The first published scholarly legal article predicting the impact of the Internet on the entertainment industry.

In 1994, long before the Internet rose to power as a distribution medium, Scott Fedewa wrote the article below. 

Published by The American Bar Association's Entertainment & Sports Law section, it was the first scholarly legal article to predict the crushing and disruptive impact of the world's biggest copying machine (the Net) colliding with the copyright protected entertainment business.  Not every prediction included holds up today, but the general vision was (and still is) on target for the music, TV, and film industries. 

Challenges and Implications of the On-line Age for the Music Business
by C. Scott Fedewa

American Bar Association's Entertainment and Sports Lawyer
Winter, 1996
Copyright © 1994 by C. Scott Fedewa
(Cite as: 13-WTR Ent. & Sports Law. 3)

The advancement of on-line technology is transforming our society. As artists, consumers, and businesses take advantage of the potential of this technology, many of the legal and royalty accounting regimes that have protected creative works and compensated their creators are threatened.

On-line direct digital delivery systems are loosening the monopolies once held by copyright holders and introducing new sources of competition into markets historically dominated by major entertainment conglomerates. To survive in the on-line era, the entertainment industry’s evolution into the digital age must be managed. No one entity stands to be more exploited by these new technologies than the recording industry.

Potential difficulties presented to the music industry by new media technologies include (1) the infringement of reproduction, distribution, and performance rights from uploading or downloading songs from the Internet; (2) the potentially perfect “CD quality” of such digital copies; (3) the blurring or disintegration of distinctions between categories of media; (4) the ease of creating derivative and synchronized works without commensurate licensing mechanisms; (5) the instantaneous, inexpensive, global, and often untraceable accessibility of data through the Internet; and (6) the potential for increased competition faced by conventional entertainment broadcast outlets due to the power and reach of networked desktop telecomputing. These capabilities present the potential for the eventual development of “celestial jukeboxes,” which will compete directly with traditional entertainment media by providing in-home, on-demand, direct digital delivery of entertainment content.

The first generation of authorized on-line music distribution systems already has appeared. The model is currently dominated by World Wide Web sites on the Internet, developed by record companies to promote their artists’ works. These sites primarily offer “clips” of artists’ songs to on-line visitors. With higher speed modems, greater bandwidth, and more advanced data compression techniques, full songs and even albums will become widely available in the near future. Accordingly, musicians, music publishers, record companies, record retailers, and radio stations all may have to come to grips with a world where music is easily available and can be limitlessly copied, modified, and redistributed through on-line or other direct digital delivery systems. This future poses a variety of challenges to the legal and institutional framework of the music industry.

Multimedia Licensing/Derivative Works
The many innovations in entertainment technology will create increased markets for the licensing of both compositions and sound recordings. If there were easy and inexpensive ways to obtain such licenses, the already robust music licensing business would explode as consumers become more and more dependent on computer generated multimedia entertainment. Such licenses will continue to be negotiated within the traditional framework of existing copyright law when they constitute straightforward borrowings of others’ intellectual property. For customized licenses, however, the multimedia industry will have to allow the creation of centralized licensing bureaucracies before it can realize the full potential of this expanding revenue source.

Radio
Radio-style broadcasting should continue because of its enduring value as a promotional tool. Although digital transmissions will gradually replace analog broadcasting technology, maintaining traditional radio style programming formats (including commercials, DJ patter, etc.) should keep radio from yielding significant new issues because its very format of constantly interrupted programming will prevent it from seriously threatening markets for full length, album style entertainment.

Retail
The on-line, on-demand future offers little comfort for businesses built on selling physical copies. However, record stores will probably survive in one form or another because consumers enjoy the purchase of physical items and shopping itself, neither of which can be effectively replicated by on-line experiences.

Performing Rights Societies
Performing rights societies and music publishers may continue to support themselves through administration fees if they can prove their worth in the on-line milieu. Both ASCAP and BMI have recently begun providing blanket broadcast licenses for performances of their members’ works over the Internet. It remains to be seen whether this approach will work. Such transmission increasingly approximate distribution of reproductions of copyrighted musical works rather than performances.

The performing rights societies may evolve to fill the need for a collective licensing agency for such mechanical/reproduction rights. Another possibility is that other players, like the Harry Fox Agency, or technologies may fulfill such functions. These changes may revolutionize royalty accounting even more than the introduction of Soundscan changed the Billboard charts in the last decade. The tracking of performances and distributions may merge both legally and practically, eliminating the need for many such music industry administrators. In fact, any businesses built around tracking uses must ensure that it is not destroyed entirely by new database tracking technologies.

Music Publishers
Music publishers may also find some of their traditional roles modified or even eliminated by the automated licensing capabilities of networked systems. Just as sample clearance has become routine, new multimedia licensing arrangements probably will become standardized in coming years. The more specialized roles of music publishers may continue with little change, however, because their premium services cannot easily be automated. Evaluating the marketability of song catalogs, providing financing alternatives, and negotiating those customized multi-media licensing arrangements that do not fall into standardized categories, most likely will provide music publishers with a continued livelihood in the future because such functions depend greatly on human evaluation and interaction.

Record Labels
The record companies will face the biggest challenges of the on-line age. On-line technologies will bring massive reproduction and worldwide distribution capabilities to every desktop, eliminating the barriers that once prevented entry into the record business. This means that for the first time, the products of record companies will be competing with equally available and probably less expensive offerings from aspiring artists worldwide.

Already, anyone with a computer and a modem can connect to the Internet through a home telephone line and upload copies of recordings of his or her, or a friend’s, song performances; these performances can then be downloaded by computer users all over the world for little or no cost and without the involvement of any recording, publishing, or broadcast license contracts. The potential for damage to the relatively orderly and profitable markets the record companies have enjoyed for decades is manifest. The ability of a single consumer to reach the global marketplace without the traditional intermediary of a record company’s royalty accounting department spells “danger” for all businesses based on the sale of copyrighted materials.

The resulting reductions, and possibly elimination, of physically distributed copies of musical works will force a reorganization of the way royalties are collected, allocated, and distributed. While traditional royalty collection mechanisms are linked to individual physical sales, no physical object changes hands with on-line distribution. Consequently, the music industry needs to develop new technology-enabled methods of tracking downloads of their copyrighted materials from on-line services to ensure that appropriate royalties are paid on these “cyber” sales.

The above factors suggest that the record industry will need to narrow its strategic paradigm from an emphasis on controlling the manufacturing and distribution of licensed copies to the enforcement of licenses on a potentially unlimited number of copies that effectively distribute themselves.

The record labels’ ability to differentiate their offerings in this hyper-competitive market will be their biggest challenge. A label’s own “brand names” or trademarks will represent important shorthand for consumers attempting to pick and choose from among an overwhelming array of on-line entertainment products. To achieve this differentiation, label A&R staffs will need to continue to drive the success of the record companies, but will have to be discriminating in signing and developing new artists.

The labels will need to ensure they can stay afloat in a market that includes upstart competitors on the World Wide Web, whose operations are confined to the low overhead world of cyberspace. Having the courage to restructure or even eliminate redundant manufacturing and distribution infrastructures will be a difficult but necessary step for the major labels if they are to succeed in the next century. And as they restructure, they should pass on to consumers the enormous cost savings that will be realized by downsizing.

Technology will no longer require economies of scale to make music distribution a profitable business for amateurs, so a cost reduction will be necessary if major labels are to appeal to music’s core consumer youth demographics and compete with illicit bootlegs of their own material.

Marginalizing Infringement
Noninfringing, authorized users of music on the Internet will probably comprise the vast majority of its uses in cyberspace. These authorized uses will include digital radio type broadcasts, specific use licenses (e.g., licensed derivative works, synchronization licenses, etc.), and on-line transmissions that are difficult to categorize as strictly performances, reproductions, or distributions of musical products.

Unauthorized uses also are certain to occur, given the vast new capabilities of technology to distribute perfect digital copies of works in an often untraceable format around the globe. The legal system and music industry will have to adapt to contain, if not entirely prevent, such activities. As technology continues to advance into the home, consumers will be presented with growing opportunities to spend their entertainment dollars on unauthorized content.

It will be the responsibility of the music and other content distribution-based industries to ensure that authorized products continue to be an attractive, available, and cost competitive source of entertainment. To do so, the music and other copyright-based industries should waste no time in mobilizing their political resources to encourage constructive public policy that mandates appropriate penalties for copyright infringers, hackers, and others who abuse the unsettled state of the law in cyberspace for their own ends.

High profile prosecutions of large scale and repeat copyright offenders will be key in ensuring consumer respect for copyrighted works. (The prosecution of minor offenders may be counterproductive as it could alienate the very consumers who make up the industries’ best customers.) Copyright markets require enough enforcement to marginalize infringement so that licensed participants receive sufficient return on investment to continue their development of new content.

In the meantime, the government should resist the temptation to over-regulate the on-line world. At this early stage in the development of cyberspace, government interference should be confined to prohibiting behaviors inimical to the on-line industry’s evolution to avoid stifling the growth of this new sector of the world’s economy. Because the 20 million plus inhabitants of cyberspace have spent years developing unique cultures and protocols for on-line communication (“netiquette”), the best solutions for encouraging respect of copyrighted materials on the Internet are those that reflect the largely libertarian ethos that already exists on the Internet. “Netizens” have years of experience in policing one another and enforcing their own social code.

These market forces (in conjunction with the appropriate legal penalties advocated earlier) should be allowed to develop an efficient allocation of duties and resources in the search for new ways to protect intellectual property. Such an approach will allow punishment of willful infringers without alienating average on-line consumers or provoking retaliation by hackers or “cyberpunks.” It also will help maintain the cutting edge ambiance necessary to gain “mindshare” with the young, educated demographic of on-line consumers.

Any other forms of government intervention, regulation, or uninformed oversight of this new industry could present fatal obstacles to its development and stall not only the development of the music industry’s progress in cyberspace but the whole new sector of the global economy based on information services.

The music industry must support proactive implementation of strategies designed to make authorized access easier, more morally appealing, and more cost-competitive than the unauthorized access opportunities that are already rife in cyberspace. The chief factors music industry executives need to manipulate, to encourage authorized uses of copyrighted musical works, are public opinion, ease of access, and price.

Shaping Public Opinion
The music industry should join other intellectual property-based industries to develop public relations campaigns aimed at educating consumers about the need to respect intellectual property protections as a means of supporting their favorite artists. In the case of music, if consumers are made more aware of the trade offs between buying authorized copies and copying bootlegs, most will learn to prefer authorized products in the interest of supporting the artists who created them. As perfect digital copies of musical works become available through on-line distribution systems, encouraging consumers to resist using their new technological capabilities to obtain and redistribute unlicensed reproductions of copyrighted works will become a necessity.

The entertainment industries could be aided in this endeavor by having their artists use their “star power” in commercial announcements to appeal to fans to respect the copyrights in their works. Such campaigns will never eliminate piracy but the industry should encourage the public, especially young people, to abide by the law and help protect the revenues of the artists and their record companies.

Ease of Access
As physical distribution systems (i.e., retail stores) decline in importance, consumers will become accustomed to the push-button convenience of tomorrow’s user-friendly hardware and software when looking for new music to purchase. It is up to the recording industry to ensure that obtaining such access is a simple, secure, and user friendly task for music consumers. Without the development of easy-to-use interfaces by the legitimate music business, there will no authorized, royalty-bearing product to access on-line. Even the best intentioned consumers will be left instead to shop among the available wares of the global music bootlegging trade. Barring major shifts in technology, there will be no practicable way to prevent authorized receivers of copyrighted materials from reposting them elsewhere for free and unlicensed access by the public.

This suggests that for the first time in history, the industry will be forced to compete with perfect copies of its own products as provided by competitors with global distribution rivaling its own. Unless the industry ensures that its products are just as easy to obtain as the counterfeits, it will have little chance of convincing customers of the value of investing precious time, effort, and money in the purchase of goods that are available more quickly, easily, and cheaply (albeit unlicensed) elsewhere. Computer hardware designers should be encouraged to develop technological solutions to the problems of unauthorized reproduction and distribution systems that will direct consumers, and their dollars, toward licensed product. Record labels that are subsidiaries of major conglomerates with hardware design and/or manufacturing affiliates should encourage their corporate partners to devote resources to the development of hardware delivery systems that meet the needs of both on-line music consumers and copyright owners.

Retail Price
The retail price of prerecorded music is the most important issue under the control of the record industry. When a consumer accesses a musical work on-line, there is no way to tell if the user intends to listen to the work just once, keep it, or make copies for widespread distribution. While this may sound like a radical development, it is really no different than the traditional relationship between consumer and record retailer.

For decades, record labels and stores have priced their goods taking into account the potential for returned merchandise, home copying, and operating overhead. Tomorrow’s music business will have to make similar pricing decisions accounting for the dramatically increasing competition and technological capabilities of cyberspace. There is little doubt, for example, that if the industry continues to insist on charging $16.99 at retail for many CD releases, an increasing number of consumers will pursue the unauthorized copies available on the Internet. It is important that record executives who make such pricing decisions not underestimate the value of low prices to the young, computer literate consumers who are their primary market.

To minimize the attractiveness of inexpensive or even free pirated on-line products, the industry needs to recognize that new market forces exist, and adapt its pricing structure accordingly. Record labels should create a new pricing paradigm that offers widespread copying for minimal prices because users will obtain their own unauthorized copies if prices are too high.

By making music easier and cheaper to obtain, the record industry may garner significant new revenue increases in volume despite the reduction of individual margins. The best way for record companies to maintain control over the reproduction and distribution of copyrighted musical works on-line will be to provide access to authorized works through “authorized downloading sites.” Because the Internet is largely user-controlled, the label’s marketing efforts and brand names will be critical in attracting consumers to the record labels’ authorized on-line distribution sites. Like the increasingly popular World Wide Web sites of today, such sites would offer consumers access to musical works (much as record stores do) with the security of password protection, ensuring the consumer pays the going retail price for products.

The industry will have to do its best to stay on the cutting edge of entertainment technology if its products are to continue to be appealing. Although there probably will always be some market for audio only recordings, it can be expected that the “music” product of the digital age will incorporate elements of what we (and copyright law) today regard as separate entertainment disciplines, such as film, live performance, interactive games, and so on. If the industry can accept the necessity of a strategic reorientation to survive on-line, record companies will continue to thrive because of their skill at discovering, developing, and marketing artists. On-line consumers should respond favorably to the high-quality, low-cost, name-brand entertainment that will be produced when the industry eliminates its distribution infrastructure and begins to respond to increased competition by focusing on the delivery of affordable, high quality entertainment to consumers.

Conclusion
The law eventually must recognize that physical embodiment of a work in a tangible medium of fixed expression is no longer necessary for reproduction or distribution. Given the technological realities of the on-line era, the music industry must avoid the mistakes made when radio, records, TV, and video were introduced, and listen instead to the demands of tomorrow’s consumers if it wants to survive amid the economic onslaught of new entertainment possibilities.

The loosening of copyright’s grip on creative forces may be in the best interests of society, as it will promote the continued dissemination of creative ideas and new technology. For example, the music industry will have to lower its prices to stimulate demand and make up the difference on volume. If the music industry can convince consumers of the value of authorized, copyrighted works and ensure that access to them is as easy and affordable as possible, it has a chance of surviving the digital revolution.



C. Scott Fedewa is CEO and General Counsel of Immortal Records in Los Angeles. His “FutureMedia” on-line consulting site on the World Wide Web can be found at http://www.leland.stanford.edu/_fedewacs/  (no longer an active link).

[THIS ARTICLE, ORIGINALLY WRITTEN IN 1994, IS POSTED FOR HISTORICAL INTEREST. CURRENT QUESTIONS REGARDING THEIR CONTENT SHOULD BE DIRECTED TO SCOTT FEDEWA.]