[Ecommerce] Economist: Calling the tune

[Thiru Balasubramaniam]

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http://www.economist.com/displaystory.cfm?story_id=3D4492917

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Online music*

*Calling the tune*
Oct 6th 2005
 From The Economist print edition



*Music firms are emboldened, but risk strangling the golden goose*

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THE music business has long wailed that internet piracy is destroying
its business. Now, it is fighting back on two fronts=97first, by driving
illegal operators out of business; then by driving as hard a bargain as
possible with those firms selling legal downloads. Indeed talks between
Microsoft and the major music firms have just broken down because the
software company thinks the music business is demanding unreasonable
levels of royalties.

Things are going better for the major record labels on other fronts.
Last week the founder of a popular =93peer-to-peer=94 (P2P) file-sharing
program, Sam Yagan, told a Senate committee that his company will soon
stop operating in its current form. He explained that eDonkey=97which
accounts for around half of all P2P traffic=97can no longer afford to
fight the music industry in the wake of the Supreme Court's ruling in
June against two other P2P firms, Grokster and StreamCast, which
declared that such applications are illegal if they induce users to
violate copyright.

As expected, the music industry is now using its legal victory to hound
commercial P2P operators out of business. Last month the music
industry's trade body sent them threatening letters. WinMx, another P2P
network, appears to have shut down, while eDonkey says it plans to start
making its users pay for music. Grokster is reportedly on the verge of
selling itself to a company called Mashboxx, which has a similar
strategy to go legitimate. In Australia last month, a court ruled
against Kazaa, another popular file-sharing service, and ordered it to
use filters to stop the trading of copyrighted content.

Nobody, however, including executives at the major labels, believes that
file-sharing is defeated. When the industry forced Napster, the first
big file-sharing network, to shut down in 2001=97it has since relaunched
as a fee-based service=97a host of free alternatives sprang up
immediately, and that is what will now happen again. Because of the
Supreme Court's ruling, says Mr Yagan, the new P2P services will simply
move offshore and underground, and will offer more anonymity. In fact,
the Supreme Court's decision is likely to encourage a move towards free,
=93open-source=94 P2P applications. Since they do not make money from
advertising or bundling software, they are less vulnerable to the
accusation that they are illegally inducing piracy for their own benefit.

In the first half of this year, digital-music sales from mobile-phone
=93ringtunes=94 and legal download services such as Apple's iTunes more tha=
n
tripled compared with last year, and now represent 6% of total music
revenues, according to industry estimates released this week. That rapid
growth has restored confidence to the music industry, as have its
victories in court.

So much confidence, indeed, that some of the major labels are urging
Apple's iTunes service=97the epitome of success in online music sales so
far=97to shift to variable (ie, higher) prices from the consistent $0.99
per track it currently charges in America. That would be a mistake.
Despite its rapid growth, the legal market for music on the internet is
still in its infancy. Apple's boss, Steve Jobs, believes that higher
prices would stifle legal sales and encourage P2P-based piracy.
Microsoft might even deserve better treatment, too. Since the major
labels' legal stick will never be completely effective against P2P, it
is vital that they also offer an attractive carrot.