Digital Music - will a 'public license' address the fundamental challenges?

Below is first of a new series of 'Devil's Advocate' articles, where we ask people to look at topics from a different point of view.

dadvocate.jpg

This guest post from Gerd Leonhard of Mediafuturist, takes the form of an impassioned 'Open Letter to Governments' for a Digital Music License (DML) as an alternative to the proposed '3 Strikes and Disconnection' legislation in many countries.
 
Readers should note that the 'official' Telco 2.0 line runs contrary to Gerd's views. We believe that there are other, more practical, ways of improving the music industry's business model problem. But then, that's the point of this 'Devil's Advocate' thread...to challenge our and our readers' thinking.

[Ed. - Either way, this should help warm people up to the debates we'll be having with Feargal Sharkey et al at the 7th Telco 2.0 Exec Brainstorm on 4-5 November in London. And Gerd will be on hand to shake things up a bit.]

The Digital Music License (DML) - why and how a new public license for the legal consumption of music on the Internet would provide a solid alternative to the proposed '3 Strikes & Disconnection' legislation

Dear Policy Makers and Governmental Organizations:

The  proposed "3 Strikes" legislation is flawed in many more ways than I could hope to outline in this letter, and many of these issues have already been addressed in many other places. Therefore I shall provide only a quick summary of some of the key issues, and then move on to describe what a fruitful, realistic and decidedly more pragmatic alternative could look like.

Unauthorized use of music on the Internet is not a technical problem but a business issue. The global 'free' sharing of music via the Internet (whether streamed or downloaded) is growing exponentially, and this cannot be overturned by technological means. The digital music ®evolution clearly poses a myriad of business and socio-cultural problems. Rather than hoping for a technical fix, they require us to devise a new social contract that legalizes what people actually do, and permits us to build new business models around it.

Anyone that has attempted to innovate within the music industry will attest to the fact that the largest hurdle for the monetization of music on the Internet during the past 15 years has been the astounding absence of new licensing schemes that actually fit the 'Internet Generation' i.e. the digital natives, and the new ways of consumption that connected consumers are rapidly adopting. Basically, the problem is not what consumers are doing - the problem is that we have not blessed it with a license yet.

Any attempt to solve these business issues with technological measures - such as the proposed 3-strikes legislation - would, with utter certainty, be very expensive, have serious social and political consequences, and yet fail miserably to deliver tangible monetary results for the content industries or indeed the creators. Digital Rights Management (DRM) has been pushed very hard by the music industry for over a decade, and has now finally been acknowledged as the snake-oil it really always was. The only outcome of the proposed 3 Strikes legislation would be to further criminalize every single fan and every potential customer.

In practice, 3 strikes means no more money for the creators, no new revenues for the industry (but even more rejection by the consumer), and still no satisfaction for the music consumers. In my view, the most pressing objective must be to solve the very real problem of how music (and then, other digital content) can indeed generate new revenues via the Internet. The old revenue streams are the past, beyond a shadow of a doubt - just look at what is happening to newspapers and print publishing! Technology will not, and cannot, solve problems posed by seriously outmoded business practices.

The bottom line: controlling the flow of digital files is 'Mission Impossible'. The challenging but nevertheless indisputable reality is that the very idea of reliably and consistently controlling the distribution of music files on the Internet is basically a technical impossibility as well as a social, political and cultural minefield. Today, the simple act of listening or streaming, watching or reading anything on a connected computer or a mobile Internet device is the same as copying the content; one cannot be done without the other. The Internet is a giant copy machine, by definition, by design, and now... by culture.

We may not like it, and we not appreciate it, but just like the railway was hated by the people that made horseshoes and horse carriages we have no choice but to shift what we do, adapt, and reinvent ourselves. As your own kids or any so-called digital native will tell you, having access to content is now the same as having a copy of the content, i.e. ownership. This is true in technical terms and in terms of user behavior and mindset, but crucially, not yet in terms of the law and revailing licensing practices. And therein lies the rub.

I would argue that we are in fact trying to build a new business on top of the pre-Internet principle of exclusive copyright - a stark dilemma that has proven to create endless friction but produce very little new revenue. The very idea of being able to control the flow of files in order to extract earlier or possibly higher payments from the users is fundamentally flawed, and we must therefore look for ways to monetize it rather than to prevent it.

The value of music is no longer (just) in the copied file. We urgently need to understand and accept that the value of music is no longer (just) in the mere copies of the digital files. Our attention needs to shift from the old - and dying - business of 'selling the copy' to selling everything else, i.e. the many other forms of user value around that copy. We need to start with providing very low-cost or flat-rated and bundled access, and then create many new revenue generators on-top of the bundled, legalized access to music.

Once legal and unlimited music distribution is built into Internet access - when Access is Content - a revitalized music industry can focus on talent, curation and marketing. That is to say, the attention-getting and the conversion of that attention into actual income. Yes, there is serious commercial value in the music industry once we regulate distribution.

The DML: the alternative to the proposed '3 Strikes' legislation.

80 years ago, the answer to the challenge of a then-new and vastly popular technology called 'Radio' was to legalize it and provide new licensing schemes to remunerate the content creators. The same thing happened with Cable TV and with the photocopier, and the very same logic needs to be applied to music on the Internet. A public, collective, standardized and open license for music on the Internet needs to be either voluntarily created by the music industry, or mandated i.e. enforced by the government - and the sooner the better for everyone.

The DML would - similar to the existing radio & broadcasting licenses that are in effect around the world - make music available on public, standardized terms and conditions, and therefore allow any and all businesses that want to use music to do so without the utterly crippling uncertainties that exist in the current marketplace.

Revenue shares and flat rates, not fixed license fees per song.


The objective of the DML is to create a new, vast, and constantly replenishing 'pool of money' for music, i.e. to grow the revenue potential along with the growing number of users, as well as with the many new use cases that will arise from the DML.

In my opinion, the most crucial component of the DML is this: the license fee needs to be calculated on a revenue-sharing basis rather than on a per-unit (i.e. per song) fee, whether streamed or downloaded. The current practice of a fixed per-track fee (usually amounting to about 1 cent U.S. per song) for a stream and around 70 cents (U.S.) for a download has proven to be economically detrimental and utterly unrealistic for the market participants (such as Omnifone, Spotify, Rhapsody, Napster and Yahoo) given that the digital music ecosystem is still in its nascent phase, that large-scale advertising revenues for new forms of media are always 2-3 years behind, and that a very large number of users - potentially all UK consumers - are likely to listen to quite a bit of music in this way.

This market does not and will not bear license fees that are fixed in this manner and that are totally unrelated to actual incoming revenue streams. Instead, the DML would need to be calculated on a flat-rate or percentage-of-revenue basis, possibly combined with a minimum 'floor' that could prevent unfair and unintended use of 'free' music as a loss-leader (if needed). Since there are many different kinds of businesses that would benefit from having legalized music available (e.g. telecoms, operators, search engines, social networks and communities, blogs, web portals, online magazines etc), but their business parameters are so vastly different, I would propose to initially make the DML only available to ISPs, mobile network operators and telecommunications providers.

This would have several important advantages: once they are able, i.e. licensed, to offer music bundles and flat rates, ISPs and telecoms will have every incentive and reason to monitor (i.e. count) which songs are used on their network, they have very large numbers of users that will provide for a critical scale of payments to be obtained immediately (thus significantly lessening the potential threat of revenue loss in the physical music market), they have strong potential for the integration of next-generation, user-friendly advertising integration, and they already have built-in billing and payment mechanisms.

When licensing ISPs, mobile operators and other telecommunications companies, it will be crucial to offer flat-rate licenses rather than to pursue revenue shares which are not going to be an acceptable way of generating music revenues from this process, at least initially. Rather, I believe that a fixed, flat-rate license fee per user, per week or month, would be the most suitable way provided that suitable 3rd parties (see below) will also engage to contribute to the funding of each user's license fee. It is crucial to not simply declare the license fee payments to be the ISP's problem - because it isn't, and because the solution is in the creation of a new Ecosystem, a new business logic, and not in creating tax-like burdens for individual industries.

Economic experts have done a lot of work on the flat rate model. Far from being an economist myself, I would venture to say that, in Europe, a payment of 1 Euro per week per user seems to be economically feasible; however the exact price point will of course need to be negotiated with all involved parties, and possibly be adapted on a yearly basis until the market is more fully developed and each party's ultimate value position can be determined. In any case-and this is crucial - the DML must clearly be so utterly affordable that every single ISP, operator, and telecommunications company would immediately apply for a license.

In terms of the actual use of the music and the subsequent accounting for remuneration purposes, I propose that it should not make a difference if a song is downloaded or streamed (i.e. played on-demand while online), and - similar to CableTV - it should not make a difference if a user would use music 24 hours a day, every single day, or just download 3 songs every now and then. All music usage would need to be counted, anonymized and reported, and artists would get paid proportional to the actual use of music i.e. according to their popularity (see below for details).

A UK-based calculation example: a pool of 2.6 Billion GBP per year for music. As an example, a DSL provider and mobile network operator with 20 Million UK users would need to generate funds to pay for a DML of GBP 80 Million per month, i.e. 960 Million GBP per year. Further, assuming an average of 50 Million eligible UK residents, i.e. a large percentage of the entire UK population (~ 61 Million) generating 1 GBP per week, the revenues for the music industry would amount to a very substantial 50 Million GBP per week i.e. 2.4 Billion GBP per year, which represents almost twice the UK's recorded music revenues in 2008 (1.36 Billion GBP). Any argument of 'cannibalization' of existing revenue streams such as CDs or iTunes would pale against this figure.

How to fund a DML of 1 Euro per week per user.

The key question is, of course, how exactly the ISPs and telecoms would raise the money to pay for the quite significant cost of the DML, every week, per user. This is a crucial issue since under no circumstances should the ISPs, operators or telecoms be made solely responsible for the financial solution of this problem; it is absolutely crucial to position the DML as a business solution that will unlock strong new revenue opportunities and will be more than cost-neutral in a fairly short time.

In my view, the job of building the financial support mechanisms i.e. the ecosystem that the DML will require should be handled by a mutually respected, knowledgeable and neutral advisory board whose mission would be to collate this new ecosystem and to get device makers, advertisers, premium-service providers and other interested parties aboard as quickly as possible. Of course, as in television and radio, advertising is one of the key factors that will subsidize the DML fee payments.

The concept of advertising-supported content is not new but what will be drastically different, going forward, will be the type of advertising that we will see on digital networks in the very near future. Concepts such as advertising becoming content, itself (such as in mobile phone applications) and social advertising will blossom once permission for the legal use of music is given, creating much higher advertising revenues than we are currently seeing online.

The global advertising spend currently amounts to roughly $670 billion, per year. Going back to the UK example, above, the UK advertising & marketing spend is forecast at approx £25 billion in 2010 (eMarketer), with - by 2012 - an estimated 25% i.e. £6.25 billion going to digital and mobile advertising. Yet, digital and mobile advertising would only be one piece of this new puzzle: handset makers could pay subsidies to get preferred i.e. 'presented by' access to users (basically a network-centric variation of the existing 'Nokia comes with Music' concept), social networks could contribute subsidies to legally integrate ISP-hosted music into their own networks via the DMLs that operators and ISPs would already have; search engines and portals could do the same.

Imagine if Google could sit on-top of this new system of fully legalized, feels-like-free music - this is similar to how Google has already made legal music (streaming and downloading) 'feels like free' in China.

After an initial set-up period, it would be crucial that an ISP or operator that makes use of the DML would be able to fully recover the DML costs through a multitude of new revenue streams, such as next-generation advertising, the sale of mobile applications based on the unlimited availability of music (such as social music and play list applications), subsidies by CE companies i.e. handset and device makers, data-mining and cross-selling (with careful consideration to consumers' data protection and privacy, of course) and various forms of up-selling of other product and services (including music-related premiums) such as the games industry has offered for the past decade, already, or even by re-packaging some of the license costs to their users.

The DML is NOT a tax. Any indication that the DML essentially amounts to a tax or is yet another compulsory payment scheme levied onto the consumer (such as the existing TV & Radio licenses) needs to be avoided, at least in the UK market where such a proposal would probably be politically unwise. The DML is simply a new license that is made available to businesses that want to use digital music, with the funding being generated from the market participants, themselves.

Monitoring of usage and fair payment to content owners.

Every song that is performed i.e. streamed or downloaded on the Internet would need to be tracked and accounted for, using already available software solutions such as Gracenote or Shazam. This data would need to be made anonymous using a mathematical formula that could protect each user's private data while still providing actuarial tracking of which song has been used how many times, on any given day, week or month. Each artist and rights-holder would then receive a monthly payment that is proportional to the actuarial use of their music during each tracking period, e.g. if a given artist's music was used 1.3% of the time (i.e. in any given month), he or she or their representatives (record labels and publishers) would receive 1.3% of the total pool of money collected. All participating creators (e.g. writers, lyricists, composers, producers etc) would get their proportional payment from the same pool. I am advocating a 50-50 split between the composer and the performer (i.e. recording and publishing), at this time. Overlaps with existing rights schemes (such as public performance on the Internet, and so-called web-casting and Internet-radio) would need to be investigated and addressed, as well.

Existing examples: similar models to the proposed DML are already in place, or are being investigated in:
  1. China, where Google is providing free and fully legal streams and downloads of music via their Top100.cn property, in return for a share of advertising revenues (and in full collaboration with all major labels)
  2. Denmark, where the ISP and mobile network operator TDC already has made music 'free' to all of their subscribers, in return for paying a flat fee per year to the music rights organizations
  3. The U.S., where Warner Music Group, via the new Choruss project, is rolling out a flat rate music license for universities and colleges
  4. Korea, where Korea Telecom's Melon service provides flat rate music access to over 50% of the population
  5. Canada, where the Canadian songwriters are lobbying the government for a new flat-rate charge for digital music