Music File Sharing HTM 304 Management Information Systems CRN 42335 Fall 2007 Prepared for: Fang Fang December 11, 2007 By: Caitlin Smith Stewart Rutledge Jess Culpeper 1 Music File Sharing Technology over the past several years has brought a lot of benefits to society and especially to business. E- commerce is almost essential for a company to be very successful in today’s marketplace. However, technology has also brought a lot of drawbacks to society and business as well. People and business constantly have to adapt to the ever changing world and way of life. With the increase of interest in cell phones, personal media players, and laptops, there has come a new interest for new products. Such products are digital music. Although the interest in digital music has opened many more doors to opportunity, it has also opened many other doors to problems. The music industry has to deal with music piracy and come up with actions on how to stop it. As well as society has to learn the legality of music file sharing and learn about what the issue of music file downloading is and in what ways is it legal and illegal to better protect ourselves as well as behave ethically as possible when purchasing digital music. Introduction To first understand why music file sharing is illegal, one has to understand the legalities that protect the music. When an artist or a group makes a song, they 2 usually get it copyrighted. A copyright is “the exclusive right to make copies, license, and otherwise exploit a literary, musical, or artistic work, whether printed, audio, video, etc.” When someone makes a copy for shares a copy of a song, it is breaking the copyright law. When breaking this law it is called piracy, “the unauthorized reproduction or use of a copyrighted book, recording, television program, patented invention, trademarked product, etc.” So how did piracy become such a problem? Shawn Fanning, a Northeastern University student, created Napster which was a file sharing service that made the way for peer-to-peer file sharing for music. In July of 1999, Napster was made available to the public. People from around the world joined the site and at a rapid rate started downloading music, but never paid a dime. Less than six months later, the music industry wanted to take legal action for violating copyright laws. Metallica, Dr. Dre, and Madonna all filed lawsuits against Napster. The claims were 1. That its users were directly infringing the plaintiff’s copyright. 2. That Napster was liable for contributory infringement of the plaintiff’s copyright. 3. That Napster was liable for vicarious infringement of the plaintiff’s copyright. 3 Napster reached its peek with 26.4 million users in February of 2001. However, in July of 2001, Napster was found against for all three claims and was forced to shut down. A year later, Napster declared bankruptcy and sold all its assets. Napster now is a pay service music sharing service similar to something like iTunes. Over the years, music file sharing has become a hot topic. Napster is not the only file sharing service that has been an issue for the music industry. Several other sites, such as Kazza, limewire, WinMX, and others, have come about to make file sharing more difficult to crack down on, but they have been trying. Who is the RIAA An organization called the Recording Industry Association of America (RIAA) has become the strongest fighter in the war against piracy, especially illegal music file sharing. The RIAA is an “organization committed to helping the music business thrive.” Their “goal is to foster a business and legal climate that protects the ability of our members.” The members of the RIAA are the members of the recording industry; musicians, producers, record labels, etc. 4 The RIAA is out there to fight piracy. The RIAA considers downloading music without paying or without the bands or artists consent as equally as bad as shoplifting from a convenience store or stealing a woman’s purse right off her shoulder. They are completely correct. Just because the crime does not exactly have an immediate penalty or the likelihood of someone being caught is less, does not make is a lesser crime. It is extremely illegal and someone can be penalized for it greatly, which will be discussed later. The industry is being greatly affected by piracy. So how much is the music industry actually loosing. Well according to the RIAA page, it is broken down into two categories. Losses from street piracy which is the manufacture and sale of counterfeit CDs and also losses from illegal online music file sharing. The RIAA estimates that approximately that the United States music industry loses more than $300 million per year to the street piracy. Calculating the loses from online piracy is extremely difficult, the RIAA does know that the online pirated marketplace largely out numbers the legal marketplace. The RIAA states “that means investment in new music is compromised,” and “piracy is a very real threat to the livelihoods of not only artists and record label employees 5 but also thousands of less celebrated people in the music industry.” Basically, the people in the positions such as the receptionist at the front desk of a record label company or the record store clerks. “Piracy undermines the future of music by depriving the industry of the resources it needs to find and develop new talent and drains millions of dollars in tax revenue from local communities and their residents.” Financial Impact No matter what side you may be on in regards to this issue, whether you are the consumer, musician, the record label, or any other facet of this interesting issue, the main thing most people are worried about is, how is downloading and illegal downloading going to impact my wallet. Well, it is obviously going to be very different from party to party. The consumer is worried that the record company is going to get fed up with the somewhat out of control downloading and lack of CD sales issue, and either jack up the prices of legal downloads or come out guns blazing on illegal downloaders and levee either heavy lawsuits and/or even jail time. The Musician or Artist is scared that they are not going to make any money due to all their music being downloaded for free and they won’t be 6 able to live out their dreams in that Bentley and huge mansion. The record label is in the business of maximizing profit for their musicians and themselves. If you are taking their music for free, they are not exactly maximizing profit. The record label would like to charge whatever they want for their products, but without absolute power over their product, they are going to have to meet the consumer somewhere in the middle. All these players in this issue need to look at the financial impact of file sharing on them, now and in the future. The fact of the matter is that physical CD sales are down, and digital downloaded music up. Nielsen SoundScan reported that as of July 2007 CD album sales were down 15 percent during the first half of 2007 compared to the first half of last years record sales. They also reported that the sale of digital tracks had increased 49 percent as compared to last year’s sales. You can see a definite trend there. People are choosing to get their music digitally more and more. This is really illustrated in the sales figures from the first quarter of 2007. NPD Group reported that Wal-Mart was number one in music sales with 15.8 percent of the market share, Best Buy came in second with 13.8 percent of the market share, and iTunes came in third with 9.8 percent of the market share. Although the numbers show 7 that a lot of people are still getting their music the old fashion way at Wal-Mart or Best buy, digitally delivered music, in particular iTunes, is fast on their heels. The financial figures are clearly not in the old CD’s favor. Nielsen SoundScan reported that digital music sales were up 67 percent in 2006 and as we stated earlier are already up 49 percent through the first half 2007 and Strategic Analytics believes we will see digital sales grow to upwards of 62 percent by the end of 2007 and account for about 2.7 Billion dollars in the music industry. By looking at the numbers from even just the last few years, you can clearly deduce from them that every year digital sales are increasing and the next year is generally bettering each previous year’s sales. The financial impact of online music file sharing in the future varies, but most analysts say basically the same thing, digital online music is an industry that is going to keep growing. Jupiter Research predicts that by 2012 digital online music sales will account for a third of the music sales market share. They also predict that digital music spending will rise to 3.4 Billion dollars over the next 5 years and that CD sales will continue to decrease. In-Stat predicts that digital music will account for 26 percent of music sold by 2011. 8 Experts and novices alike, can see financially the viability of the digital online music trend. Digitally downloaded music will definitely financially impact the music industry negatively and positively no matter what side you stand on, but it’s how you react and how one uses the advantages of online music downloading that will really prove one’s exact financial impact.