"Band of Brothers"

Keynote address by Mr. Graham Henderson,
President, Canadian Recording Industry Association

at

Canadian Music Week

3 March 2005

Fairmont Royal York Hotel, Toronto

In January of this year, the Canadian music industry announced the first year-over-year increase in consumer music buying habits since 1998. The total, year-to-date number of shipped units rose five per cent. Significant gains were realized in the number of music DVDs shipped and of CDs. DVDs were up by 24 per cent and CDs by five per cent.

This breakthrough is the combination of a never-say-die attitude in the music community, an unusually strong artistic output and a receptive Canadian public. Artists, retailers, radio, music publishers and record labels, a modern day "Band of Brothers," have together produced a near miraculous result with great music and innovative marketing and promotional techniques - amid record levels of piracy and in a virtually lawless environment.

And when we talk about record levels, we mean it. International studies show that more online theft takes place per capita in this country than virtually anywhere else in the world. Pollara Inc.'s 2004 survey revealed that that there are over 134,000,000 unauthorized downloads per month in this country. While file swapping declines everywhere else in the world, it is on the rise here, thanks largely to a confused legal regime. P2P networks are awash with illegal activity - a study by Palisade Systems confirmed that a mere 3 per cent of the traffic is authorized. Fully 97 per cent of it is illegal.

Despite this, artists, record labels (large and small), publishers, radio and retailers have shown themselves to be everything their detractors said they weren't. The music community has shown itself to be innovative, resilient and doggedly determined to survive. Having said this, we can't forget the terrible cost of the last few years in terms of artists' careers that sputtered out or never even got off the ground thanks to what we euphemistically call "sharing". Over a six-year period, our market has lost 30 per cent, and a single digit bounce should not fool us into thinking the worst is necessarily over.

Having said that, not all is doom and gloom - in 2005 we have a lot to look forward to.

Retail is bouncing back. According to Natalie Larivière of Archambault, one of the main reasons for improved retail performance is that, "Canadians are starting to rally behind artists. They know theft is wrong and they are slowly but surely returning to retail."

The independent label sector is evolving and thriving with a large crop of successful new entrants. And this is good news for everyone. The foundation of any viable musical community is a strong and flourishing independent sector - because it is there that the most innovative actions are often undertaken, it is there that the next big thing is often incubated. We have seen the emergence of a brand new generation of independent label entrepreneurs - a generation who share much in common with their predecessors - a love of Canada and an ardent desire to see our stories told around the world by Canadians.

Major labels for their part, and despite constant carping from the sidelines, are producing better records, more diverse records and are embracing new formats such a DVD-A and SACD as well as the digital marketplace with the fervor of religious zealots. To the outside world this is not always apparent. I spent four and a half years helping to build Universal's digital marketplace. It might not have been to everyone else's timetable, but hundreds of millions of dollars have been spent and we were working flat out. We understand that people want to enjoy music in a variety of ways that were not anticipated a decade ago. But we have always taken as the guiding principal that our artists have to get paid. That has always come first.

The recent focus on digital by no means suggests that labels have forgotten that for now, and for the foreseeable future, the CD continues to be the mainstay of our business. It needs to be supported and nurtured. The livelihood of our retail partners for now depends on the vitality of the CD market place and we have not forgotten that. With all of the focus devoted in the media to digital, the maligned and forgotten workhorse of the music industry, the CD just plods on. Is the CD a dying format? If it is, it is demonstrating that the obituary is a long way off. The CD still provides extraordinary value for money and a stunning listening experience.

Meanwhile, in the rest of the world, the online digital marketplace blooms. A few weeks ago, IFPI reported that in Europe and America, legal digital music was moving into the mainstream of consumer life. The digital marketplace is most likely to be an incremental marketplace, and hence very important to the future of our music industry as a whole.

What excites me about this is that its effect is not limited to the digital environment alone. The idea that virtually everything that is on iPods is stolen is not true. Music fans, like me, in enormous numbers, are converting their CD libraries into a digital library. And our research tells us that they are not abandoning the CD format. Many consumers still prefer to buy CDs and rip them to their hard drives because of the quality issue. ITunes, for example, sells files at a 128-bit rate. For the casual consumer listening to music with headphones or built in computer speakers, file quality should not be an issue. But if you own a Bose Sound Dock or high-end Altec Lansings, believe me, you won't want to be listening to 128 bit rate files after the CD experience.

The point here is that there are a lot of people out there like me - building a digital library by buying CDs. And anyone who has converted their library will know what I mean when I say, once you do this, you become a voracious consumer of music. You notice gaps in your collection. You fill them in. You build play lists. You talk about music more. And this is good for all of us.

I won't say much about ring tunes here, because there are going to be panels and key notes aplenty on the subject. There is no question that ring tunes have the potential to be a huge, singles-like market place. And the market's voracious appetite for even their poor market brethren, the ring tone (computer-generated, knock off versions of the real thing), shows just how strong the consumer's appetite for music is.

Interestingly, the ring tone market is also one the best example of the corrosive effect an illegal marketplace has on the value of copyright. Why will someone carp at paying 99 cents for a full song download and yet happily shell out as much as three or more dollars for the 30 second knock off version of it? Well, perhaps it has to do with the fact that you can steal the full-length version. The telephone companies on the other hand have built what they refer to as a "walled garden." Meaning that as of yet, there is no "free" market for stolen copies of these ring tones.

Make no mistake about it: we have a fantastic product. Our polling consistently shows that music is right at the top of people's entertainment pyramid. Despite all the grumbling about the quality of music being released today, consumers, whether legitimately or illegitimately are listening to more music than ever before. And it means just as much to them as it always did. People build their lives around music; their memories are indexed with music - more than any other media. Many of you in this room represent new partners for us - attracted to us because of the intrinsic value of music. It will take time for us to learn about one another and explore our relationships. What you will discover is that the people you will meet in the music business eat it and breathe it. They are often underpaid and over worked and cruelly and unfeelingly maligned. They do it because they love it. Understanding their passion for what they do, and the sacrifices many of them make in order to be able to do what they do, will help you to better understand their psychology.

Like many of you, I have sat through countless keynotes at successive Canadian Music Weeks at which pundits and futurists, self-proclaimed prophets of our doom, propounded their idiosyncratic visions of the future. Many of these people had absolutely no familiarity with our business; some of them were, of all things, law professors fresh from the tenured, sheltered corridors of academe. But what they all had in common was this. They were, for the most part, wrong.

And the biggest mistake they made was that they under-estimated us. They under-estimated our resilience. They under-estimated our ability to innovate. They under-estimated our dogged determination. But most of all, they under-estimated our love for music. They attacked us with relish. We were told in no uncertain terms that we would be extinct. Retail? Who was ever going to shop in a store again? Radio? Who would ever listen to radio? Labels? Dinosaurs in a post meteorite world. And incredibly, even our artists found themselves under attack, imagine they speak out in favour of the principal of choice.

Yet here we all are, bloodied but unbowed, a band of brothers brought together in adversity with more in common than we ever imagined.

There is considerable evidence that some of the illusions about the "e" world are wearing off and that the old rules are re-asserting themselves. What do I mean by "old rules?" One of the first things we were told was that the Internet was going to shatter artificial boundaries. That it did not respect borders. For an industry based on rights that vary from territory to territory - this was a confusing prospect. But in actual fact, the prognostication turned out to be at best only partly correct. Through the simple expedient of reverse IP look up or checking the address of the credit card holder, you can, in effect, control who buys what from whom in what country. But even beyond this, what we have discovered is that people, by and large, prefer to buy at home.

Echoing similar studies elsewhere in the world, a recent and as yet unpublished Pollara Inc. study found that 75 per cent of Canadians were now aware you could buy music on the Internet. But here's what's new and surprising. 75 per cent said they would prefer to buy from a Canadian service (25 per cent were able to name Puretracks) assuming price and quality were similar. 75 per cent said a Canadian service would do better at equally supporting French and English speaking services and 53 per cent felt that a Canadian company would do a better job supporting Canadian artists by making their songs available (with 32 per cent saying it would make no difference).

We have also been told over and again that people would never pay for a download. Well, hundreds of millions of downloads later, and who knows how many billion ring tones, that chestnut seems to have been laid to rest. Increasingly music fans are migrating back to the legal environment as much out of a sense of fair play as anything else. "Swapping" it without paying for it, offends values that Canadians hold dear: respect for private property and one's right to get paid for one's labour.

A perfect example of the old rules reasserting themselves is the emergence of pricing variations. The type of monolithic pricing that we have seen thus far is only possible in a marketplace where neither side of the marketplace has asserted itself. I think we can look forward to a world in which prices will vary from product to product. And that is a good thing, not a bad thing, because pricing should reflect demand.

The record industry has been plagued by what the economists call the free rider problem - which is their term for unpaid file swapping. One of the principal economic effects of the free riding problem is that copyrights become less valuable. Devaluation of copyright also means price erosion. In the music industry, pricing is as much related to the existence of the illegal "free" marketplace as it is to the intrinsic value of the product. Now that a legitimate marketplace is developing, it only makes sense that pricing will follow demand.

I want to briefly address the issue of "disintermediation." This is one of the goals ardently sought by some academics and also by some paid opponents of our industry - just get rid of the record companies. The idea is to put the creator directly in contact with the consumer - our opponents are oblivious of the need for investment in production and distribution and the need for money to market the product produced. In their view creators would interact directly with consumers in a sort of anarcho-syndicalist's paradise. And, as for getting paid? These folks regard the idea that there needs to be some sort of transaction between the seller and the buyer in a free marketplace as a quaint anachronism. In its place will be a form of centralized, government-run, collectivized, compulsory licensing system.

This is fundamentally at variance with a free market economy. It discourages investment and innovation. And it removes from the equation something that is of vital importance - you can disintermediate the record labels, but you cannot disintermediate the functions that they perform. Now let me be clear, there is nothing wrong with disintermediation per se. Some Artists have for decades successfully reached out directly to their fans. But there needs to be room in the world for both models. And our current legal system simply does not respect the principle of choice. It takes choice out of the hands of the creators and rights holders and puts it in the hands of hackers and thieves. If creators want to do it in order to connect with audiences they should be able to do so - but it must be their choice, not a choice made for them by the expropriators.

Those who do not want to see the choice put in the hands of creators talk very loosely about how copyright reform will stifle innovation - they base this on anecdotal evidence and stock horror stories. In contrast, the effects of our failure to enact copyright reform are everywhere. Young Canadian independent labels in search of investment have been stunned to find it is almost impossible to obtain. According to Stephen Ehrlick, President of Orange Record Label, "Private investors consistently regurgitated what they were reading in the newspapers, basically that kids were stealing music and how is a new record company (like ours) going to make any money. There wasn't a bank or a venture capitalist that would touch us - despite a business plan that was warmly received. It was because they considered the music industry to be the Wild West - no laws, no marshals, and most importantly to them, no profits."

He went on to say, "I hear the opinion that copyright reform will stifle innovations. That's ludicrous. We are on the cutting edge of a range of new business models in the record industry, including a digital download service. I can tell you from my experience that the absence of copyright reform has stifled investment and our ability to implement our innovations. We have turned the corner - but I can only imagine where we would be now if we had had the protection of the law. Proper laws encourage investment."

Grant Dexter of Maple Music had this to say: "We recently launched our music label. It was a labor of love that was not made any easier by the fact that it was damn near impossible to raise money from the typical sources that entrepreneurs like us look to. We live in a country in which copyright laws do not protect businesses like mine and in which courts and Copyright Boards support the proposition that downloading and uploading of music is legal. This isn't legal anywhere else. But they say it is here. That makes no sense to me, as a businessperson at all. As a result of this, raising capital to grow our business was almost impossible. Prospective investors view the music industry as a no fly zone. And they will continue to until we get the proper laws to protect developing businesses like mine. Maple has been a success; but it sure as hell hasn't been easy. We make it work because we have to."

And it isn't only indies that have trouble finding investors. Artists can't find labels that will invest in them because the labels can't find the money. Kathleen Edwards once said, "Everyone seems to think this is just hurting the labels and the superstars, so who cares? Wrong. People who download music have friends playing music in clubs in their hometowns and those people are never going to get record deals because record companies won't have sold enough records to support a new artist."

Copyright reform offers us the chance to change all of this. Now some academics will tell you this is because we want to sue, as one of them snidely put it, "teenagers and dead grandmothers". Nothing could be farther from the truth. Copyright reform will create a set of rules so that Canadians who want to play by the rules can play by the rules. And it offers stake holders of all stripes the opportunity to engage in a national conversation on the value of intellectual property.

This is important for a variety of reasons. Our cultural products, our "products of the mind" are susceptible to theft on a massive, almost unthinkable scale. Many people think that everything that can be digitized is free - that is to say, if it is on the Internet, I can do what I want with it.

The dilution of respect for copyright has a number of exceedingly worrisome aspects that are worth canvassing. I'll start with the trite. People respect tangible property rights. They know they can't take someone's microwave, or their car, or trespass on their property. Or, at least they know that if they do, they will pay a price. The same rules most decidedly do not apply to the Internet.

And the rules that do apply, to they extent they can be dignified with the name "rules," have dangerous implications for our society. Because they are the rules of a wild west where each person decides to obey only those laws that suit them. When we condone behavior like this, our society moves away from the rule of law, away from consensual agreement that there are laws that must be obeyed by every citizen.

But there is another, far more pernicious, aspect of this way of thinking. The dilution of copyright hits squarely at one of the components of our economy that we excel at - the creation of products of the mind. The Government of Canada, in its report "A Framework for Copyright Reform" (2000) noted that the GDP of the copyright-related sectors is $65.9 B, accounting for 7.4 per cent of Canadian GDP. These sectors are growing at an average annual rate of 6.6 per cent, compared to 3.3 per cent for the rest of the Canadian economy. The "Framework" concluded that Canada's copyright-related sectors constituted "the third most important contributor to [our] economic growth."

If we wish to remain competitive in the international marketplace, it won't be by making cheap widgets - someone, somewhere else, will always be able to make them cheaper. It will because we are among the best at creating products of the mind - the very products that the opponents of WIPO ratification would devalue and weaken. We should be standing up for these rights. We should be fortifying these rights. Not watering them down.

From my perspective, working together, we must initiate a national conversation- a dialogue that should take place in our marketplaces, our places of work, our schools and our homes - a dialogue about the nature and importance of products of the mind. And while this conversation can start today, in order for it to be truly effective, our government simply has to move to ratify WIPO to bring our copyright legislation into the 21st Century.

Well, we are almost there. The federal government is at last moving to modernize our outdated analogue copyright legislation. This legislation will provide the legal framework necessary to allow the digital marketplace (the industry in general) to flourish. It will bring Canadian law into line with the rest of the technologically sophisticated nations of the world. It will give labels and artist's choice: it will mean the end of expropriation and the dawn of remuneration.