Digital Economics

I think the highly disputed Digital Economy Bill is an interesting development. With a lot of opposition. Having had a 40 minute debate about it with Raj, and generally having thought about it a fair amount over the years, I would like to say that I support the Bill. I may be the only 20 something in the UK doing this.

The reason I support it (in principle, anyway) is that ultimately, illegal downloading is bad for the music industry, bad for the movie industry. Most of us don’t have terribly warm fuzzy feelings about any kind of industry – just wait for my wife‘s upcoming post on the meat and dairy industry – but I think a dislike of a large industry simply for its largeness is not a terribly mature response.

Welcome to the Capitalist State

Many people complain about “huge profits” and “ridiculous markups on CDs”. Then they do their shopping at Tescos, and go to the pub and pay £2 for a small orange juice. Ultimately, we live in a Capitalist society, one based on the idea of: you do something, you get paid for that, you buy things with your pay. We either accept that, and thus accept that there should be rich people. Otherwise, the alternative is everyone getting equal pay, and all possessions are freely distributed. Whilst that one sounds great, it kinda doesn’t seem to work in real life.

A pie chart showing a breakdown of CD costsAlso, the huge profits people love to talk about, and overpriced albums? Here is a sample breakdown of where money goes when you buy a CD for £10.49:

  • £0.11 Musicians’ unions
  • £0.52 Packaging/ manufacturing
  • £0.52 Retail profit
  • £0.54 Publishing royalties
  • £0.59 Distribution
  • £1.05 Artists’ royalties
  • £1.12 Label profit
  • £1.57 Marketing/ promotion
  • £1.91 Label overhead
  • £2.55 Retail overhead

That’s a heady profit of £1.12 for your label there. I don’t consider that a huge and outrageous profit. Yes, it could be lower, but its not like from every £10 cd, the industry is making £6. The industry responded to piracy in two ways:

  1. Cutting back on less “sure bet artists”: for example, 50 Cent is still in a job, but Capdown couldn’t make a living out of music and had to break up.
  2. Cutting CD costs. Pushing the retailers to make less profit, causing the independant music stores (and Fopp, and Virgin) to shut down. Resulting in less quality places to purchase music, to meet people, to buy zines, and to make create high streets that are full of even more homogenous buy-it-on-our-website-for-less chains.

It’s nothing to do with me!

People think music downloading is fine, saying “I wouldn’t have bought it anyway”. Yet the figures don’t back this up. Whether or not they would have bought it, someone was. Over the last 10 years, we have seen a 25% overall drop in music sales – in the words of the Economist, “paid digital downloads grew rapidly, but did not begin to make up for the loss of revenue from CDs“. In 2008, the US physical album sales fell 20 percent to 362.6 million from 450.5 million, while digital album sales rose 32 percent to a record 65.8 million units. That sounds okay, but when you do the maths, that’s a drop of 21.6 million albums.

So the industry responds with focusing more on singles, but is that a positive? Do we want just catchy pop hits, and an industry that focuses on artists who maybe don’t experiment with albums, with inventive, non radio friendly ideas? As the boss of Atlantic Records says “You have to really be right about your hits. If you’re going to invest that amount of time in them and not run as many records, you have to be way more right today than wrong”.

The Industry is stale and needs to innovate…

So then the industry has responded by trying other options. Three in fact:

  • Subscription fees for downloading
  • Ad supported streaming
  • Paid music downloads

Let’s look at these, and see why they suck more than the original system.

Subscription fee services such as Napster, and Emusic charge you a fixed fee per month, and give the consumer the option to download either a limited number of tracks permanently, or listen to an unlimited amount of music within restrictions. The downsides of these are two fold. Either they give consumers a limited selection (such as Emusic), where you can’t get chart tracks, or they prevent them from using the music they download (such as Napster) who prevent you from burning tracks onto CD, or putting them on some mp3 players. Also, they are often worse value for the artists.

Ad supported streaming has gained a huge following. Services such as spotify, with a free service or subscription supported option, seem the perfect solution. You get to listen to music, adverts pay the music industry. Except, you can’t listen to music unless you are attached to an internet connection. Or listen to it on your cd player in the car. Or in the high quality of a CD. And your music is interrupted by adverts. And the artists get approximately nothing. For example, Lady Gaga had a million plays on spotify. How much did she get paid? $167. That’s less than a weeks Tesco’s wages for being one of the most successful artists on an international music service for FIVE MONTHS.

Paid music downloads. These are the worst of the lot. This awesome article nails down a lot of the stuff I was gonna say here. What it comes down to though is that they are a bad deal for consumers, providing people with albums or singles at a similar price to the physical product, yet tied in with restrictions, less material, no resale value and, in contravention of the Consumer Protection Act, no right to return.

Plus, when you consider that labels, musicians and consumers are all forced to obey the arcane rules that (for example) the oh-so-cool Apple force you to comply with. You think the £1.12 CD cut was bad above? How about Apple taking a 30% cut on all sales? That’s compared to the traditional 9% of the old system. Not that I don’t like Apple, of course, although obviously their products are overpriced, with poor consumer value and imperialist business strategies.

A need for control.

One thing I do agree with, is that maybe big industries, like the music industry, need to be controlled a little, reigned in somewhat. Maybe them taking a 9% cut, back in the day was a bad thing, posting large profits. Personally, I accept that the larger a business is, potentially the larger the profits, but I also think there needs to be a balance.

I was talking with Raj about this earlier, saying I felt there was a need for regulation, some kind of Government OffMedia group overseeing all media stuff. And then I read some more about the bill to discover that, oh look, this terrible bill we are all against introduces, as its first point, the move to “Widen Ofcom’s scope from TV and radio to all ‘media services’, promoting investment in networks and public service content“. Now, I’m not sure how much of that has survived the numerous edits, but its still a good first step.

It’s all about me. As long as I’m happy…

Ultimately, it comes down to the basic sinful nature. People like getting free stuff. They like not getting caught. Yet most of us would agree with the following scenario:

You are an artist, that relies on your work for a living, and you draw a beautiful picture. I then come and take a photo of your picture and put it on my wall without your permission. You might be upset?

And if it turned out that hundreds of people had my photo on their wall, yet very few had paid me. You haven’t had your original painting stolen, yet also, something of your work has been taken?

Don’t you think our society should be making those people that stole your work pay you the fair price for it?

This is illegal music downloading (and film downloading). Yes, often the main losers are the big companies, but that results in less R&D from the music industry, less investments and less opportunities in the smaller artists, ultimately leading to the painter not being able to focus on their art.

Whatever you believe about man’s sinful nature, you would probably agree that a LOT of people go for the taking photos of the painting option when it comes to illegal downloads. And that if we feel for the artist in the story above, then actually maybe we should align our actions in downloading, with our beliefs in a moral code.

So, ultimately, if you want to see lots more paintings, you probably need to start buying some.

19 thoughts on “Digital Economics

  1. if it’s illegal anyway then why not take the people to court and deal with the fines there? why also block internet access for the entire family, possibly ruining a home-business due to the actions of a single family member?

    if a person steals a car does the ‘law’ also take driving licenses away from family members? no, cos that doesn’t make sense. why so for digital crimes?

    yes, illegal downloading is… erm… illegal (hence it’s name) but we already have a system in place, do we not, to deal with law breakers? why then have they rushed this through without a proper debate?

    1. @Maft The point of a potential three strikes policy would be to allow you to cope with that. As in, if little Jimmy upstairs is downloading movies, once you get the first letter through, you would tell him to stop. Specially if you are running a business.

      Secondly, the newly reworded clause doesn’t just knock off your internet straight out, but after three hits, blocks your access to the sites, ip addresses and ports you’ve been downloading from.

      The other key thing is that its not that there will be no debate. You will be able to say, err, actually this ain’t illegal.

  2. no-one is saying that people should be allowed to steal, but the government themselves have said an internet connection is now a basic human right… so why are they removing it over three unproven allegations of piracy?

    Lets not forget Piracy isn’t the only use for p2p and torrents

    1. @peeved The bill “provides for a limited power to propose regulations in the future. The regulations would allow copyright owners to apply for court injunctions. These injunctions would require ISPs (or other service providers) to block access to specified internet locations providing access to copyright infringing material. The safeguards are extensive, including provisions on consultation, threshold and proportionality, Parliamentary accountability, legitimate use of websites, freedom of speech, and ensuring due court process.”

      In other words, its not going to take out your “basic human right of internet”, and will take into account legal use of torrents, etc. I myself am a big torrent user for software and linux distros, as well as free music, and CDs I own, but I am not scared the bill will hurt me.

      I think my issue is that basically the figures tell us that an awful lot of people are stealing, that actually most of us don’t morally agree with that, yet many of us persuade ourselves that its not really a problem, and that this is hurting a creative industry that provides us with so much beauty.

      Also no government has actually come out and said that internet is a human right, it was just a big bbc poll. I hope the governments will deal with all the people worldwide without other basic human rights such as homes, health, water and education before they buy everyone a laptop.

  3. You mention sales are dropping and focus purely on Piracy as the cause, its not. Sales were artificially inflated during the 90’s by the transition from Cassette to CD, rebuying their old collections. Its no wonder sales are dropping when the figures were swollen to begin with.

    Also there has been no independant evidence to suggest piracy affects sales in a negative fashion. All research doing so (funded by the industries themselves) has been quickly discredited. The latest by DEMOS (an independant UK think tank) showed “pirates” spend £70 more per annum on music than non-pirates.

    File sharing might hurt established artists (I don’t see Bono at the social security centre asking for support) but most small artists support it completely (legal or illegal) as it is a conduit for them to gain publicity without the need to spend a fortune on expensive campaigns.

    Everything boils down to profit margins. We have digital media…which after creation costs virtually nothing, yet are charged identical prices for movies, games, music online as we are in the stores.

    You also make no mention of the fact that government can block ANY website on the suspicion of copyright content violations, Wikileaks showed a video of American soldiers killing iraqi’s last week, wikileaks is banned. Access a torrent file through Google? Google Banned. Copyrighted video on Youtube? Youtube banned. Image on facebook? Facebook Banned.

    It also allows your connection to be throttled, even cut-off without ANY conviction, all it requires is a suspicion of infringement. Guilty until proven Innocent.

    Lets not even get into how the bill was forced through on a wash-up, making a complete mockery of democracy in the Uk.

    Its disgusting.

    1. You also make no mention of the fact that government can block ANY website on the suspicion of copyright content violations

      I think the key thing is that we have no idea what the Government will and won’t do. There are no set in stone bits of legislation yet, we will have to await the nitty gritty of how appeals processes, internet censoring and various other bits and pieces will be implemented.

      I however, trust that they will not be draconian, but fair, and may actually punish some of those who do commit crime, which is ultimately the purpose of the bill.

      I agree that the figures we have to work on are not perfect. I do however think that we desperately need to work out laws regarding digital media. I think this is a first step, and its far from perfect. I would rather see it implemented, and then, if it is horrific, no worries, because then there will be a 2,000,000 strong facebook group against it, 5 papers having it as a headline, and then the reactionary politicians will conform to the public will. And if it works, then the only people it will punish are those who are breaking the law. Which is kind of what law is for.

      And with regards to democracy: I don’t think it makes a mockery of British democratic rights. Ultimately, we still have a Queen – our parliamentary system is highly irregular anyway, and this just highlights that rather than doing it a mis-justice. I think the British system is a wee bit archaic, but I reckon it works happily enough. I’d rather live here than China, and I don’t think the Bill is taking us anywhere nearer to that.

  4. I think that to a large extent filesharing is something that cannot be stopped no matter how hard the government tries to clamp down it. Napster was relatively easy to stop, but when it was stopped someone created Gnutella, then later BitTorrent came about and so on. I’ve never used Usenet for downloading anything but I understand that the nature of it makes it physically impossible to track who is downloading what (please correct me if I’m wrong on this). And I believe Limewire now offers the functionality to share files with trusted friends by letting you set up a darknet – ultimately the only way to obtain evidence that filesharing was taking place via darknet would be to infiltrate the network, which would be difficult. So we can anticipate more powerful filesharing technologies appearing in the future which are even harder to stop.

    For that matter, filesharing via sneakernet is perfectly possible – I’ve heard of “hard drive parties” where people bring a hard drive loaded with all their music and/or films and copy them all, and realistically there’s no way the UK government could stop these on a large scale. The issue of filesharing is like a game of Whack-a-Mole in that as soon as they take out one means of filesharing another pops up that’s harder to squish. So in the longer term we need to find a way that is acceptable to the music industry but also attractive enough to customers that they use it in preference to filesharing, because no matter how much legislation they may pass I think it’s just dragging out the inevitable.

    I certainly think the single format needs to die in its current form. CD singles are just as expensive to duplicate as albums, and artists almost never make money from them, so it would make a lot of sense to release all singles as free downloads – it would encourage people to listen to music they otherwise might not try, it would act as a taster for the album, and by releasing it to a peer-to-peer network there isn’t even the cost of web hosting to pay when distributing it. As for albums, that’s a harder call to make.

    As you said above, the legal alternatives at the moment aren’t that great, but that tends to be less a problem with the basic concept and more with how they choose to implement it. DRM is almost universally hated by consumers, prices are often extortionate and services are often hamstrung by all sorts of daft constraints laid down by the record labels. That said, I do buy quite a bit of music off Amazon’s MP3 download store and I really feel they get almost everything right – the price is usually better than the iTunes store, it’s DRM-free and it’s high-quality audio. I also use Last.FM and Spotify quite a lot and they’re both great services that have encouraged me to listen to and then buy a lot of new music – so really you need to take into account how many sales have been created by these services that wouldn’t have happened otherwise. Just because Lady Gaga made only $167 from Spotify directly doesn’t mean she didn’t gain additional sales because of it.

    I also think that in general music labels and artists need to be re-evaluating their relationship. The model of the past where the artist gains access to the label’s distribution network and finance to record their album is dead – there’s plenty of high quality open-source audio production software available, and music can be distributed via P2P or a service like Jamendo, so in theory an artist could create and distribute an album extremely cheaply without label help. After all, The White Stripes managed to record Elephant for around £6,000.00, in a regular recording studio, and this was a hugely popular album. There’s not really any excuse for artists going insane in the studio and spending money like water. The only thing that’s left then is promotion, so perhaps the labels need to move to just doing that and taking a smaller cut of the proceeds since they’re doing less work.

    In general I think the current model is doomed and the Digital Economy Bill is just a silly attempt to prop it up. It’s not going to change the final outcome, and it’ll just drive filesharing to more robust methods.

  5. We know exactly what will happen. Let me give you an example…the stop and search laws introduced to combat terrorism approx 9 years ago were vague, just like this bill. For the past 9 years (since the very beginning) police in london have used the bill to stop anyone and everyone regardless of reason. A vague law WILL be abused.

    Exactly what is right with huge levels of collateral damage? Local internet cafe gets shut down because a user downloads some copyrighted material? An entire family loses access to the internet because their teenager knows how to work a PC better than they do? Universities, Libraries? This is like demolishing a road to punish a drunk driver…other people use that road aswell!

    And for me it does make a mockery of democracy. We have a house of commons with 650 MP’s, this bill was debated for 20 minutes with a handful of MP’s, then voted on by only one third…a THIRD. Most of those forced into voting by the Whip system (Vote how we tell you or lose your job). How in the world can you consider a Yes vote of 180 people out of 650 to be anything close to democratic? Regardless of the fact the people voting on it have little to no idea what it means.

    Music, Games, Movies…they arn’t dying, Big business is. We are seeing a shift to “classic” culture, where people create for the joys of creating and sharing ideas, not to make profit (did you know there are only two species on the entire planet who are known to share voluntarily? We are one of them)…thats actually a good thing. Give me a film like REC, a game like World of Goo over smash and grab hollywood blockbusters and $10 million produced games that are shallow any day.

    1. @G Isherwood As someone who has lived and worked in London since that bill was passed, I disagree that the bill has been used to “stop anyone and everyone”. In fact, I know no one, black, white or otherwise, who has been stopped under it. Sometimes there is a call for vague rules, since the situation that they need to be applied to is often ill defined, or constantly changing.

      Regarding third party internet useage, the vagueness of the Bill, to me, implies that this has been taken into account, and will be detailed in the final writing into law. Just to repeat what I quoted above – “The safeguards are extensive, including provisions on consultation, threshold and proportionality, Parliamentary accountability, legitimate use of websites, freedom of speech, and ensuring due court process.”

      Regarding the wash-up period in Parliamentary politics, whilst not ideal, I think it plays a role. If you check this list of previous washup bills, there are a huge number of useful and important bills over the years that have passed during it. Part of the intent is to ensure that laws get passed quickly, that democracy can move and adapt quickly through compromise, rather than just getting caught up in years and years of argument.

      “Where people create for the joys of creating and sharing ideas, not to make profit”
      But, my point is that we live in a society based on money. That actually, if people don’t make a profit, then they don’t have jobs, they don’t create jobs; record shops, cinemas, record labels, etc; and they can’t afford to put as much time, money and enthusiasm into creativity.

  6. You made some good points, but the main controversy is mainly about the power record labels would have to deny you internet access until you launch a legal action to prove your innocence (lengthy and expensive) and internet censorship. It is also quite disgusting that only 40 out of the 646 MPs were present during the hearing, even though it is an extreme important and complicated issue, and that it is rushed through into law without proper debate even though there is obviously huge interest.So even if it is true that they might have the right intentions (we hope), the implementation is flawed at best.

  7. @Colin I agree with some of that, but also disagree. I have a question for you though- do you illegally download, and do you think this might make you more against it, because you don't want to be stopped?

  8. I don't illegal download as far as I know, but legality shifts a lot these days, so I won't attach too much sentiment to that. How legal was mephedrone two weeks ago? Yeah, the comments on your blog covered most of the bases, I read through your responses, and I am impressed by your faith in the government. Regarding this faith, how much thought had the two hundred MPs put in when they've voted, when only about 40 was there for the 2nd reading. How much would a bunch of middle aged MP, most who could just about check their emails, would understand the complexity of the bill they just passed? Why are they rushing something so important through when there are still so much more to debate?

  9. I was tempted in by the shiny pie chart…at the end of the day, even as a 'musician', I really don't think the profits of big business should be favoured over and above the civil rights of citizens. Live shows cannot be digitized, artists have to go out and work to earn the money through hard graft and touring. The atmosphere of a live show is not something you can compress and download. CD's should be the promotional tool for the live circuit in my opinion, and if enough of them sell to turn a profit then great for the record label, but the meat and potatoes of music should always be the live performance, and there's still plenty of money to be had from that.

  10. To be fair, part of my issue is that when it comes to music I’m totally selfish in a slightly weird and unique way. Technology exists such that you’re average working bloke can save up for the equipment to record stuff to a fairly decent standard. Not great, not that of a record label but OK. Check out this:

    That is a bloke who pretty much paid for all his own recording equipment and recorded it all in his room in Broomhall. Did it cost money? Yeah but I don’t care – my point is that if he can afford it (mostly as a student) then it’s just about saving up and putting the work in.

    For every band I really like, there’s probably 100 other bands out there who I’d like equally. There is no good reason why that one band should get more money than the other 100.

    Given that the distribution is no longer a problem (do it via The Pirate Bay), what is the purpose of record labels? Bands only go through them because that’s the traditional method.

    Put it this way – if you want Capdown to do better, don’t buy one of their CDs. ‘Steal’ their music via The Pirate Bay and uTorrent, then give one of their band members £10. Your pie chart then reads like this:

    £10 – Capdown


  11. I agree that live gigs are important. And yet, these days, I can't afford to go to them. I saw Iron Maiden multiple times 6 years ago for about £20. Now it would be £50. Yes, the smaller bands you can see for cheap. Meaning they are making nothing from CDs, nothing from live shows, and are less likely to get signed to the major labels forced to avoid less surefire bands.

    The atmosphere of a live gig is an awesome thing. Yet also, something that easily goes wrong. Rancid, one of my favourite bands, played in Sheffield. It cost me like £25, and the sound at the venue blew. Whereas their albums are good every time.

    Also, where do we hear music most? Is it live gigs? Or are we surrounded by music every day with radio, tv, adverts, ipods, spotify, films and everything else? Does it make sense that the music we listen to 90% of the time should be profitless for the hard working artists, yet the gigs be their salvation?

    As a guy who played in a band, our EP took me months, and I could appreciate how much more we could have achieved with a recording studio, people with experience (which means they deserve pay too) and the equipment to make it work. But yeh, in the end I was proud of what we made. Our live performances, on the other hand, were totally at the whim of the venue, the battered PA, or the curmudgeon at the mixing desk.

    Live shows make me buy CDs. And CDs make me go to live shows. I think I should pay for both.

  12. I don’t see the problem that the bands don’t get any money. Most people in a band do it because they like being in a band and not because they expect to get rich. Unless free music stops people from making music, I don’t care. As long as the quality is roughly that of the link I posted in my previous comment, I don’t care.

    (Link was to:

    Just because you do something difficult, doesn’t mean you deserve paying. If I liked your EP, I would give you money to carry on playing and/or I would go and see you at a gig. If that means you (or whoever) haven’t got the money to carry on, why am I supposed to care? If I did, I’d pay you the money directly.

    It’ll just mean it’s not anywhere near as viable a profession as it once was. Good. There are enough musicians as it is. I find it very hard to care about a musician’s salary when Arctic Monkeys may be rich but a probably equally good band are nowhere near as rich. Basically, I find it very difficult to care.

    1. “It’ll just mean it’s not anywhere near as viable a profession as it once was. Good. “

      I think that’s where we disagree. I think people should be able to make a living in Music, just as people good at maths should be able to earn money as accountants, or good at words at writing.

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