“Introduction of new technology is always disruptive to old markets, and particularly to those copyright owners whose works are sold through well-established distribution mechanisms.” Metro-Goldwyn-Mayer Studios, Inc. v. Grokster Ltd., 380 F.3d 1154, 1167 (9th Cir. 2004), rev'd, 545 U.S. 913 (2005)

In 1964, Marshall McLuhan? published Understanding Media: The Extensions of Man and popularized the quote “the medium is the message”. McLuhan? recognized an ever-present symbiotic relationship between creative content and technology, noting that the medium of delivery to the consumer often defines the content itself. In this vein, the medium of consumption, rather than the content, is most important in developing and studying business models and the legal compensation mechanisms in the media industry.

With the invention of the sound recording, music changed from an experience that could only be heard live (or on the radio) to a commodity that could be owned. Consider that in 1910, prior to the creation of sound recordings, 374,000 pianos were manufactured in the US for use in the home—by 1984, the number was 206,000 (pianos were the only way to create music “on demand”). The commoditization of sound recordings provided a limited amount of content to the purchaser, who could then listen to it at his or her convenience. Since records were relatively expensive and entailed a high marginal cost for those with limited resources, consumers selected small amounts of music to own based on personal taste and the promotional reach of each artist.

The “record” defined the business model of the music industry, which consolidated to form four major multinational profit-maximizing corporate record labels that collectively owned over 80% of sound recording copyrights and accounted for more than 77% of all retail music sales by 1998. These labels also owned ancillary businesses such as the distribution network to reap huge profits. The music industry thrived under this system until the late 1990’s, when technology destroyed institutional control and made established revenue streams obsolete (practically overnight).

These three technologies, 1) p2p file sharing (distribution); 2) MP3 compression; and 3) increased storage capacity (the iPod and other similar devices) had a profound impact on the way consumers interacted with music. Previous generations had viewed music as a commodity to be bought at a store, as one would buy a car or furniture. With “free”, albeit illegal, access to an infinite digital library, modern consumers began to accumulate huge collections of previously inaccessible or prohibitively expensive music from a wide variety of artists. Importantly, consumers would have never bought the music from many of these artists in the form of a CD.

As sociological expectations changed and consumers began to expect to hear any song on demand, music shifted from something acquired to something accessed. No longer were consumers forced to savor an unowned song as one would savor a sunset without a camera—-new technology (especially the advances in mobile telephony and storage capacity) fundamentally changed the entire business model, but record labels stubbornly refused to accept the new media landscape, especially facing the diminishing importance of their control over the business. As noted by the EU Commission, "[[http://www.mediafuturist.com/2009/07/i-love-spotify-but.html][The failed music industry business model is [caused] online piracy]]”.

While online piracy ran rampant through the 2000’s, the record labels frantically tried to retain their control over all aspects of music from studio to (digital) shelf. They created their own online stores; licensed catalogs with incredibly burdensome DRM technology; and viciously prosecuted their former consumers for file sharing, but ultimately none of these strategies sated the growing consumer thirst for (illegal) universal music access.

Recently, the growth of “streaming” technologies has provided a new monetizable distribution mechanism for the universal access business model. Consumers are now able to access any song wherever their phone has a wireless connection, making the “celestial jukebox” a reality, but labels continue to exert unnecessary control over music consumption.

The labels’ “control” is a function of the IP protection schemes that have evolved over the years. Most copyright legislation is not the result of some well thought out plan, but instead a sort of compromise with the content industries. “Streaming” IP rights, found in §114 of the copyright act, provide an illustrative example of how the record labels abuse their market position in a concentrated industry.

Any OnDemand? service such as Grooveshark or Spotify needs to attain blanket licenses to each major label’s entire catalog to make their service competitive. Without one of the major labels’ permission, the service will not be able to offer “universal” access and faces a competitive disadvantage. Recognizing their superior bargaining power, the labels have abused their position to the detriment of new, innovative companies. When the interactive service Sonific closed in 2008, CEO and co-founder Gerd Leonherd blamed the intransigence of the record labels in licensing their catalogs as the main reason for the company’s failure:

There are countless startups providing access to any and all music streams without any license whatsoever. However, when we approached the major record label decision makers in order to obtain licenses for some of the music in their catalogs we have routinely faced demands for very large cash advances and fixed per-stream minimum payments, pressure to give them ‘free’ company equity, and requirements of utterly bizarre usage restrictions. It seems that the industry’s major stakeholders still prefer this turf to remain unlicensed rather than to allow real-life, workable and market-based solutions to emerge by working with new companies such as Sonific.

For the companies that have managed to secure licenses, the terms are far from fair. Not only have the labels reportedly taken an equity stake in these companies, the compensation paid to non-major (independent) labels is substantially less, meaning an artist will make less money if they are not signed to a major. In addition, many artists are hugely undercompensated for their popularity on these services, while the labels get paid twice (royalties in addition to their equity stakes). Not until the labels are forced to provide their catalogs at a reasonable price will consumers truly benefit.

You say that "until labels are forced to provide their catalogs at a reasonable price," consumers won't really be able to benefit from innovations in accessibility/distribution. What--or who--do you envision forcing the the labels to license at reasonable prices?

Congress could step in and devise some formula for compulsory licensing that seems both fair to the copyright holder and users, but that seems unlikely--whereas the labels are few in number, organized, highly motivated, well-funded and familiar w/ the political process, music consumers (as a group) are just the opposite.

Maybe artists can play a role in pressuring the labels. You mention that labels are effectively paid twice under the current system (although, presumably, taking equity in a company also comes with financial risks). Thus, if popular artists feel that they're getting screwed under the current system, perhaps they could exert pressure on the labels to alter their (the labels') behavior. Once the popular artists are mobilized, it wouldn't be difficult to get non-mainstream or relatively unknown musicians on board--indeed, these are the artists who, as you mention, suffer the most under current conditions and would greatly by having their music more easily accessible.

Finally, maybe innovation in distribution is the only way to force the labels to act reasonably. Perhaps the labels will get tired of playing a constant game of cat and mouse, with consumers developing "illegal" distribution systems and the labels scrambling to restrict access. If consumers can consistently innovate around access restrictions faster than labels can build/maintain them, labels may eventually have to accept reality and accommodate consumers' demands.

-- MatthewLadner - 27 Oct 2011