The rise of the pirates of the digital age

The Internet has created a virtual stage for artists, where they can perform to worldwide audiences 24 hours a day, seven days a week. It has also established a magical store front where doors never close and the possibilities for creative marketing and for establishing new forms of revenue are truly endless. This direct distribution system of content to consumers (all in the comfort of their own homes) has created a monster of competition to traditional music retailers and distributors.

A demon spawned

Unfortunately, it also spawned a demon in the form of the unauthorised and illegal copying and sales of music recordings.

Global record sales have fallen dramatically since the late 1990s, while the entertainment industry has shown immense growth.

One would think that the stakeholders in the music industry, in the form of the copyright owners in sound recordings, musical compositions and lyrics, would be ecstatic following the digital revolution and laughing as they skipped merrily all the way to the bank, but the reality of the situation is that music piracy is bleeding legitimate royalty and revenue streams dry.

Ease of copying

The ease by which a sound recording can be copied through the use of digital technology and shared with others instantly all across the globe has taken the shine off the marvels of digital and online technology for those who butter their bread from profits arising from the music industry.

Figures released by the British Phonographic Industry estimate that music piracy may be costing the recording industry and artists around GBP50 million a year.

The International Federation of the Phonographic Industry (IFPI) recently announced that digital revenue has grown 8 percent over the past year to about USD5.2 billion. This figure may seem healthy in most industries, but not in the music industry when considering that overall monetary receipts have fallen by nearly two-thirds during the shift to online/digital music retailing. Piracy is largely to blame for this as it is starving legitimate online retailers and music subscription services of vital customer bases. Piracy is the constrictor that is steadily squeezing the lifeblood from legitimate online music retailers and revenue streams. The IFPI reckons that 95 percent of music downloads are illegal.

In terms of South African copyright law, the copyright owner of a sound recording is the party through whose arrangements the sound recording (record) was made. Usually this will be the recording studio or record label. The copyright owner of a sound recording has the exclusive rights to make reproductions and adaptations of the sound recording, and to benefit financially from such actions. It is this right that is being impinged upon by third parties who make unauthorised copies of sound recordings and by people who purchase such copies on our street corners or who download unauthorised copies from the Internet.

Consumers pay in the end

Of course, artists are affected as well. In terms of a recording contract an artist may receive a royalty for every legal copy of a sound recording that is sold by the record label that owns the recording. It must be said although that artist's royalties from record sales will usually only become due to the artist after all of the recording costs have been recovered from the artist's royalty share and also after deductions such as reproducing costs, marketing expenditure, taxes, packaging and distribution costs, etc. have been applied. It will, therefore, be some time before an artist can expect to receive money from the record label for record sales and, arguably, it is the record labels that are affected the most from music piracy.

Consumers may not be aware of this, but they are also affected by piracy. As record companies and artists have to try to make up some lost ground insofar as dwindling record sales are concerned, consumers pay for this in the form of increased record, DVD and concert ticket prices.

An unfortunate reality is that music piracy and illegal downloading are here to stay.

Napster sued

In the 1990s, artists such as Metallica and Jay-Z confronted and sued the illegal file-sharing website, Napster, effectively to shut down the manner in which it operated. The victory was short lived as many other illegal file-sharing websites adopted the same business model.

In the US, illegal file sharing is taken very seriously and, last year, a US Court found a student at Boston University guilty of copyright infringement for sharing music (32 songs) unlawfully and ordered him to pay USD675 000 in damages to the record companies who own the music (Sony BMG Music Entertainment vs Tenenbaum).

In France, authorities and rights holders sent over 700 000 warnings to alleged online copyright infringers during the course of 2011. This assisted in reducing the instances of illegal peer-to-peer network file sharing by 26 percent since 2010.

In the UK, the High Court ordered British Telecom (BT), the largest Internet service provider in the UK, to block user access to an illegal file-sharing website, Newsbin. This is considered a landmark ruling in favour of the record companies, but whether this approach would be adopted by other countries remains uncertain.

Universal approach needed

Until a universal approach is adopted by governments in the developed world, which clearly addresses the scourge of music piracy, coupled with the co-operation of industry bodies in those countries, it seems as if the pirates are managing to stay one step ahead of the legitimate rights holders.

In South Africa, the situation is certainly not assisted by the lack of the availability of an online portal, such as iTunes, which has comprehensive music libraries that allow for the downloading of tracks at reasonable prices. The reason for this may be rooted in delays and issues relating to the clearance of licensing and distribution rights for the African continent and, for the moment, South African consumers are tempted by other online options to acquire digital downloads and most of them are illegal, even though payment may be required for downloads.

Adapting business models

If one good thing can be considered to have originated from music piracy, it may very well be that record companies and artists have become more resilient and are adapting their business models to deal with the scourge of the illegal copying and downloading of music from the Internet.

In China, where the illegal copying of music has become so rampant that almost no revenue is made from legitimate record sales, the recording industry has surrendered record sales as a revenue stream. Record labels have begun to negotiate so-called "360-deals", in terms of which they gain the right to share in every area where an artist may receive income, such as performance fees, touring and concert income; monies received from sponsorships, publishing deals, etc.

The West kept on eye on these developments and began adopting a similar approach. EMI's record deal with Robbie Williams in 2002 is evidence of this. The label negotiated a ground-breaking deal in terms of which they gained the right to share in revenue streams, such as concert and performance fees, merchandising, television deals, etc. In turn, the artist received GBP80 million - not bad for a four-album deal.

Radiohead stunned the music world

Artists have also been doing what they do best - being creative. The alternative rock band, Radiohead, released their album "In Rainbows" in 2007 for free download on the Internet. The band made the entire album available for download by their fans and posted a message on the website that consumers can decide for themselves how much they wish to pay for the album. What followed stunned the music world. "In Rainbows" became their best-selling album. This model is perhaps more suited to groups with very large fan bases, but it is an interesting look at how some artists are treating the internet. Instead of expending a lot of time and money to try to fight illegal downloading websites, they are "going with the flow" and embracing the possibilities of excellent public relations campaigns to even enlarge their consumer base.

With the big- money awards by US Courts, the abovementioned landmark ruling in the UK and the increasingly aggressive stance that countries around the world are adopting against the scourge of music piracy, there is some hope for the copyright owners of recorded music and for artists that the tide may begin turning against the pirates of the digital age. One cannot help but feel that courtroom victories may not be enough and that record labels and artists need to be innovative and creative in addressing the scourge of the illegal copying of music.

Stephen Hollis is a senior associate at Adams & Adams