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Technology > Tech Investor
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Music misses an(other) opportunity
A brief hope for a new industry direction is dashed.
January 27, 2003: 10:37 AM EST
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - It seemed too good to be true. When I read the Reuters report on Monday that Hilary Rosen, chairwoman and CEO of the Recording Industry Association of America, had declared that her agency "will hold ISPs more accountable" and suggested that one way was to impose a fee on Internet service providers whose users frequent file-sharing sites, my ears perked up.

Not only did her suggestion make a lot of sense, but it also signaled a significant attitude shift for the industry. The music industry's business plan to date had called for suing college students and seizing laptops from Navy midshipmen; now it seemed as if Rosen was saying that the RIAA was amenable to imposing flat fees on ISPs to compensate for their users' downloading.

But alas, to paraphrase R. Crumb's Mr. Natural, 'twas never thus. When I called the RIAA for elaboration, a spokeswoman answered, "Hilary never said that." Her clarification went as follows: When Rosen was asked about charging ISPs a flat fee for users' file sharing, she said the music industry is not ready to accept that. According to the RIAA, Rosen clearly stated that compulsory licensing is not a good idea. Reuters, however, stands by its reporter's account and its story.

It's a classic case of he-said, she-said, and that's too bad. Rosen's (non)comment could have single-handedly helped lift the music industry -- as well as ISPs and telecom firms -- out of its current malaise.

In fact, one ISP tried this route in May 2002. Verizon and Kazaa proposed creating a copyright "compulsory license" for Internet music content. Rather than pay for each download, users could pony up a monthly fee that the RIAA would distribute among its constituents. At the time, Rosen called the flat-fee approach "the most disingenuous thing I've ever heard. It's ridiculous."

Economically, however, it makes sense. Going by the RIAA's accounting (units shipped, multiplied by retail price), the average American consumer spends $4.02 per month on music. Given that not all units shipped are sold, and that many retailers sell CDs for less than the suggested retail price, the average monthly amount is probably closer to $2.75.

If AOL Time Warner (AOL: Research, Estimates), (parent company of CNN/Money), Comcast (CMCSK: Research, Estimates), EarthLink (ELNK: Research, Estimates), Verizon (VZ: Research, Estimates), or any other ISP were to charge, say, a $9.95 monthly charge for "music access," the industry would add significant revenue. And whatever the ISPs charged on top of the fee would open a sizable revenue stream for them as well.

Shifting to a flat-fee compulsory-licensing model "is not a revolutionary approach to paying for things," says Jim Griffin, CEO of Cherry Lane Digital and one of the sharpest minds in digital music.

"Today we live in a world where paying for art is voluntary. Nowhere is this clearer than with music. A civilized society will levy a fair fee to incentivize the creation of art and divvy it up just as they have for over 100 years for every other technological advance."

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But news broke Tuesday afternoon that gave a hint as to what Rosen may have actually meant by "holding the ISPs more accountable." A federal judge ruled that Verizon must release the name of an individual who the RIAA believes was making hundreds of songs available for download through Kazaa.

If the decision stands on appeal, ISPs could be forced to relinquish literally hundreds of thousands of customer names -- music fans all -- and subject them to RIAA litigation.

It's a shame that Rosen is now distancing herself from the comments attributed to her in the Reuters piece. And it's a shame that a federal judge is allowing the RIAA's flawed business model to flourish.

As a music fan and an avid Internet user, I want the music industry and ISPs to fare well -- whether separately or together. Investors in these two areas should be breaking down doors trying to get the companies to embrace compulsory music licensing.

For the recording industry, the way to capitalize on file sharing and enter the 21st century sits right in front of them. Unfortunately, however, that seems to be their blind spot.


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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.