Breaking Down The Music Tax

“Suing your customers is not the answer.”

This familiar sentiment has been expressed repetitively in recent years by both consumer advocates and music futurists alike. What they are referring to, of course, is the RIAA’s half-decade long barrage of lawsuits against individual file sharers. “The majors are alienating those who should be their biggest customers”, they groused.

Taxing your customers, on the other hand, is fair game and is the answer to the record industry’s mounting woes. At least it is according to many of these same futurists.

As perplexing as it is that one group of people can hold two beliefs that are so paradoxical in nature, I am not going to attempt to decipher the logic behind their reasoning. What concerns me is that what initially appeared to be a pipe dream conjured up in the minds of a few music futurists is increasingly looking like something that could actually become a reality in the not-too-distant future. So instead, I would like to shed some light on the arrival of a new business model concept that, if brought to life, would have very serious implications for those who stand to economically benefit from the use of music as well as for anyone who has an internet connection: The Music Tax.

Before I delve into its pros and cons, the following is a brief history of The Music Tax for those of you who may not already be familiar with it:

The concept began to noticeably make its way into people’s consciousness in 2003 when Jim Griffin, then CEO of Cherry Lane Digital, gave his keynote speech at the “Plug-In” Conference. He stated that rather than fighting piracy with litigation, the solution was to find a way to monetize it, thereby creating a “pool of money” to be split among rights holders. To quote an article written after the conference by Mike Levine of emusician.com, Griffin envisioned “a future in which ISPs will have to pay fees to some sorts of performance rights organizations, and that pool of money would be split up among artists, labels, and publishers according to predetermined formulas based on sales numbers and other factors. (Undoubtedly, the ISPs would pass the cost of these fees on to their customers.) The customers would then be free to trade music at will, and the artists, publishers, and record companies would be compensated.”

In their ambitious book, “The Future of Music”, as well as in their “Music Like Water” article for Forbes, authors Gerd Leonherd and David Kusek took the concept further by refining and labeling it. They dubbed their refined version of the concept the “utility model” and went into more detail on how it might be implemented. They spoke of a day when ISPs and/or other service providers would tack a $3 to $5 “utility fee” (a nice way of saying “tax”) on to their subscribers’ monthly bills. This fee would essentially legalize file-sharing, allowing internet users to consume music via now-illegal methods without consequence. All of the music being downloaded would have to be tracked and the “utility fees” collected would then be distributed to rights holders accordingly.

For a while, this concept remained just that - a concept. However, over the last year or so, we have reached the point where theory and action are starting to converge. Two of the most prominent examples to date have been WMG tapping Jim Griffin to spearhead the controversial initiative and SAC pushing for an ISP level tax in Canada.

Regardless of the specific plan in question, the general idea remains the same; every ISP subscriber would have a tax added to their monthly bills that would give them a blanket license to download music however they please. It appears that this tax would be around $5 per month ($60 per year).

Now that we’re all familiar with what The Music Tax is, here is a synopsis of its most relevant pros and cons:

PROS

- While there is debate over exactly how much of the record industry’s troubles can be attributed to piracy, it is clear that the industry is losing some revenue due to piracy. The tax would help to compensate rights holders for this lost revenue.

- The increased revenue generated from the tax may lead to labels signing more talent and being able to devote a greater amount of time to artist development.

- There should no longer be a need for strict DRM or digital locks if the tax is implemented; the consumption of music over the internet via now-illegal methods would be a good thing for rights holders as they would be compensated for its use.

- In theory, the tax would be a positive for fans who download music illegally; they would be able to continue downloading without any consequences. There would be no reason for them to complain about the tax because it would only result in them paying for what they should have been paying for in the first place (assuming they download at least $60 worth of music per year). However, in reality, these are people who are not big on paying for music when they can easily get away with it, so I find it hard to believe that they would be enthusiastic about having to pay a mandatory tax.

CONS

- Assuming that ISPs would be the only service providers to impose a tax on their customers, $5 per month is likely an understatement of what would actually be required to keep the record industry afloat (or at least, to keep it happy). In 2008, there were 70.2 million broadband subscribers in the United States. If each of these subscribers were taxed $5 per month, the record industry would generate just over $4.2 billion in additional revenue each year. When this is added to $10.3 billion (the domestic revenue generated from record sales in 2007) we arrive at $14.5 billion, which is exactly what the domestic revenue generated from record sales reached at its peak. While this may appear to solve the problem, think again. The domestic revenue generated from record sales is steadily decreasing and the implementation of The Music Tax would likely accelerate this decline; while some people would still opt to purchase music from brick and mortar and online retailers, others would feel that they must start file sharing in order to get their money’s worth. In fact, the implementation of The Music Tax could very well signal the death of now-legal music services (especially the smaller ones) as it would be extremely difficult for them to compete. The tax, therefore, would need to be raised to compensate for the resulting deficit.

- The record industry is not the only industry that can lay claim to being negatively affected by piracy. It is likely that a tax being implemented to compensate the record industry for lost revenue would be followed by demands for similar taxes by the movie industry and possibly by other industries. If this were to happen, the total amount in new taxes that ISP subscribers would be forced to pay could get quite hefty.

- Everyone who has an internet connection would be forced to pay the tax, regardless of the fact that they may not be downloading music illegally. To make matters worse, most of the people who choose to download music legally don’t do so because they fear they’ll be caught if they file share; they do so to avoid the pitfalls associated with file sharing (inconsistent file quality, incorrect metadata, malware, etc.). Therefore, even if file sharing were to become legal, they would still opt to take the traditional legal routes instead. Because The Music Tax would merely legalize file sharing, absolutely no value whatsoever would be provided to these people in exchange for their $60 per year.

- The Music Tax would completely reinvent the industry. Accordingly, successfully implementing this model would be a difficult task. Beyond the myriad of legal issues that go hand in hand with making such a model a reality, every publisher, label, and ISP would have to get on board for it to work (I highly doubt that ISPs would be thrilled about increasing their customers’ monthly bills). Of course, accurately tracking all of the music consumption that takes place on the internet would cause a whole new set of difficulties. Considering that most p2p applications offer encryption options, it is questionable how accurately music consumption could be tracked. Furthermore, as a recent post on Techdirt.com wisely pointed out, there is a risk that the tracking process would be subject to scamming. Even if music consumption could be accurately tracked, the industry would then face the challenge of determining how to efficiently distribute the “pool of money” to every rights holder whose music was consumed, regardless of their size and location.

- While piracy has contributed to the decline in record sales we have witnessed over recent years, the industry appears to be forgetting that there are other factors causing this plummet. What about competition from other media? What about the sheer fact that when people do purchase music, most prefer to buy individual tracks rather than full albums now that they have the choice? Internet subscribers should not be forced to indemnify the industry for the losses it is experiencing when a good portion of these losses is simply due to a shift in consumer demands.

- Although this isn’t a con with The Music Tax itself, the current economic climate must also be taken into consideration. We are experiencing a recession. The last thing that people want right now is yet another tax.

In conclusion, the music tax concept, in its current form, does not come anywhere close to providing people with enough value in exchange for the tax that would be imposed on them. Internet subscribers would essentially be told, “For $60 per year, you can download all of the (potentially) malware-carrying, mislabeled, poor quality music files you want.” Yippee.

If the industry were to come together and create some sort of music destination where people could safely download unrestricted, properly labeled, high quality files for “free” (although they wouldn’t really be free due to the tax), it might be on to something. However, this still wouldn’t offer a solution to some of the other cons associated with The Music Tax.

I would like to see the industry exhaust all options - options that are easier to implement and fairer for everyone involved - prior to rushing headlong into a crusade for The Music Tax. For example, there is still more that can be done with regards to ad-supported services. Yes, there is an abundance of questions surrounding the viability of the ad-supported model; no ad-supported service has shown much potential when it comes to retaining users and creating substantial revenue streams for rights holders. However, we have to remember that labels have forced every ad-supported service that has emerged thus far to use strict DRM. Furthermore, no ad-supported service has been able to offer song files that are compatible with iPods. When the song files a service offers are not compatible with the device that has a 70% + share of the music player market, you can’t be shocked when the results are less than stellar. Allan Kelpfisz, CEO of QTrax, once said that in order for ad-supported services to work, you need to build something that is as good or better than the competition. The problem is that no one - including QTrax - has been able to do this yet. Perhaps if labels would allow someone to meet this need, the picture surrounding the ad-supported model would be a bit sunnier.