Tales of the Sausage Factory: Fileswapping- Wither To in '04

The inevitable end of year/start of year column of rehash and predictions. No doubt I’ll regret this column next December, but if you’re interested in my predictions for the future of file sharing in 2004, read on.

Was 2003 some kind of watershed for file swapping? I’ll go out on a limb and say “yes” for two reasons. First, 2003 marked the realization that yes, record companies really can track you down and sue your ass off. The average file swapper who celebrated him or herself for “sticking it to the man” and supporting the “information revolution” discovered that the info dinosaurs do fight back. Makes you think twice, don’t it?

Second, iTunes showed that a real market exists for legitimate downloadable music and that people will pay — provided the price is reasonable and the licensing terms are not outrageous.

So what does this mean? Well, for starters, The Washington Post reports that illegal file sharing is down. The article (and the study it cites)credits the RIAA’s “get tough” policy with the serious decline in illegal swapping.

Myself, I’m not entirely convinced, but I wouldn’t be surprised. The poll cited by the article is a phone survey by the Pew Internet & American Life Project. Positive responses to “do you file swap” fell from 29% to 14%. Does that mean that fewer people are file swapping, or fewer people are willing to admit it in a random telephone poll? The decline in Kazaa usage does lend support to an overall drop, although use of other file swapping software stayed reasonable constant.

Second, I believe that the article and study discount the significant growth of legal pay services with reasonable rates and reasonable licensing terms. iTunes has been an enormous success. So has the reborn Napster and several other download sites. For years, advocates of online music (as distinguished from advocates of file swapping) have complained that law abiding citizens have been turning to file swapping because there is no other way to get the music they want on terms or prices that the willing buyers will pay.

Please note I am not supporting file swapping here. I am a big believer in copyright. But if you are a music exec asking yourself how to build a profitable business in 2004, or a musician trying to make money, or a retailer, or aggregator, or random music fan, what lesson are you going to draw from 2003?

Is it a carrot and stick combo that is most effective? To the extent commentators are taking note that pay services are doing well, they attribute their use to fear rather than a desire on the part of indivudals to use pay services (or, as Al Capone purportedly said, “you get more with a kind word and a gun than you do with a kind word alone.”)

This has basically been the driving philosophy of the RIAA and MPAA. Jack Valenti, head of the MPAA, always makes this argument: how do we compete with free? Larry Lessig always has a ready answer: look at the bottled water industry. Add value and people will pay.

On the anti-coercion/users favor choice argument, I cite the following: of those who said they had stopped swapping, only one-fifth said they stopped because of fear of RIAA lawsuits. So why’d the other 4/5 stop? Neither the article or the survey says.

Also of note is that the study cites a major decline in fileswapping among university students and broadband subscribers, the traditionally highest catagory of individual swappers. This raises the question of why this catagory of users is most effected. Is it simply because they represented the highest percentage of users, and therefore an overall decline will effect this group the most? Is it because they are most likely to be scared by lawsuits? Or is it because universities and cable MSOs (the biggest chunk of the residential broadband subscriber market) began taking aggressive moves against swappers in 2003 — including alterations in their network architecture to inhibit file swapping? The decline in swapping tracked by the Pew Report has an interesting correlation to the graduation of college students and arrival of a new class getting the lecture that file swapping will not be tolerated. Some well publicized incidents by colleges in the spring and summer of ’03 may also have had an impact.

As for cable, cable aggressively limits media streaming. This serves the dual purpose of preventing file swapping and preventing broadband from emerging as a competitor for premium cable pay services. This gives them incentive to shut down file swappers.

Also of note is the lack of significant decline in video swappers. Is this because the RIAA only went after music swappers and video swappers felt themselves safe? Or is it because no legal means of buying video content online has emerged? Or a combination of both.

So what to do in 2004? If it really is all about the lawsuits, will we see a rise in file swapping now that the D.C. Circuit has eliminated the ability of copyright holders to get the identity of fileswappers from ISPs? Will the RIAA try to amend the Digital Millenium Copyright Act (DMCA) to correct the defect found by the court, a strategy the court explicitly left open by refusing to rule on the Constitutional arguments and expressing sympathy for copyright holders? Or will the music business instead try to build up the pay side by licensing more music for online distribution?

Smart money says that the RIAA would be crazy to reopen the DMCA. Last time it passed thanks to the relative obscurity of the issues. This time it is in the cross-hairs of dozens of public interest groups and industry interests that despise how it imposes costs on equipment manufacturers and ISPs in favor of content owners. And while many people would hardly rank this as a major election issue, it’s tough to sell special favors to one industry in an election year.

But if the RIAA really believes that subpeonas are their only hope against the file-swapping tide, my money says they will go for it.

So here’s my prediction: look for an ammendment via an appropriation rider after election day. It will be billed as a “technical amendment” and get hooked on to some omnibus funding bill. That will provide cover for the rank-and-file members who don’t want to get anyone annoyed on this issue (which the rank-and-file don’t understand anyway).

Also on the list of possible approaches are the “super-DMCAs” that are popping up in state legislatures. Since the consitutional arguments were never addressed, nothing stops the RIAA from getting the state laws amended and pursuing state action. True, copyright is exclusively a federal jurisdiction, but subpeona power is a traditional state perogative and if I can think of some clever mechanism of forcing ISPs to keep records of this stuff on a state by state basis, I bet the RIAA’s lawyers can as well.

The remaining players in the fray are musicians. The New York Times has an article (free subscription required) in which a number of musicians compline about how they are losing big money due to file swapping.

I’m always suspicious of the precise numbers tossed around in these articles because they assume (1) everyone who downloaded a song would have bought a song if the download were not otherwise available, and (2) no one who downloaded a song bought the song as a result of the download. both of these assumptions are rather heavily contested by supporters of file swapping, who have their own studies to back them up. But I will grant that the status quo ill-serves musicians.

The RIAA has been trying to position itself as the champion of artist rights in this fight. But small and mid-size artists don’t particularly trust the RIAA either.

The Future of Music Coalition has been trying to get a voice for musicians at the table on this and other issues for a number of years now. It has proved itself as a stable player in the Washington arena with a genuine consticuency and staying power to fight for the long term.

So what will happen in 2004? Will a growing number of artists look to legal ways to distribute music and therefore get paid? Will the RIAA continue to set the agenda for artists? This is a tough call. But FMC has proven able to reach out to some big name artists on the issue of Clear Channel and media concentration. IF FMC can leverage these contacts to create a genuine third policy voice on online music, with the star power to call into question the RIAA’s roll as spokeman for the artists as well as the major record labels, it will fundamentally alter the nature of the debate and, IMHO, push toward greater use of legal online services on the iTunes model.

Another factor that may change the debate are music industry profits. The music industry has been having a bad time of it since 2000, and has blamed its financial woes on fileswapping. Less credulous folks have observed that spending on luxury goods like CDs generally goes down in a recession and that CDs were overpriced compared with other sources of entertainment (such as DVDs, which usually retail for $6 or so less than CDs).

With the economic recovery, there are indicators that revenues for the major record labels are climbing again. No doubt labels will attribute this to the drop in file swapping, but how will it effect the ability of companies to make their case to legislators and consumers? As noted before, fileswapping continues. If profits are up, where is the crisis to change the law?

So what are my headline predictions after all this discussion.

1) Fileswapping will not go away.

2) The RIAA will persist in its legislative and legal strategies rather than market-based strategies. They will push in state legislatures and will try to amend the DMCA by stealth.

3) Pay services will continue to remain popular. Independent and niche market artists will team with the more succesful sites like iTunes in the same way the people can self-publish through Amazon.com (I’m aware you can already do this with MP3.com, but it is essentially below the public radar. iTunes and others get enough hits to make this a viable model).

4) More musicians will begin pressing RIAA and others to restructure the way in which individual artists are compensated, with an eye toward direct downloads. The RIAA will resist this. Who will win depends on how many musicians risk protesting against the status quo.

Stay tuned . . .

Harold