Music piracy and the investment drought

For several years now Britain's music industry has been obsessed with the problem of illegal downloading.  Last December the BPI, the trade body representing all the major record labels as well as many independents, produced an authoritative report, 'Digital Music Nation 2010'.  Based on research by two respected market research companies, the report painted a picture of a burgeoning new, vibrant digital music sector in the UK.  But the real story - made clear in BPI press releases - was about music piracy.  In fact, variants on the word 'illegal' appear in the report more than 70 times.

We have looked at the arguments about illegal downloading in earlier posts, noting that the industry can't always be trusted with the facts.  But while one of the arguments was about piracy destroying jobs, the BPI also stressed the impact on investment.  Looking at the word count again, variants on the word invest, investment, investor, etc. crop up 30 times in this report.  The BPI identifies two main problems: firstly that outside investors will take their cash to sectors where this kind of theft is not endemic; and secondly that record companies themselves will be unable to continue to invest in supporting new musical talent.

This latter point was made by Andrew Lloyd Webber who told a House of Lords debate that music piracy in Britain was undermining the industry to such an extent that in ten years it would be unlikely that a band such as the Beatles would emerge (reported in the Daily Telegraph).  More recently the Daily Mail's Business Editor described how before rampant piracy there was "cash to invest in new performers and to keep the creative juices flowing by paying good royalties to established singers, orchestras and musicians".  Now, though, illegal downloading "has made it all but impossible to sustain heavy investment in new artists."

As has been noted earlier, EMI's new focus on business and profits when private equity group Terra Firma acquired the firm in 2007, was followed quickly by the departure of Radiohead, The Rolling Stones, Paul McCartney, Queen and Pink Floyd.

But what does "heavy investment in new artists" consist of?

When a record label 'discovers' a new act they will attempt to 'sign' them.  Typically this involves offering a sum of money in exchange for the band signing a contract.  What many bands don't realize is that this cash is an advance on future album, touring and single sales.  The record label's costs in putting the band in the studio, in recording, editing, pressing, distributing, marketing... the list goes on... invariably go against the band's account on the debit side.  Now they owe the record label for the original advance, plus a whole raft of costs (perhaps even the "flowers and fruit" lavished by EMI's management?) associated with getting them airplay.

The record label will argue - with some justification - that their investment is in the production values added to the recordings, in the marketing expertise that will get the new band airplay, in the strategic insights which will identify market segments that the band would never have been aware of.  With luck sales will flood in and in time royalties will have finally overtaken costs, and the band will finally really start earning.

More likely, though, it will be time to make the second album - more costs, more expenses.  It was no surprise that many of EMI's major acts walked - these lucky individuals were in credit and could afford to take their business elsewhere.  The majority of musical acts have no choice: they are heavily in debt to their record company and are committed to putting out a new album every two years or so.

What other industry has this approach to 'investment' in new business assets?  Almost all of the risk is borne by the artists, not the record label.  It is like supermarket giant Tesco telling a farmer that he must bear the cost of supplying produce, packaging it, distributing it, paying all of Tesco's overheads - and that in time the farmer might start to get some revenue of his own.  The only equivalent I can think of is the book publishing sector.

Both music and publishing seem to have a business model where elements of commercial risk are skewed towards the artist rather than the company.  In the cases of both music and publishing there are now digital alternatives: artists no longer need the sort of support mechanisms that were offered in the 20th century.
 
A few musicians such as Paul McCartney and Radiohead have been able to break out of this cycle of debt as their products have had international success.  Most, though, have little choice.  In genres such as folk and jazz, musicians remain in debt to their record labels all their working lives.

Piracy is destroying musicians' jobs!

In a recent posting on the topic of music filesharing I blithely avoided the ethics of illegal downloading by saying "It's complicated".  I went on to show how many people distrust the music business when it bangs on about its lost revenues: not only has it been doing this for more than 30 years, its figures are often questionable and there is certainly some contradictory evidence.

Another strong argument it has been using in recent years is that piracy is destroying jobs in the music industry.  Under the headline "1.2 billion songs downloaded illegally", Britain's Independent newspaper reported "The creative industries employ two million people in the UK... Urgent action is needed to protect those jobs and allow Britain to achieve its potential in the global digital market."  This is quoted directly from a report produced by the BPI, the trade body that represents Britain's record labels.  It is a credit to the BPI's public relations team that the same quote found its way into many other national and regional newspapers in Britain, and was cited in numerous other blogs and online news pages.

Making the connection between illegal downloading and the threat to two million jobs is a clever piece of reporting, as most readers leave with the impression that if piracy is allowed to continue there are going to be vast numbers of people thrown out of work.  That is why "urgent action" is needed now.

There is nothing much wrong with the data, and the figure of 2 million jobs makes for good headlines.  Indeed, urgent action was being called for in December 2010 because although the UK's Digital Economy Act had come into force just a few months earlier, it was looking increasingly clear that the legislation was being implemented too slowly for the industry's liking.  Earlier this year it became clear - following legal challenges by some internet service providers (ISPs) - that the law might not be enforceable.

The Digital Economy Act was one of the last pieces of legislation put through by Britain's Labour government, which rushed the law through parliament just before losing office in May 2010.  The Act put the onus on ISPs to warn users who had been identified by the music industry as illegal downloaders, and to terminate their internet service after three 'offences'.  It was widely referred to in the press as the "three-strikes rule", which is similar to legislation operating in France.

The BPI had lobbied vigourously for the Digital Economy Act as a way of combating internet piracy, but by the end of 2010 it looked as if its efforts might have been in vain.  Not only was implementation being slowed, but one of first decisions made the new Conservative-Liberal coalition government in Britain was to abolish the Strategic Advisory Board for Intellectual Property Policy (SABIP), the body which had been instrumental in setting up the Digital Economy Act in the first place.

In order to regain the PR initiative the BPI commissioned new research showing that illegal downloading was still endemic in Britain, and played the jobs card.  This was another shrewd lobbying tactic: Britain's new government was struggling with a economy in recession and unemployment rising to levels not seen for more than a decade.

There was nothing dishonest about the BPI research: it had been produced by respected market research companies Harris Interactive and UKOM/Nielsen.  And the figure of 2 million employed came from the government's own figures.  What is questionable is suggesting that illegal downloading is putting 2 million jobs at risk.  The two million figure relates to the creative industries as a whole, and the Department for Culture, Media and Sport which came up with the number was at pains to admit that these are "experimental statistics" and a "first attempt" to measure the sector.

Looking more closely at the data we find that the music industry element is subsumed under the heading 'Music & Visual and Performing Arts': the largest employer is 'Software and Electronic Publishing' with more than twice the number represented by Music.  Looking more closely at the DCMS classifications, the Music category included anyone employed in the performing arts, supporting the performing arts and working in casting.  There are additional categories counted here including operating arts facilities, "artistic creation" and employment agencies in the arts.

So just how many of the reported 306,000 people in the "Music & Visual and Performing Arts" sector are connected to the music business?  Once we strip out all backstage staff at theatres and arts complexes? When we take out the entire acting profession?  In truth nobody knows. But we can get an indication, perhaps, from applications for courses in higher education in Britain:  according to UCAS figures for 2010, more than twice the number of young people applied for courses in drama and dance (64,000) than chose music (28,000).

This sort of ratio might mean that less than 100,000 people are employed in the music 'business'.  But you are going to get better headlines quoting 2 million jobs under threat from illegal downloading.  This is an example of the practice regularly highlighted by author and columnist Ben Goldacre, called 'cherry picking' statistics to suit your argument. 

In any case, it is practically impossible to measure the number of people employed in the music business.  Hardly any musicians make a living from their art (in the sense that it is their only or main source of income).  Mostly musicians supplement meagre earnings from gigs, merchandise and recordings with more regular, paying jobs in areas such as teaching and the service sector.

It is not so much these jobs that are 'under threat' from music piracy, but instead those in the record labels represented by the BPI.  But technology is changing the whole creative landscape, and there is a strong argument that musicians don't really need the traditional record labels any more.

Illustration (used with permission) from Deviant Art's ~Mad-Hatter-LCarol