ifpi digital music report 2008

8/14/2019 IFPI Digital Music Report 2008

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IFPI Digital

Music Report2008

RevolutionInnovation

Responsibility


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Contents

Page:

03 Introduction:Making ISP Responsibility a Reality in 2008

04 Section 1:Revolution and Innovation The Digital Market in 2007

0 Section 2:

A New Deal or Consumers

4 Section 3:The Explosion o Channels, Formats and Business Models

8 Section 4:Copyright Thet: The Impact and the Response

21 Section 5:Time or Governments and ISPs to Take Responsibility

23 Section 6Creating Value in the Digital Sector

25 Section 7:The Hidden Dangers o Illegal Downloading

26 Section 8:Promoting the Value o Music

age 02


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Introduction:Making ISP Responsibilitya Reality in 2008

In 2007 ISP responsibility started to become an accepted principleIn 2008 it must become a reality

By John Kennedy, Chairman and CEO

An incredible revolution is sweeping the musicindustry and in the pages o this report you willread how record companies are adapting theirbusiness to the dramatic changes broughtabout by the digital age. In the US, only veyears ater the commercial music downloadbusiness rst emerged, 30 per cent o all

recorded music sold is online or mobile.Record labels are becoming broad-basedentertainment companies, developing newrevenue streams. The consumer has betterchoice, availability and fexibility in enjoyingmusic than ever beore.

Our digital revenues are growing and diversiyingas our business model changes rom onedominant ormat to hundreds o channelsand products.

Yet behind the innovation, experimentation anddiversication o the digital music market in 2007,another change has happened o possibly evengreater importance to the long term uture o ourbusiness. The last year has nally seen the wind

o change blowing through old assumptionsabout the role internet service providers (ISPs)should play in protecting copyrighted content.ISP responsibility is becoming an accepted idea.

This is a critical development, because untilnow ISPs have played no such role. Copyrightthet has been allowed to run rampant on theirnetworks under the guise o technologicaladvancement. Some estimates say no lessthan 80 per cent o all internet trac comprisescopyright-inringing les on peer-to-peer (P2P)networks. ISPs have largely stood by, allowing amassive devaluation o copyrighted music. Thisin turn and despite all the positives about ourdigital growth has prompted a crisis in recordedmusic that has wide implications or the whole

digital market place and all those businessesto whom music is an important ingredient.

Today, however, a sea-change is happening.The whole music sector, governments andeven some ISPs themselves are beginning toaccept that the carriers o digital content mustplay a responsible role in curbing the systemic

piracy that is threatening the uture o all digitalcommerce. Ater years o discussing anddebating, I am convinced it is no longer aquestion o whether the ISPs act thequestion is when and how.

More than anyone else in 2007, our industryhas to thank French President Nicolas Sarkozyand the Chairman o FNAC Denis Olivennes orthe change o mood. The Sarkozy Agreement,announced in November, is the most signicantmilestone yet in the task o curbing piracy on theinternet. It sets up a groundbreaking three-waypartnership between the creative sector, ISPs andgovernment. It takes the protection o intellectualproperty online into new territory, requiring ISPsto disconnect copyright inringers on a large-

scale, using an automated system and totest ltering technologies.

Not every detail o the French plan will beexportable to other countries but the overridingprinciple behind the plan the undamental rolethat ISPs play in stopping piracy sets an excitingexample internationally. President Sarkozysummed it up: the internet must not be allowedto become a Wild West; it must be a mediumwhere we protect our culture.

There has been progress elsewhere too. Anextremely important court decision came in theorm o the Sabam-Tiscali judgment in Belgium inJune. The court not only conrmed that the ISPmust take responsibility or curbing inringementon its networks it reerred to no ewer than sixpossible technological solutions or blockingthe trac o unlicensed music.

Similar movements have happened in dierentparts o the world: new legislation engagingISPs in Taiwan and Korea; a hard-hitting messagerom the Swedish governments Renors Report;and intensiying intra-industry discussions inother countries. In the UK, with talks proceedingagainst the ticking clock o the government-commissioned Gowers Review, ISPs need toprove that they can deliver action that will havea real impact on piracy. In the US, AT&T hasshown cautious leadership, acknowledgingISPs responsibility to protect content andworking on ltering technologies with themusic and lm industries.

Introduction: Making ISP responsibility a reality in 2008 page 03

O course, one key reason or this apparentsea-change is the commercial sel-interest oISPs. Unlicensed trac has always been hoggingtheir bandwidth, but now, as ISPs get urtherinvested into the business o digital content,

it poses an increasing danger to theiruture revenues.

A turning tide o opinion is one thing a concreteprogramme o action is another. There is onlyone acceptable moment or ISPs to start takingresponsibility or protecting content and thatmoment is now. Ater years o prevarication in thisdiscussion, the French governments decision toseize the day is deeply rereshing. It shows anurgency o approach that is badly needed inevery market where music is today beingmassively devalued by piracy.

In Europe, we look to the European Unionto capitalise on the momentum created bythe Sarkozy Agreement. The moment or EU

legislation to be drawn up has already arrived.There must be obligations on the ISPs to warn,suspend and eventually disconnect inringingusers and to apply ltering measures. This shouldbe achieved by agreements, backed by legislationwhere necessary. At the same time, we as anindustry will not be shy to use legal action to orceISPs to act when dialogue ails but I would like tothink that they now understand that meaningulvoluntary action is a more attractive option thancoercion we have always advocated that!

This report refects revolution and innovationin the music business. Music is more advancedalong the digital road than almost any othercontent business. As the table on page sixrefects, we have transormed our landscapein the last ve years. I am hopeul that in 2008the online subscriptions business, hithertoheld back by a range o problems, will nallyrealise its huge potential as a revenue stream.

Revolution and innovation, however, are notgoing to be enough to secure a healthy utureor the music industry. The third corner o thetriangle is responsibility. 2007 was the year ISPresponsibility started to become an acceptedprinciple. 2008 must be the year it becomesa reality.


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Revolution and Innovation the Digital Music Market in 2007age 04


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Technology has enabled these changes. Growinguse o broadband, mobile phones and portabledevices has helped the rollout o hundreds odigital music services. These have providedaccess to vast music catalogues that extend

ar beyond the reach o traditional retail stores.Portable digital players have enabled an alwayson, anywhere music environment. Instant accessand portability have become the norm.

The consumer is king in the digital world andentertainment spend is shared competitivelyamong a wide range o products and services.Consumers time is also a valuable asset andindustries are vying or their attention.

Music is pioneering the creative industriesadvance into the digital world. The task o creatingcommercial value rom content online or throughmobile platorms conronts a swathe o creativecontent industries rom newspaper publishingto television and lm. However, musics digital

market share by revenue is higher than in anyother entertainment sector except games.

The advances o technology have brought hugechallenges too the ease o access to musichas damaged its perceived nancial valueto consumers.

There have also been signicant brakes on thedigital music sector: the lack o interoperabilitybetween services and devices due to dierentproviders digital rights management (DRM)standards; proprietary sotware tied to particulardevice brands, regardless o DRM; the lack oinvestment in marketing to promote new musicservices; consumer oerings that have not yetully evolved, particularly in the mobile sector;and piracy.

Widespread copyright thet continues to be themost signicant barrier to the development oa legitimate digital music business. The massavailability o unauthorised, unpaid-or musichas also caused major damage to CD sales.

A revolution is happening in the way consumersobtain and pay or music and the music businessis transorming itsel or a new environment. Likemany revolutions, this is a continuous processand there are many divergent views within the

industry on where it will end. Today, the digitalmusic sector is characterised by innovation,experimentation and diversity o newbusiness models.

Record labels are proactively reinventingthemselves, moving away rom a record-centricmodel and diversiying their revenue streamsacross a much broader range o products andplatorms. Digital is no longer a separate entity inthe operation o a record company it is whollyintegrated into all the products and servicesbeing oered and planned.

A release rom an artist today may appearin dozens, sometimes hundreds, o dierentproducts. Consumers have more choice than ever

as to how they want to connect to and experiencethe music rom their avourite artist they canbuy a download, a CD, wallpaper or their mobilephone, a mastertone, an e-ticket, a music video,become their riend on a social network or signup to a subscription service. In many casesconsumers will choose various products andacquire these on many dierent platorms.

The digital music sector is advancing by innovationand experimentation

Digital piracy is also developing into more variedorms, requiring more sophisticated anti-piracyenorcement strategies and highlighting thecritical need or increased cooperation romthe internets gatekeepers, the ISPs. 2007

saw signicant progress on both ronts.

The digital music market in 2007 refectedboth the progress o the industry and the verysignicant challenges that remain in creating acommercially successul digital music business.Record companies digital sales continue to growstrongly, but have not yet oset the sharp declinein CD sales, resulting in a worldwide overallmarket decline in 2007.

There are exceptions in some countries wheredigital sales have oset physical decline, led byJapan, the worlds second largest music market,and including markets such as India, China,Indonesia and South Korea.

Section1:Revolution and Innovation the Digital Market in 2007

Revolution and Innovation the Digital Music Market in 2007 page 05

Legal tracksdownloaded

350 million(up 23% on 2006)1

1 Source: IFPI, based on Point Topic data2 Source: PriceWaterhouseCoopers3 Source: Understanding & Solutions4 Source: IFPI

Key Indicators (2007)

Source: IFPI, PWC Global Entertainment and Media Outlook.

* US only

Global Digital Revenuesby Industry (2007)

Recorded music 15%Newspapers 7%*Films 3%Books

2%

Industry Digital %

US$ 2.9 billionEstimated record companyrevenues rom digital sales

15%Estimated digital percentageo the total music market

Broadband lines

Mobilesubscriptions

Portable musicplayer sales

2.5 billion(up 11% on 2006)2

140 million(up 15% on 2006)3

1.7 billion(up 53% on 2006)4


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ve years ater the emergence o a marketr legal online music downloads, the digitalusic business is continuing to see growthternationally.

ecord company revenues rom digital salesre estimated at approximately US$2.9 billion in007 up roughly 40 per cent rom US$2.1 billion2006 and up rom US$380 million in 2004. Thegital share o the total music market has risenom only two per cent in 2004 to around 15 perent in 2007. In the US, digital sales account orearly 30 per cent o the music market and inouth Korea they account or over 60 per cent

the market. Globally, the digital market is splitughly 50:50 between online and mobile sales.

hese gures exclude other digital incomereams such as licensing income romdvertising-supported models and perormanceghts income. These areas are growing sourcesrevenue to record companies.


A legal digital music market hasbeen created rom scratch over thelast ve years, with consumers nowable to shop around more than 500legal services.

Consumers can now legally accessmore than six million tracks through

legal services.

Record labels have createda digital music industry worthapproximately US$2.9 billion in justve years, a rate o growth manyindustries would envy.

Almost a sixth o music sales alreadycome through digital channels justve years ater legal options openedup and this gure is set to grow.

Today a single artist release canbe packaged in multiple ormatsinclude video downloads, ringtonesor mobile ull tracks. Sales o JustinTimberlakes FutureSex/LoveSounds comprised o 115 products

which sold a total o 19 million units,o which only 20 per cent were inCD ormat.

2003

Reinventing an Industry The Digital Dierence Over 5 Years

Digital Music Sales in 2007

1Estimated digital sales, USA, IFPI.

hart includes: online single track downloads, mastertones,gback tones, ull track downloads to mobile, videoastertones. Period Dec 2006-Nov 2007. Combines allrsions o the same song. Sales gures rounded.

ource: IFPI

Number olegal services

Licensed tracks

Value o digitalmusic sales

Digital as apercentage ooverall recordedmusic sales

Number oormats availableper artist release

Less than 50

1 million

AroundUS$20 million1

0%

Less than 10and dominatedby the CD andcassette

Over 500

6 million +

AroundUS$2.9 billion

15%

Over 100

2007

The digital market continues to grow worldwide

The record business is turning into a true music entertainment business.We are breaking away rom the single product ormat to a vast range o dierentand complementary products, all centred around the release o an artist.

Thomas Hesse, President, Global Digital Business, SonyBMG Music Entertainment

0.4

1.1

2.1

2.9

2004 2005 2006 2007

Source: IFPI. Includes online andmobile sales & record companiesrevenues. 2007 gure is an estimate

Top 10 Global DigitalSingles 2007

% o thetotal industry:

2004: 2%2005: 5%2006: 11%

2007: 15%

1

2

3

4

5

6

7

8

9

10

Avril Lavigne

Utada Hikaru

Rihanna

T-Pain

Akon

Soulja BoyTellEm

Shop Boyz

Sean

Kingston

Mims

Beyonc

Girlriend

Flavor o Lie

Umbrella

Buy U A Drank(ShawtySnappin)

Dont Matter

Crank That

Party Like aRock Star

Beautiul Girls

This is WhyIm Hot

Irreplaceable

7.3

7.2

6.6

5.9

5.7

5.2

5.2

4.8

4.8

4.6

Artist Song Sales(m)

Digital Music Revenues US$ Billions


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Online and mobile downloadscontinue to grow

Online single track downloads are the mostpopular digital music ormat on a global scale,accounting or 30 per cent o overall digitalrevenues. IFPI estimates that 1.7 billion onlinetracks were downloaded in 2007 globally(including digital albums) up 53 per centon the comparable gure in 2006.

Consumers ability to buy individual tracks ratherthan whole albums has been one o the deningeatures o the digital music market, dramaticallyreviving demand or singles.

Mobile music has enormous growth potential.The most popular mobile music ormat remainsmastertones short excerpts rom an originalsound recording that play when a phone rings but in 2007 there was notable pickup in saleso ull track downloads to mobile, with salesaccounting or 12 per cent o all digital salesin the rst hal, compared to 6 per cent in thesame period in 2006. This marks an ongoingshit in consumer demand rom mobilepersonalisation eatures, such as mastertonesand images o avourite artists, to core musicconsumption over the mobile phone.

Mobile music continues to ace obstacles

however, and in the rst hal o 2007 grew at aslower rate internationally than online downloads.Limited marketing, prohibitive data charges anda lack o consumer-riendly oerings are partlyto blame, as is the low penetration o advancedhandsets and 3G, slowing growth inthe mastertone sector in some markets.

The potential o mobile was demonstrated bythe number o new business models emergingin late 2007 (see page 14).

Digital bundles in demand

Digital consumers want not only single tracks,but bundled content as well. Digital album salesgrew by over 40 per cent globally in the rst halo 2007 and accounted or 15 per cent o thedigital markets value. In the US, digital albumsnow account or 10 per cent o total album salesand ve per cent in the UK.

Exclusivity and added value in the orm o bonusmaterial bundled with digital albums are helpingdrive consumer demand or premium product.Premium albums outsell the basic versions inmost cases.

Whenever we release apremium download as wellas a basic album bundle,its usually the highervalue product that sellsthe most, especially withinthe rst couple o months.The act that ans choosethe expanded version, atan enhanced price point,

demonstrates how muchthey value that additionalcontent and the deeperconnection with the artistit oers.

Eric Daugan, Vice President,Digital Business,Warner Music International

Interest in digital album sales was also boostedby the launch o iTunes Complete My Albumeature. It allows consumers to turn their

individual tracks into a complete album at areduced price by giving them a ull credit or everytrack they have already bought rom that album.

In January 2008, Sony BMG launched itsPlatinum MusicPass, a series o digitalalbum cards that enable consumers todownload ull-length albums, and in manycases, special bonus content in the orm ohigh-quality MP3 fles. Consumers scratchthe back o their card to reveal a PIN numberand then visit MusicPass.com to downloadtheir music fles and bonus material. Thecards are available in retail outlets acrossthe US and Canada.

The mobile platorm is an enormous part o the uture o the music business.And I believe that music is crucial to the uture o the mobile industry. People wanta more interesting orm o mobile music content. Any player in the mobile valuechain who thinks they can provide less than a great experience or consumers andremain competitive is ooling themselves.

Edgar Bronman Jr, Chairman, Warner Music Group

In November, The Enemy announced aheadline UK tour taking place in Spring 2008.Through selected online ticket outlets, answere oered an innovative one stop digitalbundle. For an added 79p, The Enemyslatest single Well Live and Die in TheseTowns was available to purchase alongsideconcert tickets. Sales o the bundle werechart eligible and contributed to the bandsthird top 40 single rom their debut album.

Alicia Keys released her third studio albumAs I Am in November 2007 and it debuted

at number one in the US. The album soldmore than one million copies in the frsttwo weeks o release and spawned herthird number one single No One. It is thebiggest-ever selling digital album in the USby a emale artist, with more than 200,000digital copies sold.


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Top 10 Digital Markets,Sales by Channel

Digital technology has shited power to consumers, and music marketing must evolverom push to pull. Our ocus is to embrace this power and become completelyconsumer ocused. By listening to and responding to our consumers and to ourartists we aim to unlock the incredible potential or music in the digital environment.

Mark Hodgkinson, Executive Vice President o Global Marketing, EMI Music


The Move to Digital Variesby Region

he switch to digital music is happening inaried ways and at dierent speeds acrosse world. Sales are still concentrated on thep ten markets, which account or 90 per centall digital sales.

he United States remains the leader in digitalusic sales worldwide, with online and mobile

ccounting or some 30 per cent o the market.is also the most signicant market or

ubscription services such as Napsternd Rhapsody.

ngle track downloads in the US totaled

44 million, up 45 per cent on 2006 (NielsenoundScan). Digital albums grew aster thanngles by 54 per cent to 50 million. Mobile salesso grew strongly with single track downloadsmobile growing more than ourold betweene rst hal o 2006 and the rst hal o 2007.

S mobile operators have pursued dierentusic strategies in 2007, broadening the mobileerings available. AT&T partnered with eMusic

nd Napster to oer music to its consumers whilevals Sprint and Verizon have built their ownusic stores. While mastertones still accountr the bulk o mobile sales, ull track downloads

re growing strongly. The launch o the iPhoneJune, linked consumers to the iTunes store viaeir mobile handset, allowing them to choose

om a much broader catalogue and purchaseeamlessly through mobile billing.

nline, Amazon opened a digital download storeelling DRM-ree tracks and Microsot launchedrereshed line o Zune players alongside itsnline store. There has also been a surge in theopularity o music on social networking sites.

the UK, 77.6 million tracks were purchasednline in 2007, a 47 per cent increase on 2006.ales during the 2007 Christmas week wereouble the previous years sales. More than0 per cent o all UK single sales are now digital,nd more than 200,000 dierent titles are soldach week. The UK singles market is still driveny hits, but the long tail accounts or most sales

olume, with the top 40 accounting or just 10 perent o all single track download sales in 2007.

he UK has the most advanced mobile musicarket in Europe, with the greatest penetrationmusic phones (43% o mobile subscribers)

nd the highest percentages o consumers usingeir phones to play music (M:Metrics). The BPI

stimates that 10-12 per cent o all chart salesre made through mobile channels in the UK.

China has enormous growth potential in mobilemusic, but any serious market growth is currentlyshackled by a rampant online piracy rate,estimated at more than 99 per cent o the market.China Mobile is reported to be in talks with Appleto bring the iPhone to the country. However, asin many Asian markets, the music industryneeds to achieve better rates o return rommobile operators in order to build its digitalbusiness. In China where the mobile music

sector has been cited as worth around US$700million annually (In-Stat), record companies areestimated to receive less than ve per cento those revenues.

InAustralia, digital revenues continued to poststrong gains, increasing rom 5.5 per cent o themarket at the end o 2006 to almost 10 per centby the end o the rst hal o 2007, and digitalonly tracks are now included in the weeklysales charts.

Latin America saw strong mobile music growthwith sales more than tripling in the rst hal o2007, while online sales are overshadowed bymassive unauthorised distribution. The Braziliandigital music market increased by 168 per cent inthe year to October. Sales o pre-loaded contenton mobile handsets boosted digital sales in bothmarkets. Current barriers include the low adoptiono advanced phones, relatively low 3G penetrationand rising mobile piracy. In Brazil, a number oillegal websites distributing mastertones wereshut down by IFPIs aliates in 2007.

New mobile music oerings introduced in theUK in nal quarter o 2007 included OmnionesMusicStation subscription service and NokiasMusic Service. Nokias service is expected toexpand into the rest o Europe, Asia and the US in2008 and will benet rom Nokias global brand andits commitment to developing a businessthat involves music.

Nokias entry into themusic download market ispart o a strategic move to

develop a strong standalone services business.

Richard Sandord,Regional Manager, Nokia MusicUK & Ireland

TheGerman digital music market grew by anestimated 38 per cent up to the third quartero 2007 year-on-year (IFPI Germany). AlthoughiTunes is still the market leader in Germany,with an estimated market share o 42 per cent,Musicload is a serious competitor with a marketshare o around 32 per cent (GK).

In France digital sales were weak in 2007,

accounting or around seven per cent o themarket. High levels o unauthorised le sharinghave stifed market development. In November,President Sarkozy launched the most signicantplan yet or cooperation to curb online piracy,committing ISPs to a system o disconnectiono illegal le-sharers on their networks.

South Korea illustrates or some the huge potentialo the digital music business, yet it is a market ocontradictions. South Korea was the rst marketwhere digital overtook physical sales. Over 60 percent o the South Korean market is now made upby digital sales and this share is advancing rapidly.This is a refection partly o the devastating impacto piracy on CD sales and partly o a highly wiredsociety with a successul music download and

streaming service. Warner Music released BaekJi Youngs album Smile Again late last year andgenerated over 67 per cent o its revenue throughdigital sales.

In the rest oAsia, ringback tones continueto dominate the digital music market o manycountries, creating a new orm o musicconsumption. Indonesia is the third biggestmarket in the world or ringback tones,behind the US and Japan.

Mobile and online are split across dierent markets

Source: IFPI, based on rst hal 2007 industry revenues.

Online Mobile

1 USA 67% 33%

2 Japan 9% 91%

3 UK 71% 29%

4 South Korea 63% 37%

5 Germany 69% 31%

6 France 39% 61%

7 Canada 58% 42%8 Australia 59% 41%

9 China 27% 73%

10 Italy 44% 56%


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The volumes we are reaching are mirroring the heyday o single CD sales in thelate 80s. The singles business is alive and well in Japan.

Rob Wells, Senior Vice President Digital, Universal Music Group International

Japan is setting a ascinatingexample to the rest o the world.It is the rst market where sales

o ull-track mobile downloads,as opposed to mastertones,are the leading digital ormat,accounting or over 40 per cento sales value.

The mobile phone is the leadingchannel or entertainment andmusic in Japan. Japanese youthuse their mobiles or multiplepurposes, allowing on-the-goaccess any time and anywhere.Mobile phone penetration is

widespread, with over 100million mobile subscribersand 70 million 3G users.

One key reason or Japansdigital market success has beenthe ormation o a mobile musicretail service jointly owned byrecord companies. Label Mobilewas established in 2001 and istoday the leading provider ocontent to mobile operators.Local repertoire is strong. Thebig-sellers in 2007 includedGReeeeN, Utada Hikaruand RSP.

Japan An International Showcase in Mobile Music

GReeeeN, a quartet o medicalcollege students, was the mostsuccessul newcomer in 2007 in

Japan, yet the bands membershave remained anonymous,not appearing in public or themedia. The entire marketingcampaign or the release o theiralbum relied on non-traditionalpromotional initiatives. Theirthird single Aiuta, released inMay 2007, saw sales o morethan our million digital downloadsplus over 300,000 physical units.With over one million ull trackdownloads to mobile GReeeeN

have set a new milestone orthe ormat.

Japanese singer Utada Hikarualso did exceptionally well withher single Flavor o Lie whichhas sold more than seven millionunits in various digital ormats.The song was rst released asa mastertone to tie in with thelaunch o popular TV dramaseries Hana Yori Dango 2.Additional digital products,such as ringvideos, ringbacktones and mastertones werereleased in the ollowing weeks,helping the single to sell overtwo million digital units in totalby the time the physical singlewas released.

As part o the marketingcampaign, online promotionswere used, such as the creation

o a blog tag which enabledconsumers to paste the singlesvideo into their personal blogs.In just one month the videowas played more than600,000 times.

The band RSP, originally romthe Kansai region, also hadsignicant digital sales successin 2007. Formed as the resulto an audition contest calledReal Street Project, RSP

was selected out o over5,000 competitors to wina record deal.

n Digital growth osetting a all in CD salesn Mobile music 90% o digital music revenuesn Full track mobile downloads 40% o digital sales

Utada Hikaru

GReeeeN


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A New Deal or Consumersage 10

Led Zeppelin and AC/DC sawtheir back catalogues digitisedin 2007


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A New Deal or Consumers page 11

Section 2:A New Dealor Consumers

More choice and the spread o portable devicesare driving music demand to an all-time high

The music industry is way ahead o other media, broadcast and online companiesin getting our content out there yet ironically we are behind when it comesto getting paid or it.

Simon Gunning, Senior Vice President o Digital, EMI UK and Ireland

Digital stores oer consumers a ar greater virtualshel space than the largest traditional brick andmortar stores. This means that a broader rangeo repertoire, including specialist, vintage orhard-to-nd recordings is now available

to ans.

Record companies have seized this opportunity,with the classical music sector in particularbeneting rom this new channel to reachconsumers. In November 2007, DeutscheGrammophon introduced a classical musicdownload service or classical music in 40countries, the DG Web Shop. The service oers2,500 DRM-ree albums, 600 o which are nolonger available in CD ormat. Consumers canchoose between entire albums, collections oalbums and box-sets or individual movements,complete works, and individual pieces.

The same marketing fexibility has revived theavailability o archived recordings o renowned

classical artists. EMI Classics, which has some100,000 recordings in its catalogue, joined withiTunes in March 2007 to give consumers accessto the entire EMI discography o the iconiccellist Mstislav Rostropovich.

Digital-only releases o classical music are alsobeing pioneered, allowing consumers to buy anew classical album much sooner ater its rstperormance. In November 2007, EMI Classicsreleased Sir Simon Rattles recording o MahlersNinth Symphony with the Berliner Philharmonikeras a digital-only release.

There is evidence that making cataloguework available is appreciated by consumers.Universals Digital Reissue Programme hasto date yielded more than three million totaldownloads since its launch in January 2006.So ar, the label has made 18,000 previouslydeleted tracks available again to consumers,rom artists including Noir Desir, Robert Milesand Nana Mouskouri.

A signicant urther batch o deleted tracksrom Universal Musics catalogue is scheduledto go online during 2008, with numbers risingto 60,000 tracks by the end o the year.

Led Zeppelins entire albumcatalogue was released to digitalretailers in November 2007. Thealbums made available included,Led Zeppelin (1969), Houses OThe Holy (1973) and The SongRemains The Same (1976;recently remixed and remasteredor reissue).

The bands catalogue is alsonow available on mobile phones.

Verizon Wireless has securedan exclusive deal in the US tooer the bands catalogue in abroad range o mobile ormats,including mastertones, ulltracks, ringback tonesand wallpapers.

This announcement ollowedAC/DCs release o its entirecatalogue o 18 albums to digitalretailers in August 2007. Beatlesmembers George Harrison andRingo Starr also had solo materialreleased digitally in 2007.

Major Rock Acts DigitalCatalogue Released

Mothership, Led Zeppelin compilation album

500+The number o licensed, legalonline music sites worldwide

6 millionThe number o tracks availablerom the major online services


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Listening to music 51%Watching TV 27%Going to the cinema

10%

Music on the go

ortable digital music devices have revolutionisede way consumers listen to music. The explosionsales o portable music devices continued in

007 with new players coming on to the market.

though the iPod is today the leading portableusic player, many other brands, rom Microsotsune to Nokias and Sony Ericssons musichones, are established as well. Nokia soldmost 220 million music-capable mobile phonesobally in the rst three quarters o 2007 nearly

wice the total number o iPods (120 million) soldp to the third quarter o 2007.

here is growing convergence betweene mobile phone and the portable player. A

ew breed o devices launched in the end o007 the iPod Touch, iPhone and the new Zuneayer, with wi- unctionality allowing internetrowsing and music downloading on the go re blurring the boundaries between onlinend mobile consumption.

he expansion o wi- technology, coupled withG, is beginning to allow a much broader musicxperience. In October 2007, Starbucks andpple announced a partnership that allowedsers o the iPhone and iPod Touch to downloadongs playing in Starbucks shops directly to theirortable devices via wi-.

pple hopes to sell 10 million iPhones in008. Sony Ericsson has announced plans orbroader music store, oering ve million songs,move that closely ollows entrances rom bothokia and Vodaones Music Store (powered bymnione) in the UK.

Recorded music boostsUS$130 billion sector

A ew years into the digital revolution, it is clearthat, or all the challenges o rewarding creatorsand producers, the overall volume o musicconsumed is greater than ever beore. In the US,according to Nielsen SoundScan, overall onlineand physical sales grew by 15 per cent in 2007to 1.4 billion units. International studies showthat listening to music remains one o the topactivities among teenagers and adults.

Surging demand or recorded music has helpedboost a wider supply chain: music publishingrevenues rose in 2007; radio advertising revenuesgrew by three per cent in the year (PWC) andportable digital player sales were up 15 per cent in2007. In total, IFPI estimates this broader sectorat a value o over US$130 billion. The recordingindustrys investment in new talent and marketingis helping to drive this wider music economy,even though the benets do not extend tosales o recorded music.

Music has also helped boost growth in the ISP,telecom and hardware industries. Broadbandrevenues in 2007 totalled an estimated US$100billion, while consumers spent US$18 billion onportable players (Understanding & Solutions).

A study rom Nokia has shown that the youthmarket or mobile phones in India has grownannually by 300 per cent in the last ew years,with music accounting or 40 per cent o mobilephone companies revenues in the country.There are now 50 million households in Indiawith an internet connection and 75 per cento these are expected to have broadband by

2010, with music a major driver.

A New Deal or Consumersage 12

Source: Public Opinion Strategies Survey, US, April 2007

iPhone Nokia Music Phone Zune Music Player

Music is the MostImportant Form oEntertainment to People

Percentage o people sayingextremely/very important:


13/28

Record labels invest up to 20 per cent o theirrevenues in discovering and nurturing new talent.This discipline is known as artists and repertoire,or A&R. Marketing and A&R are the core unctionso record companies. New digital communicationchannels and social networks have increased,not diminished, the importance o good A&Rand marketing.

Max Hole, Executive Vice President at UniversalMusic Group International, says many artistswant the benet o working with others who shareand match their vision, energy and enthusiasm.Someone, he says, who can open a door to the

producer, the recording engineer, the songwriterthat they love. In addition, artists do not alwayshave the necessary specialist skills to take careo the business side o their careers skillswhich record companies oer.

There are more than 1.2 million rock actsand 1.7 million R&B acts alone clamouringor attention on MySpace. This overwhelmingnumber o new bands and music available toconsumers also highlights one o the key rolesor record companies in the digital space. Theneed or ltering, selection, marketing andrecommendation is greater than ever.

The only bad thing about

MySpace is that thereare 100,000 bands andno ltering. I try to ndthe bands I might likebut oten I just get tiredo looking.

15 year old student, IFPI ocusgroup research, July 2007

I artists were to pitch themselves on the internetwithout creating an impression elsewhere theywould be highly unlikely to catch the attentiono a label A&R expert to give them their break.That is not to say the world o A&R is unchanged.

Mike Smith, Managing Director o ColumbiaRecords, says Ten years ago I would hear abouta potentially great act and spend all day on thephone to everyone I knew. Eventually somebodywould have a tape and Id send a bike across townto get it. Id listen to it and then try and track down

the manager, get on the phone to him and arrangeto see the band live. Now, i someone mentions apotentially great act I check them out on YouTubeor MySpace. Youre immediately listening to theirmusic, seeing what they look like and you haveall o their contact details in ront o you.

Calvin Harris was one o the biggest new musicdiscoveries o 2007 in the UK and was toutedas a discovery o the MySpace generation.But his success is also down to good A&R,says Columbias Smith: I want to know that I ambuying into a major artist with real depth and youcant nd that out just by looking at them on theinternet and seeing how many riends they haveon MySpace.

The big break is still what aspiring acts want,according to Max Hole who says that artistswant someone to love their group, createopportunities or them and give them a chequeso that they can stop being part-time waitersand start doing their music ull-time.

A New Deal or Consumers page 13

Hole also notes that artists with a developingreputation in their home territory can oten usethe A&R and marketing expertise o major recordlabels to break through internationally, and citesthe example o the British band Snow Patrol.The band was making limited progress on a UK

independent label, and a new deal with UniversalMusic gave them a platorm to reach audiencesat home and abroad, especially in the US, wherethe result was a top ve track on the BillboardHot 100 and a million-selling album.

Artists want someone to love their group, create opportunities or them and givethem a cheque so that they can stop being part-time waiters and start doing theirmusic ull-time.

Max Hole, Executive Vice President, UMG International

A record company hasalways been there to bethe venture capital o abands career, to discoverthe talent and to nancethat career. I dont thinkthat will change inthe uture.

Ludwig Werner, Chairman,Bonnier Amigo, Swedishindependent record company

Investing In Artists

Digital is driving new opportunities in A&Rand marketing

Snow Patrol

up to 20%The proportion o label revenuesspent on A&R

1,200,000The number o rock acts clamouringto be noticed on MySpace


14/28

Subscriptions 5%

Online 48%

Mobile 47%

Omnione launched MusicStation, a new mobilesubscription service designed to work on a widevariety o mobile handsets worldwide. It is alreadyrunning in the UK, Hong Kong, Sweden and SouthArica and there are plans to roll it out in many

more countries in 2008.

MusicStation oers consumers access to a libraryo over 1.4 million tracks rom all majors and manyindependent labels or a small weekly ee, with noextra data transer charges. It backs up a userslibrary so that i a consumer mislays their handsetthey do not lose their music collection. In the UK,the service comes bundled into a range o existingprice plans or is available on a Pay As You Gobasis at 1.99 per week.

At the end o 2007 there emerged a newsubscription model based on the concept obundling music with other services or devices be it an ISP subscription, a mobile phone or aportable player. While the music comes virtuallyree to consumers under this model, recordcompanies and artists get paid out o the saleo services or devices. These partnerships alsocreate opportunities or more marketing andpromotion o music services in the bundled oer.

the digital era, record companies are licensingusic across a multitude o platorms, in scoresdierent ormats and with hundreds o dierent

artners. New revenue streams are evolvings labels work with social networks, direct-to-

onsumer sites and brand partnerships

A-la-carte download services

-la-carte downloads remain the dominant digitalusiness model, with iTunes leading in the onlineector. In the US, iTunes surpassed Amazon andarget in 2007 to become the third largest musictailer (NPD MusicWatch).

ther big brand names also came into theownload market in 2007, notably Amazon, withs online music download store in partnershipith all majors and many independent labels,nd the announcement o Nokias newComes With Music service.

Subscription services

Subscription services have grown steadily,particularly in the US. Revenues rom subscriptionservices, such as Napster and Rhapsody, grew

by 63 per cent in the US between the rst hal o2005 and the same period o 2007. Napster has asubscriber base o 750,000.

However, these services remain niche in othermarkets, held back by various actors, includingtheir lack o interoperability with the dominantmusic player, the iPod, and under-investmentin marketing and promotion. I these problemscan be addressed, the potential or subscriptionmodels is enormous.

New initiatives emerged in the end o 2007.Advocates o these services point to theirhigh level o stickiness once consumers rsttry them. A mass market channel combinedwith a compelling consumer proposition

could potentially change the outlook on thesubscriptions market.

I like the act that you paya set ee or all the musicyou want with Napster,but I cant use it withmy iPod.

20 year old UK student, IFPIocus group research, July 2007

The Explosion o Channels, Formats and Business Modelsage 14

Section 3:The Explosion o Channels,Formats and Business Models

Five years ago music distribution ormats were numbered in singlegures today, they number in the hundreds

MusicStation is the rst mass-market and easy to use unlimited mobile musicdownload service, with a great choice o repertoire or a very reasonable cost thats the holy trinity o making subscription services work.

Rob Lewis, Chie Executive, Omnione

ource: IFPI, rst hal 2007 industry revenues

Digital Sales by Channel


15/28

In December 2007, Nokia announced a newsubscription venture, in partnership with UniversalMusic, to oer millions o songs to Nokia phoneusers. The Comes with Music programmeis due to launch in the second hal o 2008 andwill oer 12 month access to Universals entirecatalogue to consumers who buy selected Nokiamusic phones. Ownership o downloaded trackswill not be restricted to the 12 month period, sousers can keep their downloads permanently.Nokia is negotiating with other labels to extendthe music catalogue on oer.

Also in late 2007 Universal partnered with FrenchISP Neu Cegetel, whereby or a monthly ee o29.90 the ISP oers high speed internet, xed

line telephony, HD TV service and an unlimitedmusic download service with Universalscatalogue. In a similar deal EMI partneredwith Alice, an ISP owned by Telecom Italia,in December 2007.

Consumers oered morenon-DRM download services

Lack o interoperability between servicesand devices has been a signicant barrier tothe development o the digital music sector.Interoperability has long been a key goal othe record industry, which has worked withits industry partners to develop technologicalsolutions enabling ully interoperable DRM.

Unortunately, despite the potential or suchsolutions, some major technology providers haveso ar been unwilling to participate. Faced withthis lack o progress, all the major record labelsdecided to oer non-DRM download services,either permanently or as part o a trial period tosupplement their existing oerings. They joinedindependent labels in expanding the opportunitiesor online retailers to sell tracks without DRM.

The DRM-ree model is one way to avoid theinteroperability problem. It allows consumersto buy music rom any store, take their trackswherever they want and play them on any device.

The use o a non-DRM model led to new servicessuch as Amazon entering the already-establisheddigital music market. Amazons new service sellsmusic in a ormat that is compatible with a vastnumber o portable players, including the iPod.It oers a catalogue o over two million songsor US$ 0.89-0.99 and albums or US$ 5.99-9.99.

DRM today is still a key element o the digital

business, with DRM-ree and DRM-protecteddownload oerings co-existing in the market.Many business models, particularly based onsubscriptions (where users pay a monthly eeor unlimited access to music), super-distribution(allowing ans to share music with their riends)and time-limited downloads (such as thoseoered by ad-supported services), cannotexist without DRM and record companiesremain committed to these alternatives.

Services specialising in indie music rst oeredDRM-ree downloads. eMusic, which operates inthe US and Europe, oers a subscription servicethat allows consumers to own the tracks theyare authorised to download, even when theirsubscription ends. MP3 tracks can be played

on multiple devices, including the iPod. Theservice targets heavy music buyers over theage o 25 and specialises in a non-mainstreamcatalogue comprising over two million songs. Todate, eMusic has attracted more than 400,000subscribers worldwide.

EMI was the rst major record company to adopta DRM-ree strategy, with the launch o DRM-ree superior quality downloads as an alternativeoering through the iTunes store in May 2007.Universal also announced DRM-ree downloadtrials in 2007, which will be reviewed in January2008. Warner Music launched DRM-ree oeringsin late 2007, while Sony BMG landed its DRM-reePlatinum Music Pass series o digital album cardsin January 2008. The music o all the majors and

a number o independent labels now eature onseveral non-DRM services, including Wal-Martand Amazon.

The Explosion o Channels, Formats and Business Models page 15

Advertising-supported services

Advertising-supported music services are a smallbut potentially signicant revenue stream orrecord companies, which some see as the logicalstrategy or reclaiming a younger generationo consumers habituated to a culture o reemusic. According to Jupiter Research le-sharingcurrently dominates music acquisition amongyounger consumers. In 2007 over a third (34per cent) o internet users aged 1524 illegallyle-shared music. This is three times the rateo legal service usage among this age group.

Ad-supported services oer consumers ree

access to streamed or downloaded music whileartists and record companies are compensatedby revenues generated by advertising. The bestexamples o this are the recent deals betweensome record companies and social networkssuch as MySpace, Bebo, YouTube, LastFMand Imeem. These deals are mostly based onlicensing agreements or streaming music andmusic videos or a share o advertising revenues.

Questions remain however as to the potentialor ad-supported models as some believethe addition o ads on ree services will divertconsumers elsewhere, and there are continuingconcerns over copyright inringement. So arthe model has worked best in growing thevideo-on-demand business.

Progress was made in 2007 to create a globalrights body to act as a centralised licensingservice or independent record companies whosemusic is used on sites such as YouTube and whowish to negotiate deals with services. The body isknown as Merlin and runs as a sister organisationto the global independent record labels body WIN.


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Record labels go direct to ans

Record companies are rolling out directto consumer initiatives, allowing consumersto access a range o artist products directly viatheir website. This new wave o artist sites oerthe opportunity or ans to connect with theartist, purchase content and communicatewith other ans.

Universal Music has created getmusic.com.auin Australia as a one-stop shop or consumerswho want to buy tracks, merchandising or concerttickets. It also provides news, competitions andorums or music ans to have their say. In the run-

up to Christmas 2007, Universal ran artist-centredcampaigns using the get branding, such as getFergie and get Fall Out Boy to drive awarenesso the site.

Boutique sites have also proved successulor artists as diverse as U2 and Girls Aloud.U2.com oers exclusive music tracks, behindthe scenes interviews, an reviews, limited editionmerchandising and invitations to become involvedin the campaigns that U2 are active in. EMI alsosupports many artists websites, includingLily Allen, Gorillaz, and The Kooks. Artistsincreasingly look to labels to provide suchspecialist support services.

Warner Music and Premium TV, a specialistdigital services provider, have launched RhinoTV, a specialist digital hub or consumers. Thesite oers an interactive, ree-to-access musicexperience that enables visitors to manage andshare their avourite tracks as well as purchasecontent. Through a searchable archive, users cansearch thousands o hours o music-related video.

Experimental new pricing models also tookshape in 2007, their impact as yet unproven inthe marketplace. One such system was testedin October, when the British band Radiohead seta precedent by oering downloads o their newalbum In Rainbows directly on their websiteunder an honesty box system. Fans were giventhe option to pre-order the album download at a

price o their choosing (minimum charge o 0.45)or pay 40 or a premium boxset which includedtwo CDs, two vinyl records plus artworkand booklets.

The Explosion o Channels, Formats and Business Modelsage 16

Source: Circuits o Cool/Digital Playground, July 2007

Globally, the average young personconnected to digital technology has:

86 People in a socialnetwork community

94 Phone numbers on a mobile

78 People on an instantmessenger list

Music andSocial Networks

Top and Middle:Australias Get Music website

Bottom:Girls Aloud

Social networks have become importantpartners or the music industry. With anestimated 230 million social network usersin 2007 (Datamonitor), social networkingsites are a growing source o music discovery.Record labels are developing promotionalopportunities in and testing new ways omonetising content on social networks.

Social networks have spawned novelmarketing devices. Record labels pioneered

the use o widgets in 2007 to allow networkusers to stream and share music rom theiravourite artists on their own sites, prolesand web pages.

In November, EMI signed a deal withMySpace to launch an exclusive contestthat allowed 10 o Lenny Kravitzs MySpaceriends and their guests to join him on hisorthcoming Get on the bus with the LoveRevolution Tour and get ull backstage passprivileges or his live shows. Working withleading artist Kylie Minogue, EMI alsolaunched her own social networking siteKylieKonnect. It allows ans to create theirown proles, upload images and blogs aswell as connect with other Kylie ansaround the world using their mobilephones or web browsers.

In October, Atlantic Records UKs recentsigning, The Days, were the rst music actto appear and perorm on Bebos popularreality-based internet drama, Kate Modern.To coincide with the launch o The Days rstEP, the band and their inclusion in the showsplotline were promoted over a three monthperiod across the Kate Modern an-baseand the wider Bebo community. The groupalso interacted online with ollowers o theshow and their appearances culminatedin a real gig, populated by ans o bothKate Modern and the band.


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Exploring the 360 Degree Model

There is increasing ocuson new 360 degree deals bywhich record companies andperormers share revenuesmuch more comprehensively,rom record sales tomerchandise, publishing,brand sponsorship and touring.

Digital technology is enablingrecord companies to buildplatorms through which theycan leverage such additionalrights. EMI pioneered the modelwith the well-publicised RobbieWilliams deal in 2002 whichwas ollowed by many others.Universal Music acquired artistmanagement group Sanctuary in2007 in securing revenues roma wider range o sources. SonyBMGs recent 360 degree dealsinclude artists Sandi Thom, Lil

Chris and a series o up-and-coming bands such as RedLight Company.

Artists who have partneredwith Warner Music acrossan expanded range o rightsand services include US groupParamore and British bandsHadouken! and The Rifes. InFrance, Warner has partneredwith singer-songwriterChristophe Ma across many

aspects o his career throughoutthe digital and ofine worlds.

This year, the company alsoannounced a majority stake inTokyo-based artist managementcompany Taisuke, the ormationo a management company withUK label B-Unique and the ullacquisition o HMC (HelsinkiMusic Company), a Finnishcompany with operations inrecorded music, merchandising,music publishing and touring.

In the US, Warner acquireda stake in Front LineManagement, the nationslargest artist managementrm, which represents artists,ranging rom Christina Aguilerato Aerosmith.

Brand partnerships

With the decline in traditional orms o advertisingon TV and radio, music oers a great opportunityor international brands to reach consumersonline. The widespread appeal o music canhelp brands penetrate markets and gain credibilityamong specic segments. Record companieshave created teams specialising in identiyingbrand partnership opportunities viadigital platorms.Sony BMG launched its Musicbox video networkin 2006. Musicbox is comprised o a series oad-driven online video players that are deployed

across Sony BMGs network o nearly 600 artistand label websites. Fans can send links to riends,or embed the player on their blogs, MySpacepages, Facebook or other community sites. Thiscreates an ancillary network, providing exposureor Sony BMGs artists while adding value tobrand partners such as AT&T, Honda, Chase,Puma, Starwood, MSN, and LOreal.

In July 2007 EMI announced a digital premiumcampaign with Burger King. Consumers wereable to search or, sample and download a reesong rom a specially created microsite aterinputting a unique code obtained with purchasesat the restaurant. A multi-year, multi-platormdeal between Rihanna and CoverGirl, sawRihanna acting as the spokesmodel orCoverGirls new lip gloss.

Partnerships with brands are also helpingdrive catalogue sales. An advertising campaignor Cadburys Dairy Milk chocolate containingPhil Collins 1981 single In The Air Tonightpropelled the single to the top 15 chart inthe UK in September 2007. The advert loggedhundreds o thousands o hits on YouTube.

The Explosion o Channels, Formats and Business Models page 17

The record industry used to be ocused on therecord and all the rest was promotions. Now its amore balanced business where you have records,TV shows, merchandise, touring revenues andso on.

Jean-Bernard Lvy, Vivendi Chie Executive

CoverGirl campaign eaturing Rihanna

Hadouken!


18/28

Copyright Thet The Impact and the Responseage 18

Section 4:Copyright Thet The Impact andthe Response

he greatest problem in monetising digitalusic has been its ubiquitous availability

nlicensed and or ree. Tens o billions o illegalusic les are traded annually worldwide at an

stimated ratio o 20 illegal downloads or every

ack sold. This has had a major impact on theevelopment o legal services, holding backrowth in the whole digital sector.

he Institute o Policy Innovation study Therue Cost o Sound Recording Piracy in theS Economy projected losses rom illegalownloading worldwide to US recordompanies at US$3.7 billion (August 2007).

ther research has ocused on the specic impactillegal downloading on buying behaviour. Italys

uigi Einaudi Foundation in 2007 ound that 30er cent o P2P users bought ewer CDs andVDs, while only six per cent said they boughtore CDs. In Australia, research undertaken orRIA (February 2007) shows that 57 per cent

P2P downloaders rarely or never purchasee music they download pointing to straight

ubstitution o legitimate sales. Numerous studiesdierent markets conrm the nding that theect o illegal downloading on CD buying isverwhelmingly negative.

igital piracy in Latin America has expandedpidly. It is estimated that 2.6 billion illegal musices are downloaded in Mexico and another 1.8llion in Brazil per year (Ipsos research). Onlineracy has hit the core music buying populationthe region research in Mexico shows that

4 per cent o music downloading is carried outy consumers in the wealthier ABC economicategories, with similar ndings in Brazil. In007 the Mexican market dropped by anstimated 25 per cent and Brazil ell by anarming 50 per cent in the rst hal o 2007.

In Europe, Spain and the Netherlands havea huge online piracy problem resulting inunderperormance o their legitimate marketsector. According to Jupiter Research, over a third(35%) o all internet users are now regularly le-sharing inringing music in Spain and 28 per centin the Netherlands. A new study by the SpanishMinistry o Culture (October 2007) shows that vemillion Spaniards, or 13 per cent o the population,have downloaded music illegally in the past year.

China, with nearly as many broadband users asthe US and little eective enorcement, is one othe biggest sources o illegal downloads in theworld. A legitimate music market o only US$74million less than one per cent o global sales is choked by a digital piracy rate o over99 per cent.

The country is hosting some very largeunlicensed music delivery services that deeplinkto unauthorised song les and derive advertisingrevenue rom doing so. Such services account orthe majority o online music piracy in the country.Large, listed companies such as Baidu and YahooChina all oer such unauthorised services that areavailable throughout the world and particularlypopular in Asia.

Securing proper enorcement against internetpiracy in China is one o the recording industrystop priorities. In December 2007, a Beijing courtconrmed that Yahoo China was acting illegallyby acilitating mass copyright inringement.This verdict sets a precedent or similarservices across the country to heed.

Unlicensed music and the unair competition it imposes on legitimateservices is the biggest challenge or the music business today

The success o Japans mobile music

business has had a fip side. Research in2007 by the Recording Industry Associationo Japan (RIAJ) ound that mobile piracywas already becoming a very signicantproblem. The research highlightedthe ollowing:

nMore than a third (37%) o mobileinternet users requently obtain illegalmusic via their mobile phone. Thisgure rises to 65 per cent among theyounger demographic.

nNearly 400 million illegal music leswere downloaded in a year.

nNearly 80 per cent o users who obtainillegal music les are doing it with nosense o guilt.

Japan Conronts Mobile Piracy

The industry has been quick to respond to

the threat. In 2007, RIAJ developed specialtechnology which allows the tracking oillegal uploading. Service providers are nowreceiving a number o cease and desistnotices relating to inringing content andour criminal prosecutions have alreadyresulted against illegal uploaders.

RIAJ is launching the biggest-evereducation campaign about mobilepiracy in March 2008, with support romgovernment, mobile operators and musicright holders organisations.

The act is that in a commercial culture that doesnt protect intellectual property,todays violator is tomorrows victim. There are no long-term winners rom growingintellectual property thet.

Peter Mandelson, EU Trade Commissioner


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Copyright Thet The Impact and the Response page 19

Digital music piracy is ragmenting into neworms as technology enables many new ormso illegal le-sharing, including sharing viainstant messenger, blogs, local network sharing,Bluetooth mobile sharing and e-mail sharing. Inaddition, users can directly download rom illegalinternet sites specically designed to be used bymobile phone users. These sites are particularlylocated in countries such as Japan where fat rate3G is available.

Despite ragmentation, P2P le-sharing stillaccounts or the large bulk o digital piracyand, given the volume and the role it plays in

distribution to other piracy engines such asblogs and cyberlockers, is still the primarytarget o industry anti-piracy actions. Thirdparty surveys estimate that up to 80 per cento all ISP broadband capacity is taken up byP2P le-sharing.

Despite the scale o the problem, enorcementis helping contain piracy. Figures rom JupiterResearch show that while the number o regularle-sharers in the major European marketsrose by 35 per cent between 2003 and 2007,broadband subscriptions in these marketsrose more than our-old in that same period.In total, 17.6 per cent o internet users in Europeregularly le-shared in 2007 a gure that isroughly the same as in 2003.

In the US, the number o people using P2P le-sharing services was largely fat in 2007, but largernumbers o music les were downloaded illegally.The posting o hyperlinks to unauthorised musicon blogs and other websites has re-emerged as

a problem.

IFPIs actions intensied in 2007. A series oactions were taken against P2P networks,including the closure o seven major servers oneDonkey in October ollowing court injunctionsin Germany. There were similar eDonkey serverclosures in the Netherlands and France ollowingIFPIs legal actions.

These actions, combined with a systematicnotice and take down programme, signicantly

disrupted one o the top three illegal le-sharingnetworks. The number o les on the centralisedeDonkey network dropped by 40 per cent to justover 400 million between January 2007 andDecember 2007.

Takedown notices have been sharply increasedin the US as well. University students account ora very large share o illegal le-sharing and havethereore been heavily targeted with lawsuitsbrought against those who reused to settle outo court. Universities have been encouraged totake proactive measures against on-campus P2Puse, with notable improvements shown in someschools where measures were taken.

This impact is veried by research. In November2007 NPD ound that over a third o P2P users(39%) said they could not nd the songs theywanted on P2P networks. The second mostcommon negative P2P experience was theinability to download rom search results (32%).

Copyright law protectsall copyright holders,

big or small. Its a cornerstone o modern civilisedsociety. People shouldstop attacking it its thereor the protection o allo us, writers, producers,musicians, playwrightsetc. big and small.

Anthony Hall,Pure Mint Recordings,UK Independent Label

Responding to Copyright Thet

Contrary to popular perception,legal music services like iTunesoer a wider selection osongs than P2P networkslike Limewire.

IFPI conducted research witha sample o 70 acts, mentionedby ocus group participants(aged between 15 and 25) inthe UK throughout 2007. Theseranged rom underground bandsto mainstream artists, includingnames such as Cherry Ghostand Jack Peate.

The research examined theavailability o songs rom theseartists on the legal site iTunes

and on the copyright inringingservice Limewire.

Debunking the Availability Myth:Fans Get Better Choice on Legal Sites

In 95 per cent o searchesthe artists requested hadmore songs available on iTunesthan on the leading P2P service.

The searches revealed a

large number o duplicatesand misleading le nameson the P2P networks, as wellas many les that were notavailable to download.

Industry eorts are disrupting piracy networks

IFPI targets P2P piracy invarious orms:

n Large-scale uploaders usingnetworks such as Gnutella

n Hubs or servers whichconnect millions o le-

sharers on services such asDirectConnect and eDonkey

n BitTorrent trackers such asthe Sweden-based Pirate Bay

n Pre-release piracy, whereleaks oten occur weeksbeore the ocial releasedate, denying artists andproducers revenues at themost crucial period in theliecycle o the recording.

Cherry Ghost


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Copyright Thet The Impact and the responseage 20

Tackling Pre-release Piracy

re-release piracy is a ast-growing areathe recording industrys anti-piracy work.

ecord companies look to IFPIs global team investigators to stem the prolieration o pirateopies in the crucial weeks around the ocial

bum release.

new album makes a large share o its revenuesits rst ew weeks, so the stakes are high.

eaks usually happen between three weeks andve days prior to release. Pre-release copies areost commonly leaked on to BitTorrent sites anden spread onto P2P networks blogs, orums

nd website links.

PIs Anti-Piracy Unit tracks the distributionnline o newly-released albums, systematicallymoving thousands o illegal copies rom theternet every day, targeting oenders and pavinge way or legal action or prosecution. Teams areonitoring hundreds o albums at any one timeday. The units success stories include albums

y household names that have been leaked ontoe internet by individuals in the legitimate supply

hain, such as journalists, commercial DJs andven leading gures in an clubs.

A major pre-release leakcan mean the dierencebetween an album beinga top-ten hit or an also ran.Producers today know thati they dont take the rightsteps at the right time to

protect their releases,then the internet is goingto be literally swampedwith illegal copies otheir new release.

Jeremy Banks, Head o IFPIsAnti-Piracy Unit

Blogs are another common route or pre-releasepiracy. There are hundreds o thousands o activemusic blogs that oten eature copyright inringingmusic. Many o these tracks are hosted in onlinecyberlockers which the people who post them

hope, mistakenly, will protect their anonymity.

Pre-release leaks refect the determination othe so-called ripping groups, highly organisedand secretive groups made up o technicallyprocient internet users, or whom purloining anddistributing a pre-release hit is a badge o honour.

In 2007 over 350,000 warning notices were sentout regarding over 550,000 inringing URLs. It isestimated that the resulting number o illegal non-P2P les removed as a result o these noticesand other actions totalled around 120 million.

In October, investigations by IFPI and itsUK aliate BPI led to British and Dutch policeshutting down the OiNK website, the worlds

biggest source o illegal pre-release chart albums,in an operation coordinated between the UK andthe Netherlands and assisted by Interpol.

OiNK specialised in distributing albums leaked onto the internet, oten weeks ahead o their ocialrelease date. More than 60 major album releaseshad been leaked on OiNK in 2007, making it aprimary source worldwide or illegal pre-releasemusic. The site, with an estimated membershipo 180,000, had been used by many hardcorele-sharers to violate the rights o artists andproducers by obtaining copyrighted recordingsand making them available on the internet.

Album leaks well beore ocial release area growing threat

IFPI guides aimed at helping business andacademic institutions tackle piracy

578,000+Inringing links removed as a result owarning notices sent by IFPI in 2007

3 weeksPeriod beore release when leaksrequently occur


21/28

Time or Governments and ISPs to Take Responsibility page 21

Internet Service Providers (ISPs) are thegatekeepers o the internet and have avital role to play in curbing copyright abuse.They have the technical ability to do so, andincreasingly the commercial incentives as well.

The ull cooperation o ISPs could lead to a verysignicant change in the music sectors abilityto tackle copyright inringement while reducingthe amount o litigation needed to deal withonline piracy.

In November 2007, the most signicantdevelopment yet in this process occurredwhen Nicolas Sarkozy, the French President,announced a potentially revolutionary newagreement under which ISPs in France committo disconnect persistent copyright inringerson their networks. The move ollowed anumber o signicant advances in othercountries during 2007.

The French Presidents move conrms that

disconnecting the accounts o serious inringersis easible and reasonable or ISPs. There is nodoubt ISPs have the means to address copyrightinringement, just as they can control other ormso illegal material passing through their networks,such as spam and viruses. In most cases thisis merely a question o enorcing their existingcustomer terms and conditions: most ISPsinclude a provision prohibiting use o theservice to inringe copyright on pain olosing service.

The French model o warning and disconnectioncould be implemented by governments in othercountries as well. Disconnection o repeatinringers is already enshrined in the copyrightlaw in the US, Australia and Singapore. The modelhas attracted interest in the UK and Sweden: inthe UK, the 2006 government-commissionedGowersReview o Intellectual Property proposeda voluntary Best Practice agreement by whichISPs would disconnect users engaged in piracy.The report recommended that the governmentconsider legislation i this voluntary cooperationwas not working by the end o 2007.

In Sweden, a report by the Justice Departmentinvestigator Cecilia Renors, proposed a change

in Swedish law to oblige ISPs to take action toterminate the contracts o certain users whorepeatedly use their connection to inringecopyright. This obligation could be enorcedin court by right holders.

In addition to disconnecting user accounts,ltering is a easible and reasonable way orISPs to tackle copyright inringement. ManyISPs already implement technology to managetrac across their networks or their own sel-interest: or example most ISPs lter email tracto remove spam, and many ISPs slow downtrac on P2P networks at busy times to reducebandwidth costs. There are technologies availablethat enable ISPs to automatically lter trac andprevent exchanges that inringe copyright.

The court ruling in the SABAM v Tiscali casein Belgium in September 2007 set an extremelyimportant precedent. It not only conrms that theISP should take proactive steps to block inringingcontent; it also conrms expert evidence on arange o easible blocking and ltering solutionsavailable to ISPs.

In the US, AT&Ts recent commitment to workwith the lm and music sectors on anti-piracytechnologies marks a sea-change in approachby one o the major ISPs.

IFPI and its aliates are discussing with ISPsin many countries a system or curbing masscopyright inringement on their networks. Manycountries are now progressing towards concretesteps by ISPs in this area. However, the recordingindustry is prepared to use the courts wherevoluntary collaboration ails. In some countries,notably Denmark, the Netherlands and France,IFPI has reluctantly but successully usedlitigation to require ISPs to disconnectthe accounts o users responsible orinringing services.

Section 5:Time or Governments and ISPsto Take Responsibility

Today, getting ISPs to help protect creative content isthe music industrys top priority

The Law States

In the laws o the US, Australiaand Singapore an ISP thatwishes to take the benet othe sae harbours and avoidmonetary liability orinringement taking place ontheir networks must adopt andreasonably implement... a policythat provides or the terminationin appropriate circumstanceso subscribers and accountholders who are repeatinringers.

In Europe, Article 8(3) o theCopyright Directive providesthat member states mustensure that right holdersare in a position to applyor an injunction againstintermediaries whoseservices are used bya third party to inringecopyright.

The Internet must not become a high-tech Wild West, a lawless zone where outlawscan pillage works with abandon or, worse, trade in them in total impunity.

Nicolas Sarkozy, President o France

A groundbreaking deal or ISPs: President Sarkozyand Denis Olivennes


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Time or Governments and ISPs to Take Responsibilityage 22

P2P usage is having a signicantimpact on internet trac. P2Pnetworks are producing moreinternet trac than all otherapplications combined and thiscould impact ISP inrastructures,damaging consumers internet

experience. While P2P accountsor up to 80 per cent o all internettrac, only 20 per cent o internetusers worldwide use P2P services(ipoque).

A report by analyst rm NemertesResearch Group published in2007 ound that internet accessinrastructure will likely cease to beadequate or supporting demandwithin the next three to ve years,particularly in North America.

The investment required by ISPs to

bridge the gap between internetdemand and capacity ranges romUS$42-55 billion, or roughly 60-70per cent more than ISPs plan toinvest. Limited capacity, the reportsuggests, could stife innovationin internet-based services anew YouTube, or example,would not be able to fourish.

P2P is ChokingBandwidth

creasingly, ISPs have a commercial incentivework with the recording industry. Illegal P2P

e-sharing may have helped drive broadbandubscriptions in the past, yet today thesectivities, particularly in respect o movies,re hogging bandwidth. Independent estimatesuggest up to 80 per cent o internet trac isenerated by P2P le distribution, the vast bulk which is unauthorised use o copyrightedusic and movies.

this way, online piracy is not only hurtingPs existing business by hitting the eciency

their networks it will increasingly hurt their

ture business, as ISPs compete to share in thevenues rom copyrighted digital content suchs music, lm and television.

Governments Must Eectivelynorce The Law

fourishing digital music business needsproper legal environment and a proactiveommitment to respect or copyright. This ise challenge or governments and enorcement

uthorities. Piracy havens damage the musicector globally.

ocated in the heart o the European Union,wedish-based The Pirate Bay is one o theorlds biggest engines o copyright inringement,nabling millions o users to download illegalopies o music, lm and other content. It hasecome a global icon or the violation o copyrightnd is translated into more than 30 languages.

rganisations representing creators, perormers,roducers and publishers across the music, lmnd publishing sectors in Europe are looking ore law to be eectively enorced against Therate Bay. They warn o the danger that Sweden,

ormally considered to be a strong upholderEU standards and a promoter o culture,

hould instead be seen as the haven or a cult copyright inringement that has achievedobal reach.

Swedish police raided The Pirate Bay in 2006and in January 2008 prosecutors are preparing tole a criminal case against the sites operators. Inthe meantime, the service continues to promotethe mass inringement o copyright o recordedmusic, lms and even books.

In China, record companies trying to developa legitimate digital music sector are having todo so against the backdrop o rampant levels ointernet piracy, while the countrys major internetcompanies have to date missed the opportunityto prove that they can be responsible partnersin this process. Court cases involving two o the

countrys internet giants,Yahoo China and Baidu,have acted as a warning to internet companiesthroughout China that are illegally distributingcopyrighted content.

Record companies had attempted to orge alegitimate partnership with Yahoo China butwere orced into litigation due to the companysreusal to stop large-scale inringement on itsmusic delivery service. This is a bespoke serviceseparate rom its general search engine, and itenables and induces users to search or, play anddownload inringing music tracks or ree withoutever leaving Yahoo Chinas website. In a landmarkcourt ruling in April 2007, Yahoo China was ruledliable or illegally providing links to copyrightinringing music les. The ruling was upheld by

the Beijing Court in December ater the companyappealed the nding o liability.

The recording industry rmly believes thatYahoo Inc one o Americas best-known andmost infuential internet companies can andshould act to stop Yahoo Chinas calculatedand commercially-driven inringement o themusic industrys rights. Yahoo Inc is representedon the Board o Yahoo Chinas parent company,Alibaba Group and has a 44 per cent stake inYahoo China through its investment in theAlibaba Group.

Russia has been a particular haven or internetpiracy. In 2007 a combination o industry legalaction, government pressure rom the US and

EU and withdrawal o payment services by creditcard companies, led to the closure o the roguesite allomp3.com. Despite success against thishigh prole brand, numerous lower-prole pirateservices exist within Russia, aided by a weakintellectual property law enorcement culture.

I think the ailure o ISPs to engage in the ght against piracy, to date, has beenthe single biggest ailure in the digital music market.

Paul McGuinness, Manager o U2


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Creating Value in the Digital Sector page 23

Section 6:Creating Value in theDigital Sector

At the heart o the digital revolution is the challenge o creating valuerom digital content

Many sectors such as the newspaper, travel,television, lm, telecommunications and gamesindustries are grappling with dramatic changesin their business landscape.

Competition rom a deluge o ree inormationservices has hit news publishing hard. Localnewspapers are seeing a sharp loss o advertisingrevenues, particularly classieds and property, tothe internet. National newspapers are developingthemselves as brands across dierent media.Online revenue growth is now a top priority atmany newspapers, but digitals share o totalrevenue in this sector is still ar behind themusic industry.

In the US, online advertising on newspaperswebsites rose by 21 per cent year-on-year in thethird quarter o 2007 to US$773 million, accordingto the Newspaper Association o America. Yetthis gure represented only 7.1 per cent o totalnewspaper advertising revenues and the rise in

online advertising is not osetting the all in printadvertising, which ell by nine per cent to US$10.1billion in the same quarter.

The TV industry is seeing its audiences movein droves to the internet. Broadcasters are tryingto revive interest in programmes through sharingand recommendation clips on social networkingsites such as Bebo, in return or a share inadvertising revenues.

Outside the entertainment industry, migrationo commerce online has been held back by theinherent problem o internet payment. O allpayments serviced by credit card companyVisa, only 12 per cent constitute electroniccommerce, illustrating the relative size oecommerce transactions compared tothe ofine market.

The challenge o monetising the digital worldaects even sectors apparently at the mostcutting edge o technology. In October, the onlinecompany eBay admitted it had substantiallyoverpaid, by nearly a billion dollars out o US$

1.7 billion, when it bought the telephony serviceSkype. In November 2007, Rupert Murdoch toldNews Corporation shareholders that there wasstill a lot o work to do in educating advertisersabout the potential o MySpace, the socialnetwork the company bought or US$580million in 2005.

Piracy is proving a huge threat to many orms odigital content. Research by the Helsinki Instituteor Inormation Technology in Finland showedthat P2P piracy is mostly aecting the rentalo lms, the purchasing o CDs and viewingo TV programmes.

The publishing industry is also aected,with copies o JK Rowlings Harry Potter

and the Deathly Hallows leaking on the internetprior to its ocial launch in 2007. Film piracyis also beginning to prove a major problem, withSolutions Research nding that nearly one in veUS citizens has a pirated lm on their computerand that 80 per cent o people who downloadlms only use peer-to-peer (P2P) le-tradingsites and not legitimate services.

Will traditional orms o consuming newspapers,television and books survive?


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Creating Value in the Digital Sectorage 24

his cartoon by Wesley Bedrosian accompanied the article The Hidden Risk o File-Sharingy Joseph de Avila, published in the Wall Street Journal, 7th November 2007.

Cartoon published with permission o the artist)


25/28

page 25The Hidden Dangers o Illegal Downloading

The security risks o downloading unlicensedmusic have been well-publicised, but awarenesso them still appears low.

An academic paper by Eric Johnson, Inadvertent

Disclosure Inormation Leaks in the ExtendedEnterprise (June 2007), examined inadvertentdisclosures through P2P networks and ound that:

nUnrecognised to many o [P2P] users is theserious security threat these networks poseto both corporate and individual security.

n Condential and potentially damagingdocuments have made their way ontothese networks. The research also shows thatcriminals actively search P2P networks hopingto nd inormation that they can exploit.

n Our analysis clearly reveals a signicantinormation risk rms and individuals acerom P2P le sharing networks.

According to Symantec, the main vehicle orspreading viruses and malware today is email,but distribution via P2P is also in the top ten listo main propagation vehicles. In the rst hal o2007 15 per cent o all potential inections werepropagated by eDonkey.Specialist technology security company, McAee,looked at the risk levels o searching the internet.Its report, The State o Search Engine Saety(June 2007), highlights that searches o keywordsinvolving P2P services, such as Limewire, areamong the most likely to generate results thatactivate spyware and viruses once clicked on.

New research also points to the dangers o otherorms o inringing downloading. An experimentrun by Benjamin Googins, a senior researcherat the international IT sotware managementcompany CA, showed that a single downloadrom an unauthorised MP3 site resulted inthe installation without permission o trojandownloaders, spyware and pop-up ads havinga severe impact on his computers perormance.

Consumers are paying a price or these kindso risks. Americans spent at least US$8 billion incomputer repairs, parts and replacement over thepast two years as a result o viruses and spywarealone according to Consumer Reports.

Research exposes piracy inthe workplace

Companies ace signicant security risks whenemployees le-share on corporate networks.

Research conducted by Ipsos-MORI or IFPI inthe UK in November 2007 indicates that one inten oce employees are using the workplaceto download music, two thirds o them illegally,exposing their employers not only to computernetwork risks, but to legal risks too.

Nearly hal o those who download musicillegally in the workplace (43%) know that theiremployers have a policy on copying, sharing anddownloading music suggesting they disregardrules set by their bosses.

The problem appears to be concentrated amongyounger workers. The survey indicated that onein ve under 25s illegally download music at work.

It only takes one person to download an inectedle and expose the company to huge risks.

The problem is not restricted to the UK.Research by the Inormation Systems Audit andControl Association (ISACA) explored the internetbehaviour o US employees and ound that 15per cent o respondents indicated they had usedP2P at work at least once, with 35 per cent owhite collar workers saying they had violatedtheir companys IT policies at least once.

In Europe, McAee commissioned a pool oIT managers with research rm ICM across1,049 IT proessionals in the UK, France,Germany, Italy, the Netherlands, Poland, Spain,Sweden, Austria and Switzerland and ound that

music downloaded rom the web came top o alist o perceived threats to security. Despite this,two-thirds o European IT managers admittedthat they dont block music downloads towork machines.

Recent moves towards encrypting P2P traccould increase the overall security risks i it isused illicitly on corporate networks. EncryptedP2P prevents security measures such as ITnetwork rewalls rom screening the transerred

trac or the threat o viruses or spyware. IFPIurges companies to note this potential threatand take the necessary steps to protect theirIT networks.

IFPI has produced and distributed reecopyright and security guides or companiesand or academic institutions that can bedownloaded rom www.ipi.org. Organisationsseeking advice on how to improve or implementtheir policies on copyright should contact IFPI.

Section 7:The Hidden Dangerso Illegal Downloading

Unlicensed internet services risk spyware, adware, malwareand even identity thet. Yet these dangers are oten unknownto downloaders

n In September 2007, Citigroup confrmedthat it was investigating a data breach

where the names, mortgage inormation

and social security numbers rom 5,200

customers were inadvertently leaked

by an employee using the Limewire

P2P application.

nAlso in September 2007 a confdential

report by consultancy frm Booz-Allen

Hamilton or the Federal Transit

Administration on the US bus and rail

networks leaked on P2P, resulting in

a major security lapse.

n In June 2007, Pfzer said the names and

social security numbers o 17,000 currentand ormer employees were leaked ater

the partner o an employee downloaded fle-

sharing sotware onto a compa

ifpi digital music report 2008

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