Computing Applications Viewpoint

Voluntary Collective Licensing For Music File Sharing

Why can't American peer-to-peer file sharers have the same deal the broadcast radio industry has had for almost 100 years?
  1. Introduction
  2. The Proposal: Collective Licensing
  3. Collecting the Money
  4. Who Gets the Money?
  5. Author
  6. Footnotes

The legal battles surrounding peer-to-peer file sharing are a losing proposition for everyone. The record labels continue to face lackluster sales, while tens of millions of American file-sharing music fans are made to feel like criminals. Every day the collateral damage mounts—privacy compromised, innovation stymied, economic growth suppressed, and a relatively few unlucky file sharers singled out for legal punishment by the recording industry. The litigation campaign against music fans does not appear to have substantially reduced the popularity of file-sharing networks and has failed to put a penny in the pockets of the artists.

Any potential solution must address four premises. The first is that artists and copyright holders deserve to be compensated fairly.

Second, file sharing is here to stay. This technology genie is not going back in the bottle. Killing the original Napster only spawned decentralized networks, and the available evidence shows that file sharing is at least as popular today as it was before the campaign of lawsuits by the Recording Industry Association of America began.

Third, fans do a better job than the record labels of making music available to one another. Apple Computer’s iTunes Music Store boasts an inventory of more than 700,000 songs. Sounds pretty good until you realize the fans have made millions of songs available on KaZaA. Moreover, if the legal uncertainties would dissipate, the peer-to-peer networks would quickly improve and expand.

Fourth, any solution should minimize government intervention in favor of market forces to the greatest extent possible.

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The Proposal: Collective Licensing

A number of copyright law scholars and technology industry groups have suggested that alternative compensation systems be considered to replace the current lawsuit campaign against file sharers. Thus, if unregulated P2P is here to stay, we need to come up with some mechanism for adequately compensating copyright holders.

Among the proposals, voluntary collective licensing deserves special consideration. The music industry would form one or more collecting societies to offer file-sharing music fans the opportunity to get legit in exchange for a reasonable regular payment (say, $5 per month). So long as they pay, these people would be free to keep doing what they are going to do anyway—share the music they love, using whatever software works best—without fear of being sued.1 The money collected would be divided by the collecting societies among rights holders based on the popularity of their music.

The more people share, the more money goes to rights holders. The more competition in file sharing software applications, the quicker the pace of innovation. The more freedom fans have to publish what they care about, the more extensive the available online music catalog would be for everyone.

It has been done before. Broadcast radio set the precedent in the early 20th century, giving rise to collecting societies like ASCAP, BMI, and SESAC as mechanisms songwriters could use to bring broadcast radio in from the copyright cold. Songwriters originally viewed radio exactly the way the music industry views KaZaA users today—as pirates. After trying to sue radio out of existence, the songwriters ultimately chose to rely instead on a collecting society they formed voluntarily to collect fees from concert venues, ballrooms, and the like called ASCAP, or the American Society of Composers, Authors, and Publishers, and later BMI and SESAC. Radio stations interested in broadcasting music stepped up, paid a fee, and in return got to play whatever music they liked, using whatever technology worked best. Today, the performing-rights societies ASCAP and BMI collect and pay out millions annually to their artists.

Songwriters originally viewed radio exactly the way the music industry views KaZaA users today—as pirates.

Even though these collecting societies get a fair bit of criticism, there is no question that the system that has evolved for radio is preferable to one based on trying to sue radio out of existence one broadcaster at a time.

Copyright lawyers call such a system voluntary collective licensing. The same could happen for file sharing, if copyright holders would organize themselves to offer their music in an easy-to-pay, all-you-can-eat set. We could get there without the need for changing U.S. copyright law and with minimal government intervention.

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Collecting the Money

Starting with the 60 million Americans2 who have used file-sharing software, $5 a month would net more than $3 billion of pure profit annually to the music industry, with no CDs to ship, no online retailers to cut in on the deal, no payola to radio conglomerates, and no percentage to KaZaA or anyone else. Best of all, it is an evergreen revenue stream; the money just keeps coming, during good times and bad, so long as fans want digital music online. The pie grows with the growth of music sharing on the Internet, instead of shrinking. The total annual gross revenues of the music industry today are estimated at $11 billion.3 But a collective licensing regime for file-sharing promises $3 billion in annual profits to the record labels—more than they have ever made, even in a good year.

But how do the collecting societies get file sharers to pay up? What’s to stop music fans from continuing to use the file-sharing networks without paying?

Imagine you were the CEO of a new collecting society created to sell this P2P license to P2P users. You would have every market incentive to craft the most attractive mix of products, making it easier to pay than not. So, you would probably continue to do some targeted enforcement, the same way many public transit systems eschew turnstiles for a simple honor system backed by the occasional spot check.

The level of enforcement needed to get people to pay $5 per month is likely to be far lower than the amount needed to get tens of millions to abandon KaZaA altogether in favor of limited-inventory, 99-cent, restriction-laden download services. Moreover, because the collecting society would have a financial interest in keeping the "cheaters" as paying customers after catching them, they would want the penalties to sting but not hurt so much that those caught renounce the system altogether. In other words, no more $2,000 settlements from impoverished 12-year-olds caught sharing music.

If you, as the hypothetical collecting society CEO, relied solely on enforcement, however, your tenure would likely be brief. The carrot is often more profitable than the stick. So you would want to make your product easy for file sharers to buy.

Some fans could buy their license directly through a Web site. But for many others, this hypothetical CEO would want to find "resellers" to pass through the license fees. ISPs, for example, could bundle the fees into the price of their broadband services for customers interested in music downloading. Such an arrangement would free ISPs to advertise a broadband package that includes, say, "downloads of all the music you want for free," something they cannot do today.

Universities could make it part of the cost of providing network services to students, thereby getting themselves off the hot seat between the music industry and their students. P2P file-sharing software vendors could bundle the fee into a subscription model for their software, neatly removing (for them) the cloud of legal uncertainty that has inhibited investment in the P2P software field. Meanwhile, many parents would be eager to pay the fee on behalf of their school-age children. It would be one less thing to worry about when it comes to teenagers and their Internet activities.

For the file sharers who pay their license through intermediaries (such as an ISP, university, employer, parent, or software vendor), that license would feel free, part of a bundle of fees paid on their behalf covering the cost of related goods and services.

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Who Gets the Money?

The money collected would then be divided among artists and rights holders based on the relative popularity of their music. Figuring out what is popular could be accomplished through a mix of anonymously monitoring what people are sharing (several companies, including Big Champagne and BayTSP, already do this) and recruiting volunteers to serve as the digital music equivalent of Nielsen families. In a digital environment, a mix of these approaches would have to strike the right balance between preserving privacy and accurately estimating popularity.

The advantages are clear. Artists and rights holders get paid. Moreover, the more broadband thrives, the more they get paid, which means the entertainment industry’s powerful lobby would be working for a big, open, and innovative Internet, instead of against it.

Government intervention is minimized. Copyright law need not be amended, and the collecting societies set their own prices. (The $5 per month figure is a suggestion, not a mandate.) At the same time, the market would keep the price reasonable. Collecting societies make more money with a palatable price and a larger base of subscribers than with a higher price and costly enforcement efforts.

Broadband deployment gets a real boost, as music file sharing—its killer app—becomes legitimate.

Investment dollars pour into the now-legitimized market for digital music file-sharing software and services. Rather than being limited to a handful of "authorized services," music fans can expect to see a marketplace filled with competing file-sharing applications and ancillary services.

Music fans would finally have completely legal access to the unlimited selection of music the file-sharing networks have provided since Napster. With the cloud of litigation and record-industry sponsored "spoofing" efforts eliminated, these networks would rapidly improve and expand.

Even the distribution bottleneck that has limited the opportunities of independent artists would be eliminated. Artists could choose any road to online popularity, including, but no longer limited to, a major label contract. So long as their songs are being shared among fans, they are paid. Payment would come only from those interested in downloading music, only so long as they are interested in downloading it.

When might it happen? Many complexities must be worked out first. For example, the collecting societies would have to figure out who owns what music as they divide up the money being collected. Refining the mechanisms for accurately estimating popularity while preserving listener privacy would also require the work of smart statisticians.

Perhaps the greatest hurdle is getting the music industry to go for the idea in the first place. The industry is still a long way from admitting its existing business models are obsolete. The collective licensing approach requires that it recognize the need to try something different, transforming themselves from brick-and-mortar businesses shipping product to intellectual property companies collecting licensing revenues.

If the current effort to sue American music fans into submission continues to fail, the industry may well come around. After a few more quarters of lackluster sales, with file-sharing networks still going strong and "authorized services" failing to make up for sliding revenues, it will need a Plan B.

Here’s hoping they see that voluntary collective licensing as the best way forward.

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    1Occasional music fans who do not want the all-you-can-eat file sharing experience can forgo a blanket license in favor of pay-per-download services (such as Apple Computer's iTunes Music Store).

    2Estimates of the number of Americans using unauthorized file-sharing networks vary. However, it is safe to assume at least 60 million of them have used a file-sharing network during the past four years; see www.ipsos-na.com/news/pressrelease.cfm?id=1685 (press release from Ipsos-Reid, putting the number at 60 million in 2002); www.pewinternet.org/reports/toc.asp?Report=122 (report by Pew Internet Life, putting the number at 23 million in early 2004); and www.businessweek.com/technology/content/jan2004/tc20040116_9177_tc024.htm (suggesting survey-based estimates may undercount users).

    3See RIAA 2003 year-end statistics at www.riaa.com/news/newsletter/pdf/2003yearEnd.pdf (setting total value of units shipped, not sold, at $11.8 billion).

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