A New Business Model for the Music Industry Explained

[The following is a summary of my article, “Common Sense, Accommodation and Sound Policy for the Digital Music Marketplace,” which was published in the winter 2008 edition of the Journal of International Media and Entertainment Law.]

The music industry has been in a decade-long death-spiral for which no one has yet offered a recovery plan that has worked. This predicament results primarily from insistence by those who benefited most from how the industry operated before the Internet arose that the established relationships upon which their past successes were based be preserved as the digital music marketplace develops. Because of this unwillingness to change, the industry has failed to undertake the transformation now needed to prosper.

The major record labels have set the industry’s Internet agenda overall. They are single-mindedly committed to making the Internet safe for sale of recordings on terms and conditions that they alone decide. They risked everything on the false hope that through a combination of DRM and the force of law they could contain unauthorized Internet distribution of recorded music.

Simply put, however, the Internet is fundamentally incompatible with the music industry’s sales-based revenue model. Every Internet user, whether or not involved in P2P or social networking, and every webcaster, podcaster, or other digital audio service provider in the world is a potential source of unauthorized mass distribution of recorded music in pristine and unprotected form. Through the Internet, the market for sale of individual recordings can be saturated in a moment’s time and without payment of any royalties to songwriters, music publishers, recordings artists or record labels. The dollar amount at risk may be greater for larger rights holders; but all rights holders, large and small, are impacted to the extent they derive revenue from sales of recordings.

The industry’s efforts to salvage its sales-based revenue model have compelled it to resist consumer demand for full, unfettered, DRM-free access to music. The industry has also blocked consumer electronics makers and technology firms from offering new products with next generation capabilities; limited the growth of webcasting and other digital audio services; chilled free speech and interfered with academic freedom on university campuses; failed to resolve its conflicting claims regarding transborder transmissions; sought multiple payments for each transmission of each work and caused other distortions in the music licensing marketplace; relegated consumers to black-market services where adware, spyware, and privacy violations abound; and exposed consumers to ruinous infringement liability damages for conduct occurring in the privacy of their homes and dorm rooms.

The market forces at work at the intersection of the Internet and the music industry’s sales-based revenue model are wildly asymmetrical and to the disadvantage of music industry rights holders. The network is everywhere and music is everywhere a part of it. Thus, despite the industry’s efforts, the unauthorized digital distribution of recorded music continues unabated; P2P file- and stream-sharing networks proliferate; and new means of mass distribution have arisen, including, for example, the explosive growth of mobile communications. And for it all, the industry’s efforts have resulted in fewer licensed transmissions of fewer works and slowed the growth of royalties that otherwise may have been earned.

The problem does not lie with the Internet. Nor with technology run amok. Nor with consumers who cannot be made to relinquish their newly-acquired ability to enjoy music when, where and how they want. Rather, the problem lies with the music industry’s addiction to the sales-based revenue model. As long as its fortunes are tied to sales it must continue punitive litigation against consumers, and interference in the free markets for technology, consumer electronics, and digital audio services.

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