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People don’t pour new wine into old wineskins. If they do, the wine will make the skins burst,
and both the wine and the skins will be ruined.   -Mark 2:22

Article 1, Section 8,Clause 8 of the United States Constitution is the starting point for any discussion of intellectual property, and in this specific case copyright.  In it, our Forefathers gave Congress the right to establish a monopoly in favor of authors and inventors for the fruits of their labor.  The merits and justification for granting this monopoly was apparently the subject of considerable debate amongst the likes of Thomas Jefferson, James Madison and Charles Pinckney, not to mention the remaining representatives to the Constitutional Convention, who spent a week long session in August 1787 discussing various proposals enumerating the powers of Congress. 

Jefferson was, perhaps, one of the staunchest proponents of limiting governmental monopolies in all respects, but in particular with regard to restricting the use of original thought.  In his indubitably prosaic way, Jefferson said "If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea. . . .  [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][S]he made them . . . incapable of confinement or exclusive appropriation.”  In conclusion, Jefferson opined that “Inventions then cannot, in nature, be a subject of property. 

These concerns about granting rights of property to intellectual property, as expressed by Jefferson, were actually addressed by Charles Pinckney in his proposal.  His proposed clause, “to secure to authors exclusive rights for a limited time, added the infamous phrase to other proposals drafted by Madison.  It was combination of their drafts that were used by the Committee of Detail to draft the final clause, which included the “for a limited time” phraseology that has been the subject of debate in recent years. 

Under this authority, Congress has, through the years, established certain limitations on the monopoly of copyright.  Beginning with the first U.S. copyright law of 1790, wherein authors were given a 14 year monopoly, plus the option to extend the monopoly for a second 14 year term, to the present construct wherein authors are given a monopoly for the duration of their life, plus an additional seventy years in which their families and/or heirs can exercise the monopoly.

In addition to the time limitation, and in the spirit of Thomas Jefferson, Congress also imposes other limitations on the monopoly of copyright.  For example, originally the copyright monopoly on applied to “useful knowledge” produced by society, that is primarily writings.  This limitation evolved of the years into what we now understand as the definition of a copyright, i.e., an original idea expressed in a tangible format for more than a transitory duration.  Other limitations such as the first sale doctrine and fair use are not pertinent to the point here, but also serve as limitations on creators’ rights.

Throughout history, these limitations on the monopoly of copyright have, for the most part, served to create a very delicate balance between the need, perceived by our Forefathers, to incentivize authors and inventors to populate the marketplace of ideas on the one hand, against the utilitarian goal of providing a free exchange of those ideas for the good of society.  This creates the public domain concept of copyright law.

So it is, then, that the proprietary nature of an original idea is based on expression of that idea in a manner than can be controlled, i.e., a tangible format, again addressing the concern of Jefferson that an idea may be exclusively possessed as long as a person keeps it in their head, but “the moment it is divulged, it forces itself into the possession of everyone. . . every other possesses the whole of it.”  The resulting corollary of this is that the ideas themselves, absent expression, as well as the facts about the phenomena of the world, are considered to be the collective knowledge, or property, of humanity.  Therefore, so far in history, what I call the continuum of knowledge has been made up of these unexpressed ideas together with the works that have fallen into the public domain. 

This continuum of knowledge was envisioned by our Forefathers for the greater good of society and is the reason that, for example, tangible expressions of one of Claude Monet’s favorite subjects, the Saint-George cathedral in Venice, are theoretically entitled to copyright protection at the same time as the later paintings of François Salvat conveying expressions of the same subject.  Once the painters’ expression of the idea that is the Saint George cathedral is transformed onto canvas, he is entitled to enforce the monopoly of copyright.  Conversely, the mere idea or fact that is the cathedral is never the subject of individual property protection by the painter. 

Stated another way, the law by necessity is focused on the embodiment of the idea, as opposed to the idea itself or, to use a biblical reference, it focuses on the wine skins more than the wine as a means of control.  This conflation of the expressed idea – described by the Supreme Court as “evanescent” – and the physical embodiment creates more misunderstanding regarding the concept of copyright than perhaps any other.  In our advanced age of digitization, it is now more important than ever for us to remember the distinction between the two elements.

The best illustration of this conflation is perhaps the area of musical works.  For purposes of this discussion, we will ignore, for the moment, that there is a separate copyright for sound recordings of musical compositions and focus primarily on the latter.  In the early 1900’s, vinyl records became the embodiment of choice for musical compositions.  In the 60’s, it was the 8-track tape and in the 70’s it was the analog cassette.  In the 80’s, as digital technology advanced, we used the compact disc and digital audio tape, which ultimately led to the mp3 format in the 90’s and afterward.  Once digitization became possible, all tangible expressions we subjected to the process and it became possible to make flawless copies of the “wine” that was paintings, photographs, text, music, graphics, video, sound recordings, and cartoons. 

John Perry Barlow, ex-Grateful Dead lyricist turned founder of the Electronic Frontier Foundation, describes this phenomenon:

    Now, as information enters cyberspace . . . these [wine] bottles are vanishing.  With the advent of digitization, it is now possible to replace all previous information storage forms with one metabottle: complex and highly liquid patterns of ones and zeros.

From the moment of digitization forward, the fusion of the expressed idea and the embodiment was “rent asunder,” changing forever more how we perceived copyright.  Tangible expressions, once embodied in pigments, paper, strips of celluloid, discs of vinyl or plastic, and tape, now existed as glowing impulses of voltage conveyed in zeros and ones, flitting around the Internet at the speed of light.  The expressions, in other words, are now closer to pure thought than our Forefathers, perhaps, ever dreamed possible.  Digital technology thus threatens to disturb the delicate balance they intended to establish in their creation of a copyright monopoly.  The truly “evanescent” nature of a digital copyright monopoly makes it extremely difficult to fit into the “old skin” that is “an original idea expressed in a tangible format for more than transitory duration.”

The “RAM Fixation” cases that arose in the late 90’s – the seminal case being MAI Systems Corp. v. Peak Computer, illustrate the imbalance precisely, as the courts struggled to determine whether a cached copy of a copyrighted work that existed in the random access memory of a computer for no more than a second was sufficient “fixed in a tangible format” for more than a “transitory time,” thus warranting protection under copyright law.  The 9th Circuit in MAI Systems ruled that it was sufficient, but other courts, like the 2nd Circuit in Cartoon Network v. CSC Holdings, found otherwise, ruling that the copy was “fleeting” and therefore not “embodied . . . for a period of more than a transitory duration. . . .”  The Supreme Court has yet to rule on this issue.

Once the veil was rent asunder, trying to enforce a copyright monopoly was somewhat akin to trying to sweep back the ocean with a broom.  Beginning with its efforts against Diamond Multimedia in the late 90’s and its efforts against Napster and Grokster, and continuing through to the present through it efforts against more than 17,000 individual downloaders, the track record of the Record Industry Association of America in its fight against illegal downloading is the perfect example of this fruitless effort.  Rather than adapt and transform our concepts of copyright – the wine skin – to conform with the new wine – digitization of art – the music industry continued to cling to the status quo, a hand forced in part by decades of doing business under the old model.

What does this conundrum mean for copyright law and the efficacy of a monopoly in the fruits of our creative labor?  Before answering that question, and lest we forget, new technologies have always created challenges to Constitutional law.  If we view our founding document as a living, breathing document that was created to adapt to such challenges, it may help address the current challenge. 

This is not the first time in history that a new technology has challenged an existing way of thinking.  Even in the music industry, the introduction of the “talking machine,” a/k/a the phonorecord player, created such a stir that John Philip Sousa testified before Congress that the invention would “ruin the artistic development of music in this country” because our vocal chords would no longer be used and therefore vanish as a result of evolution!  What seems like an extreme position now is only perceived as such through the lenses of hindsight.  Congress responded to Sousa’s and the industry’s concerns, as it often does, by revising the copyright law to address new technologies.

In responding to the new technologies of our generation, we must keep in mind the primary objectives of Jefferson and others in the creation of a copyright monopoly in order to adequately address the issues – they wanted to assure the widespread distribution of ideas for the benefit of society by giving the creators of ideas a monopoly.   They were dedicated to encouraging the dissemination of mental creations throughout the New World where they could be used, entering the mind of others – the continuum of knowledge – by assuring their creators that they would be compensated for the value of such dissemination.  Once certain limits had been reached, the protected ideas would enter the market place of ideas, the continuum of knowledge, and become freely available to the public for use in the creation of new ideas.

The problem with many solutions being proposed by advocates of copyright, as well as those who would have us do away with the concept, is that they ignore the delicate balance by focusing on one aspect of that principal while ignoring the other.   Just because we can now “unclothe” the idea, stripping away its tangible, physical embodiment, does not eliminate the system of confinement, i.e. the copyright monopoly, envisioned by the Forefathers.  Jefferson clearly grabbled with the concept that an idea was “incapable of confinement,” but nevertheless clearly chose to participate in the creation of a system that would, in fact, confine the very thing that was incapable of confinement.  So, even though the creations of authors and inventors now, more than ever, more closely resemble a mere idea, using the tools given to us by our Forefathers, our society can still adapt our system that offers incentives to those authors and inventors for the dissemination of the fruits of their labors. 

Through new technologies and interpretations, we can develop “virtual bottles” to store our new wine, bottles which replace the old physical, less evanescent wine skins of embodiment.  Since laws on meant to reflect public opinion, perhaps in the end the future of the copyright monopoly may depend more on perceptions than it does on restrictive regulations.

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By Amber Rose and Barry Shrum

If you’ve cruised the net or checked out your local news any time within the last few months, chances are you’ve heard rumors currently sweeping the United States about two pieces of proposed legislation : H.R. 3261 entitled the Stop Online Piracy Act (“SOPA”) and S. 968 entitled the Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act (“Protect IP”).

Senator Patrick Leahy sponsored the Protect IP Act, proposing it to the full Senate on May 12, 2011.  SOPA is the House of Representatives’ equivalent. The government is promoting these acts as a way to decrease online piracy, something that is costs the creative industries millions of dollars each year.  The Record Industry Association of America, representing the music sector, has estimated that global music piracy causes $12.5 billion of economic losses every year, 71,000+ lost U.S. jobs, $2.7 billion in wage earnings, $422 million in lost tax revenues, $291 million in personal income tax and $131 million in lost corporate income and production taxes.  Even these calculations create volumes of debate among the Internet blogosphere as to their methodology and accuracy.  Most every credible source, however, agrees that piracy causes imagesignificant economic loss to the creative community.

After years of fighting the piracy in courts, most website that make infringing materials available have moved their operations offshore in jurisdictions where the long arm of the law does not reach.  The Protect IP Act addresses this jurisdictional problem by giving the government the ability to established a list of “rogue websites dedicated to infringing or counterfeit goods ” and then proceed to curb access to these websites by literally squeezing their revenue streams: VISA, MASTERCARD and various ISPs.  Protect IP has a heavy focus on those websites located outside the United States. 

Leahy based the Protect IP Act on a bill he previously proposed called Combating Online Infringement and Counterfeits Act (COICA). This bill failed to receive a full vote in the Senator mainly due to Democratic Senator Ron Wyden who put a hold on the legislation, claiming using COICA was “…almost like using a bunker-busting cluster bomb when what you really need is a precision-guided missile.”  Wyden felt the damage done by COICA would cost “…American innovation, American jobs, and a secure Internet.”

SOPA goes further than Protect IP by also providing a private right of action on the part of copyright owners, giving individuals and corporation with a stake the ability to appeal to the government for relief.  If enacted, SOPA would lead individuals being able to barring online advertising networks, PayPal, and other payment companies from doing business with the infringing or “rogue” website.  It would also prohibit search engines such as Google and Yahoo from linking to these sites while also requiring Internet service providers to block access to such websites.    This legislation would make “unauthorized streaming of copyrighted media” a felony. 

Opponents, such as the Electronic Frontier Foundation, argue that this would create situations where websites such as YouTube and Tumblr might be deemed “illegal,” in direct violation of Federal law.  There is no end to the drama that has been created, including use of such words as “censorship” and such “Chicken Little” mantras as “the Internet as we know it may come to an end.”

While these bills certainly have many who oppose them, including Google, there are some powerful supporters of the bill, including the United States Chamber of Commerce, as well as large online retailers such as L’Oreal and the NBA.  David Israelite, President and CEO of the National Music Publishers’ Association believes that SOPA is just what America needs.  According to Israelite “…[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][d]igital revenue streams are key components of our industry’s future” and though we are making progress it is threatened by “criminal activity” that takes place on websites based outside of the United States.  Infringing sites typically experience enormous traffic and thus are making millions off of ad revenues.  Israelite feels U.S. manufacturers are struggling to compete, as does the U.S. Chamber. 

While SOPA and the Protect IP Act are a bit different from COICA, they are still built around the same concept of restricting revenue flow.  At first glance the bills seems to be a source of relief for the industry, but upon closer examination, it appears that such relief may come at a high cost.  These are difficult issues that are not easy to decide.  On the one hand, copyright, trademark and patent owners indeed deserve the right to be able to monetize their intellectual properties, a right established by our Forefathers in the U.S. Constitution at Article 1, Section 8 Clause 8.  Jefferson and Madison had many debates about balancing that government-granted monopoly against the free exchange of information they desired to establish in a “marketplace of ideas.”  This leads to the other hand, which is that censorship of ideas was what our Forefathers were trying to guard against by establishing the “for limited times” language of the Constitution, which thrust a work into the public domain for all to use.  Now that the U.S. duration of copyright exceeds four generations (Life +70), the idea of potential government censorship of website should cause us greater concern.

The one thing I haven’t seen from either side is a solution that protects the interests of the copyright owners as well as the interests of the public in accessing information.  Perhaps if the definition of “rogue websites” were more specifically defined, and there was some form of judicial oversight involved, where due process could enter the equation, the legislation would be more palatable.  Either way, if you are in the creative industries, this is legislation you should examine and about which you should talk to your representatives.  It is important to exercise your right to be a part of this process.  Neither the Senate nor the house has taken a vote on the legislation. 

Your House representatives can be found at the House’s Directory and the Senates Directory.  Texts of both bills can be found at the Library of Congress’ website, at http://thomas.loc.gov, or click below:

S. 968: Protect IP

HR 3261:  SOPAimage

Additional References:
http://www.billboard.biz/bbbiz/industry/legal-and-management/protect-ip-sopa-bills-seek-to-protect-digital-1005621352.story

http://www.forbes.com/sites/garyshapiro/2011/12/07/save-the-internet-take-action-against-sopa/

http://www.billboard.biz/bbbiz/industry/legal-and-management/sopa-protect-ip-acts-fuels-the-fire-of-disgruntled-1005633152.story

 

Amber Rose is enrolled as a student at Belmont University’s Mike Curb School of Music Business in Nashville, Tennessee.  She is currently studying copyright under Professor Shrum.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]

By Rachel Galloway

IMPORTANT NOTICE:  The views expressed in this article are solely those of Ms. Galloway and may not necessarily reflect the views of Law on the Row or Barry Neil Shrum, Esquire.

The last time I watched a Happy Tree Friends video was when I was around 13 years old in the company of my 10-year-old cousins. The videos typically consisted of the characters getting into situations where they lost limbs or impaled themselves with blood squirting everywhere. Needless to say, when I watched YouTube’s Copyright School, I was shocked to see those same characters teaching me about copyright infringement and piracy.

[youtube https://www.youtube.com/watch?v=InzDjH1-9Ns?rel=0&hd=1]

YouTube’s Copyright School video has been on the site for roughly a month now with 248,734 views, 1,142 likes, and 5,914 dislikes (as of April 25, 2011 when I viewed it). I have heard and read many mixed feelings on this video and personally find it to be unsuccessful. Judging from the dislikes, I am not the only one.

I understand where YouTube is coming from in trying to educate children and teenagers on copyright issues using characters that they would normally watch such as Happy Tree Friends. However, I am not sure that they will get the effect they are hoping for. In my opinion (and experience with today’s generation), teenagers and children will continue to copy and use copyrighted work regardless of whether they understand that it is illegal.

In my two years at Belmont University as a Music Business major (where students are required to take a Copyright Law course), I have come to find out that teenagers do not care whether downloading music illegally is wrong or not. They simply do not care as long as they do not get caught. I find it ironic and hypocritical to go to a school where artists are encouraged to create original works and where copyrighted works are taught to be protected to find out that mosBioPic1t of the students (including the artists) still continue to download illegally. This infringement mainly takes the form of pirating music just like with the majority of American teenagers. In my opinion, if we can’t get college students who have a substantial knowledge on copyright infringement and it’s consequences to stop pirating music, then how can we get teenagers across America to do so with a 4 minute and 39 second YouTube video?

Pirating music is an issue that will always be a problem for the music industry. There have been many suggestions made that attempt to fix or at least ease this issue. Personally, I believe that the best way to go about this is to cut the cost of digital downloads (from $9.99 an album to around $1-$2 an album), so that consumers will not feel like they are forking out a ton of money towards entertainment that they believe should be free.  Personally, I would rather pay a low price for an album of superior quality than go through the trouble to find the pirated version for free that has a bad quality.

YouTube’s Copyright School had the right idea and motivation. Will it make a difference in the music industry? I personally doubt it. I applaud them for making an attempt to educate kids across America on the issue, but I believe that this is probably a losing battle.

Rachel Galloway is a Sophomore Marketing major with a minor in music business at Belmont University in Nashville, Tennessee.  Born and raised in Atlanta, Rachel graduated from Providence Christian Academy in Lawrenceville, Georgia in May 2009.  She came to Belmont University the following year with an interest in marketing and event planning in the music world.  There, Ms. Galloway studied copyright under the tutelage of Professor Shrum.  Upon graduation, she hopes to open her own event planning company.

A decade’s worth of music file-sharing and swiping has made clear that the people it hurts are the creators… and the people this reverse Robin Hooding benefits are rich service providers, whose swollen profits perfectly mirror the lost receipts of the music business.  –Bono (New York Times, January 2010)

The passage of the Digital Economy Act in England last year has resulted in a surge of articles that claim that the negative impact of illegal downloading of MP3’s on the record industry has been “debunked” and that, in fact, studies confirm the opposite, that there is no significant impact.  I recently addressed one such claim on my blog in the article entitled 90% of All Statistics are Made Up on the Spot:  Fact is, copyright infringement DOES kill jobs, which addressed an article by Rick Falkvinge.  Matther Lasar of Ars Technica recently posted another article essentially making the same claim, entitled Did file-sharing cause recording industry collapse? Economists say no.  Lasar’s article is based in large part on a research paper by Bart Cammaerts and Bingchun Meng of the London School of Economics and Political Science entitled Creative Destruction and Copyright Protection: Regulatory Responses to File-sharing..
In response to the DEA, one of the “key messages” of Cammaerts’ and Meng’s study is that common refrain that the decline in sales of CD’s cannot be attributed solely to illegal downloads of their digital equivalents.  To be precise, here is their key finding:
Decline in the sales of physical copies of recorded music cannot be attributed solely to file-sharing, but should be explained by a combination of factors such as changing patterns in music consumption, decreimageasing disposable household incomes for leisure products and increasing sales of digital content through online platforms.
Does this not seem like a circular argument to anyone else that the conclusion that a decline in sales cannot be attributed by file-sharing, a significant change in how music is consumed, is supported by the assertion that it is better explained by a “combination of factors such as changing patterns in music consumption”?   This conclusion by the “researchers” is based in significant measure, as are most of the conclusions in the report, on reports and studies done by others, including the long-since refuted study by Oberholzer-Gee and Stumpf conducted in 2004, entitled The Effect of File Sharing on Record Sales: An Empirical Analysis.    Oberholzer-Gee and Stumpf erroneously concluded that the impact of illegal file-sharing on the music industry was, in their words, “null” but have since revised their conclusions and now argue that illegal file sharing is responsible for about 20% of the decline in the decline of revenue in the music industry.  See File Sharing & Copyright 2010. It seems on the surface that the study is nothing more than rehash of old information.  Based on review of these reports, Cammaerts and Meng concluded that “the claims by the music industry regarding the detrimental impact of infringing file-sharing on sales are flawed.”
The fact is all but a handful of the surveys related to the subject confirm illegal file-sharing reduces consumer spending on legitimate music, and confirm that the dramatic decrease in the sales of recorded music is caused by illegal file-sharing.  See, e.g., Norbert Michael (The Impact of Digital File-Sharing on the Music Industry: An Empirical Analysis, 2006), Rob & Waldfogel (Piracy on the High C’s, 2006) and Alejandro Zenter (Measuring the Effect of File Sharing on Music Purchases, 2003).  A 2006 study by Professor Stan Liebowitz, File-Sharing: Creative Destruction or Just Plain Destruction? concludes that all  “. . . papers that have examined the impact of file-sharing . . . find some degree of relationship between file-sharing and sales of sound recordings.”  Oddly, the only study that finds zero correlation is the Oberholzer and Strumpf study, which it has been frequently discredited.
The International Federation of the Phonographic Industry (“IFPI”) recently released the IFPI Digital Music Report 2010:  Music how, when, where you want it reports what most economists and others who have studied the effect agree on:  “Overall music sales fell by around 30 per cent between 2004 and 2009.” p. 6.   The good news to be gained from the IFPI report is that overall sales of digital music increased to 27% of the industry’s revenue in 2010, a significant jump from almost zero in 2004.
All of this I say not really to fuel the flames of the the debate related to the cause of the decline in the music industry, but to point out that in the midst of all the studies, all the reports, and all of the conversation, there is one group of people whose voice is often not heard:  the songwriter.  I began this post with a quote from the incomparable singer-songwriter, Bono, who states flatly what is often overlooked:  the people it hurts are the creators.  If you read closely through the reports I have linked to in this article, you’ll find very little, if anything, about the impact of illegal file sharing on the songwriter.  Yes, there a some vague references to “authors” and sometimes “creators,” but for the most part the researchers focus their impact on the more broad category of impact on the overall sales of recorded music.  Very little attention is given to the trickle-down impact, i.e., how it affects the songwriter and the small music publishing companies that line the streets of Music Row here in Nashville.  The only report of which I am aware which includes a significant sampling of songwriters is the one conducted by Mary Madden for the PEW Internet & American Life Project in 2004 entitled Artist, Musicians & the Internet.  I won’t rehash all of the argument I made in 90% of All Statistics are Made Up on the Spot: Fact is, copyright infringement DOES kill jobs, except to say that most of these studies ignore the songwriter, on which the illegal downloading of songs has arguably made the greatest impact.  Even back in 2004, when the study was conducted, 75% of the respondents (which included a pool of artists and musicians in addition to solely songwriters) stated that they held down a second non-songwriting-related job which was their primary source of income.  I know for a fact that almost all of my songwriting clients hold second jobs, which prevents them from creating music.  The decline in these songwriter’s revenue is a direct result of the loss of mechanical royalties resulting from the massive decline in sales of physical product, not to mention a decline in performance royalties as a result of fewer artist being played on the radio, which is a result of fewer record labels investing in the career of new and developing artists.
This brings me to my last, and perhaps the most disturbing, observation raised by the new IFPI report.  The report states that
Illegal file-sharing has also had a very significant, and sometimes disastrous, impact on investment in artists and local repertoire. With their revenues eroded by piracy, music companies have far less to plough back into local artist development. . . .
The impact of declining revenues and illegal file-sharing on the availability of venture capital is another factor that is rarely if ever considered by many of the so-called reports on the decline in this “lost decade” of the music industry.  Why would any entity risk investing hundreds of thousands of dollars in a new artist when there is no perceivable source of revenue from which to gain a return on investment?  The answer is that they do not.  The impact of the Internet on the creative industry does not stop at the music industry.  Other industries that are starting to feel the impact of lost revenues are the movie industry, the television industry, the print publishing industry and the fashion industry.  Anywhere that creative endeavors are conducted for profit, the profits are being diminished in one form or another by the impact of P2P file-sharing.  My wife has a saying about people who live together when they are not married:  “Why buy the cow when you can get the milk for free?”  This also applies in the creative industries:  people do not generally pay for that which they can get for free.
The chief executive of Kudos, Stephen Garrett, said it best perhaps:
We are in danger of creating a world where nothing appears to have any value at all, and the things that we make…will become scarce or disappearing commodities.
I hope that danger does not become a reality.  Being deprived of the talents of, say, a Don Henley or a Bono, simply because we are unwilling to shell out a buck for a mp3, would, in my humble opinion be a real shame.
Mark Twain had a lot to say about statistics, ranking them as the highest of all lies:  “There are three kinds of lies:  lies, damned lies, and statistics.  Twain is also attributed with the more insinuated saying that “statistics are like ladies of the evening, once you get them down, you do anything with them!”   It’s been quite awhile since I’ve seen a manipulation of statistics that illustrates Twain’s philosophy about them more than what is found in the article posted by self-styled “political evangelist” and anti-copyright activist, Rick Falkvinge, this week entitled Kill Copyright, Create Jobs. Absent three very slick and attractive graphics, the only “facts” that Falkvimark_twain_pic_440_1_nge offers in support of this conclusion is statistics which, as far as I can tell, are made up!
 

In an effort to defeat the claims of the United Kingdom’s “copyright industry” that 1.2 million jobs will be lost by 2015 if stricter enforcement of copyright laws is not enacted, Falkvinge begins with the exaggerated conclusion that “for every job lost (or killed) in the copyright industry due to nonenforcement of copyright, 11.8 jobs are created in electronics wholesale, electronics manufacturing, IT, or telecom industries — or even the copyright-inhibited part of the creative industries.”
Falkvinge reaches this absurd conclusion through a somersault of logic involving segregating the “creative industries” into various categories of groups subdivided into “copyright-dependent” and “copyright-inhibited” sectors.  Of course, these phrases are never precisely defined but, reading between the lines, the reader can gather that the latter sector includes industries “fueled by a lack of copyright monopoly enforcement,” while the former we must assume includes some form of enforcement.  Once he groups the various creative industries according to this loosely defined structure, he asserts that “the contribution of the copyright-inhibited industries outweigh the copyright-dependent industries by a factor of 11.8,” and then draws the leap of faith that when a copyright-dependent job is lost, a copyright-inhibited job is created.  He then forms this general conclusion: “Prevent copyright enforcement, or weaken or kill copyright, and create jobs. Lots more of them.”  Wow!  Please, Obama, take note of this staggering feat of intellectual prowess!
There are so many errors in this article, it’s hard to begin, and I don’t intend to address each one.  But as you start to examine the sectors of industry that Falkvinge places into these divisions, you can easily see where his analysis falls apart.  Seriously, I don’t think it’s intended so much as analysis as it is rhetoric.  Nonetheless, let’s look at some examples.
In the first instance, Falkvinge erroneously relies on the conclusions of Peter Higgs in Beyond the Creative Industries for his foundational argument that the “creative industries” of the U.K. only account for 7% of its GDP, which he divides into three categories:  copyright-dependent, copyright-inhibited and copyright-agnostic.  I say he relies on this statistic “erroneously” because the 7% figure contained in Higgs’ report is based on what Higgs calls the “creative core” of the industry, not the entire industry.  Higgs’ defines the creative core as the “pre-creative and creative stages of the value chain” (p. 27).   This approach, Higgs establishes, only focuses on those involved in the initial stages of creation, i.e., the musicians, the dancers, the producers, etc (p. 28).  Thus, by default, the analysis does not factor in the post-creation employment of the creative industry and, thus, cannot be used in support of Falkvinge’s overall asssertion that on 7% of the GDP of the United Kingdom is based on the creative industries.
Second, in one sweeping yet unexplained fell swoop, Falkvinge places the entire advertising and marketing industry in the “copyright-inhibited” category.  Last time I checked, the advertising and marketing industry relied in large part on the creation of intellectual property, much of which is copyrighted work which relies on enforcement.   In another breathe, again without laying any factual foundation, he states that only 25% of the software, electronic publishing, games, film, television, radio and photography industries are “copyright-dependent.”  Twenty five percent?  Seriously?  Then he “estimates” than only 50% of the music and performing arts sectors of the creative industry are dependent on copyright protection.  Again, really?
With regard to his category of “architecture, visual arts and design,” Falkvinge’s “analysis” is totally off the mark.  First, again, he simply asserts that 100% of the architecture industry is copyright-inhibited, meaning it does not rely on copyright protection for enforcement.  He doesn’t define whether he is referring to architecture as a visual art or whether he is referring to the more intellectual and abstract protection of the actual structure which the U.S. Congress protected in 1996 with the Architectural Works Copyright Protection Act.   One can only assume that Falkvinge is unaware that the U.S. and most other Berne Convention signatory countries protect such works, since he groups architecture with the visual arts.
Secondly, Falkvinge lumps all of the “visual arts and design” industry into “fashion design” and then asserts that it is “copyright agnostic,” since fashion design is not entitled to copyright protection.  Ignoring the fact that there are many other arts to be considered in the visual arts and design sector of a country’s industries, let me just address the last assertion about fashion design.  There are several nations that actual do offer copyright protection for fashion design, namely the European Union, and France individually, and Japan, just to point out a few.  The U.S. currently has legislation pending that would follow in the footsteps of these country and protect U.S. fashion designers whose designs are pirated as soon as they are released.  (See this post on Law on the Row regarding the pending legislation).
As Falkvinge draws to a long and painful conclusion, he states that U.K’s “monopolized entertainment [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][industries’]” claim that they will lose 1.2 million in jobs by the year 2015 is “deceptive, dishonest and bordering on fraudulent,” which he uses to link to another self-aggrandizing article in which he claims that we as a culture are creating now more than ever, that copyright monopolies are an obstacle, and the copyright abolishment would only intensify this effect.  All I can say to Falkvinge’s claim is bull$^!+.  Isn’t that something akin to the pot calling the kettle black?  Is it really deceptive to say that most of my songwriting clients, the people who write the music, are struggling to feed themselves and have to take full time retail employment to make ends meet?  Is is dishonest to say that those same songwriters do not create as much music as they did before they were forced to work 10-12 hours a day to support their families?  And how can you deny the decline in sales of recorded music?  How can you deny the falling profits of the world’s entertainment conglomerates?  I certainly don’t pretend to know about the music industry of the U.K., but I do know that the local economy in Music City U.S.A., Nashville, Tennessee has suffered dramatically as a direct result of illegal downloading of copyrighted works.  I certainly know that this has a trickle down effect on all sectors of the music industry here, including my own practice!  If any of these claims are fradulent, then call me a fraud.
Long before Falkvinge began spinning his  illogical analyses, a company of men including Jefferson, Madison and Pinkney and other great thinkers of their day dealt with the issue we are dealing with – should creative ideas be entitled to protection as individual property?   These men debate natural law versus utilitarianism, and ultimately derived what is arguably a very workable system of protecting intellectual properties.  The U.S. system is based on theories like those of Thomas Hobbes and John Locke, who believed that we should “give to every man his own,” and that man acquired the ownership of property by exerting labor and converting nature – in this case ideas – into something that benefits society.  In fact, Locke believed that because a work created by an individual enriched society in general, and would theoretically continue to do so in the future, the author should have the right to be compensated as long as that benefit to society continued.  But, our Forefathers also wisely saw that in order to create, it is helpful to have a thriving public domain, so they placed certain limitations on these rights, namely granting the monopoly for “limited time.”  The “monopoly” of copyright protection – Falkvinge derisively refers to it as the “copyright monopoly” as if it’s a bad thing – is merely a reflection of these ideas.  If we believe that one should benefit from his or her own creation, his or her own expression of an original idea, then laws and rules are the only way to enforce that in a developed society.  Because of the wisdom of our Forefathers, we have that in Article I, Section 8, Clause 8 of the U.S. Constitution.  For my money, the logic of Locke, Hobbes, Jefferson and Madison surpasses the diatribe of Falkvinge at least by a factor of 11.8 to 1!
So, in summary, I am quite certain that Falkvinge, if he even takes note of my existence, would categorize me as just another one of the “lawyer who advocate maximization of the copyright monopoly.”  He would likely also allege that my claims are misleading if not bordering on fraudulent.  Regardless, I think that it is evident that Falkvinge’s assertion that for every 1 job lost to copyright infringement, 12 more will pop up to replace them is unfounded and, frankly, completely manufactured.

 


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NBC Universal recently hired a company called Envisional to study counterfeiting activity over the Internet. The results of this study – despite the fact that it is industry funded – are literally astonishing: 24% of all global Internet traffic involves digital theft!  Stated another way, one in every four people surfing the Internet are stealing intellectual property, i.e., illegally downloading either copyrighted or trademarked materials.  According to the International Federation of the Phonographic Industry, 95% of the music downloaded from the Internet is downloaded illegally!  Imagine how our society would react if one out of every four people in retail malls were carrying out stolen merchandise on a daily basis, or if 95% of the product leaving the mall was stolen.  It would be chaos.

Ring of FrodoNow consider whether these people who so quickly download a song or a movie on the Internet without paying for it would also walk up to an artist selling their painting in the park and steal one of their painting.  I firmly believe the answer to that question is a resounding no!  But why? What is different about the world wide web, i.e. cyberspace, that gives these consumers the feeling that they are entitled to download music and movies through mechanisms like BitTorrent without compensating those who created such product?  What are these people thinking?

I think the answer can be found in the writings of Plato.  In the second book of his Republic, Plato’s student, Glaucon, poses the illustration of the “Ring of Gyges.”  In the story, Gyges is a shepherd who finds a magical ring in a chasm created by a lightning storm.  The ring gives him a cloak of invisibility.  Using his newfound power, Gyges seduces the Queen of Lydia, murders the King, and takes the throne, gaining power, wealth and fame.  In the Republic, Glaucon argues that given a similar opportunity, any person, whether or not they were previously just or unjust, would use the power to commit as many crimes as necessary to get what they want [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][Book II, 359d].    Glaucon was responding to Socrates’ refutation of arguments put forth by Thrasymachus in Book I of the Repbulic, i.e., that “justice is nothing but the advantage of the stronger”  [Book I, 338c].

I believe Glaucon’s experiment in thought informs us as to why someone who would not normally steal a tangible object in the physical world is nonetheless more than willing to download music or movies, intangible objects, on the Internet for free: because the fear of being punished or getting caught is eliminated in the evanescent world of Cyberspace.  The Internet, like Gyge’s ring, confers upon its users a seeming cloak of indivisibility as it were.  As one astute commentator surmised in response to an interview with Alice in Chain’s lead singer, Sean Kinney, “The real reason people steal music is that they CAN and very easily.”  That this is a truth is evident from the plethora of “how to” guides on the Internet, teaching people “How not to get caught.” There you have it in a nutshell.   All of the commentary about how the record industry has been thieves and how the RIAA unjustly goes after the defenseless people, these are mere justifications for actions people otherwise know in their hearts are wrong.

It’s important to read Plato’s response to his student to understand fully, as Plato did not agree with Glaucon.  Plato’s argument in the remaining portion of the Republic is that the just man would not be tempted by this cloak of invisibility to commit crimes.  Rather, the just man understands that crime itself makes a person unhappy and that he is better off to remain just.   I frequently discuss this issue with my college students at Belmont University when teaching a course on Copyright Law.  One of my students made the following observation, which confirms Plato’s conclusion.  She said:

I do not follow the rules because I am scared of the RIAA busting me for illegal downloading. I follow the rules because I have respect for the people who wrote and recorded the songs, and even more, because I want to work in the music industry.

Another relevant opinion is offered in the excellent blog article found on arbiteronline entitled Illegal downloading: The real cost of ‘free’ music.” In that article, a student at Boise state, Ammon Roberts, is quoted as saying:

“I don’t do it because I don’t feel it’s right.  If I were making the music, I’d be upset if people were downloading it for free.”

For these two students, following the rules is not about whether or not they’ll be caught, it’s about doing the right thing.  It’s about honoring, i.e. compensating, the people who created the music. 03-20-invisible_full_600 This illustrates Plato’s point precisely:  a just person understands that even with a cloak of invisibility, doing the right thing makes a person happy or, in the words of Roberts, makes the person “feel right.”

The Internet is also very much the Land of Oz.  In addition to this cloak of invisibility endowed on us by the Internet, it also deceives us with illusions of anonymity – not so much that the user is anonymous, as that’s merely another form of invisibility – but in the sense that it’s difficult to know who’s behind the curtain.   As Trent Reznor said in an interview, “there is a perception that you don’t pay for music when your hear it . . . on MySpace.”  Because of its sheer vastness and its mysteriousness, Cyberspace gives people false perceptions that their actions on the Internet do not affect real people.   This, in turn, creates an illusion that “resistance is futile.”  Everyone is doing it, so I can too.  In other words, Cyberspace alters our reality in that it makes the real people behind the music an amorphous, anonymous entity.  The result is that it’s much easier to steal from an amorphous, anonymous entity – the man behind the curtain – than it is from a struggling songwriter, particularly when all your friends are doing it.

I truly believe that most of the people who are illegally downloading music from the Internet have no idea who they are affecting or how widespread the effect is.  Most of these people would not even think about walking up on stage after a singer/songwriter in a nightclub takes a break and stealing his guitar, but that very same person doesn’t think twice of taking that same singer/songwriter’s song from the Internet.  They wouldn’t steal the filmmaker’s camera, but downloading the movie doesn’t phase their consciousness.  In fact, many who contribute to the  dialog would argue that these two thefts are not analogous.  But one analysis conducted by the Institute for Policy Innovation states otherwise.  The report indicated that music piracy causes $12.5 billion of economic losses every year.  It further concluded that 71,060 U.S. jobs are lost, with a total loss of $2.7 billion in workers’ earnings.  Such reports abound throughout the industry, yet many of the people guilty of illegal download continue to view these reports as industry-driven and, therefore, skewed.  Take this comment by blogger Michael Arrington as an example:

Eventually the reality of the Internet will force the laws to change, too. One way or another the music labels will eventually surrender, and recorded music will be free.  Until it is, I refuse to feel guilty for downloading and sharing music. Every time I listen to a song, or share it with a friend, I’m doing the labels a favor. One that eventually I should be paid for. Until that day comes, don’t even think about trying to tell me that I’m doing something ethically wrong when it’s considered quite legal, with the labels’ blessing, in China.

resistanceBut what this illusion of anonymity, and such misguided opinions, miss is the fact that very real people – not amorphous masses – are being affected.  And the effect is devastating.  I have clients who are songwriters who are no longer creating art because they are forced to take odd jobs to support their families.  The performance royalties they used to receive from ASCAP, BMI or SESAC are down by half or more from a few years ago.  Their mechanical royalty checks are virtually non-existent.  They simply cannot afford to create simply for the sake of creation.  And now, working sometimes two jobs, they don’t have the time to create.  What will become of the art of songwriting if Mr. Arrington has his way and all recorded music is free?  I believe we will not have the quality of music in this country that we have enjoyed throughout the last millennium.  In this instance, I do not believe that resistance is futile.

Now, getting back to Plato and the Ring of Gyges, in answer to Glaucon, Plato would say that the root of all trouble is unlimited desire.   How true is that in this world of Cyberspace, in this world of rampant illegal downloading.  The wheels really fell off the wagon when the RIAA sued Diamond Multimedia, bringing the MP3 into society’s field of view.  Then, Napster exploded and almost everyone found that almost every song they ever loved was available for free.  It’s as if they were Harrison Ford and discovered the treasure room in an unknown, ancient tomb: everything your heart desires is within your grasp.  It’s yours for the taking.  With its cloak of invisibility and its illusion of anonymity, what the Internet has done, in short, is to return the power – i.e., the control – back to the people.  Everyone is now a creater, a publisher, and distributor.  No one needs the conglomerates anymore – the people have the power.  But, as Lord Acton said, beware:  “Power tends to corrupt, and absolute power corrupts absolutely.”  With power, therefore, comes responsibility.   Unfortunately for the music industry, the power is currently being abused and will, ultimately, mean the end of the recording industry as it existed through the 20th century unless the creators regain that power.

So what does this mean for those of us who have chosen to make our living in the world of creation?  Does it mean the end of our industry?  Does it mean an end to copyright law as it exists?  If we examine the origins of copyright – i.e., the protection of an original idea expressed in a tangible format – as passed down to us from our forefathers, we find a concept on which we can continue to build.  In the now famous Radiohead experiment in which Reznor and crew allowed consumers to pay what and only if they wanted to, 18% of the consumers chose to do so!  That to me, is an encouraging statistic, and one that confirms a believe in the viability of creating art.  At least one in five people, even with the cloak of anonymity provided by the Ring of Gyges of this era, i.e., Cyberspace, chose to pay the creators for their creation.  Take that Glaucon!  Take that Arrington!  What does that say for our society?  It says that there are people who still chose to do the right thing, even when the tide of conformity rises above their heads.

The bottom line is that it really doesn’t matter what laws are passed by society, there will always be a certain percentage of people who will chose to steal, take and plunder, whether it be because they are more powerful or because they are cloaked with invisibility or shielded by anonymity.  But – and here is the important thing – there will also always be a segment of society that recognizes the idea that Thomas Hobbes first advanced hundreds of years ago, i.e., the idea of “giving to every man his own.”    If a man bakes a loaf of bread, is it not his right to trade that to the artist for whose painting he wishes to barter?  This idea was later incorporated by our Forefathers into Article I, Section 8, Clause 8 of the U.S. Constitution, which gives Congress the authority “[to] promote the progress of science and useful arts, by securing for limited times to Authors and Inventors the exclusive rights to their respective Writings and Discoveries.”  Without this Constitutional right, a creator has no hope of protecting his or her property against plunder.  And as long as a segment of society believes this proposition to be beneficial to society as a whole, it will hopefully continue to motivate creators to create, and so profit from their creations, despite the efforts of those who choose to destroy it under a cloak of invisibility and unjustly take for themselves the kingdom of Lydia.

Quotations from Republic are taken from the W.H.D. Rouse translation, Great Dialogues of Plato, Mentor Books, 1956, a quoted in this fine article on the topic.

 


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By Barry Neil Shrum & Nathan Drake

Since before the day that Napster was a twinkle in Sean Parker’s eye – well over a decade ago now – the legal and music industries have each struggled with ways to cope with and transform their dusty old business models from the physical status quo to the digital revolution. After the industry watchdog, the RIAA, initially targeted the Diamond Multimedia’s Rio MP3 player and then Parker, and then finally individuals were illegally downloading, the major record labels began to realize something: that perhaps the fact that consumers were downloading music illegally was merely a symptom of the problem rather than the source of the problem. So, the RIAA also began suing P2P file-sharing websites that sprang up instantly in the place of Napster, websites like Kazaa and LimeWire. While this method proved to be a bit more effective, the process still accomplished little in preventing future P2P file sharing services from materializing, each taking the place of its predecessor and each growing as rapidly as the one before. In yet another continuing effort to solve the music industry’s nightmare, new legislation has been introduced to Senate which is entitled “Combating Online Infringement and Counterfeits Act.” (S. 3804)

The purpose of the “Combating Online Infringement and Counterfeits Act” (COICA) is to provide owners of intellectual property additional weapons in the battle against illegal downloading. As indicated, the inherent difficulty of deterring and prosecuting these myriad individuals who aimagere profiting off copyrighted materials is that they easily hide behind the anonymous wall of the Internet. Many of the sites providing access to this illegal property are situated well off the shores of the United States, overseas and beyond the long reach of the court’s jurisdiction.

Another problem is the sheer mass of the problem. One study indicates that as much as 1 in 4 Internet users download illegal music – an astonishing statistic! Let me state that another way: 25% of the traffic on the Internet is to sites that allow illegal downloading of copyrighted material, be it digital books, movies or music.

As Senator Leahy, one of the sponsors of COICA says, it is essential that the government enforce a

“means for preventing the importation of infringing goods by rogue websites, particularly for sites that are registered overseas.”

Through focusing on the domain names, COICA gives the Department of Justice the authority to pursue and prosecute offending website, both domestically and abroad. Incentivizing and rewarding creative endeavors remains the core ideology of American copyright protection, and instilling this value in our society is crucial if our society will continue to create. According to the Chamber of Commerce, “…American intellectual property accounts for more than $5 trillion and IP-intensive industries employ more than 18 million workers.” Therefore, protecting this integral aspect of American ingenuity and economy should be a priority.

Additionally, COICA provides universal jurisdiction to the Department of Justice in pursuing and prosecuting domain names that solicit American intellectual property in the United States. If the law succeeds, individuals committing copyright infringement will no longer be able to hide behind the protection of their native country, without fearing that their action can and will be pursued by the United States.

In addition, COICA allows third party participants to be prosecuted for “enabling” the website to sustain itself and lend legitimacy to the practices and products of the website. As Senator Leahy states, “These [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][third] parties monetize the Internet site by enabling U.S. consumers to access the infringing website, to purchase content and products off the website, and to view advertisements on the website. Without partnering with these entities, the financial incentive to run an infringing Internet site is greatly diminished.” Those directly and indirectly supporting copyright infringement will be prosecuted.

For the purposes of COICA, the government defines a website as, “dedicated to infringing activities.” Due to the outstanding number of infringing websites, the government intends to pursue only the most “egregious rogue websites that are trafficking in infringing goods.” To be considered an infringing website, one of two criteria must be identified. First, the website exhibits the “existing threshold for forfeiture” under U.S.C. 2323, or the website reveals no commercial value and intends to only sell copyrightable items protected under Title 17 of the United States Code.

One of the primary opponents to the passage of COICA is the Consumer Electronics Association (CEA). Although CEA supports and agrees with the general direction of COICA, they feel its vague and wide reaching language could potentially harm legitimate businesses that are not committing copyright infringement. CEA says, “Our primary concern is that the scope of S. 3804 was significantly broader than its intended purpose of shutting down ‘rogue’ or foreign websites solely engaging in the exchange of pirated content or goods.” The ambiguous language of COICA could potentially diminish previous milestone cases according to CEA, including the “Betamax Case” determined by the Supreme Court in 1984.

While the technological environment is constantly changing and creating new hurdles for the consumer and business, the importance of copyright protection still remains. A constantly transforming environment requires innovative and relevant legislation to meet the creative needs of our culture. In an attempt to counter this decade long battle, legislation like COICA would allow the government to target the source of global piracy, and enforce the relevance and weight of American copyright protection. But our legislators must be certain to craft language that does not impede the rights of its citizens. Balance is need lest we resort to the overreaching, irrational, and over reactive activity the RIAA engaged itself in over the past decade.

RESOURCES & FURTHER READING

http://supreme.justia.com/us/464/417/

http://openjurist.org/title-18/us-code/section-2323/forfeiture-destruction-and-restitution

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_reports&docid=f:sr373.111.pdf


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By Nathan Drake & Barry Neil Shrum

Warner Music Group’s (“WMG”) year-end financial reports for 2010 came as little surprise when you take into account two factors:  (1) the general economic downturn in the U.S. and (2) the continued piracy in the global music industry.  See the report on WMG’s website here.  WMG has been the third largest record company in the world since at least 2004, when Time Warner spun off its music-related components.    WMG’s stock was trading at $5.92 per share as of the date of this posting, 2/21/2011.

Although WMG posted positive revenue returns in the third and fourth quarter of 2010, WMG claims that total revenue in 2010 decreased sharply as compared to 2008 and 2009.  This represents the eighth straight quarter that WMG has posted decreased earnings, a trend that is concerning to many in the music industry.  To wit, the demise of EMI Music – currently No. 4 in the music world – as it crumbles under the weight of its massive debt, is a poignant lesson to WMG – and to Universal Music Group and Sony BMG (Nos. 1 and 2 respectively) – that no  music conglomerate  is immune to hardships and winds of change currently facing the music industry.  The wide moat of physical sales that once protected the record labels’ castle from ultimate destitution now fails to provide a comfortable defense.WMG Downturn2

imageAs a result, a new kind of business model has emerged on Music Row and throughout the music industry, and this business does include “traditional model” involving radio marketing or “physical distribution/sales.”.  Rather, ingenuity and innovation include the most pertinent qualities of this business model.  See my post, New Formula for the Music Industry. And though the “major record labels” while may be slow to adapt, revenue losses like those reported by WMG, is quickly teaching the behemoths that transformation is essential if they want to stay afloat and competitive in today’s music market.  There are constant rumors afoot in Nashville that several of the major labels are shifting away from the traditional type deals toward more reasonable, tech-savvy and partnership-based approaches that fit the model better.

According to WMG’s reports, released on February 8, 2011, revenue totaled $789 million for the fourth quarter of 2010.  Even though it reported positive cash flow for the fourth quarter, the reported revenue represents a 14% decline from the 4Q 2009.  The impact of this comparative decline becomes clearer when you compare the reported digital revenues for WMG for the same periods.  Digital revenue for 4Q 2010 accounted for a staggering 25% of the total revenue, or $187 million.  This total represents an increase from the $184 million in digital revenue reported 4Q 2009.  Thus, it is obvious that digital revenue continues to be an integral, and fast growing, aspect of the business model for record labels.

The growth in digital revenue and the effect it has had on WMG’s revenue stream is also highlighted in the international sales posted by the company for 2010.  While domestic recorded music digital revenue declined 3% in 2010, international recorded music digital revenue grew 12.3% during the same year.  International digital purchases of recorded music accounted for 19.7% of total revenue in 4Q 2010, increasing from the previous year’s quarterly earning of of 14.6% in the same sector. WMG’s figures show that marketing internationally provide great opportunities for augmentation, at least for the time being.

emi460The impact of these trends in the music business on the future business model of WMG is also evident from the report for those willing to consider them.  First, the news reported by WMG that it is hiring Goldman Sachs to investigate and explore the potential sell of the company offers tremendous insight.  WMG has also proposed the option of selling only portions of the company in an effort to alleviate the debt and mere size of the company.  Going in totally the opposite directino, a third proposed option in consideration is that WMG would acquire its struggling little sister, EMI Music.   According to 2009 Nielson SoundScan® sales figures for each of the major conglomerates, the acquisition of EMI would position WMG as the largest record label in the music industry, with 32.72% of the U.S. market share, leapfrogging both UMG and Sony BMG to take the crown.

As noted earlier, EMI is the fourth largest music conglomerate, representing some of the largest acts in music today, including Katie Parry, Coldplay and Radiohead.   Despite its stable of well-known artists, Terra Firma, EMI’s current owner, has been treading water for almost a year now to to repay CitiGroup, from whom it borrowed millions to acquire EMI a mere 2 ½ years ago.  But as the repayment prospects for EMI are beginning to dim, as they reported massive losses of nearly $2.5 billion last year.  So, while things may look gloomy for EMI, Warner Brothers views EMI’s plight as an opportunity to expand its catalog and artist repertoire.  An opportunity of this magnitude is rare; therefore, acquiring EMI yields the potential for Warner Brothers to transform itself into a more profitable and diverse music industry conglomerate.  I’m sure EMI hopes the third time is the charm here.

So, the music industry continues to morph and adapt into something that will not resemble the traditional “record label” models of the past.  Gone are the days when such conglomerates are the only ones who will be able to produce multi-platinum superstar artists, sold through radio marketing and mass retail distribution on which they have a stronghold.  The days of the Internet revolution are upon us and the industry is starting to see its effects.  This drama will continue to play out over the course of the next few years.

NathanMy co-author, Nathan Drake is a senior at Belmont University from Northville, Michigan who graduates in May with a degree in Music Business from the Mike Curb School of Music Business. Nathan currently clerks for Mr. Barry Neil Shrum, Esquire at Shrum & Associates in Nashville, Tennessee. He plans on pursuing a law degree after graduation.  Nathan is author of his own blog entitled “My Thoughts.”

Further Reading & References:

http://thedailyswarm.com/headlines/warners-planning-buy-emi/

http://www.wmg.com/newsdetails/id/8a0af8122de5d32c012e028916cb03a6

http://finance.yahoo.com/q/is?s=WMG

http://www.time.com/time/business/article/0,8599,1962165,00.html

http://thedailyswarm.com/headlines/warners-planning-buy-emi/

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Abraham Maslow’s famous “hierarchy of needs” places self-actualization as the pinnacle of human behavior.  To illustrate what the phrase “self-actualization” meant , Maslow said:

“a musician must make music, an artist must paint, a poet must write, if they are to be ultimately at peace with themselves.” 

Of course, the thing that is important to note about Maslow’s hierarchy is that physiological needs are at its base, i.e., a person’s basic needs must be met before Maslow's Self-Acutalization hierarchythat person can reach self-actualization.  In other words, “a guy’s gotta eat”!

Maslow’s theories shed some light on the ongoing social debate on the Internet regarding whether musicians would continue to produce quality music if copyright as we know it were to be abolished.  A different argument, though very related, is whether money motivates one to be creative. 

One movement advocating such ideas is the “Free Culture Movement.”  Another less extremist movement is Stanford professor, Lawrence Lessig’s “Creative Commons” group, which advocates modified forms of traditional license agreements as a social compromise to “reconcile creative freedom with marketplace competition.”  Watch Lessig’s video, released today on TED, entitled “How creativity is being strangled by the law.”   For another this interesting discussion, see the site Against Monopoly.

The underlying assumption of some of the parties involved in the debate, which is ostensibly grounded in the record and movie industry’s recent campaigns against infringers, is that all intellectual property should be free for the public to use without payment and that the antiquated copyright laws should be modified or abolished.   In my opinion, this extremism  ignores the foundation principle of Maslow’s hierarchy of needs, that in order to achieve self-actualization, an artist’s or musician’s base needs must be satisfied.

Proponents of the free culture movement observe that creativity survived many years without the structural form which copyright superimposed upon it.  Indeed,  it is often observed that the great works of Mozart were created without the existence of copyright laws.  Don’t forget, however, that Mozart wrote many of his works while being employed by benefactors such as the Prince Archbishop of Salzburg, Heironymus Colloredo  and Emperor Joseph II of Vienna, names that are certainly not as prominent as Mozart’s.   In fact, where would the world of the arts be without the billions of dollars that have been donated by benefactors such as J.P. Morgan, James Smithson, Bill & Melinda Gates, Andrew Carnegie, Henry Ford, John D. Rockefellar, just to name a select, if not elite, few.  So, while it is true that “a musician must create music,” it is also true that a musician has to eat. 

Long before the existence of copyright laws, there was a strong relationship between money and the creation of arts and music, and it will be that way until we abolish our system of currency as we now know it.   Walk around any great city and witness the existence of hundreds of pieces of commissioned artwork.  Listen to the commissioned works of Mozart, Beethoven and other great composers, who existed at the hand of benefactors.  Walk through the Museum of Modern Art and look at the works of art generously donated by J. P. Morgan and other benefactors.  Whether it be a king or a record label, money benefits art.  Creativity, like it or not, is often inspired by the almighty dollar, whether that is represented by paper currency or some other bartered for compensation which meets our base needs as human beings.  

That’s not to say that people would not continue to make music or art if they were not compensated for it – they would.  That is an entirely different question in my mind.  People’s hobbies and past time activities are in a slightly different class than, say, the copyrighted works of Don Henley.  If great singer-songwriters such as Henley could not make a living at playing music and writing songs, I would venture to bet that most of us would never had heard of The Eagles.  Again, even a great musician has to eat.  If the musician cannot meet his base needs doing what he loves to do, a musician will meet those needs some other way and, therefore, there would be less time to do what he loves to do.   So don’t confuse the musings of the masses with the creations of the geniuses.

The only legitimate question remaining, then, is how should a musician get paid for the music he or she creates?  How should the songwriter get paid for the songs he or she writes?  The answer, in the United States, is by virtue of the rights created in the Constitution, Article 1, Section 8, Clause 8, which gives Congress the right:

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Investors the exclusive Right to their respective Writings and Discoveries.

The portion of this Clause dealing with the arts is further codified in the various Copyright Acts and amendments thereto.  In a nutshell, the Copyright Act creates a legal fiction, called intellectual property rights, which gives creators certain exclusive rights in their works, including the rights to produce copies, create derivative works, perform or display the work, and to sell and assign the works, among other things. 

The laws in the U.S. are based loosely on English concepts and laws that date back to the 17th and 18th century, which were a direct result of the invention of the printing press.  The first actual copyright law was the Statute of Anne, or the Copyright Act 1709.  Thus, the concept of “copyright” is a three-hundred-year-old concept that has survived the evolution from printing press to piano rolls to digital media, and I have little doubt that it will continue to survive through the technological age, despite the rumblings of these groups. 

As the law often does, it must evolve, albeit it ever so slowly, to encompass these new technologies. The good news is that the debate that is ongoing in the new virtual marketplace of idea will help us formulate new and improved amendments to the laws that will hopefully address the perceived dichotomy between the rights of free speech and free culture and those of the creators and owners of intellectual properties to receive just compensation for their efforts and investments.

In the end, this blog is my response to viewing Larry Lessig’s video, as I said, posted today on the TED website, entitled How creativity is being strangled by the law (See the link above).  In it, Lessig harkens back to the days of Sousa when children sat on the porch and sang the songs of the day.  Lessig told of how Sousa decried the advent of the phonorecord machine as the demise of creativity.   He points out that in our current state ot technological advance, copyrights should be “democratized” because the new generation of children use copyrights to create something uniquely different, that is to say they use the copyrights of others as “tools of creativity” and “tools of speech.”  Since every such usage requires a copy, the arguement continues, every such usage is presummed by the establishment to be an infringement of someone’s copyright.  Lessig’s solution is that the creator should simply license the use of their creation for free in the instance of “non-commercial” usages, and retain the rights to exploit it commercially.  He refers to this as the “Sousa Revival.”

My question to Professor Lessig is this:  why does the fact that an entire generation of Internet downloaders who are using copyrighted material to create derivative works mean that the rights of copyright holders have to be abolished or even diminished?  Why do the creative whims and urges of those who utilize other people’s copyrights to create different, derivative works supercede those of the people who created the original works?  Why should they?  Are the audiovisual images of a actor portraying Jesus Christ lipsyncing to an infringed copy of “I Will Survive” so creatively valuable as to supercede to the rights of Gloria Gaynor to distribute the original? (This creation is one of the examples in Lessig’s video presentation).  Consider this carefully before you answer, as it is a slippery slope.

This brings me to another relevant observation: people would generally not want pay money to hear most children sitting on the porch singing their songs, unless that child happens to be a Don Henley protegee.  That is the difference between most of the music ony MySpace, for example, and the music that is generally downloaded on iTunes.  There is a tremendous difference in the value of the spontaneous, albeit creative, songs of a child and the intricate lyrics and melodies which are the product of a genius the likes of Don Henley.  That is precisely why almost 100% of the product downloaded from Napster in the early days was product that had been recorded and marketed by major record labels.   It had intrinsic value.

Let me illustrate these principles with an example from the world of physical property.  Person A has a piece of property populated with a lot of trees.  Person B, owns the lot next door, which is flat and has a nice stream of water running around its perimeter.  Person C comes along, see this situation and, overwhelmed with creativity, cuts down Person A’s trees and builds himself a house on Person B’s lot and claims it as his own.  When Persons A and B confront him, stating that the law says he cannot do what he did, Person C responds that his creativity is being strangled by the law and, therefore, the law should be abolished.  Is Person C making a good argument?  Is Person C likely to prevail in court?  No.  Yet, this is the argument of the Free Culture Movement and, in some ways, of the Creative Commons.

Just as the law creates real and enforceable property rights for a person who owns a plot of real estate, the law creates intellectual property rights so that person can own an intellectual creation and enforce his rights to the exclusion of those who usurp it.  Abolishing the one makes no more sense than abolishing the other.   Abolishing the intellectual property right a person has in a copyright, therefore, devalues the creation.

Now, imagine that Person A’s lot was, instead, full of reeds and twigs and Person B’s lot was full of ravines, rocks and arid soil.  Person C would never stop to take a second look!  The barron options now before Person C would NOT inspire creativity in most people.

As further illustration of this principle of intrinsic value, ask yourself whether the Jesus video referred to earlier would be nearly as popular, nearly as creative, if the actor’s own singing voice had been used in place of Gloria Gaynor.  The answer is probably no, because the reason that the video of Jesus Christ singing Gloria Gaynor’s “I Will Survive” is so popular is because it incorporates a copyright that already has intrinsic value and, therefore, adds additonal value to the video.  The arguments of the free culture movements omit or overlook this concept of intrinsic value. 

What I do like about Lawrence Lessig’s movement, Creative Commons, is that it is, in the final analysis, based on the principles of the Copyright Act, i.e., that the copyright has value and that its owner has certain exclusive rights, which he can assign to others.  Lessig’s solution is essentially using existing copyright laws to create a unique license that attempts to strike a balance between fair use and full copyright reservation.  In the end, however, the license are based on the rights already granted in The Copyright Act, proving that the copyright laws as they currently exist allow for the very thing that these groups seek.  I cannot agree with him more in that respect.

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I have often advised my clients in the past that the new direction for independent artists is what I refer to as “guerilla” marketing, meaning finding alternative means of marketing your product.  One of the most explosive methods of doing that over the past few years has been the Internet.  One of the problems with marketing yourself on the Internet, however, is how do you get people to come to you?  The void of the Internet is so vast, that finding an artist whose sound is something that matches your musical taste is even more difficult than finding a needle in a haystack! 

So, it is a beautiful thing to see an artist actually breaking into the Billboard charts catapulted in large part by her success on the Internet, particularly her MySpace page.  Her success story gives hope to every artist whose desire is to put out a record, throw it up on the Internet, and have people flock to listen.

Enter Indianapolis, Indiana singer-songwriter Sally Anthony whose  “eTeam” of over 125,000 fans, including over 40,000 friends on MySpace, helped propel Anthony to stardom.  Thanks in largem_6c31918cf33c79bad2c07905f6783a30 part to that online community, Anthony’s first album, Vent, released in 2004, sold over 175,000 physical and digital copies.  Two releases from that album spent months on the R&R pop chart.

Her new album, Goodbye, released October 23rd, has already sold 14,000 digital copies.  It has already reached the top of the pop charts at walmart.com, FYE Digital and iTunes and on November 7th landed at No. 9 on the Billboard Heatseekers Chart.  The album is being distributed by her company, Gracie Productions, through Imperial Records/EMI.

Anthony is succeeding because she is treating the music industry as broader than just the radio promoted, hit-driven, plastic disc business the major labels seem stuck in.  She is viewing the music industry as an entire package, generating buzz wherever she can, from the ground up rather than from the top down.

I predict that we will start to see more and more of these types  of breakthrough artist as the popularity of YouTube, Facebook, MySpace and other online communities grow in popularity and as the pioneers of the Internet find more creative ways to index diverse product, match it to the tastes and purchasing patterns of Internet users, and make recommendations – sites such as  LivePlasma, Pandora, Audiobaba, Last.fm, MyStrands and, of course, Amazon,

As radio fades into the annals of history alongside the monolithic corporate conglomerates that are r060719_Books_longtailChartecord labels, these innovative types of indexing sites will help those artists in the deep dark recesses of the “long tail”  find an audience for their music.  By the way, if you haven’t read Chris Anderson’s treatise on this subject, The Long Tail, buy a copy and dissect it now.   The long tail consists of that product that is not in the mainstream — not on the shelves of Wal-mart — but product that is still sought after and purchased by people.  Maybe it’s only ten people per month, but people still want and buy it.  It is the millions of artist that fly below the radar of the “hit-driven majors.”  These are the artists who can benefit from the exposure the Internet can provide.

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