Piercing the Peer-to-Peer Myths: An Examination of the Canadian Experience, First Monday, volume 10, number 4 (April 2005) (2005)
Canada is in the midst of a contentious copyright reform with advocates for stronger copyright protection maintaining that the Internet has led to widespread infringement that has harmed the economic interests of Canadian artists. The Canadian Recording Industry Association (CRIA) has emerged as the leading proponent of copyright reform, claiming that peer–to–peer file sharing has led to billions in lost sales in Canada.
This article examines CRIA’s claims by conducting an analysis of industry figures. It concludes that loss claims have been greatly exaggerated and challenges the contention that recent sales declines are primarily attributable to file–sharing activities. Moreover, the article assesses the financial impact of declining sales on Canadian artists, concluding that revenue collected through a private copying levy system already adequately compensates Canadian artists for the private copying that occurs on peer–to–peer networks.
The Canadian government has been the target of intense lobbying for stronger copyright legislation in recent months. Led by the music industry, which claims that it has experienced significant financial losses due to music downloading, the campaign culminated in November 2004 with a lobby day on Parliament Hill .
The campaign 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.
In speaking with Canadian government leaders, the industry played a familiar tune. Graham Henderson, president of the Canadian Recording Industry Association (CRIA), argued that music downloading has devastated the industry. While Canadian rock star Tom Cochrane indicated that he was uncomfortable suing individual file sharers, he nevertheless characterized Canada’s laws as akin to those found in third world countries . Amid the claims of industry losses, the industry failed to make the case that music downloading is significantly harmful to Canadian artists. Even Jim Cuddy, lead singer for the group Blue Rodeo, acknowledged that it was hard to determine whether music downloading has actually hurt his band . In fact, a careful examination of CRIA’s own numbers 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 press release claiming C$250 million in losses over the previous three years . Three months later, another press release claimed C$425 million in losses . Just weeks before the lobby day, CRIA General Counsel Richard Pfohl told a university audience that the figure was actually C$450 million per year since 1999, totaling roughly C$2 billion over the past five years .
Table 1: Canadian CD sales (Source: CRIA).
In fact, 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 C$699.9 million. That figured declined annually to C$690.3 million (2000), C$645.8 million (2001), C$609.5 million (2002), and C$559.7 million (2003). In 2004, sales increased to C$562.2 million. Using CRIA’s own numbers and 1999 as a benchmark, the cumulative decline in CD sales revenue in Canada is C$431.7 million. Given that total CD sales revenues during the period totaled C$3.7 billion, the percentage decline is a relatively modest 8.6 percent . While a C$431.7 million decline over a six–year period may still hurt, the source of that decline must also be examined. The financial impact of file–sharing is uncertain since the losses tied to file–sharing are only those that displace a potential sale, not all downloads. Those losses must be offset against downloads of music that (i) involve sampling before purchasing; (ii) that are no longer for sale; (iii) that are in the public domain or available with the express permission of the copyright holder; and, (iv) that are compensated in Canada through the private copying levy. Although the music industry seems loath to discuss the matter publicly, according to an October 2004 Economist article, an internal music label study found that between 2/3 and 3/4 of recent sales declines had nothing to do with Internet music downloads . That finding was echoed in a 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 over C$170 million in new revenue from 2000–2004 . The popularity of DVDs is surely related to the decline in CD sales and the shrinking shelf space allocated to CDs by music retailers.
Moreover, 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 and using 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 percent 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 60,000 or more titles, Wal–Mart stores focus primarily on new releases, featuring an average of 5,000 titles . The decreasing availability of older titles hurts an industry that has traditionally depended upon catalogue sales for about 40 percent of its retail music revenue .
Second, Wal–Mart has placed new pressures on the retail pricing of CDs — capping retail pricing in the United States at US$9.72 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 prices of an average CD in 2004 was C$10.95, down 8.8 percent from C$12.00 per CD in 1999. The bottom line impact has been to shave C$53.9 million in revenue for sales in 2004 when compared with the same unit sales in 1999.
Additional factors behind the decreased revenues include a significant decline in the number of new releases issued over the past six 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 percent, a sharper drop than the most recent downturn .
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 March 2004 Federal Court of Canada’s file–sharing decision which denied CRIA’s demand to disclose the identities of 29 alleged file sharers . 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 percent in Canada over the prior year .
The good news does not end with rising music sales in Canada. The evidence suggests that Canadian artists have scarcely been harmed by the reduced sales from 1999 to 2004 since royalty losses are fully compensated through the private copying levy.
To understand the impact of declining sales on Canadian recording artists, three pieces of information are needed. First, the percentage of the Canadian retail music market commanded by Canadian artists must be identified in order to determine lost Canadian artist sales. Let us assume that the percentage in music download practices mirror retail purchasing habits.
Statistics Canada, the government’s statistical agency, has estimated that Canadian artists account for roughly 16 percent of the Canadian market , while the Canadian music industry claims that the number is actually 23 percent . Using the higher 23 percent figure, this suggests that the total six year sales loss for Canadian artists is C$99.3 million or C$16.5 million per year.
Note, however, that the C$16.5 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 66 percent of recent sales declines had nothing to do with Internet music downloads (the high end of the estimate), then the loss in Canadian artist sales that could be due to music downloading would stand at C$5.5 million per year.
The second key piece of information is the royalty rate earned by Canadian artists for their music sales. Even if Canadian artist sales are down by C$5.5 million per year due to music downloading, 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 percent. 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 percent royalty, the annual royalty loss attributable to music downloading in Canada is about C$655,000 (12 percent of C$5.5 million). For those that claim that the full industry loss should be counted, the annual lost royalty for Canadian artists stands at C$2 million.
Some in the industry argue that this understates the impact since CRIA’s financial data reflects wholesale shipments and revenues, rather than the somewhat higher revenues generated at the retail level. According to CRIA’s president Graham Henderson, the artists’ royalty may be as high as twenty percent of the wholesale CD pricing . Even with the higher royalty figure, the annual lost royalty for Canadian artists could only increase to C$1.1 million for lost sales due to file–sharing or C$3.3 million for all decreased sales.
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.
In return for that right, the Copyright Board of Canada establishes a levy on blank media such as recordable CDs and on equipment such as 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 of dollars. As of the end of 2004, the CPCC has collected just over C$120 million since 1999 (the levy generated C$33.2 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 percent of the funds would be distributed to songwriters through their collectives (Society of Composers, Authors and Music Publishers of Canada, Canadian Musical Reproduction Rights Agency, and Society for Reproduction Rights of Authors, Composers and Publishers in Canada), 18.9 percent would be distributed to performers through their collectives (Neighbouring Rights Collective of Canada (NRCC) and Société de gestion des droits des artistes–musiciens), and 15.1 percent 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 percent earned by Canadian performers generated over C$5 million in 2004. Considering that the Canadian royalty loss for all lost sales is no more than C$2 million annually, it is apparent that the private copying levy, once distributed, provides Canadian artists with more than adequate compensation for their losses due to copying that occurs on peer–to–peer systems.
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 percent 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, has expressed 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. Although faced with significant pressure to reform Canadian copyright law, it is increasingly apparent that the industry’s ills are not the result of peer–to–peer downloading. Moreover, the Canadian experience with private copying suggests that a levy system may provide an effective alternative to adequately compensate artists for lost royalties that may occur due to the current popularity of file sharing services.
About the author
Michael Geist is the Canada Research Chair of Internet and E–commerce Law at the University of Ottawa. He has obtained a Bachelor of Laws (LL.B.) degree from Osgoode Hall Law School in Toronto, Master of Laws (LL.M.) degrees from Cambridge University in the U.K. and Columbia Law School in New York, and a Doctorate in Law (J.S.D.) from Columbia Law School. Dr. Geist has written numerous academic articles and government reports on the Internet and law, is a member of Canada’s National Task Force on Spam, is columnist on technology law issues for the Toronto Star and Ottawa Citizen, and is the author of the textbook Internet Law in Canada (Captus Press) which is now in its third edition. More information can be obtained at http://www.michaelgeist.ca.
The opinions expressed herein are personal and do not necessarily reflect the views of the University of Ottawa. An earlier version of this article appeared in the Toronto Star in two parts on 29 November 2004 and 6 December 2004.
Direct comments to: mgeist [at] pobox [dot] com.
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Paper received 3 April 2005; accepted 5 April 2005.
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Piercing the peer–to–peer myths: An examination of the Canadian experience by Michael Geist
First Monday, volume 10, number 4 (April 2005),