Music Is Driving Growth In Digital Commerce

John Kennedy, CEO and Chairman IFPI

Speech at ETNO (European Telecommunications Network Operators' Association) Conference: Any content, Any platform, Any time, Anywhere

3 March 2005, Brussels

Introduction

We are at an extraordinarily exciting moment in the development of the digital music business. The landscape for our industry in Europe has transformed in little more than a year. Twelve months ago, legitimate digital music in Europe was a niche proposition - today it is moving into the mainstream of consumer life.

Record companies have digitised the large bulk of their repertoire and over a million tracks are available for download from hundreds of services. We have delivered on a pledge made consistently over recent years: that we could make make music easier to buy in the digital world, than to take for free.

The greatest ambition of our industry today chimes precisely with the theme of this forum. The record industry has made its repertoire available: now we must market it, promote it and sell it - for download, hire, subscription, wherever and whenever we can. Music, available for the consumer in a array of flexible ways: tracks downloaded individually to portable devices, delivered as ringtones on your mobile phone, or made available via an all-you-can-enjoy model for the payment of a monthly subscription fee.

Any music, anywhere, in any form, on any device, for any consumer at any time - just so long as it is properly licensed secure and paid for. And just as long as music right holders retain their right to determine the distribution of their creative works.

I believe that the future prosperity of music relies on the ubiquity of music - but there is a sacred caveat, and that is that copyright and the choice of the rightholder must be respected. For all the flexibile and different ways that content increasingly will be made available, it is essential that this is voluntary and market-driven.

Ubiquity of music is the key to the future prosperity of the other stakeholders in the digital world too. Music is not just the beneficiary of growth in digital commerce. It is driving growth in digital commerce. And this is a business that will be shared with a new breed of music retailers - online service providers - which will include many, if not all, of the ETNO members in this room.

So the music industry has a common aim with the telecommunications companies and ISPs. But we cannot realise this aim alone. To deliver this we need the right environment. Service providers and music distributors must help us - and in doing so, they will help themselves. If you want content, then it needs to be respected and cared for , not abused.

Above all, the driving force for our partnership has to be respect for music, and respect for copyright.

In the next few minutes I want to focus on four things:

• what the music industry is doing as an investor in European culture and the European economy;
  
  
• how the music industry is making music available widely on the internet and via mobile devices, thereby driving the development of the whole digital economy;
  
  
• what the music industry is doing to protect its rights and stop the theft of its works on the internet
  
  
• what the music industry and the wider digital economy need from ISPs to unlock the real commercial value of the digital environment

The music industry as an investor

First, let's get beneath that term "content" - a description that any true music lover will of course find grotesque and inadequate to describe the role and value of music - and look at what the music industry is bringing to Europe.

We are a cultural asset, but first and foremost we are an industry. One that invests billions of euros every year in creativity and talent.

All the great music that is produced each year, no fewer than 100,000 new releases, released in almost every single language known to man - that does not happen by chance. It is not cheap to record and produce, and it is even more expensive to market.

When people talk about investment they often concentrate on research and development and forget about investment in marketing. In the world of music a piece of music which isn't marketed may be nice, it may even be brilliant or a work of genius, but until it is marketed successfully it does not become a commercial proposition.

As an industry, we spend more on research and development than almost any other sector.

Percentage spends on marketing are less widely known but I estimate that the music industry spends 15% of its revenues on marketing, and virtually all of this is on new releases. An investment again of billions of euros.

If you put these two spends together this is a huge investment. This level of investment is only possible because of the virtuous cycle of investment. We invest, we research, we develop, we market, we sell and we reinvest a huge amount of the sale proceeds to start the process again.

Many benefit from this virtuous cycle. Record companies, new artists, established artists, music retailers, music distributors, radio stations, film companies, advertisers, TV companies, your businesses and the public. Incidentally as with many of our businesses the biggest beneficiary is the taxman.

Our industry enriches people's lives. It is impossible to imagine a day without music. It is unlikely many of us would spend 24 hours without listening to music whether willingly or unwillingly.

And music is great value. You wouldn't always believe it because many commentators complain about the price of music. But in the online world you can buy a piece of music, a true original work of art for 99 cents, and it is yours to own forever. A song for life for less than a can of coke, a loaf of bread, a bottle of water, a cup of coffee or a bus fare or perhaps even an international telephone call.

A work of art that will entertain you, at home, in the shower, whilst working or playing, or in the car, on the plane, or the train. You may play it to your children as you tell them that, the music was better in my day, you may even play it to your grandchildren to convert them to Jimi Hendrix, Johnny Halliday, Pavarotti, Andrea Bocelli the Stones or Coldplay or U2 or even Brahms or Mozart.

For 99 Cents you get something you will keep longer than your clothes, your concert ticket, your Real Madrid shirt, even your car, your digital watch, your iPod or your mobile phone.

To anyone who thinks this is not good value I would paraphrase the author J.B. Priestley and say "you would describe a violin as catgut and wood and Hamlet as pen and ink"

Music is driving the digital revolution

Now let's look at how the music business is advancing the development of a legitimate digital market. As I have said, the landscape has changed dramatically in only the last twelve months.The legal digital non-physical music market is a viable business, and it is providing a shot in the arm to the overall business.

Digital music sites, where consumers can buy or hire music by download or subscription, are proliferating. There are 230 legitimate sites across the world - 150 of them in Europe, and that compares to only 50 one year ago.

Services like Napster and Apple iTunes have within a matter of months become household names across Europe - but in most countries they are in healthy competition with many local sites that specialise in national domestic repertoire.

There are over a million tracks on line, twice the amount of only a year ago. The number of downloads in 2004 rose by more than ten times to over 200 million. Europe is now taking a significant share of this business, particularly in UK, Germany and France. In the UK downloads have already far outstripped physical single sales. And the UK's recently-launched downloads chart reflects how quickly digital is capturing the public imagination.

Revenues from digital music are presently small, but they are set to grow geometrically. $330 million of revenues in 2004 have been estimated, and there are forecasts that that that will more than double in 2005. Some believe that by 2009 non physical digital revenues will be 25% of global music revenues.

These figures are astonishing given that the legal music service providers have to compete against free peer to peer file sharing. What other business has to break into a 100% pirate market?

Legitimate online music services have done what some thought only a year ago was unthinkable: they have proved that they can take on the unauthorised alternatives.

Meanwhile we are working on new business models and revenue streams. Music over mobile phones may be the most exciting of these, with some predictions that music will account for 50% of mobile premium revenues.

And record companies are proactively talking to many technology partners on the best way to harness peer-to-peer for commercial use. If a legitimate and viable commercial business results, based on proper payment and permission of rightholders, this could be an exciting development.

And yes -

The music industry is enforcing its rights

We have had to spend time, money and energy trying to create a space for the legal business. But we have also - and much more reluctantly - invested time and resources into defending that business by litigation. As an industry we are embracing technology on one hand, and fighting the abuse of technology on the other.

We have engaged in a litigation programme against people illegally file-sharing - not popular but necessary and effective. So far there have been 7,000 plus cases around the world and in 2005 there will be many more.

We have used litigation responsibly, effectively and alongside tireless education information campaigns. I have often said that, when you take into account the extent to which we waited and educated before taking action, you could say that we are the nicest litigators in the world.

For years, we sat back whilst our music was wantonly stolen. We tried to educate we tried to raise awareness and then only as a last resort did we commence proceedings and only then against the worst offenders.

Of course we would rather proceedings were not necessary, but we know only too well that the problem will not go away of its own accord. We owe it to producers, artists, composers, retailers and to those employed by the music industry to do what we can to combat online piracy.

And in this fight against online piracy - which threatens above all the emerging but fragile legitimate business from which we all stand to benefit - we need the help of all service providers and distributors of music.

What we need from the ISPs

And this brings me to the partnership I would like to see between the content industries and the ISPs.

There should be nothing at all unusual about expecting your help. No bona fide music retailer would ever dream of stocking pirate music or allowing piracy to take place on its premises. For decades we have worked hand in hand with retailers, and warned them when we know or believe that they have product which was not properly licensed. They then acted responsibly.

The music industry and the telecoms industry need to work in partnership. Let me take the opportunity of this platform to throw out a proposal. You could all suggest a code of conduct by which ISPs would respect the music and the music markers. Here is what it might say.

First, ISPs recognise that copyright infringement on the internet causes serious economic and cultural harm.

Second, ISPs will ask the recording industry to let them know when their customers are infringing copyright.

Third, ISPs will confirm that they already have customer terms and conditions that prohibit customers from engaging in any form of infringement.

Fourth, ISPs agree to enforce those terms.

Fifth, ISPs will work co-operatively and avoid court battles with the music industry.

I don't believe this should be earth shattering. It is certainly not rocket science, and it may even be common sense

If I don't pay my phone or Internet bill I will be cut off should being poor have more draconian remedies than copyright infringement!

The main theme of this conference is how important content is and that quality digital content is a key driver that makes consumers embrace new services. You invest billions in your pipes and cables and satellites but without content you have empty pipes and boxes. At this stage I am not even asking for much if anything by way of a financial commitment. I am asking for your time your energy your commitment and some social responsibility.

There are other issues on which we need to take a common stance. Lack of interoperability between the various music services and players is a very significant problem which, if not addressed seriously by both our industries in the year year, could hold back the development of our digital markets. The danger is of wide-scale consumer confusion and wasted opportunities. There are no easy solutions, but we have to tackle this problem in 2005.

So in conclusion: the music industry is making an enormous contribution to European life, European culture and the Euopean creative and knowledge-driven economy. We are the pioneering "content" industry of the European digital market. In that role, we have suffered huge damage from digital piracy, but we have responded decisively. We have enforced our rights effectively by education and litigation, and we will continue to do so. I believe the future for digital music is very bright, and our ISP partners who distribute that music stand to reap the benefits.

But, we cannot do this alone. We are asking for a commitment from ISPs that will be to the benefit both of industries like music driving the "content" and of the industries distributing it.

We want understanding and appreciation of the commercial reality of the virtuous cycle of investment; cooperation in the fight against piracy; constructive progress to solve the thorny issues of interoperability; and acceptance of the ISPs' social responsibility. That means, above all, that they must not tolerate or countenance copyright infringement.

We can give you what some of your businesses want, any music, anywhere, on any device for any consumer at any time in any form. Just so long as it is properly licensed secure and paid for.

But you must play your part in the bargain. You must respect the content you want and play your role in protecting it.

As an industry we ask you to help us build a bigger and better market for our legitimate, authorised professionally created content - and that in turn will mean a bigger and better market for your commercial broadband services.

Thank you for listening - please now create that code of conduct that we all can benefit from.