Last year, one US retail store defied the impact of financial and economic downturn of retailing across the nation. Its annual sales swelled to $US3.34 billion in the 2008 financial year, up from US$2.5 billion in 2007, and captivated t

courtesy of itunes

he eye of every competitor. That store was the iTunes Music Store.

Looking at iTunes’ success in the context of the recording industry makes it all the more impressive. As the global financial crisis continues to grind away at the revenues of major industries such as banking, construction and mining, the music industry has not been immune. According to sales statistics released by the Recording Industry Association of America, the US recording industry has almost halved its sales in the past decade, from US$14.5b in 1999 to US$8.4b in 2008. Meanwhile, Apple’s iTunes store became the largest music seller in the United States, overtaking retail giant Wal-mart from the number one spot by selling the equivalent of 222 million albums in the 2008. It achieved this despite being part of a recording industry that plummeted 27% in 2008 sales.

It might seem strange that the recording industry, driver of popular fashion and a veteran of promotion that has survived the eras of the record, the audiocassette and the CD, might be unable to adapt to the digital era. In 1964, the beginning of portable audio, Philips introduced the audiocassette and in 1979, Sony pioneered the cassette Walkman. These two recording industry giants then pioneered the next generation with the commercial release of the compact disc in 1980. But these giants played no part in introducing file-sharing, digital formats or online music stores. Quite the opposite, in fact.

To understand the growth of iTunes, the emergence of a digital music market, and the concurrent decline of the recording industry, one should consider the changing role of copyright in the a digital music market that embraces file sharing. Copyright’s original purpose was to further the progress of the arts by balancing access, for enjoyment of works, with incentive for artists to create new, original work. Digital music poses two divergent arguments: that the recording industry has strengthened copyright to counter file sharing, and that file sharing has undermined copyright.

Consider the first argument. Stanford law professor and free culture advocate Lawrence Lessig notes that in the framework of copyright, uses of culture can be divided into three categories: protected, fair and free. In this framework, a protected use of music would be selling the music, a fair use would be a parody of that work, and a free use would be listening to that music. Lessig argues that in the digital world, as every use is a copy, there are by default no free uses, only fair uses and protected uses. Thus, the law provides a natural, unintended extension of the scope of copyright.

The recording industry has successfully lobbied to increase the scope of copyright by shifting the burden of proof to defendants in copyright lawsuits. Under the Digital Millenium Copyright Act, introduced in the United States in 1999, copyright owners like the recording industry can issue of complaint of infringing use to internet service providers and these providers are required to immediately take down the infringing content and, if necessary, block user accounts. This all occurs without assessment of whether there has actually been infringement; it is up to users to prove that they have not infringed. Under the free trade agreement with the United States, Australia adopted these arrangements in 2006.

The recording industry also increased the length of copyright term, that is how long a work is protected, by lobbing for legal reforms in the past eleven years. In 1998, the Copyright Term Extension Act was passed in the United States, extending the works of authors from the life of the author plus 50 years to the life of the author plus 70 years. In 2006, Australia adopted this extended term, again under the free trade agreement with the United States. The charge for stronger copyright continues undeterred in other countries. In late March 2009, the European Parliament’s legal affairs committee recommended that the EU increase the term of copyright to 95 years after the death of author, almost double the current term of 50 years. And so, the term of copyright continues to increase.

The recording industry has also supplemented copyright with technological protection measures (TPMs). Any music consumer of the past decade has likely come across TPMs which prevent ripping on CDs, copying of digital music files and transfer of bought digital music from one device to another. It is illegal under current Australian law to bypass these TPMs, even if the content itself, like public domain works like Waltzing Matilda, is not protected by copyright. In short, the recording industry’s response to the digitalisation of music has been to engineer more and more technological and legal controls on use of music.

But, there is a paradox for copyright and digitalisation. Although digitalisation enlarges the scope of copyright, and this has been supplemented by legal and technological reforms, digitalisation challenges enforcement of copyright by reversing natural protection in copyright and makes access easier. It is here that the second argument arises that file sharing has undermined copyright.

File sharing has reversed the once-natural protection of copyright, that the cost of copying music was greater than the cost of buying music. The vast majority of music CDs from mainstream retail stores cost between $10 to $40. $40 is also the monthly cost of some Australian broadband internet plans with 25Gb of downloads, equivalent to three hundred albums, encoded at the common bitrate of 128kbps. While there is certainly value in the tangible parts of a music CD, such as the album art, it is difficult for most music users to find three hundred times the value of an mp3 in a CD.

File sharing also undermines copyright by creating a marketing dilemma. In the interests of protecting its product, the industry has alienated users through copyright litigation. Since the rise of Napster, the recording industry has opposed to the digital distribution of music. Across the world, from the Recording Industry Association of America in the United States to Phonoverband in Germany, the industry is suing thousands of users each year. With the rise of each new generation of file sharing, from Napster, to Grokster, to Limewire, to The Pirate Bay, comes a new wave of lawsuits from the recording industry targeting internet service providers, file sharing networks, torrent trackers and individual users. The industry’s worldwide collaboration to litigate infringing users is a flawed lose-lose plan. Failed lawsuits against alleged music copyright infringers cost the industry substantial legal fees. All lawsuits, particularly ‘successful’ lawsuits, harm the credibility of the industry, creating an us (user) and them (industry) divide. It should be obvious that suing your industry’s consumers is a losing strategy.

It is from this marketing perspective that iTunes’ strategy clearly diverges from the recording industry. The divergence can clearly be seen in the figure attached.

Developments in File Sharing and Recording Industry in Selected Years: 1999 to 2008

Given that the record industry has opposed each development in file sharing, while Apple has developed a range of compatible digital music products that are competitive in convenience, the success of the iTunes music store should not be surprising.

Perhaps, embracing change is necessary in this new digital music market. In 2007, Apple CEO Steve Jobs argued that because only 3% of all tracks on iPods were legally downloaded, technological prevention measures had clearly failed. Jobs called for record companies “to abolish DRMs [Digital Rights Management, a form of technological protection] entirely… [it] is clearly the best alternative for consumers, and Apple would embrace it in a heartbeat”. In 2008, they did, and Apple did; by April 2009, iTunes Music Store vowed to released 100% of tracks free of these protections.

This article should not be read as an attack on copyright itself as the underlying aims of copyright to are noble and worthwhile. But, the continuing decline of the recording industry and the small, albeit growing, proportion of digital music sales poses the critical question: can copyright adapt to the digital market, or is copyright now fundamentally irrelevant?

Lester Thurow argued in the September 1997 Harvard Business Review that copyright faces a problem of enforcement: “if you cannot enforce a legal right, it should not exist”. Cyber-libertarian John Perry Barlow mounted a similar argument: “Intellectual property law cannot be patched, retro-fitted or expanded to contain the gasses of digitized expression”. The Apple iTunes model reflects these views – it profits, not only by taking advantage of the low cost online distribution, but also by playing by the rules of a file sharing digital music market.

I end this article with the controversial view of music industry commentator Gerd Leonard:

“Because it is no longer about copies, it’s no longer about the right to copy, it’s no longer about reproduction – it’s about how music is being used and how to participate in those much larger revenues.”