Analysis of IT news

Friday, March 14, 2008

On the legality of ripping songs

Even though they've kept a low profile so far, several people inside the recording industry believe that copying music tracks from a CD onto a computer (also known as "ripping") is illegal. But during a recent testimony, Sony BMG's head of litigation Jennifer Pariser said that ripping a legally purchased CD onto one's computer is "a nice way of saying 'steals just one copy.'" (the RIAA has since claimed she "misspoke" and "misheard the question")

Without taking a poll, I suspect that the huge majority of consumers believe ripping a CD is perfectly legal under the concept of "fair use". President George Bush even publicly acknowledged he ripped some CDs onto his computer. But the fact that the RIAA has kept a low profile on the issue probably has more to do with the public outcry if it began suing individuals for ripping legally purchased songs than the belief ripping is OK.

So why such a huge gap between the recording industry and the consumers expectations? I see two reasons.

The first reason is that the recording business as we know requires a license to do pretty much anything. You need a license from the songwriter to sell a song. You need a so-called synchronization license to air the song onto a television program, film, video, commercial, radio. And you need a so-called mechanical license from the music publisher to mechanically reproduce music onto any type of media (e.g. a CD). I suspect a lot of music execs consider that people need a mechanical license to copy songs from their CDs to their computers.

But the biggest reason might be a business reason more than a legal one. If you remember, the CD has been a huge financial bonanza for the recording industry in the 80's and 90's. For a start, the novelty of the CD was used as an excuse to jack up prices. CDs were more expensive than cassettes, although just as cheap if not cheaper to produce. Second, a lot of consumers repurchased the vinyl albums they had in compact disk format to enjoy the convenience of the new technology. I also remember CDs with lyrics sold separately. Last but not least, the era of the CD saw the rise of "best of" albums, megamix and other ways to sell old songs. So the recording industry has grown used to sell the same song SEVERAL TIMES to a person. The consumer paid a first time for a vinyl album and a second time for the same CD album. Later on, the consumer might pay several times for the same songs as they tend to overlap when you buy "best of" albums.

Consumers accepted this practice with the CD as they acknowledged the limits of a physical medium. But with a fully digital medium the party's over - even if you set aside illegal download. The pendulum swings back in favor of the consumers. Now they can purchase only the few hit songs they like and are not forced to pay for all the B-list songs that are usually crammed into an album. Worse, they do not expect to pay to convert their song collection to MP3. Consumers understand the need to pay when a company adds some added value. For instance, with the switch from the vinyl to CD the music majors had to manufacture and distribute then state-of-the-art compact disks. But when consumers can convert their CDs into MP3 format on their own, the music majors add zero added value. In such cases, the public doesn't understand why they should pay.

So what it really comes down to is whether the recording industry can charge consumers several times for the same song without having to ship anything. Most consumers would consider this practice unfair, but the recording industry has grown used to this revenue for so long it now feels entitled to it. So after having witnessed the steady decline of CD sales over the years, it behaves like a wounded and cornered animal. Wounded because sales suffer, and cornered because it doesn't see any way out (at least no way as easy as the good old days').

The recording industry has deployed a tremendous amount of energy to protect its revenue. They tried to increase the price of online songs but Steve Jobs wouldn't let them. They have poured millions of dollars against piracy, have brought down several companies on their knees (think Napster) and have been issuing thousands and thousands of lawsuits against individuals left and right. To no avail. And that is what has been driving the RIAA mad.

Will the recording industry ever change its attitude? Unlikely. The four big music majors haven't changed their ways an inch. Sure, the four big majors have now all decided to sell unprotected MP3, but that's not because they think it's the right thing to do but because 1) they realized protected music has zero effect on piracy and 2) the MP3 is the way to sell to iPod users without having to deal with Steve Jobs. But once Apple iTunes isn't the main online music site (it currently represents 80% of online sales), chances are that the music majors will become greedy and will significantly increase the prices of the "hot" songs (without decreasing the prices of old songs of course). Except that this time the public has one way of retaliation - albeit illegal: pirate the expensive songs.

The recording industry might also try to evolve and find its revenue elsewhere. Microsoft has agreed to give a slight cut of its Zune sales to the RIAA, but knowing Microsoft this will stop if the Zune conquers the music market. But the RIAA could for example start taking a cut on artist tours, which is the way artists make real money.

Some would like to see the current music major fading away and replaced by an Internet competitor, but so far the Internet competition has been disappointing. Music majors provide indeed two services:
  • First of all they provide talent screening. The public indeed does not want to hear any garage band and wannabe artist. This can however be easily replicated by an Internet competitor.
  • The major competitive edge music major enjoy is promotion. They indeed know how to cut deals with radio stations and TV to promote songs. The Internet has failed to provide a consistent word-of-mouth mechanism to provide unknown talents with some publicity.
My guess is that the current music major's revenue will continue to decline as more people switch to purchase online songs, but this decline will eventually level off (when almost everyone purchases music online revenue will stop dropping). The music majors might not wait that long and might try to strong arm in some extra revenue. The risk is to suffer a backlash in the form of a surge of piracy.


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