The recording industry's off-key strategy

By | February 19, 2007 at 9:26 PM

Ten years ago, as the Internet began to mushroom in popularity and
emerging technologies enabled consumers to make nearly perfect copies
of digital content, the recording industry embarked on a two-pronged
strategy in response to the changing business environment.

First, it emphasized copy-control technologies, often referred to as
digital rights management (DRM), that many in the industry believed
would allow it re-assert control over music copying. Second, it lobbied
the Canadian government for a private copying levy to compensate for
the music copying that it could not control.

While the industry’s approach proved successful on the legal front —
the 1996 World Intellectual Property Organization’s Internet Treaties
established legal protections for DRM and Ottawa introduced a private
copying levy on blank media such as cassettes and CDs in 1997 — the
strategy’s effectiveness has long been subject to debate.

The week of Feb. 5 may ultimately be viewed as the beginning of the end
of that debate. That week, which began with Apple CEO Steve Jobs
calling on the industry to drop DRM and concluded with the Canadian
Private Copying Collective (CPCC), the collective that administers the
private copying levy, applying for its dramatic expansion, leaves
little doubt that the recording industry got it wrong.

The Steve Jobs position on DRM, which many derided as self-serving
given that Apple is facing mounting pressure from European regulators
to address the interoperability restrictions contained in music sold by
its iTunes service, was also widely acknowledged by those same
commentators to be right.

Digital right management supporters may claim that the technology
encourages innovation, yet experience has demonstrated that reliance on
digital locks frequently sink, rather than save, new business models.

The 2005 Sony “rootkit” debacle, which ultimately cost the company
millions of dollars in class-action lawsuits, the market
disappointments of new digital music players that rely heavily on DRM
such as the Microsoft Zune, and the lack of support for digital music
subscription services that insert burdensome restrictions on the use of
downloaded music such as Rhapsody and Napster, offer compelling
examples of why DRM has emerged as the industry’s biggest impediment to
consumer acceptance.

Indeed, many of the recording industry’s leading digital sales
channels, including Yahoo!, Real Networks (which owns Rhapsody) and
Apple have now publicly called on the record labels to end their
insistence on DRM. Moreover, last week a Jupiter survey of European
music executives found that nearly two-thirds believe that dropping DRM
would increase digital music sales.

Given the rising chorus against DRM, it is seemingly only a matter of
time before the industry backs away from its locks-first strategy. EMI,
the world’s third-largest music label, is rumoured to be ready to do so
and should one of the majors move in that direction, it is likely that
the others will soon follow suit.

The private copying levy may survive somewhat longer, but it too
appears to be nearing the end. The levy has generated an enormous
amount of income (over $150 million since its inception), yet it is far
more market distorting than its advocates anticipated, and much to the
recording industry’s dismay, it has provided peer-to-peer file sharers
with a legitimate argument that downloading for personal,
non-commercial purposes is lawful in Canada.

The latest demands from the CPCC swim against the global tide by
calling for massive increases in the current levy system at a time when
other countries are implementing new laws to authorize private copying
(such as copying music from a CD to an iPod) without compensation.

U.S. copyright law has long permitted this form of copying as a matter
of fair use (something even the industry acknowledged before the U.S.
Supreme Court), Australia enacted a law to allow for such copying last
year, and both New Zealand and the United Kingdom are currently
considering similar legislative reforms.

The CPCC takes precisely the opposite approach. It is demanding an
increase in the levy to 29 cents per blank CD, a price that would
result in huge market distortions given that the collective admits the
levy will account for more than half of the retail price of blank CDs.

Moreover, it is seeking to reinstate a levy of up to $75 on digital
audio recorders such as the Apple iPod. The collective claims that the
levy will exclude cellphones and PDAs by limiting its application to
devices that primarily play music, however, distinguishing between
devices is nearly impossible since dozens of products (Apple iPhone,
BlackBerry Pearl, Palm Treo) are music players, cellphones, digital
cameras and email devices rolled into one.

The CPCC is also seeking to extend the levy to storage media such as
secure digital (SD) cards, despite the fact that its own data shows
that 75 per cent of content copied on to these cards is not music and
80 per cent of people say that the content they last copied on to these
cards was not music. These results will not come as a surprise to
digital camera owners, yet that has not stopped the collective from
demanding up to $10 per card.

These ambitious demands may well herald the end of the private copying
levy. Unpopular with the public and targeted for elimination by the
Conservative party, the levy has been overtaken by the prevailing view
that consumers should be entitled to make copies of their store-bought
music without further compensation.

While there may be a need for an alternative compensation system for
peer-to-peer file sharing, the private copying levy is ill-suited for
this role since it does not legalize the making available of content on
peer-to-peer systems and the purchase of blank media bears little
relation to P2P activity.

Indeed, there are better solutions out there — levies tied to network
providers make more sense (and are already replicated by cable
television levies for retransmission of content) — and there is a need
to cover both peer-to-peer and the non-commercial use of content in
user-generated content.

Those approaches will require the recording industry to play a new tune
— one that includes the abandonment of the 1990s strategy of DRM and
the private copying levy.

Michael Geist holds the Canada Research Chair in Internet and
E-commerce Law at the University of Ottawa, Faculty of Law. He can
reached at or online at

Related Content