Digital broadband content : music

132 Pages·2005·1.172 MB·English

by  OECD

Unclassified DSTI/ICCP/IE(2004)12/FINAL

Organisation de Coopération et de Développement Economiques
Organisation for Economic Co-operation and Development 08-Jun-2005
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_ ____________ English - Or. English
DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INDUSTRY
COMMITTEE FOR INFORMATION, COMPUTER AND COMMUNICATIONS POLICY
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DSTI/ICCP/IE(2004)12/FINAL
FOREWORD
This report was presented to the Working Party on the Information Economy in December 2004 and
was declassified by the Committee for Information, Computer and Communications Policy in March 2005.
The report was prepared by Dr. Sacha Wunsch-Vincent and Dr. Graham Vickery of the OECD's
Directorate for Science, Technology and Industry. It is published on the responsibility of the Secretary-
General of the OECD.

Copyright OECD, 2005.
Applications for permission to reproduce or translate all or part of this material should be made to:
Head of Publications Service, OECD, 2 rue André-Pascal, 75775 Paris Cedex 16, France
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TABLE OF CONTENTS
PREFACE........................................................................................................................................................6
SUMMARY.....................................................................................................................................................8
INTRODUCTION.........................................................................................................................................14
Objective, scope and plan of study.............................................................................................................15
MUSIC MARKET INDUSTRY: HISTORY, SIZE AND DIFFERENT MUSIC CARRIERS....................17
Role of new music carriers and the advent of digital technology..............................................................17
The market for recorded music and its evolution.......................................................................................21
INDUSTRY STRUCTURE: TRANSFORMING VALUE CHAINS AND CHANGING
BUSINESS MODELS...................................................................................................................................38
Traditional record industry value chain, business models and players......................................................38
Traditional record industry business model...............................................................................................41
New Online Music Industry Value Chain, Business models and Players..................................................47
Downloads..................................................................................................................................................55
Subscription services..................................................................................................................................59
Digital Music Value Chain.........................................................................................................................60
New Value Chain and relationship to new business models......................................................................63
MUSIC AND PEER-TO-PEER NETWORKS.............................................................................................75
The rapid rise of file-sharing......................................................................................................................75
Nature of files traded..................................................................................................................................78
Music sales and file-sharing.......................................................................................................................78
Actions of the music industry against file-sharing.....................................................................................80
Commercial uses of file-sharing in the music industry..............................................................................80
ONLINE MUSIC, ARTISTS, AND CONSUMERS.....................................................................................82
The Internet, artists and the diversity of content........................................................................................82
Digital music, users and consumption habits.............................................................................................85
CHALLENGES AND POLICY CONSIDERATIONS.................................................................................86
Infrastructure, innovation and technology..................................................................................................86
Value chain and business model issues......................................................................................................89
Rights negotiations.....................................................................................................................................89
Protection of Intellectual Property Rights..................................................................................................91
National copyright law and the ratification of the WIPO Internet treaties.................................................91
Government actions that relate to the protection of IPR............................................................................92
Digital Rights Management.......................................................................................................................94
Fostering adequate legal frameworks.........................................................................................................95
Value-added taxes......................................................................................................................................95
Plurality, diversity and government support for the music industry..........................................................96
ANNEX 1. WIPO INTERNET TREATIES..................................................................................................97
ANNEX 2. LEGAL CASES INVOLVING FILE-SHARING......................................................................98
ANNEX 3. STATISTICAL ANNEX..........................................................................................................105
ANNEX 4. EXTRACT OF IFPI DIGITAL MUSIC REPORT...................................................................111
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BIBLIOGRAPHY........................................................................................................................................112

Figures and Tables
Figure 1: Global music sales by format, in billion units, 1973-2003............................................................19
Figure 2: Evolution of Digital Music Formats from 1985 to 2005...............................................................20
Figure 3: Estimated Comparative Revenues Generated by Foreign Sales/Exports of Recorded Music
in the United States, 1997-2002............................................................................................................23
Figure 4: Value of Global Music Sales, in billion USD (ARP=average realised price)...............................23
Figure 5: CD Sales in Units for OECD Countries, 1998-2003 / 1999-2003 growth....................................26
Figure 6: Korean CD unit sales and total music sales in KRW....................................................................26
Figure 7: US GDP growth versus CD units shipped in the US, 1991-2003.................................................30
Figure 8: Popular wireless Internet content in Korea, 2003.........................................................................37
Figure 9: Traditional physical value chain....................................................................................................38
Figure 10: 2003 Total Global & Regional Market Shares of Music Majors................................................40
Figure 11: Music copyright royalties in Japan, 2002 (Royalties collected by JASRAC).............................46
Figure 12: New distribution arrangements before digital distribution..........................................................46
Figure 13: New online music distribution....................................................................................................49
Figure 14: Revenue Model for US digital download (2004)........................................................................58
Figure 15: Online distribution value chain...................................................................................................60
Figure 16: Digital music value chain, selected players and vertical integration along the digital
value chain............................................................................................................................................65
Figure 17: Share of portable audio players in Europe, as percentage of total audio equipment, 2002/03....70
Figure 18: Growth in global FastTrack and other P2P networks, simultaneous audience,
August 2002-September 2004...............................................................................................................77
Figure 19: Breakdown of file-sharing for OECD countries, 2002 and 2003................................................78
Figure 20: Broadband access in OECD countries per 100 inhabitants, June 2004.......................................87

Table 1: NACE and NAICS record production and publishing classifications............................................15
Table 2 Music Retail Sale Ranking of OECD Countries - Value Analysis in USD - Standard Retail
Figures (at variable exchange rates).....................................................................................................22
Table 3: Compilations of estimates...............................................................................................................32
Table 4: US online market forecasts.............................................................................................................34
Table 5: Distribution of revenues of a CD sale.............................................................................................45
Table 6 Comparison of downloads and subscription models for a particular online music service.............50
Table 7: Depth of music catalogue of online music services (October 2004)..............................................51
Table 8: Price comparison of online shops (Benchmark: physical CD over Internet retail), Oct. 2004.......52
Table 9: A-La-Carte Pricing Structures Possible Cost Ranges on a USD 0.99 Track Download................56
Table 10: Top Level Percentage Breakdowns, Labels & Artists..................................................................58
Table 11: Different business incentives of online music service providers..................................................63
Table 12: Dollar sales of CD and MP3 players, in USD million..................................................................70
Table 13: Player and music store (codec) compatibility...............................................................................71
Table 14: Digital music player manufacturers (in alphabetical order).........................................................73
Table 15: Pew Internet Surveys: Artists’ opinions on the impact of file-sharing on music sales.................82

Boxes
Box 1. OECD Recommendation of the Council on Broadband Development, 2004..................................7
Box 1. First drops in US music sales in 2000...........................................................................................25
Box 2. The promotional value chain.........................................................................................................44
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Box 3. High credit card costs for online music and alternative payment possibilities through network
and mobile operators..................................................................................................................................57
Box 4. Case study on Apple......................................................................................................................73
Box 5. Potential challenges to the development of new business models.................................................92
Annex Box 1. The WIPO Internet Treaties................................................................................................97
Annex Box 2. Lawsuits against file-sharing networks Grokster and Morpheus........................................99

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PREFACE
Digital content and digital delivery of content and information are becoming increasingly ubiquitous,
driven by the expanding technological capabilities and performance of delivery platforms, the rapid uptake
of broadband technologies and improved performance of hardware and software. Network convergence
and widespread diffusion of high-speed broadband has shifted attention towards broadband content and
applications that promise new business opportunities, growth and employment.
At its March 2003 meeting, the Information, Computer and Communications Policy Committee
(ICCP) discussed interlinked broadband and digital content developments and policy issues. The
Committee adopted two tracks for this work, agreeing to work: i) towards a Committee statement on
promoting broadband development; and ii) to develop a work proposal on digital content. At its October
2003 meeting, it was agreed that the ICCP Committee should undertake more comprehensive analysis on
digital broadband content, focusing on growth and value creation, drivers and barriers to growth, and
changing market structures and emerging issues with development of new delivery platforms.
In February 2004, following preparation in the ICCP Committee, the OECD adopted the
Recommendation of the Council on Broadband Development (see Box 1), setting out ten recommendations
for OECD member countries when establishing or reviewing their broadband policies. These policy
recommendations recognise the increased policy attention towards broadband content and applications.
The ICCP Committee has been asked to monitor the development of broadband in the context of this
Recommendation within three years of its adoption and regularly thereafter.
At its April 2004 meeting the ICCP Committee agreed to the work plan on digital broadband content,
with this work being undertaken in the Working Party on the Information Economy (WPIE) in conjunction
with the Working Party on Telecommunication and Information Services Policies (WPTISP). The WPIE is
undertaking stocktaking studies of sectors where digital content is transforming value chains and business
models. Initial sectors studied are: scientific publishing, music, online computer and video games and
mobile content services. The studies are designed to further identify analytical, policy and measurement
issues, and prepare the ground for more in-depth analysis of horizontal issues and challenges to broadband
content development and applications. The WPIE held a Digital Broadband Content Panel in June 2004
and a Digital Broadband Content Workshop in December 2004.1
Further policy analysis is being undertaken in the area of digital content. For more information see
www.oecd.org/sti/digitalcontent.
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Box 1. OECD recommendation of the Council on broadband development, 2004
The OECD Council recommends that, in establishing or reviewing their policies to assist the development of
broadband markets, promote efficient and innovative supply arrangements and encourage effective use of broadband
services, Member countries should implement:
• Effective competition and continued liberalisation in infrastructure, network services and applications in the face of
convergence across different technological platforms that supply broadband services and maintain transparent,
non-discriminatory market policies.
• Policies that encourage investment in new technological infrastructure, content and applications in order to ensure
wide take-up.
• Technologically neutral policy and regulation among competing and developing technologies to encourage
interoperability, innovation and expand choice, taking into consideration that convergence of platforms and
services requires the reassessment and consistency of regulatory frameworks.
• Recognition of the primary role of the private sector in the expansion of coverage and the use of broadband, with
complementary government initiatives that take care not to distort the market.
• A culture of security to enhance trust in the use of ICT by business and consumers, effective enforcement of
privacy and consumer protection, and more generally, strengthened cross-border co-operation between all
stakeholders to reach these goals.
• Both supply-based approaches to encourage infrastructure, content, and service provision and demand-based
approaches, such as demand aggregation in sparsely populated areas, as a virtuous cycle to promote take-up and
effective use of broadband services.
• Policies that promote access on fair terms and at competitive prices to all communities, irrespective of location, in
order to realise the full benefits of broadband services.
• Assessment of the market-driven availability and diffusion of broadband services in order to determine whether
government initiatives are appropriate and how they should be structured.
• Regulatory frameworks that 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.
• Encouragement of research and development in the field of ICT for the development of broadband and
enhancement of its economic, social and cultural effectiveness.
The Council also instructs the Committee for Information, Computer and Communications Policy to monitor the
development of broadband in the context of this Recommendation within three years of its adoption and regularly
thereafter.
Source: OECD (2004), Recommendation of the Council on Broadband Development, C(2003)259/FINAL,
www.oecd.org/dataoecd/31/38/29892925.pdf.
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SUMMARY
Network convergence and widespread diffusion of high-speed broadband have shifted attention
towards broadband content and applications that promise new business opportunities, growth and
employment. Digital content and digital delivery of content and information are becoming increasingly
ubiquitous, driven by the increasing technological capabilities and performance of delivery platforms, the
rapid uptake of broadband technologies - with 2004 leading to a breakthrough of broadband penetration in
OECD countries - innovative creation and use of content and improved performance of hardware and
software.
In this context, digital music is attracting high attention with a large number of legitimate online
music services becoming available in 2004. Access to broadband and technological developments have
lead to the rapid creation of online music services that change the way music is accessed and consumed.
Overall the digitisation of music, changing ways of listening to music, the diversification of delivery
platforms and sharing are likely to have increased the time listened to music, but the unauthorised
downloading of copyrighted content over the Internet has raised considerable concerns. Music is thus an
area in which the transformative impact of digital distribution is strong for both the supply side (artists and
the music industry) and on the demand side (new music consumption styles, consumer choice and network
users as content creators). The most important is to find an equilibrium between available legitimate and
innovative uses of new technologies for online music and the necessary protection of associated intellectual
property rights. Developments in online music also raise many challenges and issues that are likely to be
relevant for other digital content sectors as well.
The study analyses the impacts of the availability of digital broadband content, and describe
transformations in the music industry and impacts on artists and users. Part 1 of the study provides an
historical analysis of the music industry in terms of market size and technological developments. Part 2
contrasts the traditional recording industry value chain and business models to the new online music
services. Part 3 provides data and analysis on file-sharing and music. Part 4 provides an initial assessment
of impacts on artists and users. Finally, part 5 concludes with an analysis of challenges and policy
considerations.
Part 1 Music market industry: History, size and different music carriers
Music pervades every culture and level of society. In terms of revenues and export - music also
constitutes a significant industry in OECD countries. In 2003, the value of global recorded music sales
amounted to USD 32 billion with the OECD countries accounting for roughly 94 per cent of that market
with United States, Japan and the United Kingdom being the largest markets and Norway and the United
Kingdom the largest in terms of per capita spending.
Throughout the music industry history, new formats and new playing devices have brought
opportunities and challenges. Often initial challenges to the music industry’s business model have
ultimately been replaced by opportunities leading to further growth. Unauthorised sharing of copyrighted
works and new commercial digital delivery possibilities via broadband have thus far been a disruptive
technology for the music industry. After a period of sustained growth, the music industry experienced a
pronounced fall in overall revenues (by 20% from 1999 to 2003). This downturn was not uniform in all
OECD countries. Whereas some OECD countries experienced large declines, e.g. the United States,
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France, the Netherlands, Japan and Germany, other markets for recorded music like the United Kingdom
experienced steady or growing sales. Apart from online piracy, there have been other changes in the market
environment for music over the past ten years such as the increased number of entertainment sources which
may explain changing music sales.
2004 has marked a turning point when a range of legitimate online music services became available in
most OECD markets. Apple’s iTunes is said to have changed the online music landscape by offering an
easy-to-use online store with a broad song catalogue, a consistent, uniform, and cheap pay-per-download
service. By the end of 2004, there were 230 sites offering over 1m tracks online in the United States and
Europe. During 2004, over 200 million songs were downloaded from legitimate services, up from
20 million the previous year. In addition, some sites experimented with products for consumers based
around streaming on demand, Internet radio and personalised services.
The outlook for the music market in 2005 is more positive due to rapidly increasing sales of digital
music services, the rise of mobile music (e.g. ringtones) and the popularity of other new formats like music
DVDs. Whereas the online music market is still very small as a share of total revenues (1-2%), it is
characterised by a rapid entry of new players and a rapid increase of demand, and a fast growing supply of
available tracks. In the medium-term, overall demand for music may be increased through digital
distribution and other new forms of music consumption.
Digital music and other digital content are also drivers for the global technology markets, both to
consumer electronics manufacturers and PC vendors. The increase in revenues for hardware of the PC and
consumer electronics branch resulting from the availability of online music, authorizsd or not, is potentially
bigger than the current revenues generated by paid music streaming or downloads. Finally, although
established players like the record companies retain a key role, the potential impact of online music on
artists and their discovery, on the whole industry business model and value chain and on users seems
significant.
Through a combination of new technologies, new business relationships, and innovative service offers
to consumers, the market is developing rapidly to realise the potential of online music. The challenge to
business is to reduce online piracy and to develop models that are attractive to consumers, and provide
existing and new participants in the value chain with a growing stream of revenue for the creation and
legitimate distribution of original recordings.
Part 2. Industry structure: Transforming value chains and changing business models
The rise of online music has generated product and process innovation, the entry of new players and
new opportunities for music consumption and revenues, involving different forms of disintermediation and
the continued strong role of some traditional market participants (especially the record labels).
In the new digital model, artists, majors and publishers have so far retained their creative roles related
to the development of sound recordings. Direct sales from artists to the consumer or career-building of an
artist purely through the online medium are still rare. Nevertheless, the Internet allows for new forms of
advertising and possibilities that lower the entry barriers for artistic creation and music distribution.
The creation of an online music store requires content creation and production, the digitisation of
content, the clearing of rights, the settling of technological issues, including digital rights management
systems (DRMs), the creation of online music storefronts, secure billing systems and delivery networks.
Thus, the digital music value chain is different in aspects from the traditional one but certainly not less
complex. Importantly, a whole new set of companies which were traditionally not involved in the
distribution of music have entered the picture. This involves players that always had links to the content
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industries (e.g. the consumer electronics industry) and which are now moving upstream. But it also
engages new players that were traditionally not related to the distribution of music (e.g. ISPs, consumer
brands). Furthermore, the new digital music value chain produces an array of new digital intermediaries
(e.g. digital rights clearance, software, DRMs, online billing).
Depending on the nature of the players, very different motives drive their online music activity (see
Table below) leading to new co-operation as the players try to integrate upwards or downwards along the
value chain. In their move to becoming triple-play providers (voice, broadband and TV/content), network
operators are, for example, moving into more value-added services like the provision of content and
information.
Participants Business incentives
Record labels Generate revenues through digital sales while avoiding revenue losses from online
piracy, cannibalisation of traditional revenue streams and “commoditisation” of
music.
Artists Generate revenue through digital sales while avoiding revenue losses due to online
piracy. Establish own distribution platforms and use lower start-up costs to build a
fan-base or to interact differently with labels and fans.
Hardware producers Use interest in digital content to sell hardware with new functionality and
interoperability.
White label services Generate revenue by providing services to digital music stores.
Software producers Establish player and DRM software as standard for content delivery.
ISPs Use interest in digital content to attract customers to premium Internet and content
services.
Content portals Build Internet audience to attract traffic and advertising revenues.
Consumer brands (non-music) Increase customer loyalty through e.g. music promotions.
Credit card providers Generate revenues from fixed- and percentage-based transaction fees.

There have been efforts by value chain participants to integrate some of the different functions along
the value chain (from the creation of content to the hardware devices used to listen to music; often with use
of proprietary standards). Partnerships between the individual players or upstream/downstream moves are
already taking place. Digital music and the rise of portable audio players are also redefining the boundaries
between the traditionally somewhat separate PC, software, mobile handset, content and consumer
electronics sector. The convergence of digital audio playing devices with mobile phones and the evolution
of digital audio players into multi-media appliances are upcoming trends.
The new business models are mainly built around digital download, streaming subscription models
and – more recently – portable subscriptions, with downloads still being the most popular option. In the
case of downloads, the transition to a digital distribution model has the potential to provide record labels
and artists as well as other parties involved (especially the identified digital intermediaries) with revenues.
Online music providers still seem to struggle making profits at current prices, with demand growing from
low levels and having to compete against unauthorised downloading. In the current, low-volume market,
digital economies of scale have not yet been realised. Some of the fixed costs of labels to produce artists
stay essentially the same as before. Moreover, the digital distribution of songs is far from costless.
Transaction costs and the cost of payment mechanisms make up a large share of the revenue from digital
music delivery. The economics of subscription services is less transparent but calculations show that the
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