MAGAZINE

At the ISP Level
// Steven Masur / Jul 21, 2009

Everyone says the music, and greater media distribution businesses are in trouble, but what are the problems and how can they be solved? Many people think the biggest problem is that you can download copyrighted material from the internet for free. Once the problem is so defined, it is natural to look for a general panacea, or “fix all” solution. In the search for this solution, more and more people are gravitating to the concept of collective licensing at the ISP level. But, are downloads from the internet really the problem? Is ISP licensing the answer? If so, how would it work? 

Let's discuss.

// what is ISP licensing?

The concept of ISP licensing is premised on the idea that the best place to capture revenue for distribution of content on the internet is at the source, just like at the door of a club. But the club is the internet, and the door is your internet connection, or relationship with your internet service provider (ISP). So the idea is to collect an across-the-board fee for file downloading which appears as a line item on your ISP, or mobile bill, right there with all the rest of the service charges, and state and government taxes. The proceeds would be distributed to artists and rights holders to compensate them for use of their material on, or from the internet.

Once you get past fears that this solution is not market-based, that the ISPs themselves might object, or that it's not fair to the many internet users who have never downloaded anything, and who were never big internet consumers of music or other entertainment media in the first place, there are two basic opinions about how to proceed. First a government mandated public right to collect money at the ISP level to be distributed to rights holders to compensate for free internet media consumption. And Second, an opt-in agreement in which users give rights holders the right to collect licensing fees directly in exchange for the freedom not to be sued, or to be more exact, the protection of a covenant signed by rights holders not to sue for copyright infringement based on internet uses. 

OK, so presuming further that either of these approaches is acceptable, how exactly would they work?

Let's first discuss how things work now.

// how did we get here?

The problems of the current music business and all other businesses based on the distribution of intellectual property stem from how these businesses developed, and how the law developed around them. The models of consumption and thus the business and law in each media industry – books, newspapers and magazines, music, and film – developed completely differently. In a physical distribution world, the law and business of selling intellectual property developed around the media on which the intellectual property was imprinted, rather than the intellectual property itself. Physically distributed media is sold in separate and distinct geographical distribution territories, with different rules, pricing and relationships in each territory. Despite all the work to harmonize laws, they are still different even within Europe, not to mention between EMEA, APAC and the Americas, and within each of these regions. The pricing and channel conflicts created by the worldwide, near instantaneous distribution the internet allows are often ignored or glossed over, but become very real the minute you try to sell a piece of media in more than one territory. Even assuming a standardized, liberalized and harmonized rule of digital media distribution law and business practice were accepted in all territories, how would the proceeds collected from users be distributed among the copyright holders? What about conflicting rights, and claims to the same shares? These are just a few of the large problems that would need to be addressed.

// what's happening now?

What's happening now is chaos. In a chaos situation, governments become fearful and lock things down. Copyright holders and governments are trying to lock up copyrights with ever increasing strict limitations, while uncompensated distribution of copyrighted material continues to become exponentially more widespread.

In terms of government regulation, more countries are adopting France's “three strikes and you’re out” approach, in which people who are caught downloading media content three times will lose the right to access the internet in their homes. On the opposite end of the spectrum, in regions where there is no culture of copyright ownership and minimal enforcement of the rules that exist, free file sharing and duplication is happening on an exponentially increasing scale. Even Baidu, the Chinese equivalent to Google, was caught “deep linking” or hosting free music download sites and collecting money by advertising on these sites to the tune of an estimated US$1bn. Only a small fraction of this money was paid to rights holders. In the United States, SDMI was an early example of the many high end technology solutions put forward to “solve the problem,” all of which have failed. Now everyone is waiting to see what happens with Choruss. The Isle of Man has put itself forward as the test case for adopting an ISP levy, but the test is being conducted on a sampling of only 80,000 relatively homogenous people, and primarily as a means to attract business to the Isle of Man.

In short, a lot of smart, high profile people are working on “the problem” in the loudest of ways, but no one has figured it out. The reason is that downloading content on the internet is not really a problem, but an opportunity.

// what kind of thinking gets us to a good outcome?

Looking at the glass half empty, waiting for an internet distribution business to develop that pays copyright holders fairly has not worked. Instead, it has lead to chaos. But looking at the glass half full, we might simply be in a time of necessary chaos that happens just before things start lining up and moving in the right direction.

The internet is an extremely efficient way to deliver media to individuals. As a result, even if they don't already, eventually, all people will get all of their non-live experience media from the internet. If you don't view the internet narrowly as a problem for the media and entertainment business, but instead see it as a format change to the new way that media will be distributed to people, then you see it merely as a developing set of markets, and a whole new world of “solutions” opens up. Once you see this instantaneous means of distribution as rife with opportunity, the act of searching for a single solution to fix everyone's problems looks like promoting old-fashioned communism. Instead of searching for a single solution that gets rights holders paid only one way, what feels more promising is looking for ways to establish whole markets of new opportunity for selling music and other media.

While it will take time for a more solid ecosystem of digital media production and distribution businesses to develop, now is the time to start thinking about how to help these new businesses along. Not loudly, all in one shot, but quietly, incrementally, methodically and organically, the way real industries grow. Helping these companies grow to a size where they create enough revenue to throw off a licensing stream significant enough to move the needle for rights holders should be our main focus. And in getting to this point, we should consider the possibility that the way we have things set up cannot be easily adapted to the digital internet world economy, and think about how we might be able to make it easier for these companies to pay rights holders.

So what are some of the problems specific to the media and entertainment business that make it difficult for companies who distribute media using the internet to grow and to pay rights holders?

// the internet economy requires a regulatory scheme that enables commerce

One problem is the payment structures that developed in the physical distribution world, and the law that developed around these structures. As previously discussed, the business and law of media and entertainment distribution developed around physical distribution into specific territories and countries. But the internet is a worldwide interconnected computer network based on standard open protocols. Given the internet's open nature, it will always be possible to get copyrighted material from some source, and history has shown that the internet forces gravitation toward the fewest restrictions to commerce. So any local restriction that inhibits commerce will ultimately fail to produce results, no matter how harsh the penalties. Furthermore, the internet's architecture and economics transcends country borders, so ultimately rights collection cannot continue to be effective in the long term on a country-by-country basis and will inevitably gravitate to a neutral treaty-based, or NGO solution. Therefore, any regulatory scheme we expect to be effective must take into account open networks and global politics. As a result, the regulatory scheme most likely to withstand the test of time is the one that enables commerce and makes it most efficient.

// conclusion

So we began with a single problem in search of a solution, but we are concluding with more questions than answers. Of the two approaches to collective licensing on the ISP level mentioned above, which approach is best? How do we implement collection with a public right to collect money at the ISP level, versus privately, with a covenant not to sue? How would monies collected by the ISPs be distributed to rights holders, versus how rights holders would collect from individuals and companies who had agreed to a license in exchange for a private covenant not to sue? What is the role for existing rights societies, like CMRRA, GEMA, Sound Exchange or PRS for Music? Is there a role for the establishment of a new digital rights collection society to collect and distribute rights proceeds? 

Perhaps collective rights licensing at the ISP level is a good idea, but should not be seen as the final solution to everyone's problems. Perhaps it will evolve to be an underlying foundational platform above which a wide variety of media distribution and entertainment businesses grow.

These are the questions to which we will need to develop answers as we build revenue to a new distribution technology. Music led us into the fray, but the answers to these questions must be developed for every media business and industry.

So let's get to work, starting with music.

Steven Masur is the Managing Director of MasurLaw, a venture, technology and entertainment law firm with a global practice. Steve is as passionate about new businesses as he is about artists. He has helped clients create and define a wide array of game-changing new business models and licensing schemes in music, film, video games, mobile content, licensing, advertising, media delivery, software and hardware. Steve helps clients organize, write contracts, work out complicated legal and business problems and pursue strategic opportunities. Name just about any new idea and Steve can tell you what happened in similar earlier businesses.

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1

If for some reason doors could not be locked and were left wide open, people would loot stores if they could get away with it. There would have to be security guards 24 hours a day. Is this not a security problem? If I make a long distance phone call the number is indicated on the bill and I pay the applicable charges. They have a record of this activity and they can do the same with digital media.
Each song has an ISRC code( or it should if the artist wants to be paid), it is an identification code created so that for example, 'Itunes' can pay the artist for each download. When media is downloaded or uploaded it is like walking it through a doorway. The passing of the Identification codes, such as ISRC's, from or to your isp address should be noticed with some kind of automated filtering through programming and the codes go to a file. You get a bill that repeats the codes and merchant name('Itunes' for example) on your internet charges bill. You pay it that way. That way each download is paid to each artist. With the licensing, how do all the artists get paid and is it really fair?

by lillian / August 13th, 2009

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