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Stage 2
: Music in the Digital Economy
The future
scenario for the music industry is based on the assumption that
all recorded music is either sold for permanent acquisition, or
rented to be listened to on individually customised radio channels,
by downloading from the internet to portable players. The alternative
would be that people with satellite radio anywhere in the world
would listen to hours of music on sub-walkman-sized players and
enjoy immediate online access to vast music libraries.
Music is a
unique commodity on the internet as it can be sold and delivered
like few other goods or services. The beauty of music over other
entertainment media is that you do not need broadband technology
to offer good quality audio services. Many on-line music services
are already emerging in narrowband environments. The number of
web sites on the internet is above 1 million. Over 35 000 are
devoted to music and the number is increasing by up to 100 a month.
PC users can
now easily download music to their hard drive and play it back
whenever they want to use the MP3 technology. The reaction of
the music industry was initially hostile, seeing MP3 as a new
means of music piracy. Since then, there has been a major shift
in attitude and the music industry is now trying to make up for
lost time by supporting a downloading format that is more secure
from a copyright point of view.
Music on the
Internet can also be accessed via "streaming" technology,
whereby content- carrying radio signals are converted into digital
packets and distributed over digital networks for real-time reception.
The global
and decentralised structure of the internet has enabled it to
defy attempts to regulate it at a national level. The defining
feature of e-commerce is the encouragement of self-regulation.
However, as the internet moves the world towards truly global
markets, it is also imperative for regulators to take initiatives
in harmonising rules at regional and international levels. International
consensus is required in a number of areas:
- Financial
issues such as customs and taxation
- Market
access issues in relation to content regulation
- Legal
issues such as rules on privacy, intellectual property, liability
and security of transactions
An internet
strategy must include an understanding of the fact that activities
contemplated may require defensive litigation in a foreign country.
This is because of the uncertainty as to which law governs electronic
contracts. One of the premises of international copyright law
is that copyright protection is territorial. This territorial
approach is under strain within the digital world. Which law is
applicable in online reproduction? This is a crucial question
if one wants to determine the author of the work, whether the
work is still copyright protected, the penalties for an act of
copyright infringement or the jurisdiction in charge of enforcing
the law.
Content regulation
also touches on the protection of culture and language, a matter
that will be subject to intense debate at the forthcoming WTO
negotiations and subject of much tension between the USA and Europe.
Content regulation designed to foster cultural identities is clashing
with the international nature of the internet.
The new economic
landscape brought about by the digital world is bound to have
a profound impact on an industry that relies predominantly on
sales of packaged goods (cassettes, CDs) and "brick and mortar"
retail to meet consumer demand. This type of sales represents
today 95% of record industry revenue. In the age of electronic
delivery, this predominant source of income is under threat.
Undoubtedly,
E-commerce will be the engine of future economic growth. Both
new internet-based companies and the traditional producers of
goods and services are transforming their ways of operating. Europe
is a few months behind the United States in relation to internet
acceptance and usage. However, too passive an attitude will mean
that European consumers will be lured (for ever?) to internationally
branded music sites based elsewhere. This would be to the detriment
of Europe's music, technology and services industries in particular,
and to the detriment of the European economy in general.
The need to
adapt is urgent, as the digital revolution essentially means that
control over content in the internet environment will shift away
from entertainment companies to consumers and artists. The availability
of repertoire of large companies' will also be the key to unlocking
the revenue potential of on-line distribution. The industry is
looking for the ability to keep unauthorised use, copying and
transmission of digital music to a level that permits the continued
growth and profitable existence of the record business. Achieving
this will require an appropriate legal framework, coupled with
technical systems to protect and enforce copyright.
In the field
of copyright and neighbouring rights, international harmonisation
is well under way with the adoption by the World Intellectual
Property Organisation (WIPO) of two international copyright Treaties
in 1996. Whilst these instruments do not solve all the issues,
they provide a useful framework for future national or regional
legislative efforts in this field. However, some important legal
matters, such as on-line service providers' liability in relation
to copyright infringements, or the question of applicable laws
remain unaddressed at an international level.
It is the
power of the unsecured MP3 format that kick-started the efforts
to develop secure means of distribution, including the Secure
Digital Media Initiative (SDMI). Under industry association leadership,
record companies - with the help of willing technology companies
- are trying to establish an open architecture and set specifications
for future commercial use, so as to enable the record industry
to remain in positive control of the music market and preserve
its asset: intellectual property.
The digital
world provides many opportunities. The proliferation of electronic
commerce will lower transaction costs (not necessarily production
costs however), facilitate entry and increase competition. This
in turn will lower prices and create new and more diverse products
and services. Companies are no longer necessarily disadvantaged
because of the size of their organisation or the location of their
facilities. The internet is also having an impact on intermediaries
and is leading to changes in the supply chain.
Views within
the record industry on the real effect of electronic commerce
developments tend to diverge. Some defend the position that the
whole music business "is going to be reinvented" and
that internet music sales will substitute the traditional market.
Others assert that internet music sales will mostly be incremental,
increasing the market for music with little effect on the traditional
market. The internet will lead to an increase in international
transactions, and collecting societies are working on establishing
a framework to allow international licensing. Progress in rights
management will need to take place without global regulatory harmonisation,
as electronic trading is already happening. The most fundamental
challenge for collective licensing bodies is: how is it possible
to secure the collection of royalties when delivery takes place
in an uncontrolled environment?
To capture
the potential benefits of the digital economy, companies will
have to make some fundamental changes to their organisation and
method of operation. For traditional music companies, the fundamental
strategic questions relate to combining mass production and customisation,
to keeping old customers whilst reaching new ones and to safeguarding
relationships with retailers whilst selling direct. The pricing
model in the digital world is a big unknown. Do you price access,
usage or the service itself? How do you give a value to intellectual
property when it is intangible? Do you rely on transaction revenue
or advertising revenue? Regional price differentials are also
under threat.
On-line retailing
of music could reach between 10-25% of total purchases in 10 years
time. Failure to act now will prevent companies from growing revenues
in the future. The challenge for Europe is to continue to have
its say in e-commerce development. It is significant that 3 of
the types of products with the highest percentage of on-line sales
are intellectual property products- software, books, and music.
Growth will require the continued support of policymakers in Europe
and beyond, as the European Union cannot afford to remain disinterested
in a global music market worth 40 billion Euro and 600 000 jobs
in Europe.
October 1999
Table of Contents:
Part one
: A NEW TECHNOLOGICAL AND REGULATORY ENVIRONMENT
Technical
Evolution and Music
1. The new digital packaged formats
2. Enhanced delivery services
a) Music
and internet
b) Digital broadcast
The Regulatory
Environment and Music
1. A market-driven environment
2. Public policy issues
a) Financial
issues
b) Market access issues
c) Legal issues
Part two
: THE IMPACT OF THE DIGITAL ECONOMY ON THE MUSIC SECTOR
The Digital
Economy and Music
1. The growth of e-commerce
2. The digital economy is driven by consumers and artists
Remedies to
the Main Barriers to E-Commerce In Music: Piracy and Home Copying
1. An improved copyright regime is essential
a) International
harmonisation: the WIPO treaties.
b) Copyright protection in the USA and the EU.
2. Technical
solutions
Part three
: TOWARDS NEW BUSINESS MODELS: THE VIEWS AND STRATEGIES OF THE
TRADITIONAL PLAYERS
Record Companies
1. The "majors"
2. The independents
Retailers
Rights Licensing
and Collecting Societies
Part four
: THE EMERGING BUSINESS MODELS
1. Digital
download
2. On-line retailing
3. The subscription model
4. Kiosk retailing
5. Business implications
Part five
: WINNING IN THE DIGITAL ECONOMY - Conclusion
1. The music
sector needs to adapt
2. The European challenge - Policy measures
a) A favourable
regulatory environment
b) Promote business development through market - oriented support
mechanisms
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