A light at the end of the tunnel? An artist's view of business models in the internet era

The Pied Piper: happier times, when people
trifled with artists' business models at their peril

While lawyers, economists, policy-makers and others talk comfortably in the abstract about the need to find new business models in the music industry in the internet era, there is no-one closer to the issues raised by the need to make money than the artists themselves. In this context, the following reflections are a sobering antidote:

"The direct financial losses and effects of internet piracy to the individual musician and the record industry has been one debated over since the emergence of the internet and its usage as a medium to copy and distribute such material. In his article discussing an open letter to one student by David Lowery, Paul Resnikoff weighed in on how the industry has been impacted, utilizing David’s letter as an example of both direct and indirect effects.

Paul explains that artists cannot simply tour in order to make up for the shortages resulting from low record sales. Only the top tier of artists, often backed by major labels in the process, will make any profit from this even during dwindling record sales. The sheer costs incurred in traveling around the world, or even round a mere continent, will often not get covered during the tour, let alone generate profit on top of the costs. Touring was seen as secondary and as mere coverage for losses sustained as a result of low record sales. With constantly falling figures in sales today this alone would clearly not be enough. This is a direct result of the fall of the medium in which music is distributed; people are not buying physical media, but rather switching to digital formats, using either legal or illegal means to acquire it. This produces a challenge which the record industry has failed to address, and as pointed out in the article, digital services such as Spotify will not provide an adequate remedy to the situation as things stand in terms of the average musician. Other ways of funding have emerged, such as crowd funding services, like Kickstarter, which provide means for artists to raise funds to record music and distribute it. However such services will only provide funding to a lucky few and would not answer this issue on its own. This might not be in terms of funding alone, but due to the influx of content and the resulting lack of visibility.

Paul attributes this to the attitudes of both consumers and companies. The younger generations born slightly before or during the rise of the internet are used to free access to material and thus buy less music, both in digital and physical formats. One can say the generations with this opportunity see it as a moral right to which they are entitled. One cannot simply pin this on younger people, however, as the sale of media has also dropped among older generations. Both tend to enjoy their media via other means, such as Spotify. Companies like Google and other aggregators do pose problems for individual musicians and the industry at large. A large company is purely interested in profits, not the personal plight of the artist trying to earn his bread through his work – they provide content which is paid for, morals have no place in business.

The sphere in which musicians compete has also changed. TV shows such as X-Factor, which pump out act after act, year after year, under a humongous marketing machine are overtaking the market from the average artist. How can an individual compete with such a Goliath? Odds are they cannot.

Albeit increasingly bleak, and no matter how negatively Paul portrays the prospects of anyone trying to make it in the music industry being, this writer still sees light at the end of the tunnel. Consumers will adapt, and above all, distributers and musicians have to find new ways to benefit from the ease of access and various digital formats in which media can be handled. Once affordable and accessible ways to consume media emerge, consumers will flow towards them and amounts of media pirated should fall, although cannot be fully avoided. Cassettes did not kill the music industry as then was feared, and neither will the internet in the age of the CD".

This note has been prepared by Jani Ihalainen, a Finnish native and recent law graduate of the University of Derby. Jani, who has a keen interest in copyright law, is happy to deal directly with questions. You can email him here.

Yahoo's Patent Bag

There's a little article over on the New York times about potential buyers renewing their interest in Yahoo. The company's investments in the Chinese e-commerce group Alibaba as well as its 35% stake in Yahoo Japan are often seen as potentially valuable assets. Indeed an investment group has already begun a USD 1.6 billion tender offer for shares in Alibaba (see here) which would value the company at USD 32 billion and Yahoo's stake at around USD 13 billion. Nobody has yet focussed on the IP rights in Yahoo. ThomsonInnovation are today recording 3051 individual patent families and currently 657 granted US patents - as well as a huge number of patent applications currently in process. The range of patent rights is fairly wide and a brief review shows that it covers many aspects of Internet technology. This author has not yet reviewed the portfolio in any detail, but given the volume of the portfolio, it would be surprising if there was not at least some golden nuggets in the bag. The recent Google/Motorola Mobility and Nortel deals showed the value of patents in the telecommunications sector. Much of their value has been due to the development of standards using patent technology. This has been encouraged by the telecommunications standards bodies who accept that stakeholders in the standards development process want to receive rewards based on licensing of their patents. On the other hand the Internet community has been much more reluctant to adopt standards on patent technology requiring payment of licenses. There's still nothing to stop a company from patenting its technology, but the W3 consortium wants to see royalty-free licenses as its patent policy clearly states. This means that patents may have a lower value than otherwise (as there is no mechanism to obtain royalties).

Wu Is To Us: Does Apple Have a Monopoly?

Circumstances have conspired to keep me away from the blogosphere for the better part of the last month. With this blog post, I am pleased to be returning to IP Finance. What has particularly captured my attention of late is the multi-polar contest between Google, Facebook, Apple (and perhaps a revitalised Microsoft). What makes this struggle particularly interesting is that each of these companies seeks to gain and maintain a formative position in the online world from a different set of competitive strengths.

It is against this backdrop that I read a published interview by Charlie Rose with Professor Tim Wu of the Columbia Law School (Bloomberg Businessweek, January 3, 2011). Wu is best-known for coming up with the term "net neutrality" with respect to access to digital carriers, but I have encountered him in other circumstances as well. He is outspoken and direct in his words, even if a bit ideological in his underlying thoughts. In his interview with Charlie Rose, he considered in particular what was described "how Web heavyweights are cornering digital markets." Of particular interest are the following comments by Wu:

"Well, this is what's so interesting--you have seen the same cycle repeat itself. Radio in the '20s, it was the new tech, and anyone could start a radio station. Film in the 1910s opened up. So these industries, once there's this new invention, go through incredible, exciting periods. The Internet had the same thing in the last 20years ... anyone who starts a company becomes the next billionaire.

But what history shows is, over time, what was once a young, exciting new media becomes consolidated, increasingly closed , dominated by a monopolist or an oligopoly. And the question is whether that's happening again; whether, in subtle ways, the Internet itself is slowly becoming monopolized....

If you look at most of these networks, social networking, Facebook; search engines, Google; downloading content, basically Apple. In most online content, Apple's iTunes has a monopoly. So we're getting to an age where you can talk about a sort of Big Three or Big Four."

Even given Wu's formidable intellect, I remain unconvinced. Let's drill down a bit. As part of the published interview, Charlie Rose observes that Wu argues in his new book, The Master Switch, that the iPhone and iPad [and one wonders--the iPod before that] represent a business model similar to the Bell System. To which Wu replies--"Right ....". With all due respect, I simply don't see how the iPad is, or can ever be the monopolistic equivalent of the Bell System.

We have alternative proprietary operating systems, as well as the open Android system, in the smartphone space. The tablet world, which overlaps the smartphone product line to some extent, also has its open source operating system challenge as new tablet entries continue to come on to the market. In truth, it seems that Apple's major concern is how it will continue to be dominant in the light of Steve Job's illness (not to speak of the fact that in the 1980s, it was Apple's closed system approach to its PC line of computers that nearly brought the company down in competition with the WinTel "monopoly" in the non-Apple desktop world).

Indeed, if I were asked to make a forced choice between the greater risk--Google as
the "gatekeeper" for information via search, and Apple as the "gatekeeper" for creative contents to be used on various platforms, I would worry more about the former than the latter.

Maybe the ultimate problem here is one of language. Many years ago, Richard Posner tried to teach me Antitrust Law in law school. Whatever I remember from that experience, one thing still stands out--"monopoly" is a term not to be used easily. Wu may have a legitimate concern about the centrality of Apple, Google and others in the online world, but I simply don't see how his concerns, even it taken at their collective most severe, give rise to the kind of monopoly enjoyed by Ma Bell in the U.S. The online world seems to be to be fundamentally different and our lexicon should reflect those differences.