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October 12, 2004

Why the music industry is suing you, your neighbour, or your child

Posted by Tyler Cowen

Why has the music industry throughout Europe decided to sue hundreds of those sharing music files on the Internet? Tyler Cowen - Professor of Economics at George Mason University and author of Creative Destruction: How Globalization Is Changing the World's Cultures, What Price Fame?, and In Praise of Commercial Culture - argues here that it is not an attempt to scare off the downloaders, similar suits in the US have not stopped illegal file-sharing. Rather, Prof. Cowen argues, it is 'about spreading the idea that downloading is wrong and illegal... think of the lawsuits as one way to buy space in the newspaper, but without paying advertising rates.'

In early October an international music industry group launched hundreds of lawsuits across Europe, including 28 in the UK. They targeted individuals sharing music files on the Internet through such services as KaZaA or Grokster.

If you are not familiar with the workings of these services, they are remarkably easy to use. You download some software onto your computer. You type in the name of the song you want and hit return. If you have a fast broadband connection, the song can come in less than a minute in the form of an MP3 file.

The software costs nothing, though it does slow down your computer and often brings annoying spyware. Still, millions of people, most of all the young, have found this to be an attractive bargain. And the music companies, well, they have had to compete with "free".

Earlier in March the music group issued a smaller series of lawsuits against individuals in Germany and Denmark. Many of these suits have been settled out of court, typically for sums of up to €13,000.

Is the music industry simply stupid? How many other businesses proceed by suing large numbers of their customers?

One way of making sense of music company strategy suggests that they are trying to stop downloading by scaring off the downloaders. But I find this view implausible. Most Western countries will not send downloaders to jail. Fines will deter to some extent, but users can make longer-run adjustments. The suits in the United States have not stopped illegal file-sharing. Rather they have driven it onto the lesser-known downloading services, whose customers have not been legal targets. How long will it be, for instance, until a foreign-based downloading service offers encrypted anonymity to its users?

Furthermore downloading is not the only way to avoid buying music. In fact downloading is an inefficient way to get your songs. Many files are corrupt or mislabeled. The sound quality is not ideal. I am more enamored of the idea of capturing music by software. In the United States listeners can now use software to track the contents of digital satellite radio (if you don’t know, you pay for satellite radio, the sound quality is much higher, there are no or few commercials, and there are many channels and much greater musical diversity). You program the software to record the songs you like. Over time you build up a large musical library at zero cost. And of course it is fully legal to record songs off the radio. This idea will likely evolve, as only a scant few use it at present. Over time we can expect some similar technology to help listeners capture music for free.

The real problem is not the new technology of downloading. The real problem is that storage space is falling in price and is rapidly becoming nearly costless. If people can store music for free, they will find ways of capturing music for free.

The second and more plausible interpretation of music company strategy focuses on long-term norms. I see the music companies as trying to hold back a new commercial norm. Specifically, the music companies are trying to maintain the old norm that you should always pay for music.

Two years ago most downloaders did not know that their activities were illegal. Few uploaders felt guilty about making large numbers of songs available for free on the Internet. It was viewed as akin to lending your CDs out to your friends, except that the "friends" here were both anonymous and large in number. "Art should be free," right?

Since the United States lawsuits, there has been a subtle shift of opinion. Many people, especially those beyond their teenage years, are now proud of not being downloaders. They brandish their Apple iPods with pride. The cultural climate has shifted to the point where people, even if they download, are embarrassed to admit as such. Only in the under-twenty crowd is illegal downloading still a badge of honor. And many of these children now face (admittedly imperfect) regulation from their parents.

The music industry knows that the long run will bring a network of free music. It knows that free music may have illegal status, a "grey" status, white status (recorded from the radio), or perhaps be pirate (from abroad) but not illegal in the actionable sense. But there will be two networks, a pay network and a free network.

The pay network stands a good chance of competing against the free network. Perhaps the pay network can offer better sound quality, tie-ins (concert tickets, T-shirts, etc.), upgrades and maintenance service, better information such as album liner notes, song selection services, easier interface, and other benefits. The future course of technology is difficult to predict. Nonetheless it is easy to see why a pay network will have a greater ability to finance these goodies than will a free network.

The music companies - present and future suppliers of the pay network - do not wish to face a ten year period where everyone is used to getting music for free. They do not want an entire generation to grow up thinking of music as a free commodity. They do not want hackers and illegal downloaders to become established as folk heroes.

Once commercial norms become established, they are difficult to dislodge. We are all used to breathing air for free. Imagine the response if suddenly we had to pay for air as we now pay for ice cream cones. Maybe the air would have a better quality and the price would be very low. Still I predict there would be a public outcry. It would be very difficult, in the legal and public arenas, to set up a business to charge people for breathing clean air.

Similarly, bread riots were a common phenomenon of the twentieth century in the Third World. When bread subsidies were removed or cut, the price of bread would rise. The new price of bread still might be lower than would be found in many other poor countries. Still rioting might occur. People cared not only about the absolute level of the bread price, but the level of the price relative to what they had been expecting.

The music companies know they are in for a rough ride. They will never win the competition on the basis of price, but they hope to win on the basis of quality. They feel they need commercial norms on their side. And this means that downloading cannot be allowed to proceed unanswered and unhindered. They cannot live with a norm that music should be free.

Note that the music companies are demanding far smaller penalties than they might hope to win in a formal lawsuit. This is not out of benevolence to the illegal downloaders. The lawsuits are about spreading the idea that downloading is wrong and illegal, not about inflicting the maximum possible punitive damage. Think of the lawsuits as one way to buy space in the newspaper, but without paying advertising rates. And the company gets the journalists – a more credible outside source – to be the ones reporting that downloading is illegal. Too high a penalty would make the companies look mean.

I am not here to attack or defend the behavior of the music companies, but rather to explain it.

That is why they are suing you, your neighbour, or perhaps your child.


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An insightful article, but I have a few quibbles.

Note that the music companies are demanding far smaller penalties than they might hope to win in a formal lawsuit.

Not so. The US settlements have been in the region of $10-20,000. The headline awards theoretically possible under US law would be very unlikely to be awarded in a non-commercial context.

Too high a penalty would make the companies look mean.

This hasn't deterred the litigation against 11 year olds.

Since the United States lawsuits, there has been a subtle shift of opinion. Many people, especially those beyond their teenage years, are now proud of not being downloaders. They brandish their Apple iPods with pride. The cultural climate has shifted to the point where people, even if they download, are embarrassed to admit as such.

I see little evidence of this. As for people brandishing their iPods with pride: where do you think they're getting the music to fill them? A typical iPod holds around 5-10,000 songs... do you really suppose that most users have bought anywhere near that figure at 99c a pop from iTunes, or indeed ripped that number from their own CD collection?

(It takes around 10 minutes to rip a CD. To convert a modest collection of, say, 100 albums will take 17 hours. For larger collections... you do the sums. I find it faster and more convenient to download music I own on CD rather than ripping it myself.)

The lawsuits are about spreading the idea that downloading is wrong and illegal, not about inflicting the maximum possible punitive damage.

The two are not mutually exclusive. A primary aim is to put the fear of god in the major sharers, deterring them and reducing the quantity of music available. (Distributed networks such as kazaa will fall apart when the relatively small number of major sharers leave.) This requires significant damages. As Bentham would point out, where the risk of punishment is so small, the level of punishment must be commensurately greater to achieve deterrence.

Posted by: Anonymous Coward at October 12, 2004 11:15 PM
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> The real problem is that storage space is falling in price and is rapidly becoming nearly costless

Yes, This is phenomenal. Less than ten years ago I was working for a Very Big Technology Company, setting up a Big Database for a Big Customer. We were using 1,000 one-gigabyte disks; I don't know how much the disks as part of the entire system actually cost, but I would imagine several hundred thousand dollars. Now, if I felt like it, I could have three 400-gigabyte disks in my living room for a little over a thousand bucks. Less than ten years.

> Two years ago most downloaders did not know that their activities were illegal

I beg your pardon? I find this (unlike most of what you write) highly implausible

Posted by: Alan Little at October 13, 2004 03:52 PM
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Really since it is music and video that are pirated the most, where are the warnings? Sure you get the massive blocks of text that nobody wants to read, but if they were more graphic, people will listen. For example; Cineworld has figured this out, and it does make people listen all that the government needs to do is to post adverts in all forms of media and make it sound serious. That's why most people do it, because they don't know it's illegal and doesn't sound like a serious offence even though it is and if you are caught...god help you

Posted by: Liam at March 14, 2007 01:36 PM
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