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The Real Threat to the Music Download Market

The Canadian Recording Industry Association’s (CRIA) legal campaign against music file sharing heads back to court later this week.  A three judge panel will hear an appeal of last spring’s decision that denied a request for identifying information on 29 alleged file sharers due to insufficient evidence, privacy concerns, and doubts about proof of infringement under Canadian copyright law.  CRIA is likely to use the hearing to again argue that peer-to-peer file sharing is hurting Canadian artists and the industry, which at long last is seeking to develop fee-based alternatives such as Apple iTunes, Napster, and Puretracks.

Despite all the rhetoric, there remains much doubt about whether peer-to-peer is really responsible for declining sales.  The industry’s own numbers suggest otherwise since the popularity of DVDs, changes in the retail distribution of music, and reduced retail pricing on CDs have all played significant roles in the industry’s self-proclaimed woes (which themselves are not so woeful with sales increasing by more than 10 percent in the six months following the federal court decision last year).

Moreover, there is little doubt that Canadian artists’ royalty losses have been offset by the private copying levy system.  The Canadian Private Copying Collective has collected approximately $120 million over the past five years with much of that revenue earmarked for Canadian artists. 

While CRIA has argued that the private copying levy was not intended to cover music downloading those claims ring hollow in light of recent statements and collection practices.  Last month, the industry acknowledged to the U.S. Supreme Court that users have the right to copy their CDs in order to listen to the same songs on devices such as the Apple iPod.  Given that $30 million was collected from Canadians last year, it must surely have been paid for something other than activities already permitted under the law.

In fact, the real threat to fee-based alternatives in Canada does not come from the peer-to-peer systems.  Rather, Canada’s copyright collectives are poised to kill the nascent industry by demanding the creation of a new iTunes tariff that would require music download services to surrender at least 40 percent of their revenues to the collectives.

The Society of Music Composers, Authors, and Publishers (SOCAN) recently filed a revised Tariff 22 proposal that directly targets music download and streaming sites.  SOCAN had previously focused Tariff 22 on Internet service providers.  That led to a lengthy legal battle that culminated last year with the Supreme Court of Canada’s ruling that ISPs should be treated like common carriers who rarely face liability for the transmission of data on their networks. 

In search of a new deep pocket, SOCAN has reformulated Tariff 22 by targeting websites that communicate music to the public.  The largest tariff – an astonishing 25 percent of gross revenue – is reserved for sites or services that permit users to select, listen to, or reproduce music for later listening (ie. music download services). By comparison, the top SOCAN tariff for commercial radio stations in Canada is currently 3.2 percent of gross revenue.

SOCAN’s proposal does not stop with music download services. The new Tariff 22 also calls for a tariff of 15 percent of gross revenues from both audio webcast sites that feature content similar to conventional radio stations as well as from established radio stations that webcast their signal.  Moreover, gaming sites that communicate musical works as part of their games face a potential tariff of ten percent of gross revenues.  In fact, to ensure that no one escapes Tariff 22, SOCAN envisions a tariff of ten percent of gross revenues for all other sites that communicate music.

If this SOCAN proposal were not damaging enough, it does not stand alone.  SODRAC, a Quebec-based collective, has teamed up with the Canadian Musical Reproduction Rights Agency (CMRRA) to propose a pair of new tariffs to cover the reproduction rights associated with online music.  The SODRAC/CMRRA proposals demand the greater of either 15 percent of gross revenues or ten cents per permanent download.  Webcasters would also be hit with a minimum tariff of five percent of gross revenues.

Incredibly, the 40 percent of gross revenues envisioned by these tariffs may not cover all the rights associated with commercial music download services.  It remains possible that other groups, including collectives representing music performers and producers, may come forward to demand their share of compensation by further cutting into online music services’ revenues.

Although the tariff proposals are not final – the Copyright Board of Canada will set the ultimate tariff after conducting hearings that are certain to attract fierce opposition – the starting point for discussion is discouraging since this short-sighted cash grab fails to recognize that a smaller share of a larger pie may often be better than a large share of a small pie. 

In the U.S., large collectives such as ASCAP and BMI have struck more reasonable deals for webcasting royalties.  BMI expects to collect US$400 in 2005 from each local radio station that webcasts its signal, while ASCAP has built the webcasting right into its existing over-the-air royalty structure.

The Canadian Independent Record Production Association (CIRPA) has pegged the value of the Canadian market for music downloads at $100 million.  While the established players have negotiated agreements with the record labels, the future growth of the industry depends upon the development of an economically viable model.  The true threat to that future does not come from peer-to-peer downloads that is already subject to compensation through the private copying levy but rather from collectives that seem determined to receive a very large share of a very tiny market. 

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