[IP] Piercing the P2P Myths, Part Two
Begin forwarded message:
From: Michael Geist <mgeist@xxxxxxxxx>
Date: December 6, 2004 6:58:08 AM EST
To: dave@xxxxxxxxxx
Subject: Piercing the P2P Myths, Part Two
Dave,
Of possible interest to IP -- my regular Toronto Star Law Bytes column
completes its two-part look at the impact of peer-to-peer file sharing
on the music industry. Last week's column provided a detailed
examination of the Canadian Recording Industry Association's own
numbers, concluding that the claims regarding P2P's impact on the
industry are greatly exaggerated. In particular, the total losses
since 1999 are much smaller than is frequently claimed and the evidence
further suggests that there is only a tenuous link between the losses
from the past five years and file sharing activity.
That column is at
<http://geistp2pmythspartone.notlong.com>
This week's column, which is posted below, follows on by examining the
impact of the sales declines on the artists. It concludes that
Canadian artists have not suffered financially, noting that lost
royalties from diminished sales have been more than offset by the
collection of nearly $120 million in private copying levies.
Column at
<http://geistp2pmythparttwo.notlong.com>
MG
Time music industry focused on product
Michael Geist
Toronto Star
The intense lobbying for stronger copyright legislation in response to
music downloading, which culminated in last month's lobby day on
Parliament Hill, 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.
Last week's column addressed the first two pillars. It documented how
CRIA has been inconsistent in its claims of financial losses. The
inconsistency is best highlighted by CRIA President Graham Henderson's
claim last month at the lobby day in Ottawa that industry losses
totaled $500 million just two days after placing the figure at $1.3
billion in a letter to the Vancouver Sun.
The column noted that the inconsistent claims are particularly
puzzling since CRIA posts industry sales and revenue figures on its Web
site. According to CRIA's own numbers, the cumulative decline in
revenue since 1999 is $294 million. That figure constitutes a
relatively modest 9 per cent decline in revenue on sales of $3.2
billion and, given the financial decline suffered by many companies in
the wake of the dot-com crash, hardly rises to the level of devastating
financial impact.
The column also demonstrated how peer-to-peer file sharing is at best
only marginally responsible for the losses that have been sustained in
recent years. It noted that The Economist reports that a major music
label's internal study found that music downloading is likely
responsible for no more than 25 to 33 per cent of recent losses.
Far more important factors include the growing popularity of DVDs,
which have cannibalized both CD sales and CD retail shelf space. The
rise of big-box retailers such as Wal-Mart as the dominant music
retailers has also had a dramatic impact, curtailing catalogue sales of
older titles and creating downward pressure on CD retail pricing, which
has shaved tens of millions from recording industry revenues in recent
years.
Following last week's column, readers highlighted yet more factors.
They include a significant decline in the number of new releases issued
over the past five 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 per cent, a sharper
drop than the most recent downturn.
Against this backdrop, along with news that shipments of CDs in Canada
jumped by more than 12 per cent in the six-month period following the
Federal Court of Canada's file sharing decision, it is time to slay the
third peer-to-peer myth - that Canadian artists have been materially
harmed by the decline in revenue.
To understand the impact on Canadian recording artists, three pieces
of information are needed. First, assuming that music download
practices mirror retail purchasing habits, the percentage of the
Canadian retail music market commanded by Canadian artists must be
identified. That percentage is necessary in order to determine the lost
Canadian artist sales.
While Statistics Canada has estimated that Canadian artists account
for roughly 16 per cent of the Canadian market, the Canadian music
industry claims that the number is actually 23 per cent. Using the
higher 23 per cent figure, this suggests that the total five-year sales
loss for Canadian artists is $67.6 million or $13.5 million per year.
Note, however, that the $13.5 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 of 33 per cent is used (the high end of the
estimate), then the loss in Canadian artist sales due to music
downloading stands at $4.5 million per year.
The second key piece of information is the royalty rate earned by
Canadian artists for their music sales. Canadian artist sales may be
down by $4.5 million per year due to music downloading, but 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 per cent. 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 per cent royalty, the annual
royalty loss attributable to music downloading in Canada is about
$540,000 (12 per cent of $4.5 million). For those that implausibly
claim that the full industry loss should be counted, the annual lost
royalty for Canadian artists stands at $1.6 million.
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 established a
levy on blank media such as recordable CDs and 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. By the end of this year, the CPCC will have
collected nearly $120 million since 1999 (the levy is expected to
generate $30 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 per cent of the funds would be distributed to
songwriters through their collectives (SOCAN, CMRRA, and SODRAC), 18.9
per cent would be distributed to performers through their collectives
(NRCC and SOGEDAM), and 15.1 per cent 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 per cent
earned by Canadian performers will generate over $5 million in 2004.
Considering that the Canadian royalty loss for all lost sales is $1.6
million annually, it is apparent that once distributed the private
copying levy provides Canadian artists with more than adequate
compensation for their losses due to copying that occurs on
peer-to-peer systems.
Despite the apparent success of the private copying levy, the record
labels, who lobbied to create the system in the 1990s, now criticize it
for failing to provide adequate compensation. For example, at the
Ottawa lobby day and in a letter to the Star, the industry noted that
the levy is not applied to computer hard drives, an important source of
music copying.
While there are good reasons to criticize the levy - some feel it
represents a subsidy from non-music copiers to music copiers - the
exclusion of computer hard drives is not one of them. The reason that
the levy is not applied to computer hard drives is simple - the
industry has not asked for it.
In fact, according to documents obtained under the Access to
Information Act, the CPCC met with Canadian officials in January 2004
to propose a Copyright Act amendment to statutorily exclude computer
hard drives from the scope of the levy. Although such a change would
presumably reduce artist compensation, the representatives acknowledged
that it would help CRIA in its lawsuits against individual file
sharers.
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 per cent 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, wrote following last week's column to
express 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.
The next time the music industry lobbies Industry Minister David
Emerson and Canadian Heritage Minister Liza Frulla for copyright
reform, it will be time for the Ministers to tell them to sing a new
tune.
--
**********************************************************************
Professor Michael A. Geist
Canada Research Chair in Internet and E-commerce Law
University of Ottawa Law School, Common Law Section
57 Louis Pasteur St., Ottawa, Ontario, K1N 6N5
Tel: 613-562-5800, x3319 Fax: 613-562-5124
mgeist@xxxxxxxxx http://www.michaelgeist.ca
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