Article: The Digital Dilemma: How Do We Pay The Piper?

March 2005

Click here to download this article as a PDF file (.pdf)

by Ben Challis

Music Industry Lawyer
March, 2005


In this article summarising recent developments in digital downloading and Internet copyright, the author argues that in the digital future it will not be ‘who pays the piper’ that matters, but ‘how the piper is paid’.


TRADE associations representing record labels, films companies, software manufacturers and music publishers have for some time been making noisy protests about Internet copyright theft.  As copyright owners seek to protect their intellectual property rights (and maintain profit margins), there have been numerous legal actions worldwide against peer-2-peer file swappers, uploaders, downloaders, file swapping software providers and Internet service providers.  But is the current model of ‘paid for’ legal downloads the true business model that copyright owners want – or even need?  Moves are now afoot to develop new systems to protect intellectual property, but these systems may have long-lasting ramifications for civil liberties and personal privacy.

There are, at last, a reasonable range of music files available for legal downloading – with Apple’s i-Tunes online music store leading the way. However, the more one looks at legal downloading, the more one sees this as possibly a mere ‘stop gap’, or short-term, solution, to an ongoing problem for copyright owners. The International Federation of the Phonographic Industry (IFPI) rightly points out that ‘music on the Internet and mobile phones is moving into the mainstream of consumer life’.  Record Companies are finally seeing ‘significant revenues from online sales’. Analyst Jupiter estimates that the digital music market was worth US$330 million in 2004, and is expecting it to double in value in 2005 (IFPI Digital Music Report 2005).

But ever-increasing bandwidth, and commonplace broadband access, has created choice – and opportunities – and legal downloading is not always the first choice of the consumer. Alex Kapranos, lead singer with Scottish “BRIT” winners, Franz Ferdinand, is quoted in The Guardian (14th February 2005) as saying that he has illegally downloaded music himself, as a way of ‘trying out music and finding new out stuff’’. So when even artists (the actual creators of copyright content) have mixed views on downloading, one can begin to envisage a very different future: where labels or artists no longer sell a million copies of a song for 100 pence each, but sell ten million copies for 10 pence each; and where consumers swap their online freedom and privacy for the right to use copyrights; and where copyright owners swap the right to get a one off payment for a single sale, for the right to collect micro payments ad infinitum.
It is interesting to see that in the US, the RIAA is adamant that it needs to get behind the ‘smokescreen’ of Internet Service Providers, and find ways of taking direct legal action, not only against serial uploaders, but also against individual downloaders, and the providers of software with potentially infringing uses. So far, they have only been partially successful in this quest, with a mixed bag of judgments, both in the US and around the world. But the record industry must surely have worked out by now that the traditional model of selling CDs, DVDs and cassettes in shops will not last for ever, and current legal download models are not eradicating illegal downloading and piracy.  The sale of hard copy discs could well dwindle in time, and broadband access could possibly always mean that illegal downloads might take place.  The motion picture industry has woken up to this, as broadband threatens their core revenues from the exploitation of movies.

What almost all rights owners want are secure ways to collect monies in the digital future. There are, of course, already numerous successful revenue models supporting the consumption of copyright, quite apart from the sale of hard-copy CDs and DVDs. Commercial television is supported by advertising. In the UK, BBC television, radio and Internet services are paid for by a nationally-levied licence fee. Satellite and cable television services are supported by subscription fees. Some music is given away because it is supported by sponsorship, or is part of a marketing drive (giveaways on newspapers or magazines, or with CD players, or even toiletry purchases). Music on the internet had, until recently, been the realm of peer-2-peer file swappers and downloading for free. At the StreamingMedia Europe 2000 Conference, over four years ago, one panelist announced to a hall packed with rosy-cheeked and slightly sceptical ‘dotcommers’, that the online world needed to copy the porn industry.  It was pointed out that only the porn industry had worked out how to collect revenues through a variety of new (although very discrete) means. Such clever foresight reflects poorly on the music (and indeed other such) industries. Companies clearly need to adapt their businesses to new technologies, and rethink how they produce a profit, if they are to survive – and this still holds true now.

At the MusicWorks Conference in Glasgow, in October 2004, the monetization of intellectual property rights was discussed in some detail.  At the panel chaired by lawyer, Anthony Ross, comments during the session gave much food for thought, and identified some of the new revenue models for effective collection revenues from the exploitation of copyright, including legal downloading by track, by album, by subscription, ISP subscription fees, software levies, blank tape levies, equipment (hardware) levies, and funding by advertising or sponsorship – and all of these methods are being considered by different parts of the music and film industries (and indeed different legislatures around the world). The panel also identified new markets, such as mobile downloads, and mobile ringtones, as potential boosts to record label and music publisher profits. But, that said, the question remains whether even current models of revenue collection are sustainable in the long term, especially where global copyright collections are needed (in a world where swapping is quick and easy and de-encryption common).

John Naughton, in his article, “How Apple Saved the Music Biz”, points out that with Apple’s i-Tunes now selling a million downloads each day, ‘it was a computer company and not a record company who cracked the problem of providing legal music downloads’. Clearly, with the rise of the likes of i-Tunes, Napster, MyCokeMusic and SonyConnect, legal downloading is a growing market. But is it actually a sustainable model? Are “paid for downloads” and subscription services the answer for both the recording industry and the film industry? There is a growing suspicion that the model that record labels really want is to be able to directly access your computer (or even stereo or car radio) to see what you are playing, and automatically deduct payments (by a direct debit) for that privilege; in other words, pay as you play. It would be just like a mobile phone operator charging you for every call. In such a business model, the record labels (or even bands directly) could charge you every time you play their recording, and use their copyright; publishers could charge you every time you play their song, and film companies could charge each time you watched their film (unless, of course, a sponsor was paying). These charges would be in ‘micro’ payments – automatically debited from your bank (or other account, such as a mobile phone account). And labels and film companies might even give you the music or film free in the first place – a free track, video or film download – and you just pay when you play.

Does that seem far fetched? Not any more. But there are legal complications. The first big hurdle is the issue of privacy. While we should be concerned about this, undoubtedly a large proportion of the population is not concerned at all. None of us seem to be concerned about telephone companies knowing about our call history, or private contacts; many online users readily accept ‘cookies’ lodged in their own computer. Marketing companies (who love to build up consumer profiles), would relish the ability to have a back door into your computer, and will no doubt think up some very special offers to get into your cyberspace, too!  In fact, they might well pay you small amounts of money – or more likely give you incentives, such as music or films – to be able to monitor you.

The Electronic Frontiers Foundation comments that the current tools used by big business – especially overbroad end-user licence agreements (EULAs) – are one of the greatest threats to consumer rights in the world of high tech industry. Few people realise that simply visiting a website, or downloading a software update, may constitute ‘agreeing’ to a EULA that permits third parties to monitor your communications, or allows a vendor to dictate what you can or cannot do with the product you’ve bought. Clicking the ‘I Agree’ button may mean clicking away your privacy, freedom of speech, or other rights. EULAs, often called “click-through agreements,” have become ubiquitous in the technology industry. While they are supposed to bind consumers to strict terms dictated by vendors, consumers don’t negotiate them, don’t sign them, and in many cases can’t even read them until after they’ve bought the product, taken it home and opened up the package. EFF’s white paper, “Dangerous Terms – A User’s Guide to EULAs,” comes at a key juncture in the case of Davidson v. Internet Gateway – a lawsuit that tests whether EULAs can override protections under federal copyright law, such as the Fair Use doctrine.  Civil liberty groups may worry and rattle their sabres, but the consumer might well be convinced this is all a huge benefit!

Frankly, on this issue it’s difficult to see politicians being too concerned on our behalf – although perhaps they should be, and often profess to be! The UK has only recently incorporated the European Convention for Human Rights into domestic law, and this contains a right to privacy; but the Government has already legislated to excuse itself from privacy and data protection legislation, when using state investigative powers. And, of course, governments and administrations need to collect information, and they themselves would love to get access to even more information about all of us. Intellectual piracy and the issue of protecting intellectual property rights would be a wonderful Trojan horse (apologies for the internet virus pun), or excuse, to open up citizens’ online life to closer inspection. Look how the fear of global terrorism is being used by the UK Government to drive through compulsory Identity Cards, and is being used by the US government to set aside traditional ‘human rights’. The Centre for Policy studies estimates that the UK has 529 quangos, financed by billions of pounds of taxpayer’s money, and they need information – vast amounts of information – to justify their existence. As they might appreciate a way into your computer, politicians may not come to your defence! The Digital Copyright Millennium Act in the US, and recent moves by the Norwegian government to restrict copyright uses by consumers, are fine examples of this.
The second big question is whether it is all technologically viable. The quick answer is yes: it is easy enough to give every single copy of a work an identifiable code – a digital watermark – which then ‘belongs’ to the individual who ‘purchased’ it, and can report the use of that copyright. In the UK, BAFTA members who vote for film awards now receive DVDs with digital watermarks and codes on them, so any copies can be traced back to the recipient. It doesn’t take much to make sure that every piece of music or film in the world has its own individual code, which can then be additionally coded for each and every further user.

The third big question is whether individuals will want to adapt their consumer behaviour to this possible business model. At the moment, consumers seem far better at adapting to new technological models than the companies who run most big music businesses. Record labels should perhaps have thought of new online opportunities themselves – but they did not; hence the rise of illegal peer-2-peer file swapping and illegal downloading. ‘Why the music industry didn’t spot the opportunity [of the internet] will be the subject of innumerable MBA dissertations in years to come’, Naughton argues. He goes on to suggest that record company executives missed the revolutionary potential of new technology due to a mixture of ignorance of the technology (at a senior level), a misguided strategy of dealing with the new technology as a threat rather than an opportunity (and consequently a policy of trying to stop such technology by legal and legislative means); and, finally, they can also be charged with misunderstanding consumers needs. But putting aside the past mistakes of record labels, the question must still be asked: “Is a new ‘pay per play’ model commercially viable”?

Unresolved is the issue of how micro payments automatically and regularly leave a bank account (or mobile account) to pay for copyright use. Is this possible or acceptable? Well, young (and some older!) people think nothing of paying £2.50 or more, per month, to be able to have a range of mobile phone ringtones available; The ‘crazy frog’ ringtone has grossed over £10 million at the time of writing. We almost all pay one or more telephone bills by direct debit on a monthly or quarterly basis; almost all Internet subscriptions are covered by monthly fees to Internet service providers.  In a very ‘cyber age’ example, the 700,000 subscribers to the ‘World of Warcraft’ online multiplayer fantasy role-playing game (each of whom paid £30 to buy the game in the first place) must also each pay £8 a month to stay in the fantasy kingdom (The Times, 12 February 2005). And ‘pay to play’ is nothing new in the world of golf! So it’s not so new a business model; it just needs a mind-shift away from the idea that when you buy a CD, it’s yours to play all of the tracks for ever, to a situation where perhaps you get the music free, but you pay a tiny amount each time you use the copyrights in that music, sound recording or film.

Surely in a global market haemorrhaging profits through piracy and illegal downloading, a new model is urgently needed. The obvious solution is to employ the new technology used to identify and trace Internet users, to allow for payment for copyright uses, or to direct advertisements to profiled users.

The European Commission professes that it is concerned that these technological advances may culminate in the “ubiquitous surveillance” of Internet users. But despite the clear benefits of protecting personal data, it is easily argued that legislation promoting the anonymity of domain name registrants may assist intellectual property infringers, and rather than a clamp down on access to registrant details, record labels could argue that they need more, not less, access to private data, because as intellectual property owners they need to have the ability to protect and enforce their rights.

Record labels and film companies may soon reach the conclusion that a new revenue model is critical to their survival.  Those who own copyrights need to replace existing models – models where currently you go to your local HMV and pay £11.99 for a CD or £15.99 for a DVD.  But they need to retain their existing profit margin. These margins are becoming squeezed as the market moves from a traditional ‘album’ market (where hard copy CD albums are sold to the single track download market).  Surely labels will look to make up the balance of lost profit, even allowing for their savings in the lack of production, distribution and retailing costs when retailing music online.

The answer to the present dilemma of how the piper is paid may well invoke a completely new business model – or maybe a mix of old and new ideas. Perhaps the major labels will buy up Internet service providers, so they can monitor the use of their copyrights. Maybe Coke or Pepsi will buy a major label like Warners or EMI, so they can give music away to sell soft drinks. There could be a more radical new model through: all you might need to do is open up your computer, wallet and privacy to record labels, film companies, the government, sponsors, advertisers and marketing companies – and the entire digital future is yours.

So it is not so much, any more, who pays the piper.  Film companies and record labels will work hard to secure protection of their intellectual properties, even if this entails introducing controversial new business models.  It is the issue of how the piper is paid which must surely come to the forefront of digital debates, in future. One can, for the first time, seriously begin to envisage a technological world where the controversial privacy issues of today may well fade into history, and the today’s unthinkable moral concepts transmute seamlessly into tomorrow’s commercial norms.  We may be headed for a world where – in order for us all to participate in most forms of mental stimulation and enjoyment – Big Brother will necessarily be watching us!



IFPI Digital Music Report 2005. London: IFPI, 2005

Lewis, D (2005). Essential Guide to British Quangos 2005. Centre for Policy Studies.

Naughton, J. (2005). “How Apple saved the music biz”, The Observer (13th February, 2005).

Newitz, A (2005). “Dangerous Terms – A User’s Guide to EULAs”, EFF white paper  [See also Davidson v. Internet Gateway (commonly known as Blizzard v Bnetd), a lawsuit that tests whether EULAs can override protections under federal copyright law. USA Eight Circuit (appeals)]

Sherwin, A (2005). “Join up with thousands in another world for £30”, The Times (12th February, 2005).

Slater, D (2005). How Competitive is the Record Industry – a natural experiment [competition within the industry and DRM systems]

Thompson, Bill (2005). The Copyright Copyfight, at

Wachaman, R (2005). “How sound is EMI’s future?”, The Observer (13th February, 2005).
© 2005 Ben Challis

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