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Valuing Music In A Digital World

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POST WRITTEN BY
Cary Sherman
This article is more than 8 years old.

A recent column by Hugh McIntyre here on Forbes (“The Music Industry Has A Huge Problem With Perceived Value,” August 30, 2015) highlighted a challenging paradox for those of us in the business of making music: While music has never been more consumed or important to online businesses than it is today, there is an inverse correlation in the perceived value of that music. How do we fix that? Step one: better understand the factors that produce this value gap in the first place.

When vinyl records, which peaked in the 1960s and ’70s, generate more revenue for the industry in 2014 than the billions of ad-supported on-demand streams on YouTube and similar services, something is fundamentally wrong with the market.

Here’s what we can certainly agree on: increased availability of music is a good thing. The recording industry has worked very hard over the past decade to build a robust marketplace for music in the digital world. There are now more than 70 legal digital services in the U.S. alone offering many millions of tracks in different formats. In fact, in the U.S., our industry is now more than two-thirds digital in terms of revenue. No other content industry can claim that transitional accomplishment.

Why has music industry revenue not grown at a commensurate rate?

So, if there are now more opportunities to purchase or simply access to more music than ever, why has music industry revenue not grown at a commensurate rate—when many legitimate music services are logging astronomical gains in users and listening hours?

One reason for what we call this “value gap” is the flawed licensing regime in which we have to operate. For example, government-set licensing has enabled services like Sirius XM to use music at below-market rates, based on a decades-old subsidy that has long outlived its purpose. Even worse, under current law, AM/FM radio broadcasters pay absolutely nothing for the sound recordings they use to draw listeners and generate billions of dollars in revenue. In a marketplace that values innovation, it’s ironic that it’s the legacy technologies enjoying government-granted economic benefits and competitive advantage.

A second reason is the seriously antiquated enforcement mechanism with which we are saddled. As the music industry has evolved, so too has piracy. Today, we are dealing with sophisticated international operations that find it very lucrative to offer our music online without paying for it. Look no further than Dr. Dre’s recent album. It leaked online within hours of its release, and was offered to millions of people through dozens of unauthorized sites, undermining not only the value of Apple’s exclusive deal with Dr. Dre, but the market value of the work itself.

The "notice and takedown" system has been subverted into a discount licensing system

Copyright law provides a “notice and takedown” system theoretically intended to deal with such theft. In exchange for a legal “safe harbor” from liability, online service providers must deal with instances of theft occurring on their site or network when notified. Unfortunately, while the system worked when isolated incidents of infringement occurred on largely static web pages—as was the case when the law was passed in 1998—it is largely useless in the current world where illegal links that are taken down reappear instantaneously. The result is a never-ending game that is both costly and increasingly pointless.

Compounding the harm is that some major online music distributors are taking advantage of this flawed system. Record companies are presented with a Hobson’s choice: Accept below-market deals or play that game of whack-a-mole. The notice and takedown system—intended as a reasonable enforcement mechanism—has instead been subverted into a discount licensing system where copyright owners and artists are paid far less than their creativity is worth.

Clearly, this notice and takedown system is broken. But while the music industry has embraced new technology and business models, the beneficiaries of this broken system cling to this antiquated law that was enacted at the turn of the century, well before the modern Internet and today’s most advanced (and unimagined) technologies.

So, Mr. McIntyre is onto something and his diagnosis has some merit, but his attribution of the causes fundamentally misses the mark.

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