The Music Industry's Digital Reversal

The changes began with the announcement in late December that the industry was abandoning the lawsuit strategy.  While cases already filed will continue, the Recording Industry Association of America indicated that it plans to shift its attention to discussions with Internet service providers that it hopes will lead to the adoption of a controversial "three strikes and you’re out" policy for repeated cases of unauthorized file sharing.

The decision to drop the lawsuit strategy was long overdue as it had accomplished little more than engender significant animosity toward the industry.  In fact, the approach had recently come under legal fire with courts challenging the industry's contention that liability flowed merely from making files available on a shared hard drive (some courts have demanded evidence of actual downloads) and a Harvard law professor using one case to question the constitutionality of damage awards that can run into the millions of dollars for a handful of songs that sell for 99 cents each.

The Canadian situation was similarly unsuccessful as the courts rejected lawsuits against 29 alleged file sharers in 2004 on evidentiary and legal grounds.  The failed cases were particularly damaging since they led to the perception that all file sharing is legal in Canada (it is not) and helped to convince some of Canada's best-known artists to speak out against the practice.

The crumbling of the locks pillar came last week when Apple, the dominant online music seller, announced that it will soon offer millions of songs from all four major record labels without digital locks.  Apple had long supported the removal of the locks but faced resistance from some record labels.

The about face reflects the recognition that frustrating consumers with unnecessary restrictions is not a particularly good business model.  Moreover, the interoperability problems (songs locked to a single device) and security threats (the Sony rootkit fiasco that led to class action consumer lawsuits) associated with the locks clearly made their use more trouble than they were worth.

With lawsuits and locks on the way out, cracks are now also showing in the legislative pillar.  In addition to the privacy, security, and consumer concerns with such legislation, laws to protect digital locks seems increasingly unnecessary given the decision to abandon their use in the primary digital sales channel.

Nielsen Soundscan data released last week also undermine a key argument for such reforms.  The industry has long claimed that the legislative changes are needed to support the development of a digital marketplace in Canada.  The 2008 Canadian sales data reveal that laws are not the issue as Canada experienced a 58 percent increase in sales of digital tracks last year. That figure is more than double the U.S. growth of 27 percent and, incredibly, marks the third consecutive year that Canada has outpaced the U.S. in digital music sales growth.

The data - along with the crumbling of the lawsuits and locks strategy - reinforce the view that it is innovation, not intervention from governments and courts, that will ultimately determine the digital winners and losers.