John Kennedy speaks at London Calling

Introductory speech - 28th June 2007

John Kennedy, Chairman & CEO, IFPI

Good morning.

I would like to extend my thanks to the organisers of London Calling for giving me this platform to speak to you all today. For those of you who do not know me, my name is John Kennedy and I am the chairman and chief executive of IFPI, the body that represents the recording industry worldwide.

In undertaking my job, I sometimes feel that I must have insulted someone in China in a past life and attracted the old curse “may you live in interesting times”. For there is scarcely a week over the past few years that has not been “interesting” for the recording industry.

It is not all bad news by any means, but sometimes - if I am honest - you feel as though you are strapped into a particularly hair raising rollercoaster.

Record companies, in an amazing feat, have created what this year will be a $3 billion digital music industry. Yet CD sales are falling dramatically in the US and other major markets. Kazaa, the biggest brand in illegal peer-to-peer networks signed a $115m dollar deal with the major labels to go legitimate. Yet figures show there are 20 illegal downloads for every one legal download worldwide.

IFPI is about to publish its annual Recording Industry in Numbers that summarises trends in the music industry and illustrates the oxymoronic way in which the sector is developing. It shows that overall revenue from traditional physical sales is down and this drop has not yet been offset by the growth in income from digital sales or licensing. We are still striving for that “Holy Grail”.

The report’s basic message is that technology has changed the music market forever and it is still evolving rapidly. The days of digital music meaning only a straightforward online a-la-carte service are over.

Our members have licensed more than four million tracks to over 500 services worldwide. Consumers can now legally obtain music in a myriad of different ways online and through their mobile phones in a way that suits them, at a time that suits them and in a format that suits them.

The development of such services explains why rumours of the death of digital rights management are exaggerated. DRM is still needed to ensure that a subscription remains a subscription and does not become an upload to the rest of the world. It is the foundation on which the numerous and multiplying subscription services depend.

Our members have, of course, taken different approaches on whether to apply DRM to all their products. That is only natural in a free market. But all agree that the decision on whether or not to use DRM to protect their products should rest with the creators themselves and that the plug should not be pulled on subscription services by stripping DRM from all their releases.

One of the coups pulled off by the technology industry has been to throw a smokescreen around the issue of lack of interoperability so that people perceive difficulty in moving tracks around their personal devices as a problem about DRM. Yet the real bar to the more flexible use of music by consumers is not DRM, but the lack of interoperability. Hopefully it is a barrier we can overcome.

Recognising that consumers want to use music they buy flexibly fits in with the recording industry’s mantra of license, license, license. When new services such as YouTube and Bebo approach record labels to talk about deals the overwhelming desire of our members is to come up with an agreement that works for both parties and get the music out there.

In addition to pursuing these exciting new business models, the recording industry is also working harder to develop existing revenue streams. For example, I am the first to applaud the work PPL has done to drive returns from performance rights in the UK.

Yet, we still have no broadcasting rights in the US and no public performance rights in Japan. These anomalies are costing us hundreds of millions of dollars in lost revenue. Such situations can be changed though. We have recently worked in China to ensure that the country’s hundreds of karaoke bars are licensed for the music they build their businesses on in a deal that will net the record industry millions of dollars. We must all work harder to secure our rights across the world and be paid for the work we produce.

When it comes to new business models, consumers will determine which will succeed and which will not. When mobile phone companies developed the first handsets, texting was an afterthought. Now it is a multi-billion dollar revenue stream. The most successful ways of enjoying music in the future may also shoot out of the left field.

One of the driving factors behind consumer behaviour is that people seem to be leading ever more hectic lives.

That is why the industry has licensed services than enable them to buy music on the go through their mobile phones. That is why one of the recent commercial successes in the US has been Paul McCartney’s album that has been heavily marketed through busy coffee shops. That is why supermarkets with heavy footfall account for such a large percentage of sales in the UK. Record companies need to ensure that they keep up with busy consumers and offer them - where possible - what they want, when they want it.

Of course, what some people want is to download music for free. They obtain it from illegal P2P networks and other sources. It is a fact that the most swapped infringing tracks online are the most popular songs of the day – this is not people discovering new music, trying before they buy. And they don’t care whether the tracks they take are produced by majors or independents – they just want the benefit of a permanent copy of a piece of music without paying for it.

It is impossible for record companies to put together a commercial proposition that can compete with free, unlicensed downloaded music. That is why we ask governments, law enforcement agencies and the technology industry to work with us to curb ways of obtaining copyright infringing music.

I applaud the recent announcement from AT&T that they recognise the importance of music and other creative works and will take action to clear their networks of infringing material. I look forward to seeing how this will be achieved in practice.

We are also pioneering new ways of tackling online piracy – targeting pre-release groups, pulling down the hubs that enable illegal P2P networks to operate, as well as continuing actions against serious uploaders and centralised services like Pirate Bay that persistently and flagrantly breach copyright law on a massive scale.

We do that because the record industry is based on a very simple economic model. Up to 20 per cent of the revenues we generate through sales is ploughed back into discovering and nurturing new talent. If sales dry up because people obtain their music illegally then the funds to develop new artists dry up too and the industry contracts.

This is not scaremongering. Ask the people who have lost their jobs in record labels around the world. Ask the retailers who have gone out of business. The industry is shrinking now and we must crack the problem of piracy before the situation becomes irreversible.

Such shrinkage has led to industry consolidation and many have speculated about where this leaves indies in the modern music market. I think it is simple. The fight against piracy is important for companies large and small. The need to connect innovatively with consumers through existing and new technology is important for companies large and small. The need to hone razor sharp A&R skills in an age where music is ubiquitous is important to companies large and small.

We should not be apologetic about our role in the marketplace. The commentator Andrew Keane has written a much-discussed book, “The Cult of the Amateur” that speculates among other things about life without the recording industry. He notes that without cultural gatekeepers we loose the ability to filter out the excellent from the banal amongst the almost unlimited content that exists out there.

Go to MySpace to look for information on bands. There are many brilliant artists on there and MySpace is a wonderful resource to help them reach the public. But there are more than 420,000 rock acts and over 400,000 hip hop artists to look at. Record companies are needed to acts as a filter for the public to ensure that they don’t waste their time trawling through amateur work of no real interest.

There is heartening news that this seems to be accepted in one of the most technologically advanced markets in the world – Japan. It may be an old cliché – but it is true that the sun is rising in the east. Japan has become the first large, mature market to show overall growth in the digital era – it can claim to have achieved the ‘Holy Grail’.

If Japan can make it, then so can other markets. We can return to growth and there is still much potential in the music industry if we can emerge from the turbulence of the last few years.

Music is becoming a “brand aid”. Global brands want to buy into cutting-edge music and where it is appropriate to do so record labels will enthusiastically work with them. The 21st century is the age of the brand and the recording industry is in pole position to benefit from that.

Such opportunities explain why in all that we do – in education, in litigation, in negotiation – we seek to stress the value of music. It is more ubiquitous than ever and more important than ever.

When Princes William and Harry seek to remember their mother this weekend, they will do it through the medium of music. When Al Gore tries to drive awareness of global warming the weekend after that, he will do it through the medium of music with his Live Earth concerts.

If we can crack the issues that confront our industry - and I believe that with the help of governments and the technology sector we can – then we will ensure that more great music is recorded in years to come and enjoyed by consumers in the future and we will be the generation that transformed and saved the music industry.

Thank you for listening.