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Music licensing would be viable for all

No Internet law issue is more maddeningly frustrating than online music and peer-to-peer file sharing. Since the emergence of Napster nearly five years ago, the recording industry has found itself at loggerheads with millions of music fans over an approach that will satisfy both the industry's need for adequate compensation and the consumer's desire for quick and cheap online availability of digital music.


For the recording industry, the equation is simple — file sharing is up and sales are down. With peer-to-peer networks tagged as the obvious culprit, the industry has launched a series of legal challenges against the file sharing services and their users.


Supporters of file sharing in Canada have pointed to the Copyright Act's private copying exemption as a potential solution. Last December the Copyright Board of Canada indicated that the exemption applies to personal, non-commercial copying of music, including downloading that occurs on file sharing networks.


While the recording industry disputes that interpretation of the law, the exemption still does not provide an effective solution to the file sharing issue.


First, the exemption, which compensates artists through the establishment of a levy placed on blank media, such as audio cassettes, CDs, and now MP3 players, likely does not apply to uploaders, or those who make their music available to others.


In a peer-to-peer context, that means that most file sharers may not be covered by the exemption.


Second, the recording industry argues that the compensation obtained under the private copying regime does not come close to covering the losses sustained by the industry. In fact, under the current system, U.S. rights holders in sound recordings do not obtain any compensation.


Third, the levy has been the target of heated criticism as opponents note that many blank CD purchasers do not use their CDs to copy music. Since they are still subject to the levy, non-music copiers are effectively subsidizing those that do copy music.


Moreover, Canadian retailers may ultimately be harmed by the levy since, in this era of e-commerce, substantial levies on CDs is likely to lead consumers to go online in search of CDs from outside the country not subject to the levy.


Given the imperfections of every solution attempted thus far, is there an alternative that would simultaneously satisfy both the recording industry and its customers? The recording industry has made significant strides in recent months in offering new choices to consumers.


Should the file sharing activities continue notwithstanding the availability of these authorized services as well as the deterrence arising from the lawsuits against individual users, the recording industry may want to consider supporting a new form of blanket licence for peer-to-peer users that would effectively legalize music file sharing.


Although such a scheme today faces opposition from the recording industry, some ISPs, and potentially some users, a well-targeted licence scheme may hold the prospect of providing the recording industry with hundreds of millions of dollars in compensation, while ensuring that those most likely to engage in file sharing are also the ones most likely to pay the associated costs.


To be both fair and effective, a blanket licence for non-commercial file sharing would need to provide full compensation to the recording industry for the losses it incurs due to the file sharing activity. Although estimates on the losses attributable to file sharing vary, the Canadian Recording Industry Association has argued that the industry has lost roughly $100 million per year in revenue for the past four years and it believes that much of that loss is due to file sharing.


While generating that level of compensation is not easy, it is doable. To ensure that the burden applies fairly, paying for the licence could focus on the two most identifiable groups of file sharers — students and home broadband users that use large amounts of bandwidth each month.


With respect to university students, an Internet access fee could be included as part of annual tuition and student fees. Such an approach is gaining support in the United States, where universities have begun to licence access to fee-based music services such as Napster for their students with the costs passed along to students as a new access fee.


This year there are an estimated 750,000 full-time undergraduate and graduate students in Canada. Given a nine-month academic year, a charge of $8 per month in return for a licence to engage in unlimited music file sharing would generate $54 million in annual revenue. The $72 annual student fee, while not inconsequential, would still only represent a tiny fraction of overall student fees.


The other heavy users of file sharing services are a small segment of consumers with high-speed Internet access at home (employees are typically prohibited from file sharing while at work). While the challenge of identifying those home users that engage in file sharing raises immediate privacy concerns, the ISPs may actually be in the process of providing an easy source of identification.


ISPs have long noted that a disproportionate amount of their bandwidth is used by a small per centage of users (a commonly suggested figure is that 80 per cent of bandwidth is used by 20 per cent of users). In response, many ISPs have indicated that they plan to move toward tiered pricing models that would charge heavy users increasing amounts for their bandwidth consumption.


It is widely suspected that users consuming large amounts of bandwidth are engaged in file sharing since e-mail and surfing the Web typically do not account for a disproportionately large amount of bandwidth. Given that these users may be willing to indirectly pay for the privilege of file sharing by shelling out for extra bandwidth, it stands to reason that this group is a good target to bear some of the cost of a file sharing license.


While estimates vary, most experts estimate that there are at least three million Canadians with high-speed Internet access at home. Assuming that 20 per cent of those users are "heavy users," that suggests that there are 600,000 heavy users who, with a monthly charge of $6, would generate an additional $43 million in annual revenue for file sharing compensation.


Taken together, the student and heavy broadband user compensation would yield $97 million annually, presumably more than enough to provide the recording industry with full compensation for losses sustained due to file sharing.


While there will undoubtedly be objections to such a scheme, this may be a particularly opportune time to pursue a blanket licence for file sharing. Similar licensing proposals when raised in the United States have received support from diverse constituencies such as Michael Powell, the chair of the Federal Communications Commission, ISPs such as Verizon Communications, and the Electronic Frontier Foundation, which recently proposed a voluntary compulsory licence scheme.


Unlike the U.S., which has more limited experience with collective licensing, the Canadian marketplace has a much richer experience with such approaches and could provide a fertile ground for a national pilot project to examine whether a peer-to-peer blanket licence is a realistic alternative. Moreover, last week the Supreme Court of Canada sent a strong message to the copyright community in a landmark decision in which it made it clear that it would interpret copyright law in a manner that balanced the interests of both creators and users.


The strongest opposition to such a scheme would likely come from the ISPs and the recording industry. The ISPs would undoubtedly express concern that this approach will reduce their income from the consumer broadband market since much of the tiered pricing gains would be passed along to cover the cost of the license.


Although the criticism is true, it should be noted that in marketing tiered pricing plans, the unspoken selling point for users is access to content on file sharing services and fairness may dictate that some of that value be passed along to the content creators.


Moreover, with CRIA now pursuing file sharing suits against individual users, ISPs have been placed in the unenviable position of being "copyright detectives" in the words of one ISP. Given the reluctance to play this role, ISPs may be more receptive than ever to new solutions.


In fact, a blanket peer-to-peer licence could be coupled with new statutory immunities for ISPs for potential liability for copyright infringement that occurs on their networks. Canadian ISPs have thus far been unable to obtain legal protections similar to those found in the U.S. and this policy process might provide the avenue to pursue such reform.


The recording industry would likely oppose such an approach on two grounds. First, a blanket licence would require the industry to surrender key copyright rights — the rights of reproduction and communication — within the peer-to-peer framework. Second, it would express fears that the blanket licence would undermine new commercial services such as Puretracks.


To address the first concern, it is worth noting that the recording industry has historically surrendered exclusive rights in return for adequate compensation on numerous occasions. Given the effects of peer-to-peer file sharing on the Canadian recording industry, $100 million in additional revenue for the labels and artists cannot be easily dismissed.


With regard to the competition between file sharing and fee-based services, the commercial fears may be unfounded.


As anyone who has used services such as Puretracks or Apple's iTunes can attest, there is a world of difference between authorized services that provide immediate gratification with song samples along with clean MP3s free of spyware and computer viruses, and the time consuming alternatives presented by the free file sharing services. Far from hurting sales, the industry may find that the fee and free services can co-exist as two separate revenue streams.


Consumer demand for music online is clearly here to stay. What we need now is a solution that allows all participants in the process, including the record labels, creators, consumers, and ISPs to benefit.


If the current approach fails, the solution may lie in building on Canada's experience with collective licensing to create a world-first — a blanket licence that legalizes peer-to-peer file sharing of music.

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