The Future of Music

posted by Frank Pasquale

There’s a fantastic profile of music producer Rick Rubin in the NYT Mag–a must-read for anyone thinking about how to make money in Web 2.0. Rubin provides the backdrop for his new role at a Sony subsidiary (Columbia Records):

“Until very recently . . . there were a handful of channels in the music business that the gatekeepers controlled. They were radio, Tower Records, MTV, certain mainstream press like Rolling Stone. That’s how people found out about new things. Every record company in the industry was built to work that model. There was a time when if you had something that wasn’t so good, through muscle and lack of other choices, you could push that not very good product through those channels. And that’s how the music business functioned for 50 years. Well, the world has changed. And the industry has not.”

Reflecting on these realities, David Geffen concludes “The subscription model is the only way to save the music business. If music is easily available at a price of five or six dollars a month, then nobody will steal it.” One question–will antitrust law impede this development? Consider these thoughts on the matter:

For this model to be effective, all the record companies will have to agree. “It’s like getting the heads of the five families together,” said [Columbia Head of Operations] Mark DiDia, referencing “The Godfather.” “It will be very difficult, but what else are we going to do?” Rubin sees no other solution. “Either all the record companies will get together or the industry will fall apart and someone like Microsoft will come in and buy one of the companies at wholesale and do what needs to be done,” he said. “The future technology companies will either wait for the record companies to smarten up, or they’ll let them sink until they can buy them for 10 cents on the dollar and own the whole thing.” (emphasis added)

Should a “failing firm” defense be applied to a whole industry? Jonathan Cardi has already proposed a “a regulatory merger of the licensing functions of the various intermediaries” which deal with the absurd complexity of music copyrights. A few more thoughts on related topics below. . .

First, paying for access to all songs and movies is an idea whose time has come. Two word argument: nonrivalrous consumption. Just as the recording industry helped force composers and lyricists to submit to a compulsory license, it in turn should either make all published content available for some fee or the government should step in to broker this transition. Top names in copyright law–Terry Fisher, Neil Netanel, Ray Ku, Glynn Lunney, Jessical Litman (and I’m sure many more) have advocated for moves in this direction. The model is simple:

The music industry forms a collecting society, which then offers file-sharing music fans the opportunity to “get legit” in exchange for a reasonable regular payment, say $5 per month. So long as they pay, the fans are free to keep doing what they are going to do anyway—share the music they love using whatever software they like on whatever computer platform they prefer—without fear of lawsuits. The money collected gets divided among rights-holders based on the popularity of their music.

In exchange, file-sharing music fans will be free to download whatever they like, using whatever software works best for them. The more people share, the more money goes to rights-holders. The more competition in applications, the more rapid the innovation and improvement. The more freedom to fans to publish what they care about, the deeper the catalog.

Does the math work? According to Fisher, as of 2004 it certainly did: a small universal levy or smaller targeted tax would have covered the entire revenues of the music and movie industries at that time (see math below). As for the antitrust matter: the Supreme Court has already approved similar collecting societies for composers and lyricists.

However, policymakers should still keep an eye on the blanket licensors that emerge. Deven Desai raises some cultural issues, and indeed economics alone can never settle the issue of the desirability of such entities. Moreover, though many have assumed such entities would be natural monopolies, Ariel Katz has seriously undermined that point of view:

I argue that the case for PROs [Performing Rights Organizations that collect fees in order to issue blanket licenses for content] is not as straightforward as it is assumed to be. I show that many of the underlying cost efficiencies that are attributed to PROs are usually simply assumed, and in many cases could be equally achieved under less restrictive arrangements. I further argue that even if the natural monopoly framework has been correctly applied in the past, technological changes that can facilitate the online licensing of music undermine the natural monopoly framework even further. I show that the Internet and Digital Rights Management technologies (DRM), which enable the online distribution of protected copyrighted material, can effectively facilitate the formation of a competitive marketplace for performing rights. Due to some economical, legal and political barriers however, the availability of the technology will probably not suffice to make the transition from monopoly to competition a spontaneous process.

The big question for the “free culture” crowd now is whether they’re going to accept the DRM in exchange for universalizing access to affordable music. I think that deal may be fair, but should be predicated on safeguards that allow music consumers to monitor the monitors who will be preventing free riding.

PS: For a good look at present recording industry revenue streams, see p. 10 of this PDF of a draft of Fisher’s book. And here’s a bit more of the numbers from his book regarding a blanket license scheme paid by taxes:

To pay copyright owners $1.736 billion, it would thus have to raise in taxes $2.170 billion. Last but not least, that number would have to be adjusted for inflation. For that purpose we’ll use (for simplicity) the Consumer Price Index for the past three years plus a rough projection of likely inflation during 2004. The net result: $2.389 billion.

***

The two and a half billion dollars a year necessary to run this system might be raised in one of two ways. First, we might increase slightly the federal income tax. Currently, approximately 87 million households pay federal income taxes in the United States. If the increased tax burden were spread evenly over that population, each household would pay an additional $27 per year.

***

[But another approach is available.] Following Netanel’s lead, we might identify four categories of devices and services suitable for taxation: (1) equipment used to make copies of digital recordings; (2) media used to store such copies; (3) services used to gain access to the Internet, either to download files or to stream recordings; and (4) peer-to-peer systems or other services used to share files.

***

How much, in the end, would the subscribers be obliged to pay? In 2004, the average monthly broadband subscription fee (weighted by the numbers of customers using the various types of service) will be approximately $45.43. Assuming that the ISPs passed through to consumers the entire amount of the tax, that average fee would rise by $5.36 per month ($64.33 per year), to a total of $50.79 per month ($609.48 per year).

I spent more than $65 the last time I bought CD’s at a record store. I can think of few better demonstrations of how extraordinarily inefficient our current property-rule based system of IP in entertainment is. However, I did recently hear a talk on why Japan rejected a similar proposal, and will blog about that in a bit if I get permission from the presenter.

Photo Source: Don Vito Corleone, played by Marlon Brando, in The Godfather.

 September 1, 2007 at 8:37 pm   Posted in: Intellectual Property    Print This Post

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