The Day the Music Died

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The average American listens to more than three hours of musiceach day. Next to television viewing (which itself is becomingincreasingly digitized and subject to copyright disputes), it isthe largest leisure activity of Americans. Almost everyone buysCDs, and tens of millions of listeners use file-sharingprograms.

In the Cato report Policing Pirates in the NetworkedAge, I argued that peer-to-peer (P2P) file sharing, unlikeprior copying technologies like the photocopier and VCR, couldcause actual harm to copyright owners-in particular, the recordingindustry. Even so, shutting down Napster might have been a poortactic since file sharing via Napster's successors, which do notrely on central file servers, would likely be more difficult tolitigate against. Moreover, evidence put forward in the Napstercase documenting harm caused to the record industry was weak(essentially nonexistent) at the time.

Since then events have unfolded at a rapid speed. My preliminary examination of record sale dataappeared to contradict the theoretical analysis in my earlier Catoarticle, but record sales have since dropped significantly-with MP3downloads a likely culprit. That preliminary finding made me, for atime, a hero to the legions who favor unfettered MP3 downloads.Although it was wonderful to bask in the positive media attentiontypically granted to anti-corporate (and anti-capitalist) types,the cheers turned to boos after a more thorough examination caused me to revert back tomy original position that harm was likely. As sales swoon, therecord industry has become increasingly desperate to stop MP3downloads. Since MP3 downloading is projected to cause the industryto lose 25% or more of its revenues, it is notsurprising that the industry feels besieged. This is a painful lossfor any industry to absorb.

After its victory in the Napster case, the industry hit aroadblock in its attempt to shut down Napster progeny Grokster,Streamcast, and Kazaa, when a federal judge ruled that those noncentralizedP2P file- sharing systems were little different from VCRs and thusnot liable for the infringing behavior of their customers. Thislegal obstacle has derailed the strategy of going after theconduits for file sharing, so now another strategy has come to thefore.

The record industry was recently given permission by the courts to force ISPs to reveal thenames of users thought to be engaged in substantial MP3 uploading.In an attempt to leverage this ruling before it might beoverturned, the industry is in the process of bringing thousands oflawsuits against individuals making copyrighted files available onP2P networks. In mid-July, reports indicated that the Recording IndustryAssociation of America had generated 871 subpoenas against ISPs anduniversities, asking for the names of individuals thought to beproviding MP3s on file-sharing systems.

This is a strategy fraught with dangers for the recordingindustry. For the strategy to work, tens of millions of MP3downloaders must be convinced to stop. To convince such a largebase of users to change their behavior will require massivepublicity. Bringing thousands of individuals to court will generatefront-page stories. By attracting so much attention, the industryruns the risk of alienating its customers and inviting Washingtonto step in. Furthermore, the privacy implications of on-demandsubpoenas are enormous. For example, Peter Swire of Ohio StateUniversity regards such subpoenas as a violation of due process:"On the RIAA view, your sensitive personal information...would beavailable to anyone who can fill out a one-page form."Congressional hearings, anyone?

To date, Congress has largely been supportive of the copyright industry, to the point ofproposing allowing record companies leeway to "hijack" the computers of downloaders.Nevertheless, if thousands of ordinary individuals are brought intocourt, and if the media portrays individuals sympatheticallyenough, congressional support could quickly evaporate. There isalready some evidence of congressional concern. If public opinionturns against the record industry, Congress will likely abandon itscurrent principles for more popular ones.

Lurking just below the surface of this dilemma is thepossibility that the government will turn the recording industryinto another post office-like franchise. A claim that is beingincreasingly repeated (particularly in the academy), and one thatwe are certain to hear more of if these lawsuits proceed, is thatthe government should step in to fix the problem by instituting acompulsory license, which would legalize downloading butrequire a legally set fee on products such as blank CDs which wouldbe used to compensate artists. Proponents of these systems envisionan era of enhanced artistic flowering (especially if the greedyrecord companies are taken down a peg or two alongside). Seeminglywell-intentioned proponents of compulsory licenses have fallen intothe same trap that has caught so many others-they expect governmentcontrol to lead to an earthly musical paradise.

Government intervention must be a last resort. Under acompulsory license system, private contracts are preempted. Somegovernment entity will decide how much tax one pays for a blank CD(even if the CD is not used to record music) and whether ShaniaTwain should get paid more than Eminem (in other words, how the potof money is to be split). Market pricing and allocation areextremely hard to replicate by fiat. These decisions willinevitably become political (if nothing more than in the choice ofcommissioners). Imperfect markets are superior to an even moreimperfect Ministry of Music.

It is far too early to write off market-based solutions to theproblem of online distribution. Digital rights management, atechnology still in its infancy, holds out hope of protecting worksfrom unwanted copying. Some politicians who are friendly to thecopyright industry have sought to mandate a form of this technologyto be included in playback devices. Governments should not chooseand mandate copy-protection technology, however, but instead shouldallow market experimentation.

The direction we take with the issue of music-sharing willreverberate to other markets. The U.S. has been lucky to not have amajor government ownership role in media, providing anotherimportant reason for us as a society to not to get digitaldistribution wrong: if government must regulate mere entertainment,surely hard news and information are next. (PBS and NPR are nothingcompared to the influence of a BBC). The perception that thecurrent concentration of private media ownership is high has drawnhowls of protest, but as the citizens of dictatorships know, weshould not allow governmental control of the media to enter throughthe back door. Government control of music and movie distributionand such likely offshoots as awarding artistic grants tosympathetic musicians and filmmakers should be avoided at allcosts.

Stan Liebowitz

Stan Liebowitz is an economist at the University of Texas at Dallas and is currently writing a paper on the dangers of a compulsory license system for music. To subscribe, or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html.