Please cite this paper as: OECD (2005-12-13), “OECD Report on Digital Music: Opportunities and Challenges”, OECD Digital Economy Papers, No. 100, OECD Publishing, Paris. http://dx.doi.org/10.1787/232088236784 OECD Digital Economy Papers No. 100 OECD Report on Digital Music OPPORTUNITIES AND CHALLENGES OECD Unclassified DSTI/ICCP/IE(2004)12/FINAL Organisation de Coopération et de Développement Economiques Organisation for Economic Co-operation and Development 13-Dec-2005 ___________________________________________________________________________________________ _____________ English - Or. English DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INDUSTRY COMMITTEE FOR INFORMATION, COMPUTER AND COMMUNICATIONS POLICY Unclassified DSTI/ICCP/IE(2004)12/FINAL Cancels & replaces the same document of 08 June 2005 Working Party on the Information Economy Digital Broadband Content: Music English - Or. English JT00195975 Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format 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 2 DSTI/ICCP/IE(2004)12/FINAL TABLE OF CONTENTS PREFACE........................................................................................................................................................ 5 SUMMARY..................................................................................................................................................... 7 INTRODUCTION ......................................................................................................................................... 13 Objective, scope and plan of study............................................................................................................. 14 MUSIC MARKET INDUSTRY: HISTORY, SIZE AND DIFFERENT MUSIC CARRIERS.................... 16 Role of new music carriers and the advent of digital technology .............................................................. 16 The market for recorded music and its evolution....................................................................................... 20 INDUSTRY STRUCTURE: TRANSFORMING VALUE CHAINS AND CHANGING BUSINESS MODELS ................................................................................................................................... 36 Traditional record industry value chain, business models and players ...................................................... 36 Traditional record industry business model ............................................................................................... 39 New Online Music Industry Value Chain, Business models and Players.................................................. 45 Downloads.................................................................................................................................................. 54 Subscription services.................................................................................................................................. 57 Digital Music Value Chain......................................................................................................................... 58 New Value Chain and relationship to new business models...................................................................... 61 MUSIC AND PEER-TO-PEER NETWORKS ............................................................................................. 73 The rapid rise of file-sharing...................................................................................................................... 73 Nature of files traded.................................................................................................................................. 76 Music sales and file-sharing....................................................................................................................... 76 Actions of the music industry against file-sharing..................................................................................... 78 Commercial uses of file-sharing in the music industry.............................................................................. 78 ONLINE MUSIC, ARTISTS, AND CONSUMERS..................................................................................... 80 The Internet, artists and the diversity of content........................................................................................ 80 Digital music, users and consumption habits ............................................................................................. 83 CHALLENGES AND POLICY CONSIDERATIONS................................................................................. 84 Infrastructure, innovation and technology.................................................................................................. 84 Value chain and business model issues...................................................................................................... 87 Rights negotiations..................................................................................................................................... 87 Protection of Intellectual Property Rights.................................................................................................. 89 National copyright law and the ratification of the WIPO Internet treaties................................................. 89 Government actions that relate to the protection of IPR ............................................................................ 90 Digital Rights Management ....................................................................................................................... 92 Fostering adequate legal frameworks......................................................................................................... 93 Value-added taxes ...................................................................................................................................... 93 Plurality, diversity and government support for the music industry .......................................................... 94 ANNEX 1. WIPO INTERNET TREATIES.................................................................................................. 95 ANNEX 2. LEGAL CASES INVOLVING FILE-SHARING ...................................................................... 96 ANNEX 3. STATISTICAL ANNEX .......................................................................................................... 103 ANNEX 4. EXTRACT OF IFPI DIGITAL MUSIC REPORT................................................................... 109 3 DSTI/ICCP/IE(2004)12/FINAL BIBLIOGRAPHY........................................................................................................................................ 110 Tables Table 1. NACE and NAICS record production and publishing classifications ............................................ 14 Table 2. Music retail sale ranking of OECD countries – value analysis in USD – standard retail figures (at variable exchange rates)........................................................................................................................ 21 Table 3. Compilations of estimates............................................................................................................... 31 Table 4. US online market forecasts............................................................................................................. 32 Table 5. Distribution of revenues of a CD sale............................................................................................. 43 Table 6. Comparison of downloads and subscription models for a particular online music service............ 48 Table 7. Size of music catalogue of online music services (October 2004) ................................................. 49 Table 8. Price comparison of online shops (Benchmark: physical CD over Internet retail), Oct. 2004....... 50 Table 9. A-la-carte pricing structures possible cost ranges on a USD 0.99 track download ........................ 54 Table 10. Top level percentage breakdowns, labels & artists....................................................................... 56 Table 11. Different business incentives of online music service providers.................................................. 61 Table 12. Dollar sales of CD and MP3 players, in USD million.................................................................. 68 Table 13. Player and music store (codec) compatibility............................................................................... 69 Table 14. Digital music player manufacturers (in alphabetical order).......................................................... 71 Table 15. Pew Internet surveys: Artists’ opinions on the impact of file-sharing on music sales ................. 80 Boxes Box 1. OECD recommendation of the Council on broadband development, 2004 .................................... 6 Box 2.