It's hard to believe that more than six years since Shawn Fanning's tête-à-tête with the RIAA introduced the American legal system to peer-to-peer filesharing, so much still remains unclear. While the RIAA v. Napster proceedings polarized the industry and consumers, it also brought to light the tensions inherent in the development of these new technologies and their applications. In some respects, the Napster case revealed that beneath the democratization of new technologies lie complicated legal questions, and the sprawling, powerful tendrils of copyrights, patents, and intellectual property.

Little has been done in the interceding years to change perceptions of the industry. To many, the RIAA is a faceless corporate monolith dedicated to criminalizing consumers and closing black market loopholes. Accordingly, the RIAA rethought its legal strategy and began prosecuting cases very quietly against unsuspecting victims, rather than suffer further public relations disasters in high-profile cases. Last November, defense attorney Ray Beckerman started documenting these cases at his blog Recording Industry vs. The People in an effort to make public the ongoing legal drama as it unfolds.

Steve Gordon, an entertainment lawyer and contributor to Digital Music News, contends that the RIAA needs to make creative concessions and re-imagine its business model to survive in an evolving legal and technological environment. He introduced us to the players behind the lawsuits and what the battle over digital music means for consumers, labels, and artists.

Pitchfork: How many companies own music publishing and production rights?

Steve Gordon: Recorded music consists of two things: musical recordings and songs. The record companies generally control the recordings. The major labels, Universal, Sony BMG, EMI, and Warner, collectively control and distribute more than 80% of the world's recorded music.

There is not as much consolidation with regard to the songs although the major publishers including EMI Music, Warner Chappell, Universal and Sony ATV, BMG, and a handful of others control the majority of popular songs.

Pitchfork: What profits do they earn annually? How have they changed, and what explanation does the industry give for these changes?

Gordon: In terms of record sales, profits have declined precipitously in the last several years. Many people in, and who study, the music industry blame this on the impact of peer-to-peer (P2P) music file sharing and CD burning. They argue that these technologies have dramatically diminished CD sales. In fact, the major labels are currently making little if any profits, and in the past five years CD sales have suffered serious declines. Recorded music sales worldwide have dropped by more than 15% since peaking at nearly $40 billion in 2000. Final figures for 2005 have not been released yet, but 2004 sales totaled only 33.6 billion, according to the International Federation of the Phonographic Industry. And although sales of digital singles on iTunes and other authorized digital services have multiplied in volume, they have not earned nearly enough income to offset lost income from declining CD sales.

The music publishing business has not suffered as much since a great deal of their income has come from sources other than mechanical royalties from record sales. These other sources of income include public performance on radio, TV, and the internet, and licensing "synch" rights to use songs in TV shows and movies. The income from these sources has actually increased in the past several years.

Pitchfork: What is the RIAA, and what is their function?

Gordon: RIAA stands for the Recording Industry Association of America, a trade group that represents the interests of the major record companies (Sony BMG, EMI Universal and Warner), plus many of the bigger indies. According to their website, RIAA members create, manufacture, and/or distribute approximately 90% of all legitimate sound recordings produced and sold in the United States.

The RIAA's mission "is to foster a business and legal climate that supports and promotes our members' creative and financial vitality." In the past they were primarily knows as the people who certified Gold and Platinum sales awards. But more recently they have known for suing thousands of people, including parents, children, and even grandparents for unauthorized music file sharing.

Pitchfork: What is ASCAP? Where do they stand on this issue?

Gordon: ASCAP is a "performing rights organization" (PRO). There are two other PRO's in the U.S. They are BMI and SESAC. And there are PRO's operating in almost every country in the industrialized world. Their function is to license the songs, not the recordings, for public performance on radio, TV, the internet and physical venues including nightclubs, stadiums, restaurants, and every other place where music is publicly performed.

There is no public performance right for musical recording expect for digital transmission such as internet radio. In the United States an organization called SoundExchange provides licenses to internet radio stations to play records.

Pitchfork: Have they been involved in these cases? If so, what has been their role?

Gordon: ASCAP, BMI, and SESAC do not approve of unauthorized P2P music file sharing, but they have less to lose from it. Even if P2P does displace record sales, these organizations do not make income from sales of records anyway. They only make money from the public performance of music. And no one has seriously argued that P2P somehow reduces the number of performances of music on radio, TV or at live events.

In fact, in contrast with the record labels, the PROs have taken a relatively enlightened point of view about digital music. They will license any website that requests one and their fees, between 1-3% of income, are reasonable. I recently secured licenses for an internet radio channel client. Altogether the PROs' only wanted about 5% of income for use of all their songs. And by "all their songs" I mean about 99% of recorded music. On the other hand, I recently tried to clear music for an online record store from the labels, and they wanted six figures upfront.

Pitchfork: To what extent has piracy endangered the music industry's commercial viability?

Gordon: A lot! It is estimated that tens of millions of illegally pressed CDs are distributed each year. In China and South America, counterfeit pressings are especially rampant. Although you can say that this form of piracy is old-fashioned as it is not web-based, it has flourished due to the increased availability of low-cost, high-quality digital copying machines.

P2P and CD burning are relatively recent threats to the record business. In 1999, income from sales of recorded music was approximately 15 billion in the U.S. Since then, income has continually declined and in 2004 it amounted to approximately only $11 billion (PDF file).

Although the RIAA has not published the sales and income report for 2005, experts advise that both fell again in 2005. In an article called "Music Biz Laments 'Worst Year Ever'" Rolling Stone reported that:

"It was yet another unhappy New Year for the music industry: Despite hits by Mariah Carey, 50 Cent, and Green Day, 2005 saw album sales drop 7.2% as labels continued to struggle with adapting to the age of the iPod and the internet. Overall, consumers bought 48 million fewer albums than in 2004, marking a disastrous 21% slide from the industry's peak in 2000, according to Nielsen SoundScan. 'It was arguably the worst in the music business's history,' says Steve Bartels, Island Records president."

Although digital-song downloads jumped 150% in 2005-- consumers bought 352 million of them-- since labels only make about 60 cents off a 99-cent download, digital downloads fall far short of compensating the labels for the loss of 48 million albums at about $12 wholesale. In fact some experts think that by allowing music lovers to "cherry pick" popular singles, the labels may be losing album sales because if iTunes and other digital services offering single track downloads.

Pitchfork: Is there a definite link between P2P and declining CD sales and recording industry income?

Gordon: In 1999, the first generation of peer-to-peer music file-sharing (the original Napster) was becoming terrifically popular. P2P has grown every year since and the recording business has been on the decline. Some experts argue that P2P is not to blame. They point to reasons such as the music is not as good as it used to be, that the public is increasingly distracted by other forms of entertainment such as video games and a bad economy. But others argue that the ascendancy of P2P and the decline of the recording business are not coincidental. I tend to believe there is a cause and effect between P2P and declining music sales-- but that the record companies exacerbated the impact of P2P by (a) Overpricing CDs, and (b) Failing to give music lovers a high quality low priced alternative to P2P.

In addition, CD burning's popularity has been spurred by the increased availability of burning software, which is now pre-packaged in most personal computers. Although this software may enhance the value of the computer to consumers, it also enhances the possibility that people will make CDs for their friends and this, I think, does displace record sales. (This is consistent with our discussion later that certain companies, although not the record labels, are making a lot of money from "free" music.)

Pitchfork: So, is this a recapitulation of the "home taping is killing music" scare? If not, how is it different legally speaking?

Gordon: No. Copying tapes was cumbersome and second generation tapes were inferior in quality. Digital provides random access for easy picking of best songs to make compilations and the copies are generally as good as the originals.

Legally, they're more or less the same. Making a copy of recorded music for your own personal use, whether a tape or CD, is generally legally acceptable. But new technology makes it very easy to share music with friends or strangers on line.

Pitchfork: What does the law actually say in these matters? What precedents exist? Describe the legal/political landscape, giving a brief chronology of the P2P phenomenon.

Gordon: On June 27, 2005, the Supreme Court in MGM Vs. Grokster ruled against the unauthorized P2P services Grokster and Streamcast Networks. The Court noted that file-sharing services violate federal copyright law when they promote and encourage swapping copyrighted songs and movies illegally. "We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by the clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties," Justice David H. Souter opined.

Although the decision was a victory for the RIAA, it actually confirmed that P2P technology itself is legal so long as not marketed and promoted in such a way as to encourage copyright infringement. This could be very bad news for the recording business. There are new file-sharing programs such as BitTorrent, which is even faster than Grokster; its founder, Bram Cohen, doesn't promote the technology in such ways as to violate the ruling in Grokster. Bit Torrent is also free and can be used without ads. It is therefore unlikely that the record companies can ever shut down P2P using the courts.

RIAA started suing individual music file traders several years ago. They realize that many of these defendants are their own customers, but they have become somewhat desperate as CD sales and income continues to fall.

Pitchfork: Describe the original case against Napster and its impact on P2P.

Gordon: The Napster case preceded the Grokster case by several years. Napster controlled a central database from which all the users took music. Napster could have filtered out copyrighted songs, but they didn't. The courts had no problem finding Napster to be illegal. But the new file sharing services do not control a central database. They merely allow you to download software that enables you to share music with others. The Grokster case stands for the proposition that so as long as these services do not actively promote that you can use it to get copyrighted music for free, the technology itself seems to be legal!

Pitchfork: Define intellectual property law's application to the music business, and, if you can, explain in plain language the rules of ownership and copyright when it comes to music. Also is there a distinction between file sharing and P2P downloading?

Gordon: The copyright law provides protection for music-- both for the songs (musical composition) and the musical recordings (sound recordings). Under copyright law no one but the copyright owners can make copies of either songs or recordings and distribute those copies to others. Without the copyright law the record companies, which own the recordings, and the songwriters and music publishers, which control the songs, could not make a living. The copyright law also affords other exclusive rights, including making derivative works or variations, and public performance. These rights also contribute directly to the income of those who create music.

The distinction to be made is that if you wrote and recorded your own music, rather than other people's music, you don't need permission to share it. So a band that allows people to download their music from their blog or website is not violating any copyrights so long they wrote and recorded the music and did not enter into an exclusive recording contract that gives labels the right to distribute the music.

Pitchfork: Tell us about the RIAA's lawsuits.

Gordon: They are suing people for sharing recordings without the permission of the copyright owners. Generally they demand several thousand dollars and refuse to negotiate. Many defendants are dissuaded from fighting the cases because hiring a lawyer can quickly add up to more than what the RIAA will accept to settle.

Pitchfork: Of what consequence are these sums? How are they to be distributed to all concerned parties? (Is this really about the artists?)

Gordon: That's a great question! The lawyers are definitely getting some of it because the RIAA farms the cases out to private firms. Of course, some it has to pay as salaries to all those new lawyers the RIAA has hired in the past several years. What's left is possibly distributed to the record company members of the RIAA. It is not clear whether the artists share in any of these monies.

Pitchfork: Explain the subpoena power in these cases, and how it has been used to identify alleged downloaders, heretofore referred to as John/Jane Does?

Gordon: The RIAA initially used a provision in the Copyright Act they thought allowed them to demand names of ISP subscribers who uploaded files in unauthorized P2P services. But the ISPs, specifically-- Verizon resisted, arguing that the record companies did not have the right to their subscribers names. The federal court agreed. Although this made it harder and more expensive to initiate law suits, the RIAA forged on and are now suing more individuals than ever.

Pitchfork: Why are children being targeted in these cases?

Gordon: If the ISP addresses belong to children they can be the defendants. This is due to the fact that RIAA can only get limited info on its targets. In addition to children they are suing soccer moms and grandmothers who may not even know what file-sharing is. Their children or their children's friends are maybe using their ISP addresses to grab free music. So a lot of innocent people are being targeted.

Pitchfork: Is a political message being sent with these cases? Are they a witch hunt?

Gordon: The RIAA hopes to send the message that there are negative consequences for unauthorized music file sharing. One problem is that they may be targeting the wrong people and there may be backlash by the public. Music fans are turned off to the labels for life.

In addition to this negative publicity it does not help that Sony recently released anti-copying code on millions of their CDs that allegedly contained spyware that allows them to look at what you are doing online. The code also subjected many computers to hacking. Sony had to recall the CDs and are still fighting court battles including one with the state of Texas for allegedly violating their anti-spyware statute!

Pitchfork: How effective have these cases been for the RIAA?

Gordon: There is some disagreement here. The RIAA has stated that music file sharing has, if not declined, at least has not gone up since they started suing people. But independent monitoring firms such as Big Champagne asset that music file sharing has continued to increase.

Pitchfork: Why do you think "illegal downloading" has proliferated since these cases began?

Gordon: P2P proliferated before the suits started. However, the suits do not seem to have a clear effect in reducing P2P.

Pitchfork: What is the industry doing right and wrong?

Gordon: On the wrong side, I think suing their own customers will backfire. Not only is it terrible publicity, it will also lead people to download more free music out of revenge. It is a well-known secret that if you download without offering your collection to others, you can avoid detection. Therefore people can rely on the more adventurous to feed them music without risking detection.

Another wrong is Sony's placing spyware on their CDs. Not only was that bad PR, it was probably illegal.

Another depressing event was Sprint's recent introduction of Over the Air Downloads of single songs for $2.50 each. Presumably this was done with the record company's collaboration on pricing. It's just stupid to think people would pay 2.5 times more for a song that they could get legally for $1 (or for nothing on P2P) just because it's more "convenient" to buy from the phone directly. Consumers can almost just as easily "sideload" all the music they want into their cell phone from their existing desktop music collection. Verizon's introduction of $2.00 for OTA songs a few weeks ago is almost as depressing. By the way, both services require you to pay an additional $15 per month to access the music service. Plus you need to pay money to upgrade to a special phone. And then you have pay up to $100 or more on a memory card that will hold only a few hundred songs!

Another wrong: some of the labels want to increase the price of front line product on iTunes. Even the labels agree that iTunes is one of the few bright spots for the business in the last several years. Increasing the price might well end that success.

On the right side? At least the labels are actively seeking deals for digital distribution. I just think the deals are being priced wrong and do not provide what the public really wants-- abundant music, reasonably priced.

Pitchfork: Are the artists making money from iTunes and other sources of digital revenue?

Gordon: The artists with the big labels are not seeing much revenue. Although sales of digital music have multiplied in the last year, they still only represent a fraction of the income from CD sales. And the artists are paid on digital sales basically the same way as they are paid for ordinary record sales. Artists usually only receive any recording royalties after "recoupment" of their "unearned balances," that is, production and marketing costs. But only the most successful artists recoup production and marketing costs. Under the standard recording agreements artists only "recoup" at their royalty rate. After deductions, the artists' royalty usually is well less than a dollar per album. So if production and marketing costs (including music videos) are $250,000 (modest in terms of big labels) then they must sell more than 250,000 records to earn any recording royalties. In addition many agreements reduce the artists normal royalty rate for digital sales.

Now compare this to an artist who records and sells an album without a record company. Say an artist records an album for $10,000 and sells the CD for $14 on CD Baby. CD Baby takes only $4. If the artist sold 10,000 units, he or she would make 10,000 x $10 = $100,000 minus $10,000 and gets to keep $90,000. If the artist recorded the same album for a record company and sold the same number of units they would probably receive no recording royalties at all. If the record company produced the album for $10,000 and spent $10,000 on recoupable marketing costs, and the artist's royalty was a dollar, the artist would in fact still owe the record company $10,000.

Pitchfork: Next steps: Is there a compromise that can be reached between the industry and the consumer? If so, what is it?

Gordon: I am in favor of a levy on those who truly profit from "free music," that is the electronics business and the ISPs. In exchange, all music file sharing would be legal. This plan would a. compensate the labels and the artists; b. provide music lovers with access to any music ever recorded any time they wish to hear it; c. eliminate the RIAA's lawsuits against consumers

In order to get "free music" you need a computer. You also need a fast internet connection. In addition, if you want to hear your free music at the gym or on the subway you need to buy an iPod or other mp3 player. So you are paying a lot for "free" music. But the money is going to computer and mp3 player manufacturers, and ISPs rather than music content companies. If we imposed a very small tax on sales of computers, mp3 players, and broadband subscription, we could compensate the record companies and the artists. And the RIAA could stop suing their own customers!

Yet the major labels continue to reject this position. Why? At least one of the majors, Sony BMG is partially controlled by a major electronics company. Another reason is that under this scheme the record companies would have to split 50/50 with the artists. The labels rarely pay artists any royalties now because the artists only generally get 10% to 20% royalty after they recoup production and certain marketing costs.

The record companies are desperately still trying to shut down the free digital flow of music and recapture control over pricing so they can sell music for whatever price they want and people will be forced to buy it. Unfortunately, huge economic forces-- the interests of the electronics and broadband industries-- are allied against them. In addition, the technology itself makes it so easy and fast to share music, that sooner than later the labels may become sufficient enough to embrace this solution -- even if it means the artist would make some of the profits!

Pitchfork: What is the future of the major labels?

Gordon: When Napster came on the scene in the late-90s, the majors were making money hand over fist selling CDs, including back catalogue replacing all those vinyl and cassette collections. They could have built a low-cost, high-quality alternative to Napster, or as Fanning wanted, licensed Napster and made money from it. But they were desperate to preserve the old and incredibly profitable $18.99 CD business model. By the time they were able to kill Napster in court, faster and ever more popular forms of P2P such as Kazaa and Grokster were thriving.

I think the culture of the labels have been unable to adapt to the impact that new technology, particularly the web, has had on the recorded music. The labels, for many years, combined two basic characters-- Ivy League-trained lawyers and savvy music business types with "ears." Sometimes one executive was both-- Clive Davis, for instance. But the one culture that was never present were techies. They are there now. But they do not call the shots.

The Sony DRM debacle shows they still have no clue. That is why I think that in the foreseeable future, companies such as Yahoo!, Google, and Microsoft may buy or become labels-- because knowledge of technology is so important to the new music business.

The recording industry and the great music moguls (such as Clive, Doug Morris, and my old boss Tommy Mottola) have and continue to develop great talent and launch careers. It would be a shame if they folded their tents. But they are running out of time and need a jumpstart into the digital age. One promising sign is that all the majors have now signed on with Shawn Fanning to launch SNOCAP, an authorized P2P service. SNOCAP plans to launch soon. Let's hope the labels can get it right before they run out of time!

Steve Gordon is an entertainment attorney, author, educator and Fulbright Scholar based in New York City. His book, The Future of the Music Business: How to Succeed with the New Technologies, A Guide for Artists and Entrepreneurs, is available on Backbeat Books. For more information visit Steve Gordon Law.