Giving music a chance: promoting new markets and fighting piracy
John Kennedy, CEO and Chairman IFPI
Athens, May 26, 2005
Good afternoon, my name is John Kennedy and I am Chairman and CEO of IFPI. I am delighted to be joining you in Athens today, at a time when Greece is enjoying a period of impressive achievement on the international stage. You brought the modern Olympics back to its original home with fanfare and great cultural celebration. You defied the football pundits by winning the European Championships.
These are proud accomplishments, and the success continues. Helena Paparizou has won you the Eurovision Song Contest – not to mention the honour of hosting next year’s awards in front of a TV audience of 150 million. Greece’s international profile, in music as in other areas, is on the up.
I am here today to represent the recording industry worldwide. IFPI, the organisation which I head, promotes the interests of over 1400 large and small record companies, majors and indies, in over 70 countries of the world. Our mission is to help the industry find new markets for its music, physical and digital; to fight piracy, on the internet and in our physical markets; to work for good copyright laws and enforcement practices; and to promote awareness of, and policies that reflect, the economic and cultural value of music.
In Ancient Greece, music was associated with the gods and described as having great power over human beings. Music was seen as something magical, and really, that hasn’t changed. Music continues to have this tremendous power to awaken our emotions. Music has universal appeal and is a language that we all share.
It has, at the same time, developed into a business. And that is why we are gathered here in Athens today.
I have said I am delighted to be in Athens, but I am not here just to celebrate. Greece has a rich music culture and an important music market – but it is also a market with very serious problems that need to be addressed. I would love to say that Greece’s recent international music success is matched by a international reputation for successfully containing music piracy – but I am afraid I cannot say that. Along with Spain, Greece is our biggest piracy problem country in Western Europe. It joins countries like Estonia, Czech Republic and Slovakia, all with piracy levels above 45%. In fact with a piracy rate of around 50%, Greece is one of the very few Western European countries where illegal music copies almost outnumber legal sales.
I will return to our industry’s issues in Greece shortly.
Today I am going to talk about the state of the international music industry and the contribution we make culturally and economically. I will outline what we and our member companies and national affiliates do to fight music piracy. I look at what we are doing to build the digital music business, as well as the lengths we are going to raise public awareness of our issues. And – last but not definitely not least – I will tell you what we need from governments to help us do our business.
First of all, let me give you a brief overview of where we stand from an international perspective.
Overview of the industry
Today, the international recording industry is steadily and purposefully adapting itself for a new era and a new way of doing business. We are proactively looking to distribute music in every way, in every format and to every consumer possible – just so long as the music is properly licensed and paid for.
This is without question a period of dramatic change in our industry’s landscape. We have been through years of turmoil, with the combined impact of falling CD sales and surging internet piracy. Now, the future looks more hopeful.
Global sales, at US$33.6 billion, appear to be stabilising after successive market falls over the last five years. Digital distribution of music has been transformed from a theory into a business reality within a period of just a few years. But physical sales still represent the vast majority, over 95%, of our revenues. Increasingly, our global markets are split between those with high internet penetration where digital sales are now proliferating, and those where the CD is still overwhelmingly the dominant format.
Fighting piracy is our industry’s number one challenge. Internet piracy has had a devastating impact in markets of high broadband growth – for example cutting by over 30% the size of the German music market within five years to 2004. But elsewhere, in major markets from Mexico to Spain, and from Russia to Greece, traditional disc piracy, run by organised syndicates and backed by organised crime, remains a substantial threat to our business.
In the digital world, record companies are pushing music into the mainstream of consumer life. A host of new players is vying for business, ranging from online retailers like iTunes and Napster, Internet Service Providers, mobile companies and, of course, traditional physical retailers. All these players are eagerly looking for the winning business model of the future - whether it be music downloads, subscription services, ringtones, music video clips or songs swapped on a would-be legitimate file-sharing networks. All of them are searching for that elusive target - the music consumer of the future. How he will buy, rent or subscribe to his music; how his music listening habits will fit into his lifestyle; what format he will want, and what device he will want to play it on; how he will want to store his music, and how much he will want to pay for it.
And all the time, while record companies are working to build this legitimate music market, a very different kind of internet operator is working against us, abusing technology to devalue music and to stop the legitimate business ever taking off.
These are the unauthorised file-sharing services, the pirate websites and the uploaders who illegally distribute copyrighted music on a massive scale. It is an uneven contest – what other business has to break into what is effectively a 100% pirate market – but one in which our member record companies are determined to prevail.
That, then, is a snapshot of the international environment in which the recording industry is trying to build its future.
But before we discuss piracy and new markets, let me tell you what the recording does - as an investor in culture and artists, as an economic contributor and as an employer - and at the same time address a few myths along the way.
The recording industry and the virtuous circle of re-investment
Many people forget that the recording industry is a massive investor in culture throughout the world. Every year we invest billions of euros in creativity and talent, an investment that sustains all the great music that is produced – that is no fewer than 100,000 new releases per year across the world.
As an industry, we estimate that we spend around 15% on research and development, more than almost any other sector.
R&D as % of Sales
Such exceptionally levels of investment are made possible because of the virtuous circle of revenue-raising and re-investment that underpins our entire business. 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 circle: record companies, new artists, established artists, music retailers, music distributors, radio stations, film companies, advertisers, TV companies, your businesses and the public. And of course the biggest beneficiary of all is government tax revenues.
The virtuous circle of investment depends critically on a simple idea: that music is properly licensed and paid for. It is at the heart of our business model, and what we act to protect. It is above all what distinguishes the legitimate recording industry from those who steal, counterfeit and pirate our product.
The fight against commercial piracy
Some people mistakenly think that all piracy these days takes place on the internet. That is very far from the truth. It is true that in some countries, like Taiwan and Korea, internet piracy has replaced not just legitimate business but also physical piracy. However, fighting piracy of physical CDs and DVDs is just as great a priority to our industry today as it ever was. The market in illegal music sales is around 4 billion euros – one eighth of the value of the global music market – and that is only at the low prices that pirates charge. Over the last five years the number of pirate discs has doubled to more than 1 billion discs sold – that means that one in three of all music CDs sold worldwide is an illegal copy.
IFPI puts together a Commercial Piracy Report each year, and copies of these are available here today. Last year no fewer than 25 markets in which record companies try and sell music were identified as having more illegal than legal CD sales. In 2005 Greece, with piracy at 50% is knocking on the door of that inauspicious group of countries – Latvia and Estonia are the only European countries registering a higher piracy rate.
Our view of such a high piracy rate in a country like Greece is simple. For a country which, in its own right and as a member of the EU, has an important example to set to the rest of the world, it is unacceptable for piracy to be tolerated to this degree.
Of course, you may not be surprised to hear this from me. But you will hear it more and more from allied industries based on intellectual property in the film, software, games sectors. And you will hear it more and more from other governments who recognize that it is overwhelmingly in their economic interests to tackle copyright piracy. Today’s global entertainment and media sector – a broad alliance of industries founded on intellectual property – is worth no less than one trillion US dollars, according to Price Waterhouse. Copyright industries now represent over 5% of Europe’s GDP and this is growing each year. The percentages for the USA and Australia are similar.
This is a motor of economic growth and prosperity, and a key driver of the development of today’s innovation and knowledge-based economy. It cannot function without proper intellectual property protection and enforcement.
Governments are finding that prosecuting music piracy syndicates is also a short cut to tackling organised and serious crime. At IFPI we have the most renowned and professional anti-piracy enforcement operation in any industry – a team of 250 investigators and analysts who track pirate traffic, advise and train governments and help enforcement authorities arrest, convict and sentence the illegal traders. They use the methods employed to tackle the drugs, fraud and money-laundering business. Every year they help decommission and close down factories with a vast capacity for producing pirate discs – last year they stopped production equivalent to half the United States CD market. You will hear more on this, and on the proven links between music piracy and organised crime, from other IFPI speakers on this programme.
But our self-help measures cannot alone do the job of containing piracy. Governments have to act. We need political commitment, we need good laws and above all we need committed and sustained enforcement –including penalties that will genuinely deter the pirates.
In Greece you have a vast industry of CD-R burning syndicates which are ripping off your legitimate companies, hurting the artists who need the investment from record companies and tarnishing your international reputation. Remember, it is local artists who are suffering the most from this. It is they who really depend on investment to start their careers and they who are very vulnerable to the moves by record companies in Greece to cut their roster of artists.
I will take this opportunity of saying what IFPI would like to see in Greece. It is the following:
A final word on tackling commercial piracy. These measures need to be sustained and effective and they need to start now. In your plans for hosting the Eurovision Song Contest next year, you will be interested to know that this year’s host, Ukraine, decided that it needed to clear the streets of its large pirate CD trade in advance of the event. Operation Intellekt saw a very efficient enforcement crackdown. I would like to see similar action in Greece, but the planning needs to start early. To seize the opportunity and bring about sustained improvement, the enforcement programme needs to start now.
The Internet: developing new business and fighting piracy
I said earlier that the recording industry is advancing decisively into the age of digital distribution. Our challenge has been not just to make music more difficult to steal – but to make music easier to buy online than to steal. In 2005 we can confidently say that that goal is being met.
As IFPI’s Digital Music Report announced a very positive news story when we published it in January this year – and copies of that report are available to you today. In many markets, digital music has moved in the last year from the margins to being a mainstream part of consumer life. Recent innovations, from high speed internet access to peer-to-peer technology, have brought information and entertainment to consumers in ways that barely existed a few years ago. Online music is fantastically good value – 99 cents for a song you will own for life; and the possibilities for new revenue streams for the content owners are very exciting. The landscape has changed dramatically, and, as most participants in this emerging market know, this is just the beginning. iTunes has led the field, and is now present in most European markets. After its launch in Greece earlier this year, consumers have online access to hundreds of thousands of tracks.
The facts and figures show that the digital music market is on the move internationally:
I hear some disgruntled criticism about the digital music business. Most of it is ill-informed, and I welcome any opportunity to tackle myth with reality. For example, record companies have not been unnecessarily slow in embracing digital music. In the last two years the highly complex process of digitising and licensing repertoire has been accomplished fast and effectively, including the setting up of rights management and technical protection systems. Of course it takes no time to get music on to an unauthorised website – but that is not what the music business does. And of course the breathtaking pace of change has caused problems in this new market – notably the lack of interoperability between devices, an obstacle to which the recording industry, along with consumers, seeks an urgent solution.
In summary the online market is a momentous opportunity for the music industry and its consumers. More music can reach more people in far more ways than ever was possible before. This, I believe, is where our industry’s future lies. It is in the ubiquity of music and in the proliferation of ways of getting music to the consumer - music made available at any time, in any place, on any format, in any country, via any distribution method.
But there is one sacred caveat – it must be properly licensed and paid for. Artists and copyright holders must retain the exclusive right to determine how their music is distributed digitally, just as they do in the offline world. Payment for music funds artist livelihoods, investment by record companies and employment throughout the music sector. Music may be voluntarily given away for free by its creator - but it should not be forcibly taken from those who invested, created and produced it and are owners in the rights to that music.
Fighting Internet Piracy
As you may know from the huge publicity it generated, we have not been afraid to defend ourselves from the theft of our music on the internet.
In April of this year, IFPI stepped up our legal actions against illegal peer-to-peer filing sharing to help clear a space for legitimate services to develop. We announced a further 963 new actions in 11 countries in Europe and Asia.
This is the largest wave of litigation we have taken and there will be more lawsuits announced before the end of the year. The total number of cases against illegal file-sharers has risen to 11,552 worldwide.
Why did we take this action? Because of the evidence of the damage illegal file-sharing was doing to our business – down 15% globally since 2000. Because the law is incontrovertibly clear that illegal file-sharing is tantamount to stealing other people’s music. And because, finally, after months of raising awareness and warning people who were file-sharing – it was clear that only bringing legal actions with real financial penalties was going to have the right impact.
We’d rather these 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.
Education before litigation has been key to our strategy in fighting internet piracy. We have promoted online legal services, set up websites to confront the myths about online piracy, advertised on radio and newspapers and run campaigns graphically warning about the risks of illegal file-sharing. We sent file-sharers 45 million instant messages in 12 countries. You might call us the nicest litigators in the world. We have sued people only as a last resort.
Across the world we have responsibly informed people of the legal risks in illegal file-sharing before taking action. Here are some examples:
We believe that the litigation, though not necessarily always popular, is nonetheless working. Our surveys show seven in ten Europeans now know that file-sharing music without permission is illegal. Consumer attitudes are changing. Take-up of legal online services is rising while use of unauthorised services is falling. They have a long way to go before they meet – but the trend is encouraging.
Meanwhile litigation is helping contain the problem. We estimate that the number of infringing music files fell slightly from January 2004 to January 2005 from 900 million to 870 million. That is in stark contrast to the rapid rise of broadband penetration across the world.
There are also signs of success in Germany, where the number of illegal downloads has fallen from over 600 million in 2003 to 380 million in 2004.
From time to time some people have tried to claim immunity from our actions, or that the law in some way exempts them from the risk of legal penalties. A judge in Canada inexplicably sowed some doubts on that front last year by ruling that Internet Service Providers were not obliged to disclose to record companies the identities of copyright infringers. That ruling, however, was effectively overturned on appeal last week, paving the way for actions in Canada.
The message from the IFPI and our national affiliates is clear: the law grants no immunity for illegal file-sharers and there are in truth no havens of legal confusion. Greece has not yet seen legal actions in this area, but this may still happen in Greece just as elsewhere. The law is as clear in Greece as anywhere. People who continue to upload unauthorised music for distribution on file-sharing networks will run the risk of legal action and financial penalties.
As well as attacking those who abuse peer-to-peer technology, we are working closely with those who want to put that technology to legitimate commercial use. In the USA, Shawn Fanning’s new Snocap project has pointed the way to harnessing peer-to-peer technology for commercial use. If a legitimate and viable commercial business results, based on payment and permission of right holders, this could be a very exciting development for the entire online business.
Whatever does develop from such initiatives, the legal situation surrounding p2p services is going to have a very important impact. Shortly we will see the US Supreme Court ruling on the legality of Grokster. In Australia in the next few weeks a ruling is expected on the legality of KaZaA.
We are hopeful that these cases will help clarify the legal status of file-sharing services, and in turn give a great shot in the arm to the legitimate business. These cases are about the rights of a pro-technology legitimate music sector that wants to get music to consumers the right way – and protecting those rights from the bad operators, who seek to abuse technology to take our content and deliver it for free.
Before I finish, let me raise one of the most pressing priorities for our industry in Europe, on which we seek firm support from the Greek Government.
Europe has always prided itself on being a champion of culture, yet the EU is seriously lagging behind many other parts of the world when it comes to protecting its recordings. Performers and producers receive 50 years protection for recordings in the European Union, while many other countries such as Australia, Singapore and Brazil offer 70 years protection. The U.S. protects recordings for 95 years, which is 45 years longer than Europe.
This situation is becoming critical because some of the most important classical and popular European recordings of the 20th century are due to fall out of copyright in the foreseeable future. In Greece, the first hit single by Nana Mouskouri, the “White Rose of Athens”, is due to fall into the public domain in just six years. From this time onwards, the artist will not receive any revenues from this recording, which can then be commercially exploited by others, appear in ads and be used in ways in which the artist may not approve.
These recordings are treasures of the European music industry and it makes no sense that the work of European artists receives a much longer term of protection abroad than at home. It should also be remembered that many early recordings can now have a second commercial life on the internet. Online distribution gives record companies the possibility to make their entire back catalogue available, in a way not possible in the past because of limited capacity in retail stores. This potential will be lost if these recordings fall into the public domain in Europe well before they do in other markets.
The European Commission is now looking at the Term of Protection Directive to see whether it needs to be updated to take account of technological developments. We therefore strongly urge the Greek government to stand up for culture and for an important creative industry by calling for term of protection for performers and producers to be extended in Europe. The European Union should be brought up to the highest international standards of protection in order to protect its vital musical heritage.
Let me finish with a call to action: a call to Greece to tackle the number one problem affecting the music industry in the country – physical piracy. It is one thing to hear governments respond positively to speeches such as this and to pledge more enforcement, more convictions and tougher penalties for pirates. It is quite another thing to see those pledges translated into reality. When we publish our Commercial Piracy Report next month, it will show Greece with a music piracy rate of 50% - the highest rate by far in Western Europe. By the time the 2006 Report is published, I would like to see that rate halved at least. It is in the interests of the Greek music community, the Greek economy, Greek music and Greece’s international reputation that such a target is achieved.
Many thanks for listening to me, and I would be happy to take any questions you may have.