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Online music distribution providing both opportunities and challenges according to OECD report

 

13/06/2005 - Online music distribution is set to grow significantly over the next few years, forcing industry to reconsider their business models and posing regulatory challenges to governments, according to a new OECD report on the digital music industry.

The rise of online music sales has implications for a wide range of players, including artists, consumers, the record industry, and new digital intermediaries. The OECD underlines the positive potential of digital distribution, both as a new business model and as a new social and cultural phenomenon. Its report also concludes that Internet-based piracy may be reduced, if licensed file-sharing and new forms of (super)-distribution evolve.

The report is the outcome of work involving of a wide range of stakeholders. It represents one of the first roadmaps as to how public policy should be re-evaluated.

In particular, the OECD calls for policies which balance the interests of suppliers and users, in areas such as the protection of intellectual property rights and digital rights management, without disadvantaging innovative e-business models and new technologies. Given that the online distribution of content is a relatively new phenomenon, legal frameworks involving issues such as rights protection technologies and secure (micro)-payment systems may need to be revisited.

Findings of the report include:

  • Around one third of Internet users in OECD countries have downloaded files from peer-to-peer (P2P) networks, with the number of simultaneous users on all P2P networks reaching almost 10 million users in October 2004.
  • In principle, file-sharing software is a innovative and promising technology. , However, many P2P users are making unauthorised copies not only of music, but increasingly also of video and software.
  • It is difficult to establish a basis to prove a causal relationship between the 20% fall in overall revenues experienced by the music industry between 1999 and 2003, but digital piracy may be an important impediment to the success of legitimate online content markets.
  • 2004 marked a turning point when a range of legitimate online music services became available. By the end of 2004, there were 230 sites offering over 1m tracks online in the US and Europe.
  • In the online business model, it is mainly the record labels that generate direct revenues from the sale of online music over third party services. In the current environment, online music providers currently face low or zero margins, calling into question wholesale and retail pricing.
  • Online music sales account for only a small share of total revenues (1-2%), but they are forecast to rise by a factor of 3 to 5 by 2008, representing 5-10% of revenue. In addition, there are positive and significant economic ripple effects on the consumer electronics manufacturers, the PC and telecom industries and on new digital intermediaries (e.g., digital rights management software).
  • Efforts by value chain participants to vertically integrate some of the different functions along the value chain accompany the trend towards online music delivery.
  • In terms of price, unbundling of music tracks may work to the advantage of the music consumer. However, there may be “cultural costs of unbundling”, including the loss of meaningful societal access to an artist’s less “commercial” offerings.

Challenges and policy considerations include:

  • Standards and technical interoperability: Too many incompatible audio and DRM formats and hardware devices could depress the growth of online music. With vertical integration of the value chain, and a potential lock-in of consumers in certain standards, attention should be paid to maintaining an environment where small and innovative players can compete. A diversity of interoperable content, standards and hardware is likely to prove most beneficial to competitive online markets.
  • Protection of intellectual property rights: The importance of government actions to take steps to address internet piracy is underlined. Public policy also needs to be attentive to differing approaches to establishing copyright liability of Internet intermediaries across jurisdictions; multiplicity of rights clearance, etc.
  • Digital rights management (DRM): DRMs are essential to new content business models, yet they have often failed to prevent unauthorized uses. Concerns over transparency, privacy, and comparatively restrictive terms of usage rights (e.g., denial of fair use) are also flagged.

This study is part of the OECD Project on Digital Broadband Content (www.oecd.org/sti/digitalcontent). For more information, journalists are invited to contact econtent@oecd.org, OECD's Science and Technology Directorate.

 

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