Close to Boiling Point: ISPs, Aggregators and Music Rights Holders
The current EC review of Telecoms Law and the UK government consultation on Illicit P2P Downloading (announced last week) threaten the ISPs relationship with its customers. Legislation alone will not solve the Content Industries problems with the internet - ISPs have capabilities they can bring to the table to help ease the pain.
Throughout history, whenever an industry is in meltdown, bullets of blame are sprayed everywhere and the industry players turn towards governments and the legal system for protection. These days, the music industry is in meltdown and the bullets of blame are targeting the ISP industry. Failure to react could cost the ISP industry dearly. We examine some of the options below.
Note that music is not suffering from a demand-driven meltdown: consumer demand for music appears as strong as ever. The problem appears to be music is being increasingly delivered by the internet, and it is proving difficult to monetise this demand across the whole of the value chain.
All the evidence seems to point towards a significant number of consumers who are sharing music without the rights holder's permission and without compensating them. Demand for legal online services pale into insignificance compared to the illicit demand. Even worse, consumer behaviour and expectations seems to have changed -- free sharing of music is becoming the default mode. Not surprisingly, music companies are looking for the law for protection and other content industries fearing a similar fate are jumping onto the bandwagon.
The Legislative Pipeline
In Europe, the EC is proposing amendments to European telecommunications law which will allow the monitoring and blocking of services by ISPs. The amendments will also permit ISPs to sanction users by suspending or terminating Internet access. Our friends at TelecomTV are so concerned about this that they have started a "throttle the package" campaign.
In the UK, the Department of Business Enterprise and Regulatory Reform (BERR) has issued a 'Consultation on Legislative Options to Address Illicit Peer-to-Peer (p2p) File-Sharing'. This consultation seems to be driven by the Gowers report, specifically:
"Recommendation 39: Observe the industry agreement of protocols for sharing data between ISPs and rights holders to remove and disbar users engaged in 'piracy'. If this has not proved operationally successful by the end of 2007, Government should consider whether to legislate."
Any new legislation will pose interesting questions about the potential loss of individual privacy, opening the door to censorship and digital disenfranchisement. However, the Telco 2.0 angle is less about civil liberties, as we are more interested in the impact on the value chain and business model.
Enforcement won't be cheap
In France, the Oliveness Agreement recommends the majority of costs will be borne by a government agency employing 30 people, sending 3 million infringement notices per annum and costing £15m per annum.
In the US, the rights holders seem to bear the brunt of costs of the Digital Millennium Copyright Act (DMCA) -- monitoring aggregator sites (eg YouTube) and issuing take-down notices. This can take a significant amount of resources. The DMCA seems ineffective for file sharers, and obviously is inapplicable to aggregators based outside the USA.
There is no doubt that the ISPs will have to install equipment on their networks to monitor traffic. Yet detecting and differentiating between legal and illegal traffic is a formidable challenge. Most UK ISPs have already installed Deep Packet Inspection (DPI) equipment on their networks, but a technological arms race seems inevitable and ongoing costs will be significant.
In all probability, over time enforcement will reduce the amount of the consumers file sharing on the internet. The internet is far from the only way to file share. A recent British Music Rights (BMR) survey showed that sharing and ripping of CDs is more prevalent today than file sharing on the internet.
Without wishing to delve deep into the cannibalisation debate, we suspect that legislation alone will probably not generate any new money to the music industry.
The BMR survey shows just how much people love and value music, and highlights that a significant amount of that value is currently unmonetised:
"It forms when fans really connect to a piece of music or to an artist. They develop a bond and will be prepared to pay more for a specific item: the original CD, band paraphernalia, or concert tickets. The value to the music consumer in this case rests in the item itself or to the individual who produced it"
It seems clear that there is value in proving a legitimate purchase of music has taken place -- a digital token proves support of an artist. Lessons from retailers with loyalty schemes allowing discounts on associated products are clearly appropriate for content aggregators.
Another key finding of the BMR survey is about that people enjoy experimenting with music:
"It is about trying-out, searching, exploring, investigating, giving something a go, rating, and recommending to others. The value to the music fan is in access to a large range of music for experimentation, and participation in a community of like minded music lovers, rather than in any one track."
A new generation of services are becoming available to meet this need - last.fm, and Pandora are just two examples. I have been personally experimenting with a service called Spotify and can see great advantages compared to managing a digital music library on my hard disk.
Simplifying Rights & Access to Catalogues
In the EU, there is not a simple, streamlined system for clearing music rights. The EU is trying to change the status quo, which will allow licensing across Europe and also competition between collecting societies.
In the UK, the MCPS-PRS, which is the major UK music royalty collection society, has a standard Joint Online Licence which costs music aggregators around 8% of Gross Revenue, but has some minimum rates which could push up the bill. For details see here. These royalties are paid to music writers, composers and publishers.
It seems obvious that the more difficult it is to license music, the higher the probability that someone will infringe either accidentally or deliberately. Price is also a big factor, for example the robot-powered music recommendation and streaming service Pandora closed down in the UK complaining that royalty rates were too high.
Getting access to the record companies catalogues is an even bigger problem. Even a company the size of Nokia, and probably with a huge budget, seems to be finding it difficult to get access to all catalogues.
Some artists who own their own rights even refuse to put their material online. The Beatles are probably the most famous such case.
We firmly believe that the rights holders should be free to choose their own distribution channels and set their own prices. However, the current market problems points towards more flexibility being required.
BSkyB's announcement of a music partnership with Universal is also interesting, although there are more questions than answers about the service at this early stage.
The trend is set and it won't be long before all of the major UK fixed ISPs are offering some sort of music service. We strongly believe that partnerships are the way forward here for ISPs, rather than building vertically integrated solutions. ISPs should focus generic capabilities which can be offered to any type of content:
- Making content delivery cheap and efficient -- by building CDNs, caching content close to the edge and making P2P delivery more network-aware. There needs to be a menu of choices of content delivery, for example off-peak data -- not just 'premium' options like assured QoS streaming.
- Helping content aggregators build a sustainable economic model (and reduce their need for underpriced 'over the top' distribution). It should be straightforward to charge to your monthly ISP bill; or offer an ad-funded model with the ISP using its customer knowledge to target ads; or offer separate per-megabyte charges for delivery to the user for specific partners or applications. Then offer the billing and collections service on behalf of the third party.
- Market services to the base. The ISP should know better than most which of its base likes which type of content!
Douglas Merrill, ex-Googler now head of digital media at EMI, sums up the challenge of how to make money in a digital age perfectly:
"We don't know the answer, and that's kind of exciting, when you don't know the answer, you try a bunch of things, and in careful ways you measure the result. We'll figure out how to make money later.''
We don't believe there is a silver bullet on the horizon either. We are certain that carrots are needed as well as sticks. And, we are certain that participation amongst parties in the value chain is the only way forward.
[Ed - Telco 2.0's new 'Content Distribution 2.0' research practice will continue to track these developments and suggest solutions. Watch this space for launch later in the summer]