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Numbers don’t crunch against downloading

Last week the Canadian music industry, led by senior executives and star musicians, including rocker Tom Cochrane and Jim Cuddy of Blue Rodeo, descended on Parliament Hill to lobby the government to reform Canada's copyright legislation. The industry sought meetings with government leaders such as Canadian Heritage Minister Liza Frulla and Industry Minister David Emerson, the ministers responsible for Canadian copyright policy.


The industry played a familiar tune. Graham Henderson, president of the Canadian Recording Industry Association, argued that music downloading has devastated the industry. While Cochrane indicated that he was uncomfortable suing individual file sharers, he nevertheless characterized Canada's laws as akin to those found in developing countries.


The government did not provide an official response, however Toronto Liberal MP Sarmite Bulte attended the event and offered up her potential solution. Bulte argued that the onus must be placed on Canada's Internet service providers to ensure that music cannot be accessed "automatically." That comment likely took many ISPs by surprise given that it runs counter to a recent Supreme Court of Canada decision that ruled that ISPs are mere conduits and thus not directly responsible for the actions of their subscribers.


Moreover, forcing ISPs to control access to online content raises the chilling prospect of a censored Internet much like that found in China or Saudi Arabia.


Although dragging ISP liability issues back into the copyright debate is unlikely to generate much support, the music lobby event, which took place complete with a mini-concert, helpfully placed the broader copyright issue at centre stage. Unfortunately, three critical issues were lost among the frantic claims of damage from music downloading.


First, the side effects of the industry-supported copyright reform proposals were not addressed. The U.S. experience, surveyed in previous columns, is instructive. Should Canada adopt a similar model, the proposed reforms are likely to result in the loss of millions of dollars for the Canadian education community, create a chill over research and small business innovation, adversely impact personal privacy, and establish a barrier to new creativity for millions of Canadians.


Moreover, eight years of U.S. experience suggests that the laws will do little to stop file sharing, which despite tougher laws remains as popular as ever. The U.S. courts, which are not subject to intense lobbying campaigns, have increasingly sided against the industry, recently dismissing lawsuits against Grokster, a leading peer-to-peer provider used to access online music.


Second, by emphasizing copyright reform, the industry failed to focus sufficient attention on government support for Canadian music, which is the real engine of Canadian music creativity. The federal government provides tens of millions of dollars each year through programs such as the Canadian Music Fund to assist the industry.


With renewal of that support currently uncertain, the music industry would have done much more for struggling Canadian artists by making continued public funding to assist in the development and release of new Canadian music its top priority.


Third, amid the claims of industry losses, the industry failed to make the case that music downloading is significantly harmful to Canadian artists as even Jim Cuddy acknowledged that it was hard to determine whether music downloading has actually hurt his band. Careful examination of CRIA's own numbers, along with industry data from Statistics Canada, suggests that the financial impact of music downloading on Canadian artists is greatly exaggerated.


The actual financial impact of music downloading has long been difficult to ascertain. In August 2003, CRIA issued a news release claiming $250 million in losses over the previous three years. Three months later, another release claimed $425 million in losses. Several weeks ago, CRIA general counsel Richard Pfohl told a university audience the figure was actually $450 million per year since 1999, totaling roughly $2 billion over the past five years.


The guesswork surrounding record sales is unnecessary since CRIA posts its members' monthly record sales data directly on its Web site. According to CRIA, Canadian CD sales in 1999 generated almost $700 million. That figure declined annually, to $690.3 million (2000), $645.8 million (2001), $609.5 million (2002), and $559.7 million (2003). Using CRIA's own numbers and 1999 as a benchmark, the cumulative decline in CD sales revenue in Canada is $294 million. Given that total CD sales revenues during the period totaled $3.2 billion, the percentage decline is a relatively modest 9 per cent.


While a $294 million decline may still hurt, the source of that decline must also be examined. The uncertainty associated with the financial impact of file sharing arises since the losses tied to file sharing are only those that displace a potential sale, not all downloads. Moreover, those losses must be offset against downloads that involve sampling before purchasing, downloads of music that is no longer for sale, downloads of music that is in the public domain or available with the express permission of the copyright holder, and downloads that are compensated in Canada through the private copying levy.


A recent Economist article reported that an internal music-label study found that between two thirds and three quarters of recent sales declines had nothing to do with Internet music downloads.


That view was echoed in a recent Ministry of Canadian Heritage-commissioned report which concluded that "[t]he assumption by the recording industry that demand for CDs is fundamentally strong and that Internet piracy is to blame for falling sales is a simplistic reaction to a complex problem . . . to place the burden wholly or partly on illegal downloads from the Internet is to ignore a host of other reasons."


The "other reasons" include the growth of DVD sales, which accounted for zero revenue in 1999, but generated nearly $105 million in new revenue from 2000 to 2003. The popularity of DVDs is surely related to the decline in CD sales and the shrinking shelf space allocated to CDs by music retailers.


U.S. census data actually indicates that the number of hours people spend listening to music is declining. Its data suggests that people now spend increasing amounts of time talking on cellphones, playing videogames, watching movies or spending time on the Internet.


The shift in music retail merchandising and marketing has also had an enormous impact on CD sales. The Recording Industry Association of America, CRIA's U.S. counterpart, reports that the dominant retail chains are now big-box retailers such as Wal-Mart.


In Canada, Wal-Mart and Costco now account for 25 per cent of the music retail marketplace, while in the U.S., Wal-Mart, Target and BestBuy are responsible for over half of all CDs sold.


This shift affects the music industry in two ways. First, while traditional record stores carry 50,000 or more titles, Wal-Mart focuses primarily on new releases, featuring only 1,500 to 5,000 titles. The decreasing availability of older titles hurts an industry that traditionally depends upon catalogue sales for 25 to 40 per cent of its retail music revenue.


Second, Wal-Mart has placed new price pressures on the retail pricing of CDs — capping retail pricing in the United States at $9.72 (U.S.) per CD. The pricing pressure has had a dramatic impact on the revenue generated from each CD sale. According to CRIA's own numbers, revenue from the average CD this year is $10.72, down 10.7 per cent from $12.00 per CD in 1999. The bottom line impact has been to shave $47.8 million in revenue for sales in 2004 (through October) when compared with the same unit sales in 1999. The per-CD decline in revenue in those ten months alone is equal to 16 per cent of the total drop in revenue for the entire 1999-2003 sales period.


In fact, perhaps the best evidence yet of the tenuous link between file sharing and music sales comes from the music industry's performance following the Federal Court of Canada's file sharing decision denying CRIA's demand to disclose the identities of 29 alleged file sharers at the end of March of this year. Despite the dire predictions that the decision would decimate music sales, the six-month period following the decision saw CD unit sales jump by 12.4 per cent in Canada over the prior year.


The good news does not end with rising music sales. The evidence suggests Canadian artists have scarcely been harmed by the reduced sales from 1999 to 2003 since royalty losses are fully compensated through the private copying levy.


Next week's column will examine that side of the issue, focusing on artist compensation, the support for peer-to-peer among independent artists desperate for exposure, and the levy that will have generated well more than $100 million by the end of this year for the music industry.

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