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«Kate Totaro An honors thesis submitted in partial fulfillment of the requirements for the degree of Bachelor of Science Undergraduate College Leonard ...»

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between June and September, judgments against Grokster in the U.S., Kazaa in Australia, Soribada in Korea and Kuro in Taiwan formalized the fight against illegal P2P distribution. All of the above-mentioned cases determined that, “Operators of unauthorized P2P networks, who encourage the use of their networks for copyright infringement, can be held liable for music piracy” (IFPI, 2006, p.18). Additionally, the industry’s fight against individual downloaders has seemed to instill fear (lawsuits), annoyance (corrupted files), or knowledge (education on copyright law) into enough people to combat the growth of P2P networks. The figure below illustrates an interesting P2P phenomenon; while broadband penetration has been growing steadily over the past two years, illegal file-sharing has been kept in check.

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While the industry has met some success in combating illegal file-sharing and distributing royalties equitably (Digital Rights Management3), regulation cannot be their only action with regard to P2P networks. File sharing is a great device for consumers to test and experience new music, as has always been available on listening kiosks or on the radio. As Mark Katz states in his book, Capturing Sound: How Technology has Changed Music, “MP3 and P2P are influential not because they are good or bad, but because they provide radically new ways to experience and disseminate music” (Katz, 2004, p.187). The industry’s next step in furthering this market legally is to gain effective cooperation from the Internet Service Providers (ISPs) in combating illegal usage. The ISPs gain huge indirect revenues from digital music popularity and should have a role in protecting copyright laws on their networks. As stated in the IFPI 2006 Digital Music Report, “As creative content industries—first music, then film and video, news media and publishing—drive the growth of businesses on the internet, ISPs must share Digital Rights Management (DRM) is the umbrella term for new software rights distribution. DRM helps to recompense the many rights holders involved in digital music.

responsibility in a business where they increasingly generate revenues of their own” (IFPI, 2006, p.18).

While the music industry has been successful in the first phase of the P2P game, regulation, they are currently entering phase two, effective utilization. By getting the ISPs on their side, the industry will be able to garner support and gain knowledge about the new digital reality of commercialized, legal P2P networks, thus increasing revenue streams.

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While ringtones and ringbacks do not make much sense from an artistic point of view, they certainly offer a profitable revenue stream. The ringtone business currently accounts for about 40% of the total digital music business and is expected to grow to $6 to 7 billion in revenues by 2008 (Kusek, 2005, p.70). Not only does this business have a successful pricing strategy, it also offers a favorable means of payment. Consumers shell out about $1.99 to $2.50 for each ringtone—a ten-second, poor quality sound sample—as opposed to $.99 for full single downloads. Consumers are charged more for a sonically inferior product. Why is it that mobile downloads bring in more money on a per download basis? This odd discrepancy is partly due to the payment structure for mobile ringtones. Because payment is processed through an existing billing relationship between the consumer and the mobile phone provider, the incremental cost of a ringtone does not register too sharply with consumers. However, with digital downloads, there exists no longstanding billing relationship and usually a cumbersome registration process which discourages consumers from impulse or infrequent buying. Another factor that differentiates ringtones from traditional digital singles is that ringtones are a strong symbol of consumer personality. Because ringtones are very public—even when sitting in class, it is not uncommon for Fifty Cent to chime in with “Candy Shop” every once in a while—they are a very clear personification of the consumer; they are a manifestation of personality. For this reason, some consumers place a higher value on ringtones rather than digital singles.

In addition to these current advantages that the mobile phone market holds over the traditional downloadable music market, the mobile phone market is also progressing in technology much more rapidly than its counterpart. For instance, 2005 was marked by the introduction of the master ringtone (a sonic clip sourced from master recordings), and 2006 will see wider implementation of full track downloads and the 3G technology, which allows for highspeed data transmission, greater voice capacity, access to multimedia features (audio and video) and internet access.

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The above figure breaks down the current U.S. market for ringtones and demonstrates the overwhelming popularity of the master ringtone.

The growth of the mobile market cited above is a clear indication of the importance of user friendliness; when it becomes easy to download legitimate music, people will be willing to pay. The ringtone industry has set the tone for the music industry in terms of technological adaptation and success, and will continue to see growth with the adoption of full track downloads and additional premium content. While ringtones are not “real music” at this point and cannot be heard in “optimal listening conditions,” they do offer an extremely profitable and wholly unique revenue stream for the music industry.

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Online streaming music services, while small in popularity in comparison to digital downloading, do deserve a bit of attention because of their early introduction to the market.

Streaming music was one of the music industry’s first attempts at legal digital content. While streaming music is declining in popularity right now—mainly because of rivals in the satellite radio industry and limitations on listening format—it does serve a purpose for some listeners. In fact, the crux of streaming music, unlimited digital content, is the key to a new industry theory that will be discussed further in the section titled, “Collective Licensing”. While streaming music will play a role in the future of digital music, it will only cater to a small, niche market.

3.2.4 BUNDLED DOWNLOADS Some digital music advocates like to point out the quick rise in digital album sales (up 190% from 2004, to 16.2 million) and the unprecedented potential of bundled digital media products. As Richard Burgess says in his book, The Art of Music Production: “Once it becomes standard practice to package digital downloads with substantial metadata—including artwork, images and extensive notes, with a choice of compression schemes and digital media players that can play audio, video, and text—it is hard to imagine why anyone would want to buy a CD” (Burgess, 2005, p.263). Given these encouraging statistics and predictions, one might imagine that there is a market for bundled digital music products; however, others (myself included) would argue that a traditionally bundled product (as described above by Burgess) is far more attractive in its tangible form than in its digital form. Bundled products such as full digital albums, or enhanced products (added music videos, interviews, artwork, ect.) attract a very particular consumer, usually a devoted fan or music junkie. If a consumer believes in an artist enough to shell out $10, they are probably going to want to hold and display their purchase rather than simply enjoy it on their desktop or iPod. This “fan” phenomenon is demonstrated most starkly by the makeup of the digital market. The single—the digital world’s bestseller by far— does not attract avid listeners of an artist, but instead, caters to the “in-the-moment listener”.

Consumers interested in the value added benefits of bundled products are not shopping for their favorite artists online. The statistic on digital album sales cited above, while staggering in percentages is far less impressive in real numbers; compared to the 800 million albums the industry sells per year, digital album sales are almost inconsequential.

As Catherine Moore, Director of NYU’s Music Business Program said in our interview on the topic, “Digital bundling can’t survive by simply replicating CD attributes. [Digital technology] doesn’t lend itself well to direct replication; it has many more opportunities and really can’t replicate a majority of the attributes of a real CD. The industry has to rethink what the customer is getting from digital music” (Moore, 2006). As Moore hints, there is a potential market for digital music beyond the singles scene. Where digital can exploit its attributes is in its flexibility. Digital technology offers the opportunity to bundle media products across sectors (i.e.

live performance, film, or video game combos) and provide unprecedented speed to market. For instance, a band performing a live show can have a unique, live performance digital product for sale only a few hours after they have cleared the stage. It is in these sorts of promotional and exclusive content products that digital bundling has potential; however, as stated above, direct digital replicas of tangible products will not flourish because they cannot offer the attributes that album purchasers demand.

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With so many different formats of music available—ringtones, digital singles, digital albums, illegal copies, and full fledged CDs, to name a few—the timing of format releases has become an important consideration for labels to explore. In terms of label activity, the verdict is still out on an optimal structure. A few labels, including Island Def Jam, prefer to suspend the availability of digital copies of singles and albums until the tangible album is released. For instance, recently Island Def Jam restricted the availability of digital copies of Ne-Yo’s hit single “So Sick” until the album was in stores. Their strategy was met with explosive success. Fans’ pent-up demand for Ne-Yo’s products led to release day sales of the album hitting 301,000 and release week sales of the digital single reaching 120,000 downloads according to Nielsen SoundScan (Leeds, “Labels Halt…”, 2006). The label also followed a similar strategy for Mariah Carey’s “Limited Mimi” album, waiting almost a month after the tangible album release date to make digital albums available online. Again, they were met with huge success for the album.

Island Def Jam, among others, follows this strategy because they feel that $.99 downloads are cutting into their overall album sales and hurting albums of consistent quality throughout. As Steve Bartels, COO of Island Def Jam, said, "If you know you have something of depth, you have to be careful about how you bring it into the marketplace. We're in the business of having consumers believe in an artist. If everything is up and gone before you have a chance to listen to the album, what do you have?" (Leeds, “When All the…”, 2006).

However, many experts are questioning this timed release strategy. As Leeds points out, “Holding back on new singles now […] may end up doing more harm than good in the long run, especially if music continues to be available on free, unauthorized online networks” (Leeds, “When all the…”, 2006). By not taking advantage of every possible outlet, labels maybe shooting themselves in the foot. The music is out there, and if labels are not giving consumers the opportunity to purchase their music legitimately, they may effectively be encouraging people to download illegally. Rather than providing ubiquitous access, the labels may be effectively strong-arming the market and creating artificial scarcity.

Are labels then effectively telling consumers which albums they truly believe in by choosing certain release schedules? This remains to be seen because different labels approach timed releases differently but in the future, the release schedule of an album may tell consumers something about the quality of the overall product.

3.2.6 COLLECTIVE LICENSING Many industry experts have suggested that collective licensing will be the solution to music piracy. The collective license, if implemented, would take the form of a small monthly fee, or tax on ISP services for which consumers would then be afforded unlimited access to digital music. This approach would create a central pool of money for artists to be paid from, similar to compulsory licensing used in distributing mechanical licenses for music played “on the radio, in restaurants, stores, elevators, and in shopping malls as background music” (Kusek, 2005, p.131). Rather than sue people to change behavior, collective licensing would simply tax everybody at the primary point of access. This theory rests on the fact that all ISP customers would gain enough utility from digital music to be willing to pay. As Kusek states, the access has to be “so compelling that everyone considers it a part of their basic expenses, like the phone bill, cable television, or car registrations” (Kusek, 2005, p.16).

This concept of collective licensing is not new to the entertainment field; in fact, it is the

standard for most European broadcast television industries. As Kusek states:

In some European countries, such as Germany and Austria, all residents that have television or radios in their homes, regardless of how or whether they use them, must pay a yearly flat fee to the government. The government then uses the funds to pay for public television and radio productions. […] People pay an average of $100-150 per year in return for what feels like a free, unlimited, and unmonitored supply of media programming (Kusek, 2005, p.10).

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