First Sale Doctrine: Digital Threat or Opportunity?

One of the drawbacks with ebooks is that there is no second hand market for them. Unlike physical books you can’t sell a book once you have read it. You can’t even put it on your bookshelf. It is doomed to sit often forgotten on some virtual bookshelf.

The lack of ‘first sale doctrine’ on ebooks is a big opportunity lost today as we find ourselves tied up in DRM knots and fear of the digital unknown. Too much of what we do is negative and restrictive and denies freedoms, rights and norms taken as a given within the physical world. Denying established social practice just helps fuel further consumer piracy.

Music is probably the last sector media should look at for digital guidance.
Last week EMI filed two lawsuits against different online music services, Grooveshark and ReDigi for breach of contract and copyright infringement.

The first case against Grooveshark is understandable in that it is claimed that the digital music service has paid no royalties since entering a licensing agreement to stream music nearly three years ago. That it has taken three years to issue a lawsuit is somewhat amazing and EMI’s filing comes after three other major record companies; Universal Music Group, Sony Corp and Warner Music Group, all filing accusing Grooveshark of pirating thousands of songs.

Founded in 2006, Grooveshark claims 35 million users and has major adverting support contracts. It allows users to upload songs to their servers, which it then lets other users stream for free. A virtual ‘swopshop’. The music industry is starting to accept services like Spotify and Rhapsody that stream music by subscription, but Grooveshark is again different and operates heavily under the protection of the Digital Millennium Copyright Act.

Founded only last year ReDigi is different again and operates under the “first sale doctrine” legal concept, that allows users who buy a copyrighted item like a book or CD the right to sell it or give it away. ReDigi operates a ‘used music store’ where users upload unwanted songs and buy others at a discount. ReDigi claim that they can verify individual MP3 files were legally purchased and not ripped or downloaded from a file-sharing network. Interestingly the sellers must also install a ReDigi program on their computer that removes any copies of a song from the seller’s computer.

The case pivots on the claim ReDigi is infringing copyright in making copies of digital files as part of the process of uploading songs from a seller’s computer and transferring them to a buyer’s. EMI claim that, unlike selling a used CD, a used MP3 is theoretically the same as a new one and hence the infringement. ReDigi counters saying it is merely acting as a responsible marketplace. Again EMI is not alone and the RIAA (Recording Industry Association of America) has also sent ReDigi a cease-and-desist letter.

So we return to the question of opportunity versus restriction, or a glass half empty versus a glass half full. Digital files have been made different not by technology, but by unimaginative thinking, restrictive DRM and bad law that is no longer relevant to the times. We must all realise that just as like having different tax rules for the same product, having different consumer rights will just drive more honest consumers to cut corners and disrespect copyright. The publishers may protect today’s revenues, but in doing so may end up losing tomorrow’s and their customers.

Publisher be they music, games, ebooks all have to realise that the right to resell is a given and finding a way to allow that is a must. We already have digital rental and loans and restricting or denying resell is just plain lunacy. The resell markets could in fact blooster the price of the original sale and start to create value added ownership. It could even offer the independent bookstore a digital lifeline. The ebooks and publishing market is a very fragmented and getting consensus of vision let alone action is often a challenge in itself.

Music Lessons?

Music is a complex business that is not just about selling recorded music. It like all media is fundamentally a rights business with creation, performance, synchronised royalties.

We all know the music business remains stuck in digital treacle and it is no surprise to see that the global recorded music sales fell by some $1.5bn (£930m) last year.

The UK music business physical sales dropped by almost 20% with the overall performance down some 11% and although digital sales continued to rise by some 20% it did not offset the equivalent loss in physical sales. The result is that the market is shrinking and the UK is sliding down the ranking and has now been overtaken by Germany.

Now US economist Joel Waldfogel disagrees with the music industry bodies and major labels and claims that music piracy hasn’t hurt the creation of new music, but that changes in creation, production and distribution have turned the previous economics of scale of their head. He and many academics also claim that there is no link between Internet piracy and the revenues of the major music labels and that the losses claimed by the industry itself are being hugely exaggerated.

With new and cheaper recording technologies, digital music outlets and social networks, many of the tasks that were previously fulfilled by the big labels could easily be taken over by independent labels, or even the artists themselves. This sounds very familiar to that being experience in other media sectors. The economics are changing and scale is no longer an asset.

EMI was acquired last month by Citigroup and rival Warner Music is also seeking a buyer and many question whether there is a future for these former titans? EMI's losses over the past four years total £2.82bn.Warner’s fourth-quarter revenues in 2010 was down 14% at $789m and its digital turnover fell 5%, giving it a loss for the quarter.

The big labels’ monopoly is falling apart as their role can be taken over by independent labels that operate with a much smaller profit margin. Where the majors sometimes have to sell half a million albums to break even, independent labels can do the same by selling 25,000 or less.

Established artist now make a substantial amount of their money from live music and some claim this could be as high as 90%.

Creation, promotion, and distribution aided by new technologies have changed the music landscape and the Internet offers millions of ways to promote content at a fraction of the cost of the old world. Youtube, Facebook, Last.fm, Spotify and Pandora, now offer artists many new platforms to promote themselves.

Distribution has changed too and with little investment artists can now upload their work for sale on iTunes. The loss of major UK retailers such as Zavvi, Borders and Woolworth has also changed people access to physical music as they are increasingly forced online and once there they aren’t going back.

The impact of these seismic changes don’t just impact the UK with the global recorded music revenues falling by 8.4% last year. According to the Recording Industry body, the IFPI, physical sales, fell by 14.2% year on year. Again although digital revenues grew by 5.3% and account for 29% of all recorded music revenues the growth rate of digital revenue growth has halved year on year .US overall sales fell by 10% with physical sales down 20% and digital sales are stagnating with 1.2% growth. Japan’s music market declined by 8.3%. Digital revenue growth in Europe continues to grow by some 20% plus but still does not compensate for the decline in physical sales.

So is Waldfogel correct to conclude that piracy is not the root of the music industry’s declining fortunes and that the entire music industry has instead changed with more power going to the artists and smaller labels? We believe that today music is more alive, accessible and broader in its offer than ever before. If we accept this, or even a large proportion of this, then we better take a cold look at what is happening closer to home and focus less on yesterday’s economics and models and more on tomorrow’s.

Its The Same Old Song

When sales fall six years running you have to be brave to keep faith, or have a trick up your sleeve. When the drop happens during a period of significant change many would question if the demise will be terminal for some.

The British Recorded Music Industry (BPI) report states that the combined digital and physical album sales fell 7% last year, from 128.9 million to 119.9 million. The fall is the sixth year in a row and change is dramatic as physical CDs go through what some believe is their death throws. The fact is that CD sales are declining much faster than digital sales are growing.

HMV is shows clear signs of fatigue in its latest results and is planning to close stores and impose further costs. EMI is in turmoil and appears to have the ability to press its own self destruct button. A price drop below 99p downloads may not be enough to breath life into and accelerate download sales to the level that would buck the decline in market size. Even with Simon Cowell’s X drive and music machine the result leads one to envisage that casualties are inevitable.

On a positive note BPI claim sales of digital albums this year have increased by a staggering 30% and also that the combined singles market recorded an record high of 161.8m. However the underlying trend is of sales decline and a shrinking market.

Alarmingly, sales of digital single tracks are already digital and some 98% of the overall figure. This means the physical single is already dead and growth is now done to digital alone. However, just under 25% of digital albums sales are now coming from online services and the percentage has to grow significantly to avoid disaster. So as the market goes digital and is shrinking it appears it must either sort out how to get albums back on the buying agenda or move back to a smaller singles driven market.

BPI has to continue to blame illegal downloading for the drop in sales and continuing to blame customers for the industry’s own failures isn’t exactly a positive move. It is clear that the industry needs to look to streaming services and advertising revenues and keep one step ahead of the market and not just expect the iTunes model to save it.

EMI versus MP3tunes: A Question of Safe Habour

We have often raised a question of whether the “safe harbour” provision of the Digital Millennium Copyright Act (DMCA) work. Our point is that it is a reactive process and depends on the party whose copyright has been infringed raising the appropriate notice and by the time the material is taken down the cat is probably out the bag and had many kittens. However, the recent Viacom versus YouTube found that the site was not liable for illegal content uploads, because it didn’t encourage them and quickly removed them.

Now we have a New York federal court deciding on another case between EMI and cloud based music service MP3tunes. MP3tunes enables users to store their music and access it from computers and mobile devices and also operates Sideload, a music search engine which allows users to discover music tracks and then copy them to their own space. They claim that their service only enables users to store their music online so they can listen to it anywhere and that it can’t held responsible for copyright infringement and are shielded from liability by the “safe harbour” provisions of the DMCA.

EMI claim that MP3tunes and Sideload represent a two-step mechanism for the discovery and acquisition of copyright music. EMI claim that MP3Tunes ‘does not own the music it exploits; nor does MP3tunes have any legal right or authority to use or exploit that music.’

The legal debate is also about whether someone who bought an EMI CD, ripped it to their computer and uploaded it to MP3Tunes for their own use and so they can listen to it anywhere, is in breach of copyright. It is further clouded by EMI initially claiming they did not place free downloads on the internet and that MP3tunes should have know that any their music on the internet was copyrighted. This was exposed when it was accepted that EMI had given away free copies of songs to the likes of Walmart, Amazon.com, MySpace, Facebook, Google, hoping the songs would go viral. The problem was that they went viral in a way the had not bargained for and made their somewhat righteous stance appear somewhat hypocritical when they had no way of distinguishing many of the music tracks they had leaked online with the tracks they accused MP3tunes of infringing.

Last week, the Electronic Frontier Foundation (EFF), filed an amicus brief along with others asking the court to protect the “safe harbour” provisions of the DMCA. DMCA defendants fear that the case could go beyond online music storage and impact e-mail, photo and video storage applications.

We don’t like DMCA and safe habour but until we can find a better way its what we have today. Closing down DMCA through this action could have serious implications on social network services and digital restictions on both legitimate as well as infringing material. Many say we should learn from music industry and yet again they are in showing us what not to do.

EMI: Another One Bites The Dust?

How often do we hear the cry to learn from the digital mistakes of others? The finger often rightly points to the catalogue of mistakes that the music producers have made and the mess they have created in their wake. But it appears that it’s not just digital moves that some have got wrong and a close look at EMI today should certainly send out many warning shots to those who think they can walk on water.

EMI has struggled with the decline in record sales, reading digitisation trends and repositioning itself and also a general slump in the music industry. EMI owners Terra Firma had sued Citigroup for its advice during his acquisition of EMI in 2007, but admitted in court that EMI was only worth half the £4.2m he paid for it. The court ruling now brings into question whether it can meet the £2.6bn of debt repayments to Citigroup and whether it has to be sold or broken up.

On top of the loss of their high profile legal battle of last week with Citigroup has come the news that the British band Queen have parted with EMI after 40 years and signed to Universal Music Group. A label is only as good as its artists and since the EMI group was taken over by private equity firm Terra Firma in 2007, it has lost the likes The Rolling Stones, Paul McCartney and Radiohead. EMI Music still is home to artists such as Pink Floyd and Coldplay and the back catalogues of artists like The Beatles, Beach Boys, and Frank Sinatra, but is that enough? Queen's Universal deal covers the world outside North America, but they will loose a the wealth of re release opportunities of the group's global hits like "Bohemian Rhapsody," "Crazy Little Thing Called Love," and "We Are The Champions."

The usual suspects are lined up waiting to pounce on EMI. Warner Music Group and BMG Rights are thought to be hovering awaiting the potential pickings from what will be a fire sale. If this happens the music business will have shrunk even further.

Sandisk and Music

On the 20th of August we wrote about SanDisk:

‘Obviously one thinks about pre loaded MP3 music that could potentially play on any music enabled phone. But why not apply the same logic to other media? You simply slot the tiny card into the little slot on the side of your phone and you have potentially a huge mobile library that is device and network independent. It is reported that 770 million phones were shipped this year with micro SD slots and an additional 900 million are planned for next year. SD an 8 gigabyte micro SD card, and a 16 gigabyte card is coming.’

Today we read the Wall Street Journal reports that the flash memory chip and portable music device manufacturer and the four major producers, Universal, EMI, Warner and Sony BMG, are to introduce in October this year, SlotMusic, music plus on a stick.
This further opens up mobile phones, PCs and some portable MP3 devices. The disc is aimed at retail outlets such as Walmart and Best Buy.

Despite entering into other deals which adopt a different model which makes the music free at consumtion these discs albums will be priced at $15 each. Perhaps the right hand will tell the left hand what it is doing.

Safe Harbours in a Copyright and Privacy Storm

Can you determine who someone is and where reside by their computer IP address?

In the interesting and ground breaking Google versus Viacom, Google have argued that YouTube viewing data should be kept from Viacom, to protect the privacy of its users. However Google in the past has also rejected demands by privacy groups for more protection of I.P. address records, claiming that in most cases the addresses cannot be used to identify users. So that pretty unclear then!

A federal judge has ordered Google to give Viacom its records of which users watched which videos on YouTube as Viacom press it’s $1 billion copyright suit against Google. The judge requires Google to hand over to Viacom the login name of every user who had watched it, and their IP computer address. The data covered by the order includes every video watched on YouTube since its founding in 2005. In April this year, 82 million watched 4.1 billion clips some say virtually every Internet user has visited YouTube at some time.

So we have on one hand the handing over of personal access information, on the other we must ask about the about of information the likes of Google has in its vaults.
Viacom claim that YouTube’s success was built on the popularity of copyrighted clips that were illegally posted to the site and that the data will validate that but the user rights issues and data issues this case raises go far greater than the case itself.

We now read that from a different legal angle EMI has filed a federal suit against VideoEgg and its partner site Hi5, alleging that they are responsible for the EMI-controlled music videos that they display.

ISPs are generally not liable for the content passing through their networks, but the question now is whether the new social networks and sites like YouTube are in the same legal position. Viacom and EMI say they're not. They argue that both YouTube and VideoEgg knew about the material abuse VideoEgg claims to have "humans review every video."

Meanwhile ISP Virgin Media has begun sending out 800 letters to users who have allegedly been using their connections for file sharing purposes. The campaign is in partnership with the British Phonographic Industry(BPI). BPI has been reported as saying that "thousands more" would be sent in the near future. The envelopes state, "Important: If you don't read this, your broadband could be disconnected."
However, Virgin have stated to BBC Newsbeat that there was "absolutely no possibility" of legal action being taken against users as part of the current campaign, and that it wouldn't hand over user information "under any circumstances." A mixed message there then!

In 1998, US Congress passed the On-Line Copyright Infringement Liability Limitation Act (OCILLA). Codified as 512 Digital Millennium Copyright Act (DMCA), the law shelters on-line service providers that meet the defined ‘safe harbour’ provisions from claims of copyright infringement made against them that result from the conduct of their customers. These ‘safe harbour’ provisions are designed to shelter service providers from the infringing activities of their customers.

So what is a ‘safe harbour’ and who will define the rules? Copyright infringement is a serious issue but so is personal privacy. We await more litigation and hope that common sense will prevail.

The DRM cat is out of the Bag!!

EMI announced today that it is taking the software restrictions off some of its digital music songs sold via download sites and selling these as "premium" versions. Apple's iTunes store will start selling the EMI tracks in the "premium" format in May.

Every song in its catalogue will be available in the "premium" format which will be of higher quality than those it offers now. These will be free of digital rights management (DRM) software and will cost $1.29 (99p). Itunes users will also be able to upgrade previously purchased EMI songs and albums for 30 cents (15p) a track.

By contrast albums free of DRM and those with it will be the same price and Mr Jobs stated that he expects that other record companies would soon follow EMI's lead.

What this means is that we are clearly entering a new digital phase were the DRM field will be levelled but the battleground will be a bit more fraught. What is means for other copyright sectors such as publishing is uncertain but if the rules change in music its hard to see them not changing elsewhere.

Apple and EMI to announce...

EMI and Apple are planning a joint press announcement today. Speculation is rife as to what it will be but given their recent debates over a certain label, the band associated with it , the dire position of EMI and of course Mr Jobs recent statements on open copyright...

We ait with open breath