IvIR, commissioned by the ministry
       for Economic Affairs, the Justice Department and the ministry for Education Culture
       and Science of the Dutch government.
Not payin‘
attention, arr
    rrrya?
Piracy Vs. Music Industry
Piracy Makes Waves, but
   what is the Ripple Effect?
Who is damaged by
unauthorized music file-
sharing?
   Music recording sales
   are down considerably
   (despite digital sales
   taking off).
   The Big 4 music labels
   increased their
   profitability from 1999-
   2003 in spite of Napster
   and the golden age of
   file-sharing.
Piracy Makes Waves, but
  what is the Ripple Effect?
Who is damaged by
unauthorized music file-                    Music Industry Revenue
                                                       Streams
sharing?
                                        • radio advertising revenue •
   The music industry as a              • record company revenues •
   whole has seen a significant           • musical instrument sale •
   revenue increase since the                  • live music sector •
   advent of file-sharing                    • music retail sectors •
                                       • music publishing for portable
   according to the IFPI.
                                                   digital players •
   Price Waterhouse Cooper
   tells us that the media
   (including music)
   entertainment industry is
   soaring, potentially rising
   from $1 trillion to $1.8 trillion
   from 2006-2009.
Piracy Makes Waves, but
   what is the Ripple Effect?
Some studies find
limited correlations.
   Downloaded songs
   negatively impact
   sales of 25% most
   popular albums, but
   positively impact
   the rest.
   Computer
   ownership
   negatively
   influenced record
   purchases.
Piracy Makes Waves, but
     what is the Ripple Effect?
The most extensive
macroeconomic studies with
huge, proprietary datasets
show no harm.
   No statistically significant
   correlation between P2P
   downloads and record sales.
   At most, 5000 downloaded
   songs replaced 1 album
   sale.
   Spawned a contentious
   debate due to lack of data
   transparency and general
   pettiness.                     Great Wave off of Kanagawa by Katsushika
                                  Hokusai, 1832
   File sharing does not impact
   chart survival of
   albums, though album
Piracy Makes Waves, but
  what is the Ripple Effect?
                                                 Lily-livered
From a microeconomic study of                   landlubbers!
                                                  Ye be no
Canadians:                                         pirates!
   File sharers buy 0.44 CDs for every 1
   downloaded — likely subject to interest
   bias.
   No significant correlation between
   unauthorized and authorized downloading.
   Positive correlation between purchase of
   music and purchase of other entertainment
   media (DVDs, games, concert and movie
   tickets).
   Those with high interest in music purchase
   and download more.
   Income is not correlated with music
   purchasing.
How do these studies resolve with each
               other?
    It is likely that file-sharing effects the sales of
    albums of varying popularity and genre
    differently.
       Notably, it benefits the ―long tail‖ of lesser known
       artists with free, listener-driven exposure.
       It detracts from sales of the most popular
       artists, making it more difficult to “go
       platinum”.
       Replaces expensive marketing campaigns with
       listener‘s choice and public hype machines.
       Effectively evens the playing field, to the likely
       dismay of the Big 4.
How do these studies resolve with each
               other?
    As the recording industry tapers off, the music
    industry has ample opportunity to thrive:
       Cross-media markets are booming, e.g. Guitar
       Hero
       Digital music sales are climbing steadily.
       Competing with free unauthorized downloads is
       hard.
          Huge catalogs, e.g. iTunes Music Store, last.fm
          Cross-platform usage, e.g. Amazon MP3 store, no
          DRM
          Harness network effects to suggest songs, e.g.
          iLike, imeem
          Ad-based or subscription models, e.g. Spotify

    I posit that a more profitable equilibrium can be
Online Digital Music Peddlers — A Rough
                              Survey
          iTunes Rhapso      eMusi    Last.fm Napste      Pandor Amazo        Spotify
                 dy          c                r           a      n MP3

Launche 2003       2001      1998     2002     2003       2000       2008     2009
d
Songs     10M      5M        4.5M     3.5M     7M         N/A        > 5M     > 6M

Big 4     yes      yes       no       2 of 4   yes        Yes?       yes      yes

                                                          None –
Payment 69¢ -   25           $11.99 $3/mo.     $12.95/               Free to None or
        $1.29/s free/mo.     /mo.   premiu     mo. or     links to   $185.76 $1.10/d
        ong     -            and up m          99¢/son    mp3                ay or
                $12.99/                        g          stores             $12/mo
                mo.& up                                                      .
Users     lots     unknown 400K       30M      > 830K     2M on      unknow   growing
                                                          iPhone     n
                                                          alone
Notable   70%      Owned     All      Owned    Roxio      Music      1st to   Celesti
          market   by Real   indie    by CBS   rollout;   Genom      sell     al
          share              labels            Best       e          DRM      jukebox
71% of users
                               increasing their
     95% of music              illicit downloads
     downloads are              cite high prices
      unauthorized               as the reason




                      84% of illicit
                     downloaders
                      think artists
                     deserve to be
                          paid




SOLUTION: Lower song price &
  Raise artist compensation
        transparency
Limited
Ownership of   Ownership/Limited
Commodities        Access
This is the ballad of Henry Morgan
Who troubled the sleep of the King
      of Spain
With a frowsy, blowsy, lousy pack
Of the water rats of the Spanish
      Main,
Rakes and rogues and mad
      rapscallions
Broken
      gentlemen, tattermedallions
Scum and scourge of the
      hemisphere,
Who looted the loot of the stately
      galleons,
Led by Morgan, the Buccaneer.
               — BertonBraley, 1934

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Piracy Vs. Music Industry

  • 1. The rising tide of Piracy, its effect on the music industry Kerry Snyder Law & Economics 2009 Lewis & Clark Law
  • 2. Copyright law grants certain limited monopolies to the author(s) of a creative expression fixed in a tangible medium. For sound recordings: • copying — the right of reproduction • remixing — the right to create derivative works • public release — the right of distribution • digital performance rights Digital piracy, for the most part, infringes the rights of reproduction and distribution. Newer channels of digital piracy implicate the digital performance rights (unauthorized streaming) and the derivative works right (sampling within new compositions).
  • 3. Share the booty? Shiver me timbers! • physical media to digital file • digital file to P2P network • P2P shared file to physical media • Napster, Kazaa, Gnutella, Limewire, BitTorrent, Ares, eDonkey, Usenet • zShare, RapidShare N.B. All images and trademarks reproduced as (hopefully) fair use under 17 U.S.C. § 109 as ―criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research,‖ or the Lanham Act § 43(c)(3).
  • 4. Digital on the Rise; Physical Media Crashing 16.00 $ 14.00 i 12.00 n 10.00 All Sales B 8.00 i Physical Media l 6.00 l Digital Sales i 4.00 Mobile & o Others 2.00 n s 0.00 Year
  • 5. Digital Sales by Type — ’04 to ’08 3000 $ 2500 i Subscription n 2000 Mobile M SoundExchang i 1500 e Music Video l l 1000 Albums i o Singles n 500 s 0 2004 2005 2006 2007 2008 Year
  • 6. Digital Music Sales by Type Subscriptio 2008 2007 Subscriptio n n 8% Sound- 7% Exchange Sound- 2% Exchange 3% Singles 34% Singles 38% Mobile Mobile 37% 30% Music Albums Music Videos 18% Albums Videos 1% 1% 21%
  • 7. Physical vs. Digital Recordings in the US 100% Q 90% u P 80% a e 70% n r t 60% c i 50% e t Physical n 40% y Digital t 30% S 20% o o 10% f l 0% d 2005 2006 2007 2008 Year
  • 8. Arr, there be mutiny afoot…
  • 9. File sharing meets consumer demands, formerly unfulfilled ―[The fact that] the smart people now also have access to recorded music represents a much bigger increase in economic welfare (and does not hurt the recording industry as it is ‗demand without purchasing power‘ that is being met).‖ From a study published recently by TNO, SEO, IvIR, commissioned by the ministry for Economic Affairs, the Justice Department and the ministry for Education Culture and Science of the Dutch government.
  • 12. Piracy Makes Waves, but what is the Ripple Effect? Who is damaged by unauthorized music file- sharing? Music recording sales are down considerably (despite digital sales taking off). The Big 4 music labels increased their profitability from 1999- 2003 in spite of Napster and the golden age of file-sharing.
  • 13. Piracy Makes Waves, but what is the Ripple Effect? Who is damaged by unauthorized music file- Music Industry Revenue Streams sharing? • radio advertising revenue • The music industry as a • record company revenues • whole has seen a significant • musical instrument sale • revenue increase since the • live music sector • advent of file-sharing • music retail sectors • • music publishing for portable according to the IFPI. digital players • Price Waterhouse Cooper tells us that the media (including music) entertainment industry is soaring, potentially rising from $1 trillion to $1.8 trillion from 2006-2009.
  • 14. Piracy Makes Waves, but what is the Ripple Effect? Some studies find limited correlations. Downloaded songs negatively impact sales of 25% most popular albums, but positively impact the rest. Computer ownership negatively influenced record purchases.
  • 15. Piracy Makes Waves, but what is the Ripple Effect? The most extensive macroeconomic studies with huge, proprietary datasets show no harm. No statistically significant correlation between P2P downloads and record sales. At most, 5000 downloaded songs replaced 1 album sale. Spawned a contentious debate due to lack of data transparency and general pettiness. Great Wave off of Kanagawa by Katsushika Hokusai, 1832 File sharing does not impact chart survival of albums, though album
  • 16. Piracy Makes Waves, but what is the Ripple Effect? Lily-livered From a microeconomic study of landlubbers! Ye be no Canadians: pirates! File sharers buy 0.44 CDs for every 1 downloaded — likely subject to interest bias. No significant correlation between unauthorized and authorized downloading. Positive correlation between purchase of music and purchase of other entertainment media (DVDs, games, concert and movie tickets). Those with high interest in music purchase and download more. Income is not correlated with music purchasing.
  • 17. How do these studies resolve with each other? It is likely that file-sharing effects the sales of albums of varying popularity and genre differently. Notably, it benefits the ―long tail‖ of lesser known artists with free, listener-driven exposure. It detracts from sales of the most popular artists, making it more difficult to “go platinum”. Replaces expensive marketing campaigns with listener‘s choice and public hype machines. Effectively evens the playing field, to the likely dismay of the Big 4.
  • 18. How do these studies resolve with each other? As the recording industry tapers off, the music industry has ample opportunity to thrive: Cross-media markets are booming, e.g. Guitar Hero Digital music sales are climbing steadily. Competing with free unauthorized downloads is hard. Huge catalogs, e.g. iTunes Music Store, last.fm Cross-platform usage, e.g. Amazon MP3 store, no DRM Harness network effects to suggest songs, e.g. iLike, imeem Ad-based or subscription models, e.g. Spotify I posit that a more profitable equilibrium can be
  • 19. Online Digital Music Peddlers — A Rough Survey iTunes Rhapso eMusi Last.fm Napste Pandor Amazo Spotify dy c r a n MP3 Launche 2003 2001 1998 2002 2003 2000 2008 2009 d Songs 10M 5M 4.5M 3.5M 7M N/A > 5M > 6M Big 4 yes yes no 2 of 4 yes Yes? yes yes None – Payment 69¢ - 25 $11.99 $3/mo. $12.95/ Free to None or $1.29/s free/mo. /mo. premiu mo. or links to $185.76 $1.10/d ong - and up m 99¢/son mp3 ay or $12.99/ g stores $12/mo mo.& up . Users lots unknown 400K 30M > 830K 2M on unknow growing iPhone n alone Notable 70% Owned All Owned Roxio Music 1st to Celesti market by Real indie by CBS rollout; Genom sell al share labels Best e DRM jukebox
  • 20. 71% of users increasing their 95% of music illicit downloads downloads are cite high prices unauthorized as the reason 84% of illicit downloaders think artists deserve to be paid SOLUTION: Lower song price & Raise artist compensation transparency
  • 21. Limited Ownership of Ownership/Limited Commodities Access
  • 22. This is the ballad of Henry Morgan Who troubled the sleep of the King of Spain With a frowsy, blowsy, lousy pack Of the water rats of the Spanish Main, Rakes and rogues and mad rapscallions Broken gentlemen, tattermedallions Scum and scourge of the hemisphere, Who looted the loot of the stately galleons, Led by Morgan, the Buccaneer. — BertonBraley, 1934