Economic and Social Benefits of P2P

Aram

May 23, 2012

¶ 1 Leave a comment on paragraph 1 1 While the net economic impact of P2P on the music retail marketplace is an open question, there is ample evidence to suggest that, in many cases, it contributes substantially to record label bottom lines and has a positive effect on broader musical economies, and that it has other beneficial social and cultural effects that can’t be quantified. Even the major labels have come to recognize many of these benefits, repositioning themselves to take advantage of the newly-energized, P2P-driven fan base for their artists. In recent years, traditional artist contracts have been largely supplanted by “360 deals,” in which a record label or other institution (e.g. concert promoter LiveNation) will participate in all artist revenue streams including recordings, concerts, merchandise, publishing, endorsements and licensing. Because of the diversification and control 360 deals offer labels, they are so lucrative and low-overhead that they’ve come under heavy fire from pro-artist advocates. In the words of industry analyst Bob Lefsetz, who advised aspiring artists against signing such deals, “they want more of YOUR money for doing less work.”[1]

¶ 2 Leave a comment on paragraph 2 0 Between these 360 deals and a host of other emerging revenue streams, record labels have significantly offset the decreases in album retail revenues over the past decade or two. These new revenues typically aren’t reflected in the infamous figures depicting the music industry’s precipitous decline, and are rarely mentioned in the industry’s piracy crusade rhetoric. Some of the most significant new revenue sources for labels include:

• ¶ 3 Leave a comment on paragraph 3 0
• Performance rights royalties. This category includes the licensed use of music in broadcast, specifically royalties from satellite, digital and Internet broadcasting. A decade ago, these revenues were virtually nonexistent, because AM/FM radio in the US only pays royalties to publishers. But in 2011, according to the IFPI, global performance rights from these new, digital broadcast platforms yielded $905 million in revenue for labels.[2] It is important to note that, unlike sales revenues, the labels are not required to pay artist royalties on this income; an additional $905 million in royalties (or thereabouts) were paid directly to artists and unions by collection societies.
• Synch rights royalties. In addition to the licensing revenues described above, record labels receive synchronization or “master use rights” revenues whenever their songs are used in television shows, video games movies or commercials. The music industry only began reporting revenues from this source in 2012, when it claimed $342 million for the previous year. The IFPI, which bases its estimates on revenues reported by member labels, may be underestimating the actual figure considerably. In 2011, music licensing attorney Steve Gordon (a former major label executive and widely read author[3]) told me that “in the last 20 years, master use licensing has gone way up and become a new, important income source for the labels.” Overall, Gordon estimates that this market brings the labels closer to $1-2 billion per year.
• Live events. The live music events sector has climbed steeply in value over the past decade, as ticket prices have escalated, and audiences awash in digital recordings increasingly crave live contact with their favorite artists. Today, this sector is worth well over $20 billion annually, roughly three times what it was a decade ago. It’s difficult to say what percentage of this accrues to labels through 360 deals, but a conservative estimate would be over $1 billion and growing, compared to zero a decade ago. There is little question that free online music sharing has played a significant role in driving these gains; as Lady Gaga told the Sunday Times in 2010, she “doesn’t mind about people downloading her music for free, ‘because you know how much you can earn off touring, right? . . Make music — then tour. It’s just the way it is today.’”[4]
• Hardware royalties. In different regions of the globe, record labels earn royalties on the sale of different forms of storage media (e.g. CD-Rs, DATs) and hardware devices (e.g. MP3 players, CD burners), which are both markets driven by free music sharing. It’s difficult to establish exactly the volume of revenues accruing to labels from this sector, but given that these product categories represent tens of billions of dollars in sales each year, the figure must be considerable.

¶ 4 Leave a comment on paragraph 4 0 Thus, while the amount of money accruing to large record labels from the direct sale of music to consumers has dropped significantly over the past decade, these losses have been mitigated to a great degree by a variety of new and rapidly growing sources of revenue, driven in large part by the free distribution of music via online channels. Although it’s very difficult to establish whether this nets positively or negatively for any given record label or even for record labels as a sector, there are a number of recent analyses by researchers from around the globe providing compelling evidence that free music sharing has contributed to an increase in revenue for musicians themselves, and/or for the music economy overall.[5] For instance, based on a variety of sources, the editors of Techdirt, a prominent media and technology blog, have shown that the musicians’ share of the overall US music economy grew 16% between 2002 and 2010, to $16.7 billion, while the overall entertainment economy has grown by 50% in the past decade.[6] Even the IFPI’s own figures show that an economic index it calls “the broader music industry” (an amorphous and changing category including some forms of consumer spending that don’t directly impact the labels’ bottom lines) has grown from $132 billion in 2005 to $168 billion in 2010. A great many prominent recording and performing artists have acknowledged this publicly as well. As 50 Cent told an interviewer in 2007, “What is important for the music industry to understand is that this really doesn’t hurt the artists. . . . A young fan may be just as devout and dedicated no matter if he bought it or stole it.”[7]

¶ 5 Leave a comment on paragraph 5 0 These findings have already had policy implications that contrast sharply with the recommendations of the IFPI and other piracy crusaders. For instance, immediately following the 2011 release of a report it had commissioned on the subject, the Swiss government announced that it would allow its citizens to download copyrighted content freely, from unlicensed channels, for personal use. The Swiss report found that money saved by consumers via P2P was being reinvested in newer, more innovative entertainment products and cultural practices, while antipiracy efforts simply cost more than they saved, both economically and socially. As the report’s authors argue, the process is necessarily one of Darwinian adaptation: “Winners will be those who are able to use the new technology to their advantages and losers those who missed this development and continue to follow old business models.”[8]

¶ 6 Leave a comment on paragraph 6 0 In addition to the more quantifiable dimensions of P2P’s economic impact, it offers several widely-acknowledged benefits for artists, labels, and musical culture in general. One of its most valuable roles for the industry at large is as a conduit for marketing and promotion, providing a platform for new and emerging musicians to find a listener base, for established artists to deepen their relationship with their fans, and for record labels and other industry organizations to defray some of the costs of traditional media. Terra Firma, the private equity firm that owned EMI at the time, acknowledged this in its 2007 Annual Review, writing that “[h]istorically, the industry has viewed digital principally as a piracy threat. In reality, it offers new possibilities across the value chain, from discovering and producing through to promoting music.”[9] In fact, the labels have exploited the user bases of online file sharing networks for marketing and distribution for years, partnering with platform providers like SNOCAP, QTrax and Grooveshark to place commercial tracks within peer-to-peer environments, and relying upon consumers to promote and distribute both free and for-pay digital music on their behalf. Many of the world’s best-known recording artists have embraced this principal as well, either explicitly leveraging P2P as a marketing and distribution platform, or simply acknowledging its value as a conduit for fan relations. As Shakira told the Daily Mail in 2009, “I like what’s going on [with file sharing] because I feel closer to the fans and the people who appreciate the music . . . It’s the democratisation of music in a way. And music is a gift. That’s what it should be, a gift.”[10]

¶ 7 Leave a comment on paragraph 7 0 Online music-sharing platforms and social media have also proven a vital platform for artists, labels and other content providers to more effectively research the marketplace. This is hardly a new idea; in 1999, I published a research report advising entertainment companies to track the usage of downloaded material “to better understand their markets in aggregate and to build closer relationships with individual consumers,”[11] and even back then, popular acts like Rage Against the Machine[12] and Tom Petty[13] were already leaking tracks online both to gauge and to stoke consumer demand (and also to cash in on the inevitable press coverage). In the years since then, first a cottage industry and then a mature market research sector have emerged around delivering “intelligence” to record labels, movie studios and software publishers based on the analysis of free sharing, commenting, and linking on social platforms including P2P.[14] Today, both independent firms such as MusicMetric, Next Big Sound and BigChampagne (perhaps the first to track actual P2P behaviors in aggregate for a market research product), and established research titans such Nielsen and NPD offer such products, and they are used widely throughout the media and entertainment industries.

¶ 8 Leave a comment on paragraph 8 0 Beyond the business and economic spheres, P2P also serves some important social functions. One effect has been to broaden significantly what we might call the “musical public sphere.” In the pre-internet music industry, there were only three media channels providing an opportunity for musicians to share their work with potential fans: retail, radio and television. Each of these channels was, and continues to be, highly concentrated in its ownership structure, as in the record label sector. This high concentration, along with the native technological limitations of traditional media (e.g. limited shelf space and airtime) drastically diminishes the number and range of artists who are able to share their work through such channels. Internet-based distribution, especially P2P file sharing, eliminated these bottlenecks. While a commercial radio station may play fewer than a hundred artists’ work in a given week, and Wal-Mart’s shelves may carry a few hundred at best, millions of artists have the capacity to reach their audiences around the globe via the “long tail”[15] of P2P networks.

¶ 9 Leave a comment on paragraph 9 0 Unlike traditional media, these networks are also largely immune to the influence of “payola”[16] and other anticompetitive forms of promotion that have plagued traditional broadcast media virtually since their inception. This means that music fans are able to develop their tastes based largely on their social connections to other fans, instead of being dependent on media gatekeepers who have been paid to keep most artists and styles out of the public eye (and ear). Thus, as several researchers have argued, P2P has both improved the accuracy with which consumers are able to match music to their tastes, and has broadened those tastes.[17] For musical culture in general, this increases the prevalence of diverse and innovative music, and also allows songs, artists and styles to remain in the public ear far beyond their traditional market lifespan. As music blogger Eric Lumbleau, editor of Mutant Sounds, argued in a recent Wire magazine article, free music sharing serves an important social function: “File sharers uploading rare and out of print records challenge official histories of music.” This has not only helped to democratize musical culture, but has also made the marketplace more sensitive to diverse tastes, and helped it to thrive by catering to those tastes. Lumbleau boasts that “numerous reissues have come to market as a direct result of those albums having first been discovered on Mutant Sounds and/or made viable enough to reissue because of the increased profile that a previously obscure album has received by being posted on Mutant Sounds.”[18] This is not a self-serving claim; many high-profile musicians have made a similar argument. In the words of Pink Floyd’s Nick Mason, “File sharing means a new generation of fans for us. It’s a great thing to have another generation discovering your music and thinking you’re rather good. File sharing plays a part in that, because that generation don’t do it any other way.”[19]

¶ 10 Leave a comment on paragraph 10 0 Of course, “pirates” have been responsible for keeping obscure and out-of-print music in the public sphere for generations, and perhaps since the dawn of the music industry itself. As Adrian Johns argues, music bootleggers in the 1950s who sold jazz and opera records “wanted to make money, but they were in business for more than profit alone. They justified their actions in terms of furnishing a public archive of classics” that the recording industry was overlooking in search of larger markets.[20] This is true in other musical traditions, as well. Ethnomusicologist Harry Smith, whose groundbreaking compilation Anthology of American Folk Music more or less singlehandedly inaugurated the 1960s folk revival, and in so doing forever changed the tenor of American music, used dozens of songs still under copyright, without permission, for his anthology. As he argued in his liner notes, “Only through recordings is it possible to learn of those developments that have been so characteristic of American music,” and therefore the power of such recordings to “make historic changes” rests in their “making easily available [to a broader audience] the rhythmically and verbally specialized musics of groups living in mutual social and cultural isolation.”[21] To put it simply, Smith believed that, by uniting the diverse ethnic and regional recordings in his collection, he was somehow uniting America as well. Far from being branded a criminal for his blatant rejection of copyright, Smith was celebrated throughout his life, and was even awarded a Chairman’s Merit Award, shortly before his death, at the 1991 Grammys. In his acceptance speech, he told the smiling crowd of music industry executives and major label artists that “I’m glad to say my dreams came true. I saw America changed by music.”[22]