Brunswick Review Issue 2

John Kennedy - Chairman And Chief Executive, IFPI

A personal view on what other communications businesses can learn from the music industry.

Among creative industries the music business has long been seen as villain and victim in the debate about how to adapt to the digital age. But things are changing. Today executives in other creative fields such as film, TV and book publishing talk less about music having “failed to adapt to new technology”, and more of how it has acted as a “pathfinder” in the internet world.

It is not hard to explain why. The music industry has transformed its business model in recent years, generating $4bn of digital revenues: indeed, as a proportion of overall sales record companies now earn more from digital channels than the proportion of earnings for the film, television and book industries combined.

The myriad online options available to music fans today are simply unrecognizable from a few years ago. They range from single and album downloads on iTunes and Amazon to advertising-supported sites like Spotify and We7. More will follow – for example, Sky’s United Kingdom music service which will bundle a tiered download offer with an ISP (internet service provider) subscription.

Such ventures are seen as attractive by the music industry, providing they can deliver a first-class consumer experience and sufficient revenues to pay artists and composers, while recouping record labels’ investments in the music they make available.

So why is the music business still fighting for its future? The simple answer is that a legitimate business cannot compete in an environment awash with free, unauthorized content. Dealing with this problem is the challenge facing creative industries generally, ISPs and governments.

Music piracy in the online world is immeasurably worse than in the physical market, with around 95 per cent of music downloads now unlicensed. Digital piracy has been a major factor in the fall in the trade value of music sales around the world from $25.8bn in 1999 to $18.4bn in 2008.

The bad news is that the situation has generally not improved over the last five years. The good news is that the needle does not have to move all that much to make a substantial difference to the legitimate digital music business.

This is a crisis not just for the music sector. It has critical implications for the wider creative economy, too, and the hundreds of thousands of people it employs.

There is a view that live music will save the industry while recorded music declines into obscurity. I believe that view is deeply flawed. That view ignores the particular relationship between live and recorded music: when people enjoy recorded music on a CD, on the radio or played in a bar or club they want to go and see the artists responsible perform live.

Others believe, mistakenly, that the internet will marginalize music companies. But the reality is that the essential functions of a music company are more important in the digital world. New artists need help to cut through the sheer amount of noise in the market. There are more than 2.5m hip hop acts and over 1.8m rock acts on MySpace alone. The music company’s “filtering” role remains vital.

The solution to music piracy lies not just with creative industries, but with the internet’s gatekeepers, the ISPs. ISPs need to take sensible, proportionate measures to help protect creative content online. That is the core of our message to governments. One such measure is the proposed “graduated response” to warn and ultimately impose a sanction on repeat infringers.

Others in the creative content business agree the era of the “free lunch” is well and truly over. Media moguls such as Rupert Murdoch and Barry Diller have changed the tone of the debate by indicating they will charge for content online. Unfortunately, we have not seen a co-operative response from most ISPs.

Fortunately, some governments have grasped the scale of the problem. President Sarkozy of France has set the standard by introducing a graduated response approach to piracy that is now enshrined in legislation. Internet users who repeatedly infringe copyright will be warned about their behavior and their attention drawn to legal sites – if they continue to flout the law they will ultimately face the sanction of account suspension. This should persuade users to migrate to those legal music services being licensed by record labels. There has been good progress elsewhere: in Asia, South Korea and Taiwan have introduced the graduated response approach to tackle piracy. But in Europe the debate has been tougher. The European Commission has so far failed to match noble words with meaningful actions.

In the UK, following the Digital Britain report, the government is proposing to bring forward legislation that would include, as a last resort, the effective sanction of temporary account suspension for those infringers who repeatedly ignore warnings to stop. It has said it is committed to reducing piracy by about 70 per cent within two or three years. 

The music industry has proved the pathfinder for creative businesses in the digital age but governments must make the next move. Do they want the internet to be properly regulated and intellectual property rights respected and enforced? Or is the internet to be regarded as beyond the writ of law, with the disastrous implications for the creative economy that that implies?

John Kennedy is Chairman and CEO of the International Federation of the Phonographic Industry (IFPI). He has headed record companies internationally and in the UK since the mid-1990s – latterly as President and COO of Universal Music International. He was honored with an OBE from the British government for his leading role in the Band Aid and Live Aid projects.