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Time music industry focused on product

The intense lobbying for stronger copyright legislation in response to music downloading, which culminated in last month's lobby day on Parliament Hill, is premised on three key pillars. First, that the Canadian recording industry has sustained significant financial losses in recent years due to decreased music sales. Second, that those losses can be attributed to peer-to-peer file sharing. Third, that the losses have materially harmed Canadian artists.


The time has come to acknowledge that each of these pillars is a myth.


Last week's column addressed the first two pillars. It documented how CRIA has been inconsistent in its claims of financial losses. The inconsistency is best highlighted by CRIA President Graham Henderson's claim last month at the lobby day in Ottawa that industry losses totaled $500 million just two days after placing the figure at $1.3 billion in a letter to the Vancouver Sun.


The column noted that the inconsistent claims are particularly puzzling since CRIA posts industry sales and revenue figures on its Web site. According to CRIA's own numbers, the cumulative decline in revenue since 1999 is $294 million. That figure constitutes a relatively modest 9 per cent decline in revenue on sales of $3.2 billion and, given the financial decline suffered by many companies in the wake of the dot-com crash, hardly rises to the level of devastating financial impact.


The column also demonstrated how peer-to-peer file sharing is at best only marginally responsible for the losses that have been sustained in recent years. It noted that The Economist reports that a major music label's internal study found that music downloading is likely responsible for no more than 25 to 33 per cent of recent losses.


Far more important factors include the growing popularity of DVDs, which have cannibalized both CD sales and CD retail shelf space. The rise of big-box retailers such as Wal-Mart as the dominant music retailers has also had a dramatic impact, curtailing catalogue sales of older titles and creating downward pressure on CD retail pricing, which has shaved tens of millions from recording industry revenues in recent years.


Following last week's column, readers highlighted yet more factors. They include a significant decline in the number of new releases issued over the past five years (less product presumably results in fewer sales) and the view that the CD sales decline simply reflects broader economic conditions. For example, during the 1991 economic recession, CD sales growth in the United States dropped by 11 per cent, a sharper drop than the most recent downturn.


Against this backdrop, along with news that shipments of CDs in Canada jumped by more than 12 per cent in the six-month period following the Federal Court of Canada's file sharing decision, it is time to slay the third peer-to-peer myth — that Canadian artists have been materially harmed by the decline in revenue.


To understand the impact on Canadian recording artists, three pieces of information are needed. First, assuming that music download practices mirror retail purchasing habits, the percentage of the Canadian retail music market commanded by Canadian artists must be identified. That percentage is necessary in order to determine the lost Canadian artist sales.


While Statistics Canada has estimated that Canadian artists account for roughly 16 per cent of the Canadian market, the Canadian music industry claims that the number is actually 23 per cent. Using the higher 23 per cent figure, this suggests that the total five-year sales loss for Canadian artists is $67.6 million or $13.5 million per year.


Note, however, that the $13.5 million annual figure reflects the total lost Canadian artist sales, not the lost Canadian artist sales attributable to music downloading. If the various other factors contributing to the loss discussed earlier are included and The Economist's estimate of 33 per cent is used (the high end of the estimate), then the loss in Canadian artist sales due to music downloading stands at $4.5 million per year.


The second key piece of information is the royalty rate earned by Canadian artists for their music sales. Canadian artist sales may be down by $4.5 million per year due to music downloading, but the actual loss sustained by the artists is limited to the lost royalties attached to those sales.


Although royalty rates vary between artists, the consensus estimate is that the combined royalties earned by both the performer and the songwriter stand at approximately 12 per cent. In fact, Sanderson Taylor, a leading Canadian music law firm, maintains that the actual royalty earned by the artists is typically even lower, since the producer's royalty is taken from the artists' compensation and many contracts do not provide for a full royalty for CD sales.


Assuming artists receive the full 12 per cent royalty, the annual royalty loss attributable to music downloading in Canada is about $540,000 (12 per cent of $4.5 million). For those that implausibly claim that the full industry loss should be counted, the annual lost royalty for Canadian artists stands at $1.6 million.


Given the tens of millions of dollars that the Canadian government spends annually to support the creation of Canadian music, it is apparent that the relative impact of lost royalties due to file sharing pales by comparison.


Moreover, lost royalties must be offset by the third key factor used to calculate the impact of music downloading on Canadian artists — the private copying levy.


The levy represents an effective, if controversial, means to compensate artists. The Copyright Act includes a private copying exception that grants Canadians the right to make personal, non-commercial copies of music without requiring permission from the copyright holder. Both the Copyright Board of Canada and the Federal Court of Canada have ruled that private copying may include peer-to-peer music downloads. This interpretation is consistent with both the technologically neutral language found in the legislation as well as with many similar private copying systems in Europe.


That artists are being seriously hurt by file-sharing


has not been established

In return for that right, the Copyright Board of Canada established a levy on blank media such as recordable CDs and MP3 players. The Canadian Private Copying Collective (CPCC) collects the levy and is responsible for distributing the proceeds to songwriters, performers, and the music labels.


While artists may only receive a few pennies per blank CD, those pennies add up to millions. By the end of this year, the CPCC will have collected nearly $120 million since 1999 (the levy is expected to generate $30 million in 2004), though the collective has been agonizingly slow in distributing the proceeds.


The allocation of the collected funds among songwriters, performers, and the labels varies from year to year. For 2004, the Copyright Board determined that 66 per cent of the funds would be distributed to songwriters through their collectives (SOCAN, CMRRA, and SODRAC), 18.9 per cent would be distributed to performers through their collectives (NRCC and SOGEDAM), and 15.1 per cent would be distributed to the labels through the NRCC collective. It is important to note that the funds earmarked for songwriters are distributed worldwide, while the performer and label compensation are available only to Canadians.


Although identifying the precise compensation earned by Canadian artists under the levy is difficult, there is no question that the sum is in the millions of dollars annually. For example, the 18.9 per cent earned by Canadian performers will generate over $5 million in 2004. Considering that the Canadian royalty loss for all lost sales is $1.6 million annually, it is apparent that once distributed the private copying levy provides Canadian artists with more than adequate compensation for their losses due to copying that occurs on peer-to-peer systems.


Despite the apparent success of the private copying levy, the record labels, who lobbied to create the system in the 1990s, now criticize it for failing to provide adequate compensation. For example, at the Ottawa lobby day and in a letter to the Star, the industry noted that the levy is not applied to computer hard drives, an important source of music copying.


While there are good reasons to criticize the levy — some feel it represents a subsidy from non-music copiers to music copiers — the exclusion of computer hard drives is not one of them. The reason that the levy is not applied to computer hard drives is simple — the industry has not asked for it.


In fact, according to documents obtained under the Access to Information Act, the CPCC met with Canadian officials in January 2004 to propose a Copyright Act amendment to statutorily exclude computer hard drives from the scope of the levy. Although such a change would presumably reduce artist compensation, the representatives acknowledged that it would help CRIA in its lawsuits against individual file sharers.


Not only does the private copying levy as it is currently designed provide Canadian artists with full compensation for their losses due to music downloading, but the structure of the Canadian music business further insulates the impact felt by Canadian artists.


Although CRIA accounts (by its own estimate) for 95 per cent of the sound recordings manufactured and sold in Canada, the vast majority of Canadian artists actually get their start with smaller, independent labels. In fact, Applaud!, a leading Canadian music industry publication, recently concluded that "it's the independent companies which continue to take the lead in developing new talent, and which can proudly boast that their under-the-radar success is building the careers of young Canadian artists on an international basis."


Moreover, many independent music labels and artists welcome music downloading as an opportunity, not a threat. Neil Leyton, founder of Fading Ways Music, a Toronto-area independent label, is a strong supporter of music downloading, having found that it is a great method of promotion that ultimately increases sales. Similarly, Bob Wiseman, an original member of Blue Rodeo, wrote following last week's column to express his support for peer-to-peer distribution and his disagreement with his former bandmate Jim Cuddy.


Following years of lobbying by CRIA, a new reality is only now coming to light — music downloading is not responsible for the ills of the music industry and Canadian artists have not been harmed by the sales declines that have occurred over the past five years.


The next time the music industry lobbies Industry Minister David Emerson and Canadian Heritage Minister Liza Frulla for copyright reform, it will be time for the Ministers to tell them to sing a new tune.

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