A scheme that would shift the cost of digital music from users to Internet service providers is gaining international support.

August 26, 2005

Though legal forms of digital distribution of music like iTunes and Rhapsody that charge users to listen to songs are gaining steam, some experts propose a more radical system for collecting revenues: making Internet service providers pay.

“There should be a tax on the people who really make money off the free music, which is the computer makers, the CD burner makers, the MP3 player makers, [and] the ISPs,” said Steve Gordon, an entertainment lawyer and author of The Future of the Music Business.

One new ISP, PlayLouderMSP, set to launch later this year, is bundling unlimited downloads with the regular cost of broadband. It announced its first deal with a major label, Sony BMG, early this week (see U.K. ISP Wins Music Contract).

RIAA Coming Around

File-sharing, the bane of the entertainment industry since the late 1990s, hasn’t been all bad—even for musical artists and labels. Peer-to-peer (P2P) technology for quickly and efficiently distributing files is now catching on for legitimate purposes, though major labels remain cautious and resistant.

Following the U.S. Supreme Court’s ruling against the business practices of P2P file-sharing networks in June (see Grokster Loses), even Mitch Bainwol, chairman and CEO of the Recording Industry Association of America, had kind words for legit P2P.

“The Supreme Court has helped to power the digital future for legitimate online businesses including legal file-sharing networks,” said Mr. Bainwol. He called the decision “an opportunity that will bring the entertainment and technology communities even closer together.”

Harvard Pilot

William “Terry” Fisher, a Harvard law professor and director of the Berkman Center for Internet & Society in Cambridge, Massachusetts, is a key advocate of revising the process by which copyright holders get paid. His group is working on a project called the Digital Media Exchange, to be built next year. The exchange would compensate artists by dividing customers’ subscription fees based on how many times a work is played.

Mr. Fisher said the system would not use digital rights management to control the use of works. DRM is an increasingly heavy component of online music stores and services.

While there is concern that a lack of DRM might scare off music labels and movie studios, Mr. Fisher dismissed this fear.

“Especially for music, the system leaks like crazy right now,” said Mr. Fisher. “This is not going to add to the leakage; we will just create an alternate revenue source. It’s a way of making more money that doesn’t cost them anything.”

A potentially bigger challenge would be “devising a way of reconciling accurate counting on the one hand with privacy rights on the other hand.”

People fear targeted marketing based on knowledge of their preferences, he said, and watchers of porn or “junky action films” might not want their tastes to be known.

Mr. Fisher said his preference would be for governments to impose a tax on ISPs to collect revenue and make all works available to consumers. He says that China, some countries in Eastern Europe, and Brazil seem as if they might be open to this possibility.

Mr. Fisher also promoted a public copyright registry that lists owners of works. That way, when people want to use a song or film, they’ll know whom to ask.

Making Friends

ISPs would do well to offer content to their subscribers, said Andrew Parker, CTO of CacheLogic, a Cambridge, England-based firm that monitors and reduces ISP bandwidth usage.

“ISPs can’t squeeze bandwidth because they’re still in a land grab,” he said, referring to the intense competition to offer high-speed Internet. “The emotional relationship is with content. The danger is to become a mere conduit.”

And this week’s announcements of Verizon and SBC’s partnerships with Yahoo (see Verizon, Yahoo in DSL Hookup, Yahoo, SBC Team on Music, and Yahoo Fueling DSL Demand) show that ISPs are seeing the value of Mr. Parker’s thinking on the matter.

But ISPs and Hollywood are not quite buddies, as high-speed Internet revenues have been largely driven by illegal file-sharing.

“At least 60 percent of activity on broadband networks is file-sharing,” said PlayLouderMSP CEO Paul Hitchman. He contends his 18-month-old company is “flipping the traditional relationship of resentment between ISPs and content owners.”

PlayLouder is especially focused on replicating the social nature of file-sharing networks by allowing customers to trade songs. However, the DRM details are not yet settled, said Mr. Hitchman. It’s unclear whether subscribers will be permitted to burn CDs, download songs to their portable players, or keep songs after canceling their PlayLouder service.

The bargaining power of one ISP may not be enough to get music labels to allow these kinds of flexibility. And Mr. Hitchman notes that his negotiations are limited to the United Kingdom; his company will have to find outside partners to make the deals available internationally.

But there does seem to be international support for the idea of ISP-sponsored music, at least in theory. The Organisation for Economic Co-operation and Development (OECD) in Paris advocated such a system in its recent commentary on the digital music industry.

“If ISPs charge a few euros or dollars a month, it would be larger-than-average revenues from regular CD purchases,” said OECD economist Sacha Wunsch-Vincent.

“Deploying broadband or 3G is a huge investment,” he added. “It needs to be recuperated somehow, and the only way is with value-added services. There’s win-win situations between the ISPs and the consumer content providers which haven’t really been seized yet.”