Digital Music Sharing: Risks and Potential Benefits for the Industry's Future

(Published December 18th 2005)

Maintaining profitability is one of the greatest challenges facing the music industry today. New technologies offer the potential to increase profits, but they also entail risks, and the industry is always quick to protect itself. New technologies can even threaten the industry’s structures fundamentally, particularly when issues of intellectual property and copyright infringement are at stake.

A case recently brought before the US Supreme Court offers a prime example of the wealth of promise and danger a new technology can pose to the music business. On June 27, 2005, the Supreme Court found that filesharing companies using peer-to-peer (P2P) networks were promoting copyright infringement, thus making them liable when individuals use this software for illegal downloading. This paper deals with the implications of this decision for the music industry, focusing on the contrasting situations that arise for two different types of companies: first the serious challenges facing filesharing companies if they do not revise their business model significantly, and second the potential benefits for online music distribution companies, which have already begun using digital music sharing as an aspect of their overall business concept offering diverse benefits.

The Risks of Sharing Under their current business model, filesharing companies like Grokster stand to suffer from the US Supreme Court decision. Their model is based on providing access to a large Internet database containing lists of users’ music files for other users to download from each other directly, without any authorizations from or payments to copyright owners (Kasaras, 2002). In other words, these filesharing companies are currently in the business of supplying users with free music. According to the recent US Supreme Court decision, however, these kinds of filesharing companies and websites encourage users to infringe on property rights. And from the music industry’s point of view, not only does this threaten copyright holders’ interests, it also calls into question the legitimacy of the industry itself. To avoid such violations and comply with industry demands, filesharing companies will have to reinvent their business model. One way would be to enable users to pay copyright holders for the files they download. The use of filesharing technology per se is not made illegal by the court’s decision (Porter and Rife, 2005). Thus filesharing companies could also offer users “free samples” of music that they could then eventually purchase, allowing P2P distribution to enter a new dimension. It would then present a flexible model of experiencing and buying music that would be in users’ interests and in the music industry’s interests as well.

The Benefits of Sharing To see who the court’s decision can actually benefit, we can look at the example of Apple, which allows music to be purchased online with its iTunes software. It provides this music along with a wide array of music-related information and products—some of them free—including streaming previews, downloadable files, correct meta-tags and detailed content information, history of use, and music-specific data such as genre, mood, and lyrics. This type of music distributor can actually increase revenues by providing a multi-product platform in which conventional music distribution products are presented alongside online digital products to suit all types of consumer demands and tastes. By efficiently deploying its marketing strategies and using “feels like free” distribution models, this type of company allows users to purchase whatever music they want using sampling as a “free” informational tool. This can help customers significantly in the process of deciding whether and what to buy. Sampling is thus the key to the success of this business model.

Why? First, it allows consumers to find their favorite music and thus induces a higher demand for online music by shifting the demand curve of online consumers outward (Peitz and Waelbroeck, 2004). The information available online acts as a pullout market strategy, inviting consumers to find out more about their favorite artists and musicians and guiding them to a wide range of information that they can access easily—and for free—via Internet. Second, sampling allows labels to save on marketing and promotion, and thus cuts costs significantly. In effect, sampling, which is an information-pull technology, acts as a substitute to marketing and promotion, an information-push technology (Mahtani and Salmon, 2001). Today, the music industry infrastructure dictates how the market is supplied on a massive scale. The alternative music market fills a gap left open by the mainstream music market, providing music that fits individual users’ personal tastes. Since MP3 downloads and music sales complement each other in this kind of business model, alternative labels can also use this model to achieve higher revenues (Fisher, 2000). The possibilities of online music distribution ultimately enlarge the potential benefits for the music industry overall. In the future, these benefits can be enjoyed more broadly by both the mainstream and the alternative music industry. Conclusion The long battle over filesharing reveals one thing above all: that the technologies connected with digital music are defining music industry trends today. Modern communication technologies will create a skyrocketing demand for online music distribution in the years to come. By taking a strong position in favor of the copyright holder, the US Supreme Court has protected the industry from the threat of filesharing. At the same time, these limits point the way toward the potential benefits of free music provision—for example, sampling—as a sales tool and cost-cutting means of marketing and promotion. While this can mean huge potential profits for online music distributors, companies that have promoted free filesharing will have to fundamentally reinvent their business model to meet the legal demands and, at the same time, stay profitable.

Filesharing and related technologies offer great potential for the entire industry—both commercial and alternative labels—but only if they take advantage of its opportunities, particularly in the design and marketing of innovative sampling/sales packages. This will without doubt change the way the music industry does business, and could greatly increase its profitability in the future.