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Running Head: Music Piracy and Cloud Services

Music Piracy and Cloud Services Streaming Music and Piracy Patrick Parker

Temple University Professor K. Flener

Music Piracy and Cloud Services Streaming Music and Piracy

Introduction

The easy accessibility of broadband Internet, both at home and on our mobile devices, has created great interest in cloud-based music services. Apples domination of the music download market for the past decade has recently seen new competitors arise using cloud-based services. These services hope to revolutionize music consumption in the form of music streaming and subscription services. Through recent agreements with major record labels and Facebook, Spotify has grown to be one of the greatest challenges for iTunes.

With mobile device and affordable broadband, music fans now have the power to access music on the go. Internet access companies such as Spotify, Rdio, and Pandora noticed this trend early and began establishing powerful cloud-based services, designed to provide users with easy access to their favorite music, without the need for local storage on a hard drive.

After years of losing money to piracy and other factors, record companies could possible see some return from all the file sharing services, as users crave access to their vast libraries of music from within the cloud. In order for the music industry to survive, music fans will have to pay one way or the other.

The impulse to share information and common interest seems hard-wired into human beings and file sharing is a natural progression of that impulse, combining timely advancements in technology with changing attitudes on ownership. Music fans are beginning to accept that they simply cannot consume all the music they want without contributing to the industry either by traditional methods or by subscription services.

Through the creation of software that compresses and store music files, the relationship has changed in the supply and demand chain. These technological advances have raised issues about

the role of the record companies, the digital music distributors, and music sharing among Internet users. This paper will address specifically the changes in technology and law, along with behavioral factors, in order to establish trends and implications of a viable business model for the future of the music industry. Because Spotifys business model is so new, this paper does not present an in-depth examination of the research data. Rather, its purpose is to juxtapose research findings with key observations made in the literature. This paper argues that in recent years, cloud-based services like Spotify are creating new socioeconomic structures for the music industry. The research suggests the state of the industry is slowly becoming more harmonized through the development of new institutional platforms and the commoditization of music as a cultural and socio-economic process.

Background

For over the past 100 years, the music industry has come to be characterized by three major factors: heavy concentration, vertical/horizontal organizational integration, and changing formats for consumption. Through consolidation and acquisition, the major record labels have enjoyed success primarily because of the way in which theyre internally integrated.

Before the Internet, copyright laws were useful in solving piracy problems because the piracy could be attached to a physical product. Law enforcement agencies had physical evidence in the form of bootleg CDs and cassettes to arrest offenders and enforce the laws. By contrast, when you take an MP3 from a computer network, there is not one less CD that can be sold. The physics of piracy of the intangible are different from the physics of piracy of the tangible. (Lessig, 2004) In 1972, the Copyright Revision Act made the "willful infringement for commercial advantage or private financial gain" of recorded music not even a felony. Punishment included one year in jail and $10,000 for the first offense. In 1992 the law was amended, and the stakes went up to 5 years in prison and $250,000 for individual offenders of $500,000 for organizations. (Krasilovsky, Shemel & Shemel, 2006)

As new inexpensive technology, such as cassettes and CDs, made it easier to copy and share music, courts and lawmakers shifted to favoring property rights over the free exchange of goods and information. Music sales were declining throughout the late 1970s until the compact disc was introduced to the Japanese market in 1978. As the popularity of CDs grew, cassette tapes and vinyl gradually became less significant, together accounting for less than 40 percent of total market share in 2000. (Krasilovsky, Shemel & Shemel, 2006)

As CDs became cheaper, they became the dominating force in the market for all record labels. In 1990 the, CD-R (CD-Recordable) was introduced to the consumer market. This presented the first opportunity for people to pirate music without losing sound quality. (O'Malley, 1998) Up until the late1990s, the development and growth of music technology and law was under the influence of key players in the industry itself, allowing for a period of self-regulation and control.

With the topic of music piracy, it is important to address the MP3 file, which allows for easy distribution of digital music over the Internet. The MP3 format was developed and patented in 1989 by the Fraunhofer Institute in Germany, and received a patent in the United States in November of 1996. With this MP3 technology came the opportunity for music fans to download and share copyrighted music with one another. (Schonfeld, 2009)

In 2002, the RIAA reported that CD sales had fallen by 8.9 percent and revenues fell 6.7 percent over from the previous year. This trend has continued over the past decade. According to the IFPI (International Federation of the Phonographic Industry), the recording industry lost sales $4.6 billion worldwide due to piracy. (Krasilovsky, Shemel & Shemel, 2006) 361 million CDs were sold in 2008, which was down almost 20 percent from the previous year. About 84 percent of all album purchases were CDs, down from 90 percent the year before. (Stone, 2009) The RIAA claims Internet piracy is responsible for the decline, though there are many other reasons that could be responsible. Rising prices could account for at least some of the loss. From 1999 to 2001, the average price of a CD went from $13.04 to $14.19. Competition from other forms of media could also account for some of the decline. As Jane Black of BusinessWeek points out

that, the soundtrack to the film High Fidelity has a list price of $18.98, but you could also get the whole movie on DVD for $19.99. (Lessig, 2004) Apples ITunes was also launched in 2001.

After a yearlong study on the effects of piracy and counterfeiting on the U.S. economy has led the Government Accountability Office (GAO) to this conclusion that it is difficult, if not impossible, to quantify the economy impact on the economy. While the report acknowledges that piracy and counterfeiting certainly has some negative effects on the economy, the GAO found that three commonly cited estimates of U.S. industry losses due to counterfeiting could not be substantiated or traced back to an underlying data source or methodology for the research. Because no quantifiable data was presented, the GAO concluded that the economy-wide impact of piracy is pretty much unknown. (Government Accountability Office, 2010)

Attempts To Limit Piracy

Until the nineteenth century, all popular music was excluded from copyright protection. Without a solvent market, no one could commodify or protect its ownership. When a market was established and copyright laws set in place, an artist could sell their work just like any other possession. However, once it was sold, it belonged to the publisher, who could market it as they saw fit, with no possibility of the musician's opposing it. Copyright thus established a monopoly over reproduction, not protection for the composition or control over representations of the work. (Atalli, 1984)

Sirois and Wasko (2011) points out that researchers must explore copyright because the downfall of the music industry, for the most part, is based on the exchange of immaterial items. They argue that we should research the music industry on three levels: the "corporate regime" of consolidation, influence in production, and consumption; and the 1egal-Iegislative regime" of ownership deregulation and the increased scope and duration of intellectual property rights.

When downloading sites first began, sites such as Napster and Limewire required only registration information to gain access to all the free songs they wanted. Napster acquired over 10 million users within the first nine months. After eighteen months, there were close to 80

million registered users of their service. (Lessig, 2004) A court case began in 1998 in attempt to stop the sale of MP3 players using the legislation of the Audio Home Recording Act. In 2000, the RIAA file suit against Napster and the legislation included the Digital Millennium Copyright Act of 1998.

The RIAA (Recording Industry Association of America) is a trade group that represents the legal interests of the recording industry, and the holders of music copyrights. When the RIAA first realized the availability of free MP3s for download was a threat to the economic structure of the music business, it attempted make accessibility to MP3s difficult. In Recording Industry Association of America v. Diamond Multimedia Systems, the RIAA tried to prevent sales of the first MP3 player, the Diamond Rio, claiming that a MP3 players would encourage piracy would have a devastating effect on music sales. Previously, users who downloaded MP3s could only listen to them on their computers, but the Diamond Rio made MP3s portable. Diamond was charged for violating the Audio Home Recording Act by creating their portable MP3 recording devices. The RIAA claimed that Diamonds players lacked a system that would verify the copyright status of files on the device. The Ninth Circuit court found that the Diamond Rio did not violate the Act and therefore its production could continue. The RIAA reacted to this defeat by trying to sue the file-sharing systems themselves. (Zilkha, 2010)

The Digital Millennium Copyright Act, known as the DCMA, deals directly with issues related to copyrights in the digital environment. (Krasilovsky, Shemel & Shemel, 2006) Napster did not store its library of songs on servers, but rather was software that allowed users to connect directly to others computers and download the MP3s. The problem was that the files that were being shared were protected under copyright law. (Crews, 2001) The court determined that the actions of Napster led to the loss of sales of CDs. As a result, the Ninth Circuit Court of Appeals ruled on February 12, 2001 that Napster committed repeated infringements of copyright law. (Krasilovsky, Shemel & Shemel, 2006)

While courts were able to quickly dismantle Napster, similar services soon take its place. Although these other services, Kazaa, LImewire, etc., used different interfaces, they were not very different functionally because each enabled users to upload content and make it available to

any number of other users. With a p2p (Person to Person) system, you can share your favorite songs with an unlimited number of people. (Lessig, 2004)

Based on 2003 survey that found 21% of the Internet population shared files over P2P networks and that two-thirds of file-sharers were unconcerned about copyright laws, the RIAA could no longer simply sue P2P systems and hope to end file sharing. The RIAA then set out to prosecute individuals. The initial RIAA campaign was intended to educate college students and p2p users against illegal file sharing. Following this campaign, on September 8, 2003, the RIAA began suing illegal file-sharers while offering clemency to users who promised to stop file sharing. (Zilkha, 2010) From September 2003 to February 2006, the RIAA had sued 17,587 people for illegally downloading music. In December of 2008, the RIAA said it would no longer bring lawsuits against individuals. (Sherman, 2011)

DRM

When Apple introduced the iPod in 2001, it wanted to provide its own music library service, called iTunes, to allow users to buy new music. In order to ensure the music industry was going to receive its share of the profits from this service, DRM (Digital Rights Management Software) was imposed. Digital rights management systems aim to prevent unauthorized copying and to reduce the overall rate of piracy. For the consumer, DRM meant only being able to play certain files on particular devices. This caused frustration for consumers and resulted in the pirating of DRM-Free music. (Lymburner, Pikas, & Pikas, 2011)

On January 6, 2009, Apple announced that it would no longer incorporate DRM in its music files. In order to do this, Apple gained the permission of the four major music labelsUniversal Music Group, Sony BMG, Warner Music Group and EMI, along with thousands of independent labels.

Although without DRM people were able to freely share music, Apple was still able to gain profits through the purchase of the songs. Based on what the music labels charge Apple, songs

on iTunes are available at one of three price points: 69 cents, 99 cents and $1.29. (Neumayr & Roth, 2009)

Apple also has another way to create profits to coincide with the release of the DRM-Free music. ITunes users have the opportunity to upgrade their ITunes library of previously purchased songs to versions of the same songs, but without the DRM lock and with better sound quality. But, each song upgraded costs 30 cents, essentially asking users to pay for the songs in each library all over again. Apples iTunes music store has sold over 6 billion songs, and at 30 cents per upgrade, Apple can make an estimated $1.8 billion in upgrade fees alone. (Schonfeld, 2009)

Since the fall in CD sales continues and illegal downloading remains prevalent, the strategies applied by the RIAA to stop piracy have failed. In order to address the issue of piracy, the music industry needs to also research determinants underlying the behavior of a potential paying customer, and that of a music pirate. At this time, file sharing has become the normal way for users to acquire music. (Zilkha, 2010)

Current Measures to Reduce Piracy

In May of 2011, the PROTECT IP Act was proposed to curb access to websites that are dedicated to infringing on counterfeit goods and copyrighted works. The websites targeted by the PROTECT IP Act are defined as having no significant use other than violating copyright laws by distributing copyrighted material, or for sites promoting or selling goods bearing counterfeit trademarks. PROTECT IP Act requires non-infringing third parties to adhere to with the courts order by cutting off access to the targeted website. (Sherman, 2011)

While is difficult to justify businesses that are designed to make a profit from counterfeit goods or copyrighted material, this method could possible have negative unintended consequences. There is potential for sites that conduct legal businesses could be targeted and shut down based on the behavior of a single user. In a statement issued on May 12, 2011, Senator Ron Wyden of Oregon suggests that the PROTECT IP Act may have serious ramifications for Internet speech

and commerce and could trample free speech and stifle innovation. (Sherman, 2011)

SOPA, the Stop Online Piracy Act, is a bill that introduced to the United States House of Representatives on October 26, 2011. It gives the U.S. government and copyright holders the authority to seek court orders against websites that illegally traffic copyrighted works and counterfeit intellectual property. Although SOPA is new, it builds on previous legislation. In October of 2008, The PRO-IP Act was approved to increase civil and criminal penalties for trademark, patent, and copyright infringement Supporters of the bill include the MPAA, RIAA, Comcast, Viacom, NBC/Universal, and many more. (United States House of Representatives, 2011)

Why Music Fans Share

Factors contributing to the behavior of piracy in the music industry have been attracting the attention of researchers and music business insiders for years. Recently, researchers have been studying whether the creation of P2P networks is responsible for the decline of sales in the industry (Peitz & Waelbroeck, 2004; Liebowitz, 2006; Oberholzer-Gee & Strumpf, 2007). While most studies agree that music sales have decreased due to pirated music, a minority takes an opposing view (Oberholzer-Gee and Strumpf, 2007).

Social norms are the main factor on one's behavior and can support or undermine a law. The social norm of digital music file sharing has effectively prevailed over copyright law and market alternatives. While several cultural, economic, and political factors can be explored to explain piracy, one possible factor can be found using the theory of planned behavior (TPB). Social networks and online communities, whether built by fans or for commercial purposes, provide an alternative means of connecting with both music and other music fans. They also became a means of connecting with artists themselves, via social networking services like Facebook, and Twitter. (Jones) TPB suggests that individuals behaviors are chosen by considering the consequences of their

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actions. TPB has been applied to a large variety of behaviors, some of which can be seen as analogous to music piracy by their delinquent character. Kwong and Lee (2002) used TPB to explain the intention to exchange music files on the Internet. The study found that beliefs in the relationship between the record company and consumers and the discouraging effects of copyright protection laws had a significant impact on the attitude toward music piracy. The study also found an important factor in users intent to pirate music is based on the perception of the act amongst their peers.

Spotify - Streaming Services

One of the most critical attributes of cloud music services is that software programs and data no longer necessarily reside on our personal devices. Streaming services like, Spotify, Google Music, iCloud, Pandora and GrooveShark are following in the footsteps of Napster. Except this time, these services have been granted access to the music libraries of the major record labels. Cloud music exists on large servers owned by various companies and allows users to access stored data from multiple devices. Music cloud services allow users access to a collection of millions of songs for a fraction of the price it would cost to acquire those songs individually. This makes it increasingly easy for younger or newer users to familiarize themselves rapidly and comprehensively with a particular artist or genre. The more music as software becomes a part of the users experience with music, the more natural it becomes to view music as a service. (Morris, 2001)

Sean Parker, founder of Napster, former President of Facebook, and current board member of Spotify has described Spotify as an attempt to finish what Napster started. (Parker, 2011) However, while cloud services allow for improved musical experiences and easy access to music, some of the conveniences overshadow many drawbacks. Cloud music services enter their users into service agreements that rent music for a fee or control access to the music for certain devices. One could see shift away from music ownership and towards music in the cloud is part of a planned effort to organize and control digital music through technologies like DRM and sophisticated user behavior tracking software. (Morris, 2001)

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Morris (2001) believes that music in the cloud is a threat to musics status as a social and cultural good. With intellectual property laws, computer software, and user agreements constantly being updated, music fans potential face a loss of consumer product protections, control and usability, rights of first sale, and other rights and privileges.

Signing up for many cloudbased music services requires personal data to very the user. As a result, these services expose users to various risks that arent associated with previous media. With CDs or cassettes, the commodity itself could be lost or damaged. With cloud services, user information potentially could be hacked or exploited. Users cannot simply optout of providing this information though. Personal data then serves as the connection between various social networking sites, interfaces, devices and songs. (Morris, 2001)

Spotify is a peer-to-peer music streaming (real time, not download) service that allows access to music through a platform that allows users to easily find new music and create playlists of their favorite songs. Spotify, developed in Sweden, was launched for public access in October 2008, and offered free accounts to the public in February 2009 when it was launched in the UK. You can sample on an unlimited basis. It costs nothing to make each additional copy. And you find out about music primarily through your friends. (Parker, 2011) Spotify is funded by paid subscriptions and advertisements played by the Spotify player at intervals in between songs. Spotify, which launched in the U.S. in July after becoming popular in Europe, offers a free, ad-supported streaming service and a paid premium version. Priced at $4.99 to $9.99 per month, Spotify's paid version adds offline music access and other advanced features. The service currently has 10 million active users and 2.5 million paying subscribers worldwide. Spotify is currently the second largest source of revenue for the music industry in Europe. Spotify has also seen a 25% drop in music piracy in Sweden between 2008 and 2011. (Ek, 2011) However, as Spotifys user base has grown, its business model has been criticized, as advertisements appear to be becoming longer and more frequent. In February 2009, advertisements were reported as lasting 15 seconds, and playing at half-hour intervals

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(McCormick, 2009). By May 2009, the intervals between audio advertisements were not consistent, and it is not unusual to hear an advertisement after every song. (McLean, Oliver & Wainwright, 2011)

When asked if the platform would remain free, Daniel Ek, CEO of Spotify, replied, "We're creating this platform knowing it's the early days, and we'll figure things out along the way," he said. "Right now, there's really no monetization within this platform." (Ek, 2011) The new platform offers a handful of applications from Spotify partners. A TuneWiki app lets users read lyrics while listening to songs and a Rolling Stone app brings playlists and articles into Spotify. Another app from Songkick, searches users' music libraries and suggests local concerts and events that might appeal to them. (Ek, 2011) The platform system takes a similar approach to Facebook, a close Spotify partner. Facebook decided several years ago to open its service to outside developers, transforming Facebook into an ecosystem of externally created apps and features.

Conclusion

While recording technologies and record labels have changed over time, the capital commoditization of the industry has remained the same. History shows us an ongoing battle between the companies that produce playback formats and device, the recording industry, and the consumer. Technology has provided a contradiction within the industry as it has both helped the music industry grow globally while simultaneously seeking to destroy itself from within. (Sirois & Wasko, 2011)

Attali (2004) believes eavesdropping, censorship, recording, and surveillance are weapons of power. This eavesdropping allows institutions to memorize, interpret, control, and manipulate the culture of a people. Musical distribution techniques are today contributing to the establishment of a system of eavesdropping and social surveillance.

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In order for the traditional music industry to survive, it must contend with changes in industry practices, social behaviors, and technological advancements. Music will have to conform to the standards set by cloud services. The industry must be careful as music fans have more power now than ever in deciding its future.

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