File Sharing

The term file-sharing refers to the sharing of computer data or space on a network. File-sharing allows multiple users to access the same file, giving the user the ability to read, modify, copy and/or print it.

Peer-to-Peer (P2P) technology enables the sharing of computer resources such as files by a direct exchange between end-users' computers. P2P networking means files are not stored on a central server. Instead, client software (such as the popular Kazaa) works as a server for shared files on an individual's computer. This allows each computer with the software to act as a mini-server from which other P2P users can download files. P2P's popularity stems from its easy-to-use, convenient setup that has empowered informal networks of file sharers to make files available to each other around the globe.

MP3 is the short form for MPEG3, which stands for "Motion Picture Experts Group, Audio Layer 3". The MP3 format produces CD-quality sound in a highly compressed file. The technology creates sound files a tenth the size of standard CD music files with very little loss of sound quality. Due to their size and relatively high quality, MP3s have become a popular way to distribute music on the Internet.

The range of material available on peer-to-peer networks is seemingly limitless. Since millions of individuals around the world act as music providers, music of different genres and from different countries is more readily available through file-sharing than at the local music store. Remixes, obscure tracks, and copies of live performances unavailable on commercial compact discs are often found on P2P networks.

Another big attraction of file-sharing is cost: users can download as many songs as they like from each other, for free. With the price of CDs often well over $20, many music-lovers have engaged in file-sharing despite the legal risks involved.

Moreover, many consumers are loath to spend $20 for a compilation of songs when they are really only interested in one of the tracks on the CD. They may turn to file-sharing in order to download the one song that they want, without having to purchase the full CD.

Finally, in the age of the Internet culture, people are accustomed to free use of most things available online. The Internet allows one to read the newspaper, or use the encyclopedia without any cost. It is easy to see how our perception of cyberspace has made free music file-sharing a seemingly acceptable social practice.

According to a May 2004 Ipsos-Reid study, 5.7 million Canadians had downloaded digital music files from peer-to-peer networks such as Kazaa. An April 2004 poll funded by the Canadian Record Industry Association (CRIA) found that the number of people who say they use the popular file-sharing software Kazaa grew from 8% in the fall of 2001 to 26% in spring 2004. File-sharing is especially popular among Canadian youth: In 2001, 60% of Canadian secondary students admitted to downloading MP3s, and 30% have downloaded movies. On the basis of a poll that it commissioned in 2005, CRIA estimates that "at least 14 illegal files are downloaded for every legal one", and concludes that "comprising just 21 percent of the population, Canadians between 12 and 24 years old are responsible for 78 percent of illegal music downloading."

Worldwide, music file-sharing is just as popular. In the United States, as of February 2004, approximately 23 million people download music. Downloading by those in the US represents 36% of all global file-sharing downloads. Globally, as of June 2004, the biggest downloaders after the US are Germany, with 14% of global downloads, Italy, with 10%, Poland with 7%, France with 7%, the UK, with 4%, Spain with 3%, Japan with 4%, and Australia with 2%. As of February 1st, 2003, approximately 200 million people worldwide share music on P2P networks.

PEER.pdf)". The paper examines the impact of peer-to-peer communications networks as a multi-faceted, broad purpose technology in the long line of advancement of

1. "technologies of democracy,"
2. "technologies of innovation,"
3. "technologies of distribution,"
4. "technologies of creativity."

The Canadian Record Industry Association (CRIA) claims revenue losses of approximately $100 million annually due to file-sharing. Since 1998, retail sales of CD and cassette recordings in Canada have decreased by almost 30%. In the US, the Recording Industry Association of America (RIAA) blames file-sharing for a decrease in CD sales from $13.2 billion in 2000 to $11.2 billion in 2003.

However, some have questioned the assumption that file-sharing is responsible for reduced sales, or at least for the extent of the decline in sales, noting that the industry downturn could be a result also of a reduced number of albums released, increased competition from other forms of entertainment (e.g., DVDs), and/or a general economic downturn, affecting other industries as well. A 2005 survey of 600 UK music fans, reported in the Guardian Online, (July 27, 2005) found that those who illegally share tracks over the internet also spend four and a half times as much on digital music as those who do not.

A March 2004 study by researchers at Harvard University and the University of North Carolina tracked music downloads over 17 weeks in 2002 and compared that data to actual market performance of the same songs and albums. It found that even high levels of file swapping had an effect on sales statistically indistinguishable from zero. The same study noted that while there is a large amount of downloading taking place, most users likely would not have bought an album even in the absence of file-sharing. On the other hand, a July 2004 study by Stan Liebowitz of the University of Texas at Dallas suggests that file-sharing has a negative effect on record sales.

It's also worth noting that although the recording industry publicly denounces P2P services, it uses file-sharing data in order to obtain information on music fans' preferences, and thereby to improve its marketing and sales. Record companies use services such as those offered by the research firm BigChampagne to track which songs are traded online and help pick which new singles to release. They increasingly use such file-sharing data to persuade radio and music television stations to play new songs, or boost airplay for those that are popular with downloaders.

Although larger, "big-box" stores which sell music may feel the effect of a decline in CD sales, independent music stores are finding that the buzz created online through file-sharing can actually lead to more sales - especially for more obscure recordings that the big-box stores don't carry. Like radio, file-sharing has become another form of promotion for many artists.

Experts continue to disagree as to whether P2P file-sharing is a death-knell or boon to music. At the annual Austin, Texas music festival in March 2005, panellists argued over the current and future impact of file-sharing on music. Similarly, research out of Japan by a Keio Universtity Economics Professor concluded that "Winny", the most popular P2P application in Japan, has had no effect on CD sales in Japan. In fact, the study found that P2P allows consumers to discover new music and so promotes music sales.

Musicians hold mixed views in regards to file-sharing. While reduced CD sales worry artists, the exposure an artist receives through file-sharing can be a valuable promotional tool, especially for lesser known acts. Many feel the tactics of the recording industry are misguided, and believe working with file-sharing technology would increase industry profits.

A survey of 2755 musicians and songwriters on the effects of filing sharing was conducted between March and April of 2004. When asked what impact free downloading on the Internet has had on their careers as musicians, 37% said that free downloading has not really made a difference, 35% said that it has helped and 8% said that it has both helped and hurt their career. Only 5% said that free downloading has exclusively hurt their career and 15% of the respondents answered "do not know".

In interviews, some musicians and their representatives have said their label has asked them not to talk about the recording industry lawsuits, or the issue of file-sharing. However, some artists are taking a public position on industry practices, and the pros and cons of file-sharing on their work.

Some artists publicly denounce file-sharing. Canadian artists such as The Tragically Hip, Jann Arden, and the Barenaked Ladies take issue with the prevalence of music file-sharing. In 2003, Madonna took aim at file-sharers by deliberately uploading a spoofed file of her release, American Life, in response to the number of music fans sharing her music.

In contrast, Moby, System of a Down, Public Enemy and the Dead, frustrated with the record industry's lawsuits directed at music fans, contend that the record industry's efforts are misguided and that, to succeed in the evolving marketplace, it must work with the new technology instead of against it. Courtney Love, in a speech at the Digital Hollywood Online Entertainment Conference, given in New York on May 16, 2000, talks about industry practices, and the possibilities that P2P networking and the mp3 format gives artists to independently promote their work. Robbie Williams has also expressed approval of file-sharing.

Often, frustration expressed by artists relates more to the actions of the record companies than to those of consumers. Many musicians record on their own independent labels in order to avoid the high cost of signing on with a big name label.

CD Royalties

The following is a breakdown of where the money goes when we buy a CD. Typically, the artist earns just over $1 on every CD sold. Promotion, video, recording and touring costs are often subtracted from that figure, leaving the artist with very little after every one else has been paid.

Royalty Math

| | | --- | | Consider this hypothetical example based on realistic figures. Suppose a new band signs a contract stipulating a royalty rate of 14%, which applies to cassette sales. The CD rate is 85% of that. The band records its first album on a $300,000 budget with a producer who gets a standard 3% royalty share.

  | | CD suggested retail price |   | $18.98 | | Less packaging (25%) |

• | $4.74 | | Royalty base | = | $14.24 | | Royalty rate

14% minus 3% for the product, multiplied by .85 to determine CD rate | = | 9.35% | | Royalty rate per CD | = | $1.33 | | Royalty amount x 500,000 CDs |

• | $665,000 | | Less 15% free goods

(Copies given away to retailers, distributors, radio stations and reviewers) |

• | $99,750 | | Less recording costs |
• | $300,000 | | Less 50% of independent promotion

(Cost of hiring outside agents to secure radio airplay. Multi-format campaigns can run $350,000 to $700,000 per single) |

• | $100,000 | | Less 50% of video costs |
• | $75,000 | | Less tour support

(Losses accrued on tour. Few new acts break even on the road) |

• | $50,000 | | Total

(Before managers, agents, etc. take their cut) | = | $40,250 | | Source: All You Need to Know About the Music Business By Donald S. Passman (Simon & Schuster) | | |

Under the Canadian Copyright Act, it is illegal to reproduce, authorize the reproduction of, distribute or "communicate to the public by telecommunication" a musical work in which copyright subsists, without the copyright holder's permission. Copyright automatically subsists in original musical works for the life of the artist + 50 years.

The Copyright Act contains a special exception for "private copying": it permits the copying of music files "onto an audio recording medium for the private use of the person who makes the copy", but does not permit copying for the purpose of "distributing" or "communicating to the public by telecommunication" (s.80). It is generally accepted that downloading music for personal use is legal under this section. However, the record industry disputes this on the basis that a computer's hard drive does not constitute an "audio recording medium".

According to the Federal Court, in a decision issued by Justice von Finckenstein on March 31, 2004, neither downloading a song for personal use nor merely making that file available to others to download from your computer (without some more active sharing activity) amounts to infringement under Canadian copyright law. The court ruled that "the mere fact of placing a copy on a shared directory in a computer where that copy can be accessed via a P2P service does not amount to distribution" or "authorization of the reproduction of sound recordings" under the Copyright Act. On appeal, the Federal Court of Appeal ruled that Justice von Finckenstein had ruled prematurely on the issue and set aside the ruling without deciding the issue. See CIPPIC's webpage on File-sharing lawsuits for more information on this case.

In addition, industry representatives are lobbying for legislative change to add a "making available" right to the Canadian Copyright Act, so that merely making songs available on your computer for others to access would infringe copyright. See CIPPIC's webpage on copyright law reform for more information on the legislative front.

Note that there is no private copying exception for movies, software, or even for non-musical sound recordings. Making copies of these kinds of content likely infringes copyright.

Pay-Per-Download Music Services

Online music services such as Puretracks, or in the US, ITunes, charge customers a small fee for each song downloaded. These services have been gaining in popularity, although are still not nearly as popular as P2P file-sharing. According to the International Federation of Phonographic Industries, the number of digital music tracks legally downloaded from the Internet almost tripled in the first half of 2005. The IFPI reported that 180 million single tracks were downloaded legally in the first six months of the year, compared to 57 million tracks in the first half of 2004 and 157 million for the whole of last year.

Commercial music services offer many benefits to users. Mainly, they are easy to use, offer high quality tracks (no spoofed tracks or viruses), and have a low per-single price point (between 99 cents and $1.35 per song).

Online music services have other benefits, such as providing the industry with exact data on actual music use and popularity, which aids in refining marketing and sales efforts. While revenues from online music services may be lower than from CD sales, costs to distribute music online are also reduced, involving much lower manufacturing, transportation, and retail selling costs.

However, there is resistance to embracing new distribution methods ? the record industry is hesitant to change current distribution channels without assurances that online music services are profitable ventures. There is also a concern that if file-sharing continues to be a socially acceptable free alternative to buying music, consumers will not be willing to pay for downloaded tracks.

Industry lawsuits seem to be slowing the use of peer-to-peer networks. According to Ipsos-Reid, 41% of Canadian downloaders agreed in May 2004 that the lawsuits in the United States targeting music file-sharers caused them to download less often then they used to, and 43% agreed that warnings by CRIA in early 2004 of lawsuits against individual music uploaders caused them to download less often than they used to.

Another effect of the lawsuits has been a shift in popularity of different P2P services. For example, between November 2003 and February 2004, when the record industry was launching lawsuits in the USA, the number of Kazaa users (who have been heavily targeted by lawsuits) dropped by five million. However, the use of eMule and BitTorrent (other file-sharing services) increased.

While the effects of file-sharing on the music industry and the sale of CDs are being debated, CD sales have increase since the lawsuits were filed. In 2003, overall sales of CDs in the US were down 2% from 2002. However, in the fourth quarter of 2003, after the suits were filed, sales went up 6% as compared to the same period in 2002. The popularity of online digital music services also grew during the same period.

The Canadian Record Industry Association is in the midst of legal proceedings against 29 unnamed alleged music file-sharers. In the US, the music industry is aggressively pursuing music file-sharers through legal action. Since January 2004, the RIAA has filed over 1500 lawsuits against those they believe are swapping music on P2P networks. In addition to lawsuits, the recording industry is attempting to use technological means to curb music file-sharing. In response to technology allowing consumers to easily copy CDs to their personal computers and devices such as MP3 players, record companies have begun to release copy-protected CDs. Copy-protected "CDs" are not standard audio CDs. They have been modified to make it harder for them to play correctly on computers. This is accomplished by placing a corrupt data track on an audio CD. Most audio CD players are built to ignore corrupt data tracks, allowing the disc to play without difficulty. However, CD-ROM drives in computers read CDs differently. Computer drives look for data files, and when they find one, try to read it. If the file is corrupt, the computer may endlessly try to read the disc, or will eventually give up, and eject the CD. The use of copy controlled CDs is growing. By mid-2002, all five major U.S. record labels began using copy control measures.

Copy-protected CDs can create a host of problems for consumers. For Mac users, protected discs have been known to get stuck in the drive, or even cause computers to crash, meaning costly repairs for owners. Copy-protected discs may not play on other devices as well. Car CD players, game consoles, DVD players, portable CD players, and even some audio CD players have been reported to not play some copy-protected discs. As computer hardware and software advances, it is possible these CDs will not play on newer systems. Some copy-protected CDs do come with built-software allowing the disc to be played on a personal computer, but the software does not play the disc back in CD-quality audio. The use of copy protection methods risks offending music consumers by infringing on their rights to play the CD in their medium of choice, and to make copies of audio recordings for personal use. It therefore makes alternative methods of obtaining music, such as file-sharing, more attractive. In addition to offending its own customers, the music industry has little chance of stopping file-sharing through copy protection. Circumventing copy protection can undo the efforts of the record company to protect a disc's contents-and it only takes one successful circumvention for material to be shared online, and widely distributed. Additionally, copy protection will not stop file-sharing of previously released, non-copy-protected albums.

At a minimum, discs restricted by copy-control technology should be labelled as such, allowing consumers to make an informed choice. In Canada, copy control labels are not required on affected discs, although some companies are voluntarily using labels. In the US, a bill has been introduced making labelling mandatory, but has not yet passed.

While the record industry has been slow to embrace new technologies, a number of proposals have been made with a view to allowing file-sharing while still compensating musicians.

Levies

In Canada, levies are applied to blank recordable audio recording material such as CDR, CD audio, audiocassettes and minidiscs. The levies are designed to compensate copyright holders for revenues lost due to the private copying provisions, which allow Canadians to make audio copies for personal use. To the extent that they do not already do so, revenue from these levies could be used to compensate artists for revenues lost due to file-sharing, as well as downloading. See CPCC website for more information on the private copying tariff. It should be noted, however, that the distribution of these levies is an issue: concerns have been raised that the CPCC's method of distributing levies (based on "representative samples of radio airplay and album sales") tends to benefit large corporate copyright holders and a few heavily promoted artists to the detriment of independent and new artists (who use blank media and must therefore pay the levy).

Compulsory Licensing Schemes

Compulsory licensing schemes must be "compulsory" for consumers as well as content providers in order to work. From the consumer's perspective, a compulsory scheme works by requiring consumers to pay a flat fee for access to copyright material. Various compulsory schemes have been suggested. For instance, a compulsory system could be achieved by adding a tax or fee to broadband Internet service, collected by the Internet Service Providers (ISPs). Consumers would pay a flat fee for the right to download and share as many copyrighted music files as they wish. The record industry would divide the money based on accepted measurements of downloading. (See, "Is the War on File-sharing Over?"). Others have suggested implementing a fee on university students as part of their tuition fees to cover licensing costs. Professor Michael Geist suggests targeting the cost of the license to the two most identifiable groups of file sharers ? students and home broadband users that use large amounts of bandwidth. ISP's could institute a tiered system, charging the heaviest users the highest fee.

If consumers are required to pay a fee for access to copyrighted material, there must be material to access. Refusing to license, or cross license material so not all P2P software providers have access to it would limit the success of a licensing scheme, and make free file-sharing even more appealing to consumers. That is why in a compulsory scheme, record companies and artists must license their content to P2P vendors used by consumers for file-sharing. It is unlikely the major record labels would be willing to license their material on a voluntary basis. Legislation will be necessary if a compulsory scheme is to be created. In the US, a representative of five P2P software vendors has called on the US Congress to pass a law requiring record companies to license their content to P2P vendors if they are unwilling to voluntarily license their product.

Voluntary Collective Licenses

The most promising alternative according to some experts is voluntary collective licensing. Under a voluntary collective license, the music industry would first form a collecting society which would offer file-sharers the opportunity to share as much music they like for a reasonable regular payment. This collection agency eliminates the need for individual record labels to license their material to each P2P software vendor. Once a record company becomes part of the collecting society, their material can be made available on a P2P network. Licensed file-sharers would be free to download whatever they like, using whatever software they prefer.

A voluntary system is dependent on consumers' willingness to pay a small fee in order to file-share. Although there will always be a small percentage of people unwilling to pay who continue to attempt to file-share for free, it is believed that as long as the voluntary fee is reasonable, effectively invisible to file-sharers, and does not restrict their freedom, the vast majority of file-sharers will choose to pay, instead of attempting to evade the system.

Consumers could agree to the voluntary license by paying the monthly fee to the collecting society directly, or as with compulsory licenses, fees could be paid to the collection society by intermediaries, such as ISPs or universities. The money collected would then be divided among artists based on the popularity of their music on various file-sharing services. A monthly fee of $5 has been suggested as a reasonable amount to collect under a voluntary licensing scheme. Radio broadcasting currently works on a similar voluntary system. Stations pay a fee to collection groups such as the Society of Composers, Authors and Music Publishers of Canada (SOCAN) and in return, broadcast the music they wish. The collection groups distribute the money to the artists.