Sun, 04 Sep 2005

Rewarding Failure?

You're a widget producer, and 40% of the widget retail price comes from packaging and transporting widgets. A new technology comes along, and it can eliminate much of that: you'd jump on it, right?

Not if you're the music industry; they've been fighting against online distribution for over seven years now. People want to be able to download singles and albums, with lyrics and cover art; purchasing them in the same way they purchase CDs, but nobody lets you do that. It took a third party (Apple) to push online music distribution, and they still don't do what you want: you can't upload onto non-Apple MP3 players (except burning to CD and re-ripping, with the associated loss of quality), you can't sell "your" music.

The reason is two-fold: firstly, online distribution is a form of copying, so unlike trucking CDs around, you need permission of the copyright holder. This means, by law, they control the online market in a way they don't (or shouldn't) control the offline market. Secondly, having been given a monopoly on distributing copies, the music industry has come to believe they have a natural, inalienable right to control all uses of the music. They really don't believe you actually own music when you buy a CD. Most people will disagree with this, resoundly.

Sheltered from a free market for so long, the industry reacts to change with horror. Their instinct when the Internet became widespread was not "whee, we can cut costs and get control of distibution!" but, amazingly, "we can't put things online without stronger laws which allow us to control more uses of our music". To give the government credit, it might not have been clear at the time that furthur protectionism was simply rewarding failure, but it's become increasingly obvious. Legal or no, online copying is what the marketplace wants, and the industry has failed to supply, so unauthorised copying is the rule.

So, what's the solution? The Economist suggests 14 year copyright (with an additional 14 years on request). That would certainly work to create a healthy online music supply industry, but is extremely difficult in Australia due to our treaty obligations. Hence, for the specific case of online distribution, deregulation is required. A compulsory licensing scheme would promote competition among distributors (that a compulsory license is a deregulation of the market shows how extreme a regulatory framework we are currently suffering). My preferred method is that the prices be set by the online distributor, but a reasonably high (up to 80%) royalty be paid to the copyright holder. This high rate leaves room and incentive for direct negotiation, but still allows online stores to supply a wide catalogue from day 1.

The benefits from this are multiple. Firstly, the existence of a competitive market for online music is the best way of reducing unauthorized online copying. Secondly, the market can decide which formats to supply, ensuring that we don't indirectly lock customers into certain technologies (such as music which only plays on the iPod, or on Microsoft Windows). Thirdly, attractive online services promote the spread of broadband and infrastructure, giving Australia an edge over other countries in areas unrelated to music. Finally, the efficiency increases particularly help those in remote locations, who do not have access to huge (offline) music stores which only exist in cities.

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