By William Fisher
With 40 million to 60 million Americans having swapped music files over the Internet, taking a few hundred of them to court as the Recording Industry Association of American did this week is, as the legal scholar Randal C. Picker has remarked, "a teaspoon solution to an ocean problem." For a few months after the lawsuits began last year, file sharing diminished, but it has now rebounded. If lawsuits aren't the answer to this problem, what is?
History may give us some guidance. After all, file sharing isn't the first new technology to have destabilized the entertainment industry. The way in which the industry responded to the introduction of three earlier inventions — radio, the VCR and Webcasting — offers important clues for music executives today.
In the 1920's, the advent of radio transformed the way most consumers gained access to musical "performances." Ascap, then a fledgling organization for composers and music publishers, initially allowed the infant radio stations to use its members' compositions without charge. When radio prospered, Ascap demanded compensation, but kept its fees low. The result was that radio continued to flourish, and the copyright owners enjoyed increasing incomes. By 1940, the broadcast industry earned gross revenues of $200 million, of which $4 million (2 percent) went to Ascap members. By 2000, Ascap and its sibling organizations were collecting approximately $300 million per year from American radio stations, roughly 3 percent of the stations' total revenues.
The film industry had its own challenge in the 1970's, when the development of VCR's allowed consumers to record television broadcasts. The major film studios feared that the new machines, by letting viewers skip advertisements, would end up hurting television networks and thus their licensing revenue. But the Supreme Court rejected the studios' claim that the manufacture and distribution of the devices constituted "contributory copyright infringement." Did the film industry collapse? On the contrary, it created a VCR- (and DVD-) dependent market of video sales and rentals, which today earns the studios approximately $10 billion a year.
Finally, in the mid-1990's, when Webcasters began "streaming" music over the Internet, they were compelled to pay fees to the owners of the copyrights of musical compositions, but not to the owners of the copyrights of sound recordings (that is, the record companies). Fearing that the new technology would erode CD sales, the record companies then persuaded Congress to give them a right to compensation from Webcasters.
But, in contrast to the modest compensation that Ascap got from radio more than a half-century earlier, the record companies got through arbitration rates that were so high that, within a year, the number of Webcasters had shrunk by about a third. The result has been to slow significantly the development of this industry — cutting into the fees that record companies could have collected.
It is noteworthy that the story with the happiest ending — both for the public and for the copyright owners — was the one in which the owners were denied any share in the revenues earned by the developers of the new technology but instead had to develop a new business model to take advantage of it (VCR's). The next best outcome occurred when the copyright owners first allowed the new technology to take root and then worked out an arrangement in which they obtained modest license fees (radio). The least satisfactory outcome occurred when copyright owners demanded fees that were so high they hurt the growth of the new technology (Webcasting).
If the pattern holds, then the record industry's response to file sharing — trying to block the technology altogether — would generate the worst of all possible results. To its credit, the industry has started to participate in paid music download services like iTunes, but a better solution would be to institute a monthly licensing fee paid by Internet users. History suggests that the record industry, and society at large, would be better off in the long run if it approached this new challenge with more open minds.
is Op-Ed for New York Times