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Blank media levies: record once, pay thrice

Levy, content, royalty

By Faultline, 4 May 2004

Opinion We have often heard that the idea of charging levies for empty digital media is a way around having to bother solving all those complex digital rights management (DRM) problems.

In fact we’ve even heard people express as radical an opinion that perhaps what we should all do is leave ALL entertainment content without any form of copy protection and just have a series of collection societies and performing rights organizations collect all our dues, including levies.

Personal copies and piracy would be paid for simply by calculating how much the content that was copied onto them was likely to be worth, and adding that, as an aggregate price hike to every piece of persistent memory, including hard disk drives and flash memory, that could feasibly be used to store music or films. In fact, why not add a levy to the playing platforms also?

The levy model would then have us give all that collected money to a collection society and they would fairly distribute it among all the companies that made content. Sounds crazy, but it’s something that is not only happening, but happening increasingly, led by Canada and Europe.

And that’s what’s at the heart of the spat that Apple finds itself in over sales in France of the iPod, with French collections agency Sacem threatening to sue Apple over unpaid music levies on iPod disk drives. The story broke about five weeks ago and little has been heard about a resolution yet, mostly because US businesses, Apple included, think the system is ludicrous.

And after some thought, we agree. But the levy model is not about to go away and right now it is increasing at a rate of knots. A report from DRM consulting group Rightscom in London last year estimated that levies in just five countries in Europe would reach €230m ($274m) this year and as much as €451m ($538m) in two years' time.

But the report was written over a year ago and even since then the emergence of massively more dense flash memory cards, means that its predictions may be slightly on the low side. The estimates were made taking in only Germany, France, Italy, The Netherlands and Spain, and it assumed that levies on blank media would remain static. However, Austria, Belgium and Greece have joined these five in charging levies and the new members of Europe who joined the EU last week - Poland, Hungary, Latvia, Slovenia, Lithuania, Slovakia, the Czech Republic, Estonia, Cyprus and Malta - have all agreed that they plan to attack the piracy problem with levies.

These previously unfactored nations add a further 40 per cent by population to the five countries that Rightscom measured, so perhaps that €451m will become more like €631m ($753m) in 2006 - and that’s without notable members of Europe still not buying the levy ticket, including the UK.

If you bring in Canada, it’s more still. And what if someone convinces China that it’s the way to get rid of the DRM issue? Then that might make this a $4bn global collections business overnight.

Where it all began

First, though, we have to understand how this solution came about. European collections agencies began several 100 years ago, taking royalties for the great composers of Europe. Mostly back then it was for rights to perform a work, the simplest form of reproduction; then later for making copies on records and later still for playing music and video over the airwaves.

So now it appears to those societies that the idea of its collecting and distributing a blank digital media levy, is the same age old solution moving onwards into a new age. Globally there are well over 100 such collecting societies. They get their work from content owners who request collection of royalties in a particular country or region. Radio and TV broadcasters publish their airplays, etc, and pay out royalties. Whenever anyone performs live, the same applies. When someone wants to make a record, the same again. In each case the number of times a song or play is repeated, and how many people watch or enjoy it, are matters of record.

But when allocating royalties which come from levies, these collections agencies must guess how much each piece of art is worth - what percentage of the total pie they should allocate. There can be only two guiding principles: the number of separate works owned by a publisher or content owner; or their respective revenues in other areas of royalty collection. A band selling lots of records should have lots of the levy money. The question is, will a band making lots of records - which no-one wants to listen to - get just as much?

It comes down partly to guesswork, but also to preference. The collection agencies do not say how they divide up levy collections. But isn’t it reasonable that they might give more to a content source they know well, and which has a history of content provision, than to one they have only just acquired the collection rights for?

If that is the case then levies are a force for maintaining the status quo (no, not the band), which is not such a good idea in digital media.

Something we have said many times before is that in Faultline technologies, where media is transforming from analog into digital, new patterns of behaviour emerge every day.

Home movies

For instance, people may begin recording their own voice for fun and amusement, trying to make their own music demo tape, or begin to record and store home movie material. Each time this happens the blank media levy is being paid, but not for the reason for which it was implimented.

What about a band which decides it will give a certain amount of music away for free using peer to peer networking and then charge for perhaps only merchandising - this is clearly copyright-free material available to millions. At some stage a rock band is going to emerge which will enjoy huge success over the Internet without record company involvement and therefore without the collecting societies' support. If such a thing happens, then all the levies on media that is used to record their songs will be paid to their competitors. Somehow galling.

And what about the local football team that decides to invest in a few cameras and offers its games to the local community for free. Or the "made-for-broadband" films that are sold online?

Or the DVR which is levied but which mostly offers time-shifted viewing. There are many new business ideas that the digital age is bringing, but each of them will get punished by levying, as there is no choice in whether to levy or not.

But of course the true contradiction in levies is that it is not yet and not likely to be global any time soon. As a result, the only protection that the dominant US content producers will accept, at the very minimum, is copy protection, and at the very best, a full digital rights regime.

Double whammy

If content owners use copy protection AND get levies they will always get paid twice. And the thing about DRM regimes is that they are indiscriminate. They don’t care what country you are in, or whether or not you have already paid over the odds for the blank media that the content is recorded on. You have to obey its rules and that will mean that as DRM extends, customers will be paying twice.

Actually it’s more than that since customers will pay for the content, pay for the media and pay levies on the media. Potentially it's payment in triplicate. And given that almost 100 per cent of DVDs on film have copy protection, this is already happening in Europe. Also if customers have paid a levy and are aware of it, they may well begin to feel more justified in piracy, and the whole stupid cycle repeats and continues.

There is also some profiteering already going on. Blank writeable DVDs and CDs cost just the same in the parts of Europe which do not exact levies as they do in parts that do. Here the money goes to the blank media makers. Perhaps they feel that the price cuts that they have to offer in the levy counties to make their products appear reasonably priced, need to be paid for by making extra profits in other countries.

And even if the world adopted levies across the board, as well as music and film companies no longer having to try too hard (as they would get paid anyway), there would be another form of piracy - grey blank media imports that have no levies paid on them.

4bn industry

We have seen that levies could easily become a global $4bn industry with the current level of levies, but there is also pressure from the collection societies to raise those levies. Back in 1965 when levies were first invented, they were supposed to counter the losses from making personal copies of music on analogue tapes. Piracy was not a factor, but it is today and many people think that levies should be raised to take it into account.

So, most European politicians, and especially those lobbied by the collecting societies, are in favor of raising the existing levies.

Targeting the humble PC?

Also, the humble business PC has so far not been targeted, but easily could be. The 400m PCs sold each year (increasingly becoming media friendly and portable) might also be levied. The rate favored for this in Germany and France is €30 ($36). So that would add a nice €12bn ($14bn) to the pile if this was a global system, used everywhere and taking in all forms of portable storage.

At the moment the amount of money levied on 32MB memory cards is just a mere €0.34 (40 cents) in France. But devices are expected next year to come out with 1GB cards. Does that mean an €11 ($13) levy?

If so, what will happen as cards like this go into every camera, videocam, portable playing device and mobile phone that uses high density flash memory? That would put another 3bn into the levy pool. And as capacities in memory cards double every year, will the levies follow suit?

So how will this all be resolved? In Canada the levies on blank media have been frozen for the next two years. There is much lobbying between Canada and the US. In the US the content businesses prefer suing their 12-year-old customers, while in Canada they prefer a practical solution that would surely be a disaster if it was anything other than temporary.

There is a direct contradiction in 179 countries signing the World Intellectual Property treaty, and promising to enact legislation similar to the US Digital Millenium Copyright Act, but at the same time charging levies.

And the contradiction is not lost on consumers. It seems to us that even if the industry can bring watertight DRM into play over the next two years or so, that it will take a huge concerted push to eliminate levies, with the effort mostly coming out of the US through the World Trade Organization and through institutions like the World Intellectual Property Organization.

Levies are embedded into century-old institutions, and even after their function is dead and buried, with the onset of strong DRM, they will not go without a fight. But it’s a fight that has to be fought.

© Copyright 2004 Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of events that have happened each week in the world of digital media. Faultline is where media meets technology. Subscription details here.

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