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    Recording Industry and the Digital Age Essay

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    In this essay, several studies are examined that illustrate the economic impact of digital piracy on the music industry and the U.

    S. economy. Also examined are the changes made in copyright laws, as well as the recording industry’s strategies designed to deal with this growing problem. The first study, done for California Management Review in 2010, shows steady industry growth throughout 1990’s quickly eroded with Napster’s rise in popularity in 1999. A second study, completed in 2009 for the International Science Review, backed up earlier claims made by the recording industry in Federal Court that they account for a significant portion of the U. S.

    Gross Domestic Product. The study also shows a direct correlation between increases in file sharing and decreases in sales. The final study examined was completed in 2009 for Contemporary Economic Policy. It offers evidence that the recording industry’s partnerships with digital content providers, is having a positive effect on consumer’s willingness to pay for low priced premium content.

    Further research is required in order to measure the impact these [and yet to be] partnerships have in reducing online piracy. Keywords: digital piracy, music piracy, file sharing, economic impact, U. S. Copyright Law Captain Crook: Why the Recording Industry must Adapt to the Digital Age According to the U. S. Department of Commerce, the Entertainment Industry [as a whole] accounts for 6% of the United States Gross Domestic Product [GDP] (Bender & Wang, 2009).

    Since 1999, the RIAA [Recording Industry Association of America] has seen sales of recorded music drop from $14. billion in 1999, to $7 billion in 2011 (“Scope of the Problem,” n. d. ). The source of the recording industry’s dramatic losses since 1999, are the pervasive number of sites that offer free uploaded music available for downloading and sharing.

    These sites have crippled a music industry that many felt had been too slow adapting to changes in the way music was being sought after and ultimately consumed. The act of making music available on-line [uploading], and/or copying said music [downloading], for free, without compensating the copyright holder, is called piracy. Piracy is a form of copyright infringement. No matter what name it is given, piracy is a criminal act that is wrong and is impacting the Recording Industry and this country’s economic recovery.

    A major issue that must be addressed is the overall attitude of indifference towards illegal downloading. This is especially true with the generation that came of age at the turn of the Millennium. The role of technology in their lives, and its ability to provide instant access to information, informs how they perceive information and its uses. It’s not to say this generation condones theft; they simply don’t see it as stealing. To them, downloading and sharing digital music files without paying, is nothing more than an exchange of information. Traditionally, this is the very demographic that has always been the recording industry’s bread and butter.

    There are those who would argue that the current copyright laws are outdated and no longer apply in the 21st century. In the opinion of some, the rules have changed; and so must the very definition of what constitutes copyright theft. Regardless, there is no denying the legalities of this issue must be addressed. In the meantime, the recording industry and lawmakers have pro-actively sought to adopt more pragmatic policies and legislation enabling them to compete with illegal file sharing. By pursuing partnerships with Digital Service Providers [DSPs] and utilizing digital media marketing strategies, the recording industry can create value and demand for their products; making illegal downloading less and less attractive. Background and Brief History Piracy, as it pertains to this subject, is defined as “the act of illegally reproducing or disseminating copyrighted material, such as computer programs, books, music, and films” (Hosch, n.

    . in Encyclopedia Britannica). Music piracy, or bootlegging, has been a problem for record companies for as long as the recording industry has been around. However, since the advent of personal computers and the rapidly expanding digital age, digital [or on-line] piracy has become a major problem for the music industry. By the late 1990’s, readily available computer software made it even easier to copy music in many formats and compress it into a digital file, or MP3 format, that is easily transferrable. Music could then be shared by simply uploading it to a file sharing site where anyone could download it for free.

    These sites became known as P2P [peer to peer] sites (“Napster,” n. d. ). The Sound Recording Act passed by Congress in 1971, allowed for an array of reforms to copyright laws. The three biggest reforms were the lengthening of copyright terms, first in 1976, and then again in 1998. In 1984, Congress banned the rental of sound recordings around the time that cassette tapes were beginning to overtake vinyl albums as the primary from of music distribution.

    Congress also made it illegal to even attempt to circumvent these anti-piracy measures (Cummings, 2010, p. [659-681]). In 2001, as a reaction to changing technologies, the Supreme Court ruled against P2P sharing networks and criminalized sites that allowed its users to share and/or exchange digital audio files without the expressed consent of those who owned the copyrights. It seemed that this ruling was a reflection of a broader consensus. Sharing these files without compensating the copyright holders, as the Supreme Court saw it, was illegal.

    They also saw it as detrimental to the U. S. economy (Cummings, 2010, p. [659-681]). The most notorious of these file sharing sites was Napster.

    It is estimated that at its highest volume in 2001, there were 1. 5 million people sharing and downloading music for free using Napster’s P2P software (“Napster,” n. d. ). In 2001, the Recording Industry Association of America [RIAA] was successful in receiving a court ordered injunction against Napster, effectively shutting the site down. It seems, however, that it may have been too little too late.

    The seed had been planted. Other sites began filling the void left by Napster. The idea of file sharing [uploading and downloading music for free] had taken off [see figure 1. ] The Economics of Piracy The word piracy usually brings to mind images of buried treasures, Caribbean islands, and Johnny Depp [see figure 2. ] In recent years however, another form of piracy has increasingly become the bane of the music industry.

    It is known as on line, or digital piracy. In the late 1990’s, rapid advances in technology, access to information, and ever advancing software, began to re-shape the way music was listened to and consumed. On-line music piracy, in the form of file sharing, quickly became the most prevalent form of copyright infringement. The music industry’s inability [or unwillingness] to adapt to these rapid changes had cost them dearly.

    It is because of the digital piracy’s negative impact, that an immediate response to this problem is needed; the survival of the recording industry and its artists depend on it. The 1990’s were good for the music industry. It enjoyed continued growth throughout the decade. CD sales and shipments saw steady increases from $7. 5 billion in 1990, to $14. billion in 1999 (Goel, Miesing, & Chandra, 2010, p.

    [6]). But, as the decade began to draw to a close, trouble was looming just on the horizon. The introduction of Napster in 1999 was a sign of things to come. It is no coincidence that shortly after the launch of Napster, sales quickly began to decline.

    By 2008, sales for the recording industry had dropped to $8. 5 billion (Goel, Miesing, & Chandra, 2010, p. [6]). Initially, the entire entertainment industry seemed to be caught off guard by the file sharing phenomenon; but soon enough, a strategy for litigation had been developed. By 2001, the music and movie industries had joined forces and were successful in getting an injunction against Napster.

    Their strategy was simple, but effective. It was their position that, because their products consume so much of America’s disposable income and leisure time, it impacts a very valuable percentage of this country’s Gross Domestic Product [GDP. ] The U. S.

    Department of Commerce statistics cited to make this claim showed that the entertainment industry actually accounts for 6% of the United States Gross Domestic Product [GDP. The Recording Industry Association of America [RIAA] was also able to show that the entertainment industry is one of a few that still enjoys a positive trade balance globally. These statistics, obviously, weighed heavily in the court’s deciding in their favor (Bender & Wang, 2009). A study done for the International Social Science Review published in 2009 concluded that the RIAA’s argument did have statistical merit. In fairness, the study does acknowledge that file sharing could actually be a more efficient way for the recording industry to market their products.

    Doing so would allow [potential] customers to sample an artist’s work prior to [possibly] purchasing it. But in its conclusion, the study estimated that for every 1% increase in file sharing, music sales decreased by . 6% (Bender & Wang, 2009). That is almost a 1 to 1 ratio.

    To put it in monetary terms, the recording industry loses $6 million every time digital piracy increases by a percentage point. And while 1% may not seem like a lot, when dealing in billions of dollars, it adds up quickly. Grammy Winner Promotes the Virtues of File SharingSurprisingly, some of the most vocal opposition to the theory that digital piracy hurts the music industry comes from the artists themselves. One of the first artists to come out in opposition to the theory was Janis Ian. In 2002, the Grammy winning singer, songwriter, author and poet, offered a different, and more personal perspective on file sharing.

    Her position is that file sharing does little to harm the multi-billion dollar global recording industry. In fact, as she sees it, file sharing actually benefits the artists by increasing demand for their music; at least that’s been her experience. According to Soundscan statistics [the industry’s standard for tracking album sales,] there were 32,000 new releases in the U. S. by the major labels in 2001.

    This figure does not include the smaller independent labels that do not report sales to Soundscan. Conservatively, it is estimated that about 100,000 titles were released that year. To her, that seems like “an awful lot of releases for an industry that’s being destroyed” (Ian, 2002). Currently, Janis Ian’s website [www. janisian.

    com] still averages about 75,000 hits per year even though her last charted hit on Billboard was in 1975. This she attributes to the rise of file sharing sites such as Napster. In fact, when Napster was at its peak in 2001, she claims her website averaged 100 hits per month; just from people who had downloaded her two biggest hits, “At Seventeen,” and “Society’s Child. ” This, according to Janis, generated an additional $2,700 of income per year for her (Ian, 2002). She goes on to say that these figures do not factor in the [potentially] countless others who may have chosen to purchase her CD at a store, or perhaps anyone who may have paid to attend one of her many live performances.

    All of this, she attributes to interest in two songs that were illegally downloaded. Beyond Selling CDs: The National Economic Impact of File Sharing Janis Ian does make a compelling [if somewhat anecdotal] argument. Her sales seem to have benefited [slightly] from illegal file sharing. But her argument fails to address the full scope of the problem.

    One of the problems is the drop in overall sales. The Recording Industry Association of America [RIAA], the leading trade organization whose members are responsible for 85% of all recorded music produced and sold in the United States, offer these statistics as evidence. Since 1999, sales of recorded music had dropped 53% from $14. 6 billion to $7 billion in 2011 (“Scope of the Problem,” n. d. ).

    That is an average loss of $1. 12 billion per year to the U. S. economy.

    As if that alone weren’t enough, a 2007 study by the Monthly Labor Review conducted for the U. S. Department of Labor also offers some very alarming statistics. The study measured the economic impact of the creative arts industry in the first quarter of 2006. The study’s main focus was on New York and Los Angeles; the two cities where the entertainment industry has the biggest economic impact.

    But most revealing, were the study’s nationwide statistics. Nationwide, the creative arts/entertainment industry accounted for 1. 2 million private-sector jobs in the first quarter of 2006. The range of jobs took in to account all facets of the entertainment industry from dinner theaters to recording engineers and business managers. That is 1.

    1% of total U. S. employment, and accounts for $16. 2 billion in wages (Dolfman, Holden, & Wasser, 2007, p. 23 and 29). These statistics reinforce the argument of the vital role the recording and entertainment industry plays in the health of the U.

    S. economy. In 2013, what would a 1. 1% reduction in unemployment and an additional $16.

    2 billion in taxable income and consumer spending do to for the U. S. economy? In terms of growth, the impact would be huge. The numbers don’t lie. A Sign of the Times The economic impact of music piracy and file sharing has been felt by retailers across the country, but none more so than at Melody Records, on Connecticut Avenue in Washington, D. C.

    The store closed its doors on March 9th, 2012 after 35 years in business. Since 1977, this husband and wife owned “full service” record store had become a fixture in the D. C. area. Todd Dibell, a former account manager for Polygram Records and Universal Music, ended up being one of their most loyal customers. His job was to sell music to stores like Melody Records.

    But more often than not, Todd would actually end up buying music from them instead. For him, it was all about the discovery of new music through the personal connections he had with the owners and employees (Cole, 2012). One of Todd’s favorite store employees was Charlie Manning. Charlie had worked for Melody Records for 30 years. It is where he met and married his wife some 20 years ago.

    Charlie also laments over the loss of the personal connections. For him, what is missing from the way that music is being consumed today is the “value of browsing;” the joy of spending the afternoon in an actual brick and mortar store. Time spent developing relationships with store clerks while browsing is what leads to discovering new music. As Charlie sees it, human interaction is falling by the wayside in the digital age. It’s being replaced by iTunes and Amazon (Cole, 2012).

    The Law Another reason digital piracy remains a problem is that current U. S. opyright laws clearly define what constitutes violations of the law, and the consequences of doing so. Federal law, as it written in section 501[Infringement of Copyright] part (a), says that anyone found to be in violation of any of the exclusive rights of the copyright owner is “an infringer of the copyright or the copyright owner” (“Copyright Law of the United,” n. d.

    ). Section 504(c) [Remedies for Infringement: Damages and Profits] states the copyright owner is entitled to “actual” and/ or “statutory” damages (“Copyright Law of the United,” n. d. .

    “Actual damages” refers to any profits the infringer may have gained in the act; clearly aimed to address file sharing sites. “Statutory damages” are geared more towards addressing individuals who are found to be in violation of the law. The awarded damage amounts were set at a minimum of $500, and up to $20,000 for each violation (“Copyright Law of the United,” n. d.

    ). The Digital Theft Deterrence and Copyright Improvement Act of 1999, amended Section 504 (c) [Remedies for Infringement: Damages and Profits] (“Copyright Law of the United,” n. d. ). The amendment substantially raised the amount of damages awarded. The $500 minimum was raised to $750, and the maximum from $20,000 to $30,000 for each violation (“Copyright Law of the United,” n.

    d. ). This was the recording industry firing the opening salvo in the war on piracy. As the amendment’s name clearly implies, it was squarely aimed at dealing with the rise of digital piracy being ushered in by Napster.

    This amendment, in conjunction with all copyright laws, sends a clear message: This is the law of the land. And like any other law, it must be obeyed. What is Theft?Morality in the Digital Age While the law clearly states that file sharing is indeed copyright infringement, and therefore illegal, how it [and the morality of file sharing] is viewed by the very demographic that the recording industry is targeting presents an interesting problem that many opponents of digital downloading like to point to. An example of this was a study conducted by Management and Computer Science Professor Anthony G. Gorry at Rice University in 2005.

    One of the courses he teaches focuses specifically on the effects of information technology on society. He hypothesized that the law, and the recording industry’s characterization of digital piracy as simple theft, fails to address a larger issue. The issue, as Professor Gorry saw it, is the idea that technology had significantly altered how theft was viewed by an entire generation. For this generation [commonly referred to as the Millennial generation,] information and technology has always been a large part of their everyday lives. For better or worse, they had been weaned on having instant access to almost anything at the touch of a button. Inherently, Professor Gorry theorizes, information and technology had simply become an extension of who they are.

    Professor Gorry presented the class with a scenario that occurred when he was a graduate student in the 1960’s. A well-known member of the football team had been caught stealing a book from the campus bookstore. Once the incident made the campus newspaper, several student groups came to his defense. The student group’s arguments focused on the university’s requirement for the student to have the book, the high price of the book, and the bookstore making the book so easily accessible. From that point of view, they argued that the incident should be viewed as entrapment, not theft.

    Professor Gorry’s students overwhelmingly thought otherwise. To them this was a clear case of theft (Gorry, 2005). Prof. Gorry then played the class a song from his laptop that a student had given him. He then asked the class if the song he’d just played them was stolen property; like the book from the campus bookstore. Because a student had given him the song, and because the song was a copy, they answered with a resounding no.

    Prof. Gorry then pointed out that all compact disc covers carry warnings about unauthorized duplication. The song he played was clearly a copy of the original. At what point, he asked, is copying stealing (Gorry, 2005)? This is where things got interesting. In his conclusion, he states”the students who saw theft in the removal of the book back in the ’60s did not see stealing in the unauthorized copying of music. For me, that was the most memorable aspect of the class because it illustrates how technology affects what we take to be moral behavior.

    ” Defining Copyright Infringement in the Digital Age’s Infancy Although purely anecdotal, Professor Gorry’s findings do offer a glimpse in to the next generation’s views on morality. But more importantly, those who still hold the opposing view that digital piracy is not a crime cite legal precedence to uphold their claim. One of the cases cited by the opposition is the 1994 case of the United States vs. LaMacchia. David LaMacchia, a student at MIT, and described by the courts as a “computer hacker,” operated a bulletin board on the internet that encouraged users to upload and download copyrighted commercial software.

    The courts estimated losses of for copyright owners to be in excess of $1 million (“Statement of Marybeth Peters,” 1997). But because prosecutors could not prove a commercial motive for doing so, the courts had no choice but to find Mr. LaMacchia guilty of the lesser crime of wire fraud. The Federal Indictment against Mr.

    LaMacchia was subsequently dismissed (“Statement of Marybeth Peters,” 1997). Therefore, those who oppose penalties for digital piracy can argue that, as long as it is not for commercial profit, it is okay. The No Electronic Theft Law ; the Courts Unfortunately, proponents of digital piracy continue to rely on the case above to justify their reasoning. However, the “No Electronic Theft Law” act of 1997 [NET Act H.

    R. 2265] specifically addresses digital copyright infringement. In fact, the United States vs. LaMacchia case was one of the primary reasons the law was enacted. It would only be a matter of time before the merits of the law would be put to the test.

    It finally happened in 2006. At age 28, Jammie Thomas, a single mother of 2 from Brainerd, Minnesota found herself facing multiple lawsuits from several music industry organizations for allegedly using a file sharing service called Kazaa to illegally download music. The case achieved notoriety because, unlike others facing similar lawsuits, the now married Mrs. Thomas-Rassert, refused to settle her case out of court (Browning, 2012).

    And because of extensive media coverage, the case has essentially become the face of the recording industry’s war on piracy. After several court battles, rulings, reversals and appeals, her case still remains far from settled. In October 2007, a jury awarded the plaintiffs $222,000 in damages [$9250 per song. ] However, Chief U.

    S. District Judge Michael Davis concluded that he erred in his instructions to the jury, and awarded Mrs. Thomas-Russert a new trial. His position was that simply making a copyrighted work available to the public may not necessarily constitute “distribution” under the law [an interpretation that continues to divide the courts.

    ] However, the second trial ended with the jury finding in favor of the plaintiff again. This time the plaintiff was awarded $1. 92 million [$80,000 per song. ] Judge Davis found that amount to be excessive, and reduced the damages amount to $54,000 [$2,250 per song. ] The recording industry refused to settle for that amount and successfully argued for a third trail.

    So after a third trial in November 2010, the jury again sided with the plaintiff and awarded them a $1. 5 million [$62,500 per song] judgment. This time, Mrs. Thomas-Russert’s attorneys appealed the decision; arguing that amount violated her rights of the due-process clause in the constitution. Judge Davis sided with the defendant, and reduced the amount awarded back down to $54,000.

    However, upon review, the Eighth Circuit Court of Appeals reversed this decision and remanded the case back to Judge Davis, and ordered the original $222,000 amount reinstated in September 2012 (Browning, 2012). The Eighth Circuit Court of Appeals decision clearly represents a broader consensus as well as upholds the merits of the No Electronic Theft Act. No matter the legal nuances, digital piracy is illegal and should be prosecuted to the fullest extent of the law. Solution[s] While issues with the legal definition of what constitute theft in the digital age continue to persist, one solution adopted by the recording industry has been to partner with Internet Service Providers [ISPs] and use a warning and throttling system. This method can identify and then issue a warning to the most egregious violators.

    If those progressive warnings are not heeded, the ISP will then begin to throttle the connection [slow down connection speed, making downloading virtually impossible. ] This method can also include ISPs blocking certain URLs, and shutting down the individual’s internet connection all together. From a public relations standpoint, this method of deterrence has gained a wider range of acceptance than the previous method of prosecution/litigation (Nakashima, 2008, n. p. ).

    Perhaps the most effective solution has been the recording industry’s willingness to market and create value for their products by finally embracing the very technology that once was being used against them. This is evident in the rise in popularity and profitability Digital Service Providers [DSPs] like iTunes and Amazon. Sites like these offer ever expanding catalogues of music for every taste imaginable. Between the two, there are over 40 million songs available download, most for .

    99 cents per song, as well as entire albums for as little as $5. 00 (“Google Music Has a Lot of Catching,” 2011) (“MP3 Music Download,” n. . ). Purchased music can be downloaded and even streamed to almost any enabled device.

    Now, purchasing high quality sounding music online, legally, has become so convenient and cost effective that it rivals illegal file sharing sites. With that in mind, and to further illustrate the point, review the results of a 2009 study titled “Estimating the Willingness to Pay for Digital Music” conducted for Contemporary Economic Policy. The study concluded that simply reducing file sharing through legal means would not necessarily be enough to lead to an increase in revenue (Chiang ; Assane, 2009, p. 12 – 522).

    The consumer’s “Willingness To Pay” [WTP] must also be considered. In other words, offering a convenient high quality product, at a low price, can sway one’s decision to purchase said product. This study took controlled samples of students from diverse social and economic backgrounds nationwide and surveyed them. Their study indicates that the rise in popularity and availability of fee based services such as iTunes, Amazon, and Spotify does have a positive influence on consumer’s WTP. By continuing to partner with digital/online music services, the recording industry can now [at least] offer a viable alternative to peer-to-peer file sharing (Chiang ; Assane, 2009, p. 512 – 522).

    The study determined that an individual’s willingness to pay [WTP] is largely influenced by two things. One would be the level of disposable income. The second would be the perceived risk of getting caught. Obviously, the perceived level of one will undoubtedly influence the other. While the study doesn’t directly address the attitudes towards file sharing in the digital age, it does demonstrate that, government policy in conjunction with effective marketing, does have a positive influence.

    In its conclusion, the “Willingness To Pay” study determined that the two pronged approach does seem to be working. Increasing the perceived risk of music piracy, and the perceived value and convenience of legal music downloads, can reduce illegal downloading (Chiang ; Assane, 2009, p. 512 – 522). The study concedes that there will always be an underground market for illegal file sharing. But, by continuing to build on its momentum, the recording industry has begun to make up some ground (Chiang ; Assane, 2009, p. 512 – 522).

    To put this all in perspective, Jeff Beck, an Accounting Manager for Saddle Creek Records, offers insight into how the recording industry has had to adapt its business model in order to stay competitive in the digital age. Because of the popularity of Digital Service Providers [DSPs] like iTunes and Amazon, music is now available instantaneously (Beck, personal communication Saddle Creek Records, January 8th, 2013). Jeff summed up the new business “mantra” that record companies have begun to follow, “the proliferation of these services means we have dozens, if not hundreds of more revenue streams, albeit very small revenue streams in a lot of cases. The industry mantra is to put out as many buckets to collect as many pennies as possible. It eventually will add up.

    ” In Conclusion The law is clear. Digital piracy is a criminal act. Not only is it a criminal act that must be prosecuted, there is also clear evidence that it is detrimental to a U. S.

    conomy that continues to struggle. Remember, the entertainment industry accounts for 6% of the United States Gross Domestic Product. Digital piracy adversely affects economic recovery. It also adversely affects one’s personal economy as well.

    Take a moment, and do some simple math. Spend . 99 cents for one song downloaded legally, or $750 for downloading the same song illegally. Which of these options makes more financial sense? With all the low cost music readily available for legal downloading and streaming, why risk breaking the law as well as breaking the bank?


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