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Recording Industry's Digital Strategy Out of Tune

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Monday February 19, 2007
Appeared in the Toronto Star on February 19, 2007 as Recording Industry's Off-Key Strategy

Ten years ago, as the Internet began to mushroom in popularity and emerging technologies enabled consumers to make near-perfect copies of digital content, the recording industry embarked on a two-pronged strategy in response to the changing business environment.  

First, it emphasized copy-control technologies, often referred to as digital rights management (DRM), that many in the industry believed would allow it re-assert control over music copying.  Second, it lobbied the Canadian government for a private copying levy to compensate for the music copying that it could not control.

While the industry’s approach proved successful on the legal front - the 1996 World Intellectual Property Organization's Internet Treaties established legal protections for DRM and Ottawa introduced a private copying levy on blank media such as cassettes and CDs in 1997 - the strategy's effectiveness has long been subject to debate.  

The week of February 5th  may ultimately be viewed as the beginning of the end of that debate.  That week, which began with Apple CEO Steve Jobs calling on the industry to drop DRM and concluded with the Canadian Private Copying Collective (CPCC), the collective that administers the private copying levy, applying for its dramatic expansion, leaves little doubt that the recording industry got it wrong.

The Steve Jobs position on DRM, which many derided as self-serving given that Apple is facing mounting pressure from European regulators to address the interoperability restrictions contained in music sold by its iTunes service, was also widely acknowledged by those same commentators to be right.  

Digital right management supporters may claim that the technology encourages innovation, yet experience has demonstrated that reliance on digital locks frequently sink, rather than save, new business models.  

The 2005 Sony rootkit debacle, which ultimately cost the company millions of dollars in class action lawsuits, the market disappointments of new digital music players that rely heavily on DRM such as the Microsoft Zune, and the lack of support for digital music subscription services that insert burdensome restrictions on the use of downloaded music such as Rhapsody and Napster, offer compelling examples of why DRM has emerged as the industry's biggest impediment to consumer acceptance.

Indeed, many of the recording industry's leading digital sales channels, including Yahoo!, Real Networks (which owns Rhapsody), and Apple have now publicly called on the record labels to end their insistence on DRM.  Moreover, last week a Jupiter survey of European music executives found that nearly two-thirds believe that dropping DRM would increase digital music sales.

Given the rising chorus against DRM, it is seemingly only a matter of time before the industry backs away from its locks-first strategy. EMI, the world's third largest music label, is rumoured to be ready to do so and should one of the majors move in that direction, it is likely that the others will soon follow suit.

The private copying levy may survive somewhat longer, but it too appears to be nearing the end. The levy has generated an enormous amount of income (over $150 million since its inception), yet it is far more market distorting that its advocates anticipated, and much to the recording industry's dismay, it has provided peer-to-peer file sharers with a legitimate argument that downloading for personal, non-commercial purposes is lawful in Canada.

The latest demands from the CPCC swim against the global tide by calling for massive increases in the current levy system at a time when other countries are implementing new laws to authorize private copying (such as copying music from a CD to an iPod) without compensation.  U.S. copyright law has long permitted this form of copying as a matter of fair use (something even the industry acknowledged before the U.S. Supreme Court), Australia enacted a law to allow for such copying last year, and both New Zealand the United Kingdom are currently considering similar legislative reforms.

The CPCC takes precisely the opposite approach.  It is demanding an increase in the levy to 29 cents per blank CD, a price that would result in huge market distortions given that the collective admits that the levy will account for more than half of the retail price of blank CDs.  

Moreover, it is seeking to reinstate a levy of up to $75 on digital audio recorders such as the Apple iPod.  The collective claims that the levy will exclude cellphones and PDAs by limiting its application to devices that primarily play music, however, distinguishing between devices is nearly impossible since dozens of products (Apple iPhone, Blackberry Pearl, Palm Treo) are music players, cellphones, digital cameras, and email devices rolled into one.

The CPCC is also seeking to extend the levy to storage media such as SD cards, despite the fact that its own data shows that 75 percent of content copied onto these cards is not music and 80 percent of people say that the content they last copied onto these cards was not music.  These results will not come as a surprise to digital camera owners, yet that has not stopped the collective from demanding up to $10 per memory card.

These ambitious demands may well herald the end of the private copying levy.  Unpopular with the public and targeted for elimination by the Conservative party, the levy has been overtaken by the prevailing view that consumers should be entitled to make copies of their store-bought music without further compensation.  While there may be a need for an alternative compensation system for peer-to-peer file sharing, the private copying levy is ill-suited for this role since it does not legalize the making available of content on peer-to-peer systems and the purchase of blank media bears little relation to P2P activity.  

Indeed, there are better solutions out there - levies tied to network providers make more sense (and are already replicated by cable television levies for retransmission of content) and there is a need to cover both peer-to-peer and the non-commercial use of content in user-generated content.  Those approaches will require the recording industry to play a new tune - one that includes the abandonment of the 1990s strategy of DRM and the private copying levy.

Michael Geist holds the Canada Research Chair in Internet and E-commerce Law at the University of Ottawa, Faculty of Law. He can reached at mgeist@uottawa.ca or online at www.michaelgeist.ca.

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