The great rock ‘n’ roll swindle

Audio piracy is a very real problem for the international recording industry and a genuine threat to the future of the audio business. Estimates place the cost of lost revenue due to piracy at over US$14 million a day. Digital Studio investigates an international problem at a local level.

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By  Marcus Webb Published  May 2, 2002

I|~||~||~|Piracy, copyright infringement and theft of intellectual property are the biggest threats to the modern audio industry. Recent reports suggest that copyright infringements cost the industry in excess of $4.5 billion a year and figures announced this month have shown a further 5% drop in worldwide music sales.

The Middle East suffers from all forms of copyright violation. The sale of counterfeit, or pirate, CDs and music cassettes, the use of the Internet to distribute copyrighted works in MP3 format and the public broadcasting of copyrighted music without a licence are draining local economies and dissuading future investment in the area. Clearly the question of audio piracy is one in urgent need of address.

Fools gold

The sale of pirated products is perhaps the most obvious form of copyright infringement.
Physical piracy takes three basic forms: simple piracy, counterfeits and bootlegs. Simple piracy is the unauthorised duplication of an original recording. Pirate copies are often compilations of tracks within a specific genre or 'greatest hits' packages of a specific artist. Counterfeits are products copied and packaged to resemble the original recording as closely as possible. The original producer's trademarks and logos are reproduced in order to mislead customers into thinking they are buying the original product. Bootlegs are the unauthorised recordings of live or broadcast performances.

The Middle East suffers from a piracy rate that can be as high as 99% for some international releases. This piracy mainly takes the form of illegal cassette duplication and the overwhelming majority of recordings contain Arabic material.

One man on the front line of the war against physical piracy is Willem van Adrichem, regional representative of the International Federation of the Phonographic Industry (IFPI). The IFPI represents the recording industry worldwide and spearheads the industry's fight against piracy on behalf of its 1,400 members.

According to the IFPI, there are six high priority countries around the region: Egypt, Lebanon, Saudi Arabia, Kuwait, Syria and Pakistan.

The pirate market in Egypt is worth an estimated $46.5 million, around 48% of the total market. Lebanon, Saudi Arabia and Kuwait also show high levels of piracy with estimated overall rates of some 50%.

||**||II|~||~||~|"The reason Pakistan is a major problem for this area is that they export at least two million CDs a month," says van Adrichem. "That includes all formats, VCDs, DVDs, software and audio. There are eight CD plants in Pakistan alone and they are capable of exporting an enormous amount of illegal products. Dubai, due to its proximity to Pakistan, is a hub for the transit routes. But the authorities, customs in particular, are excellent. They are a truly professional and highly organised group and are working very hard to combat the problem."

The work by the authorities is certainly producing some impressive results. The UAE is the only country in the area with a piracy level below 10%, which is comparable with Europe or the United Sates.

Piracy, however, is a difficult problem to solve. There will always be a market for products that are cheaper than the authorised version. As one source, who wished to remain anonymous, revealed: "Why would I pay Dhs50 for a CD in a legitimate store when I can purchase the same music for Dhs12 from a street vendor? CDs are too expensive, so if I can buy them cheaper, I will."

Ola Khudair of the Arabian Anti-piracy Alliance (AAA), which protects the intellectual property rights of motion picture, software and cable companies in the region, claims that pirate copies offer a false economy. "Illegal CDs can actually damage your equipment," she claims. "These copies offer no guarantees, no refunds and are often of poor quality."
The AAA and IFPI, alongside the Motion Picture Association and the Business Software Alliance, run training sessions around the Gulf region to educate local law enforcement and government bodies on the increasing problems of piracy.

Van Adrichem expands: "We are combating the problem by communicating and co-operating with law enforcement authorities worldwide. We are producing manuals and guide lines in Arabic that explain how to carry out investigations and how to identify pirate products."

Mekki Abdulla, managing director of the Arabian Radio Network, has seen the damage piracy can inflict on local artists. "The money being lost due to piracy has damaged the music industry a great deal," he claims. "The money is no longer there to develop new talent and, while you have a niche of established artists, you no longer have the volume of fresh talent coming through."

Abdulla also believes that the pricing of products encourages people to buy pirate goods. "The pricing policy by the distributors is not being done correctly," he asserts, "in terms of pricing for the market to get the volume out there, or looking at the local licensing to move the product around. If you look at an area such as northern Africa, it is too attractive for people to buy pirate goods: incomes are low and legitimate music is expensive. You still see massive quantities of cheaper audio formats being shipped out to Africa and poorer parts of the Arab world."

||**||III|~||~||~|Stewart Morrison is international marketing manager with BMG Middle East and Northern Africa. As one of the few major labels with a strong presence in the region, BMG's profits are directly affected by local piracy. "BMG deals with 22 countries in the area and piracy levels vary a great deal.

"Whereas the UAE has been very effective in combating piracy, bringing levels down considerably, piracy remains high in other areas such as Egypt and Saudi Arabia.”
"Unfortunately you will never get a pirate free world while the potential rewards are so great and the risks comparatively low," Morrison concludes.

Web of intrigue

The illegal distribution of copyright protected music over the Internet has grown exponentially over recent years. The popularity of the Napster web site and its successors has seen a boom in peer-to-peer services, which allow users to download material, including copyright protected songs, directly from another computer over the Internet.
The impact of digital file swapping is already being felt in conventional music sales. US industry executives believe that 5% of CD sales were lost to digital piracy last year, and as much as 10% could be at risk this year. Defenders of peer-to-peer systems claim that they offer a valuable resource for unsigned bands to distribute their music online and blame a minority of users for violating copyright.

"Internet piracy is a major problem as it is hurting sales," observes Eddie Esho, Branch Manager of distribution company SIDI. "The end user is getting the product at a cheaper price and that is downgrading and cheapening the product. The owners of the music are not getting their dues, and that is affecting the whole cycle," he says.

According to Internet research firm Webnoize, some 2.8 billion copyrighted songs were traded on Napster in February 2001. The Recording Industry Association of America (RIAA) responded by suing Napster for allowing the distribution of copyrighted material. On May 5, 2001 a federal court sided with the RIAA and ordered the service to shut down.

Napster is currently attempting to re-launch its service as a subscription based system.
It appeared that the industry had struck a fatal blow to the pirate services. However, research reveals that the demise of Napster, and the industry's increasingly heavy-handed campaign against pirate site users, has failed to kill off consumer demand for free downloads.

In Napster's place, a host of sophisticated peer-to-peer file swapping services, such as Gnutella, Morpheus and Aimster, have emerged. These new services boast a user base far in excess of peak Napster usage and have proved much harder to shut down.

While Napster relied on a centrally maintained computer server to locate files and direct traffic between individual users, the latest breed of services allows individual users to ||**||IV|~||~||~|search the computers of other people in the network to find the digital files they want. Once the file is found, it can be directly downloaded from that computer.

The legal technicalities were exposed in March 2002, when the Amsterdam Court of Justice ruled that the Dutch technology firm KaZaA was not liable for any individual's abuse of its software, which is being used by millions of people around the world everyday to swap copyright-protected games, music, pictures and films. KaZaA, alongside its US peers, Grokster and Morpheus MusicCity, still faces a court battle against the RIAA and the Motion Picture Association of America, which is expected to start in October.

The industry's attempts to put the download genie back in the bottle by offering legitimate, paid-for music services, such as Pressplay and MusicNet, have proved expensive flops. A report by OC&C Strategy Consultants published in March revealed that sales of legitimate downloads brought in only $1 million last year, despite expectations that music would lead the way in recouping the $4 billion invested across the entertainment sector to capitalise on the expected boom in digital content. In contrast, up to 2.7 million people at any one time are now logging on to free file swapping services, such as MusicCity and FastTrack. Last year, they exchanged more than eight billion tracks between them.

Tambi Fernando, managing director of Emirates Studios, is not surprised by the apparent failure of legitimate download sites. "Why would people spend their money on a legitimate download when they can download the exact same piece of music for free from a different site?" he asks.

"The Internet and the wealth of MP3s available has killed the music industry," Fernando proclaims. "If music is being downloaded for free then there is no money coming back into the industry. If there is no money coming back into the industry then there is no money feeding the production houses and artists.

"Previously I had a record that sold 400,000 units and I only got to number 11 in the British charts. Today, 30,000 would get you into the top ten. That gives you a gauge; there are no record sales anymore," he concludes.

Morrison disagrees that the Internet will be the death of the music industry. "People have been proclaiming the death of the music industry for decades," he observes. "They said that music cassettes would be the death of the industry when they were first introduced, then mini discs were the next menace and now MP3 files and CD burners are seen as the threat. At the end of the day people will always want a record collection. It is like book collecting, or stamp-collecting, people always want a physical object."

Far from seeing Napster and its clones as the enemy, Morrison believes they can become powerful tools to the music industry. "I think sites such as Napster will be brought increasingly under corporate control," he explains. "A year ago BMG bought up Napster. While the other majors sued, we bought them out and took control. I think the Internet ||**||V|~||~||~|offers a lucrative opportunity, particularly for us here [in the Middle East]. We deal with 22 countries and crossing borders becomes physically very difficult. If we could market music from one network across borders without physically shifting sample CDs our job would become a lot easier. By just directing people to the website we could save a lot of time and money."

Other members of the music industry are not so optimistic about the spread of MP3 technology. Speaking at the recent Grammy awards, Michael Greene, president of the National Academy of Recording Arts and Sciences, whose 13,000 voting members chose the winners, railed against Internet piracy, which he described as "a life and death issue" for the music business.

Greene claimed that "the most insidious virus" of piracy was now out of control on a "world wide web of theft and indifference". He warned that many artists were in immediate danger of being "marginalised out of business".

Perhaps the biggest long-term threat to the industry is the digital piracy of CDs before they have been commercially released. Promotional singles and albums sent to radio stations, television music channels and club DJs are finding their way to the file swapping services so that by the time they are released the market is already exhausted.
Britney Spears' single 'I'm a Slave For You' was downloaded on the FastTrack network four weeks before its official release last October. By the end of the week before release, more than 200,000 copies had been downloaded. Just last month, 'Heathen Chemistry,' the new album by Oasis, was distributed on the Internet a full three months before the official release date.

Mekki Abdulla of the Arabian Radio Network, goes to great lengths to ensure that anything played on his stations is not recorded and illegally distributed.
"We take a number of measures to stop people recording and pirating from radio," he says. "We have radio edits, we cut it in, put a sweeper in the middle, whatever it takes."

Life on the open waves

The broadcasting of copyright-protected music in public places raises other issues of copyright and intellectual property. A composer of a track is entitled to royalties every time their work is played in public, whether that be on the radio on television or broadcast in such public places as shopping malls. Whereas in the UK bodies such as the Performing Rights Society (PRS) protect these rights, no such system currently exists in the Middle East. This leaves radio stations free to play whatever piece of music they like regardless of royalty or intellectual property issues.

Far from damaging the record industry Abdulla claims the current system is mutually beneficial. "At the moment radio stations and the music industry work very closely together," he says. "It is very much a case of 'you scratch my back, I'll scratch yours.' The music company gives us music, we promote their music, we do deals, and so we kind of pay them back in kind."

||**||VI|~||~||~|The record industry also seems happy with the present arrangement as Morrison explains: "In the UK, for example, it is a constant battle to get a song played on the radio. We, and I think most other record companies would agree, are prepared to forgo the royalty rights for other benefits such as high rotation, play-listing of brand new artists and promotions. So far we have no problem with the situation. We have issued letters of no contest to most of the radio stations, but they can be withdrawn at any time."

Eddie Esho of SIDI Distribution disagrees. "Radio stations need to pay for the music they use," he says. "While radio stations do promote music, and they do a very good job of that, they still make money from advertisers and are obliged to pay their dues to the owners of the music."

"It is a given law worldwide, Radio stations have to pay the dues per song they play from six o'clock in the morning to midnight five days a week. That is the law and I hope the day will come when radio in this part of the world respects that."

Perhaps that time will come sooner rather than later as neither Morrison nor Abdulla can foresee the current arrangement lasting much longer. "The four other major record companies are going to come in quite heavily at some point," observes Morrison. "The radio stations will become inundated with promotions in an attempt to get certain tracks play listed. As competition increases record companies will have to start advertising. Once we start spending money on these TV and radio advertisements then the existing relationship is thrown off balance; I'm scratching his back and he is no longer scratching mine."

Abdulla also believes that things will change. "At the moment the arrangement may not be as structured as it should be, but it has been working for five years," he says. "Now as the industry becomes more mature, and as music becomes big business here, things will have to change and we are totally prepared for that."

While the current situation benefits both radio stations and the music industry, the use of music in advertising remains a contentious issue. Tambi Fernando of Emirates Studios regularly sees copyright infringement in the advertising industry.

"People are using copyrighted music as backing tracks, which is totally illegal," he says. "People are taking a piece of music, adding a voice-over to it and associating their product with a worldwide hit. Worse still are incidents when people are taking famous songs and changing the lyrics to advertise their product. It is ridiculous."

Morrison also sees such infringements as a major problem. "Whereas with radio I am getting promotion and making money, some advertising agencies and production houses are making money from our product and we are not getting anything in return. It is pure theft. These guys are using my product to make money for themselves," he complains.
Attempts are being made to combat the problem with the introduction of registered music libraries and sound beds. BMG now operates BMG Publishing, which provides licensed sound beds and music tracks to production houses.

"Previously publishing studios had not been paying any royalties at all," Morrison explains. "They had just been downloading this stuff off the net or ripping it from a CD. What we are doing now is offering the chance for such companies to become legitimate, to take a step forward in culling an illegal industry."

Sound beds and the licensing of music tracks obviously comes at a price, and while the enforcement of copyright remains relatively lax there is a danger of rewarding less scrupulous businesses. As Fernando puts it, "principles are great if everyone adheres to them."

"To legitimately use a piece of music takes time and money," he observes. "If a production house down the road is ignoring copyright they can offer the product quicker and cheaper and that puts me in a difficult position.

“I personally have it in my contract that it is the agent’s responsibility to obtain copyright. They sign even if they have not obtained rights because they know nothing will happen."

The majority of people that Digital Studio spoke to see the establishment of some kind of body as the best way of combating piracy in the area.

"Enforcement almost always ends up being the responsibility of the copyright owning company," says John Robbins, of Aether Media. "In much the same way that the software companies in the area are banding together to form a policing body, the local music industry should be doing the same."

Fernando agrees. "There is only so far we can go as individuals. A body would be stronger, less isolated and harder to ignore," he says. "I think the first step is to create a syndicate of producers, who create copyright in music, have it all legislated through government and the copyright body, and then enforce it. So if someone infringes copyright there is a body to go to and make a complaint about and this can be enforced in line with legislation."

Whether such a system actually materialises remains to be seen, but it is increasingly clear that combating piracy is vital to encouraging growth in the region. Robbins again: "I think the building of trust is vital to encouraging business in the Middle East. Whereas in other markets there is a moral standpoint, here people have been allowed to get away with blatantly breaching copyright for too long. Maintaining a more wholesome business environment is a crucial facet and is something that the UAE, in particular, is trying to instil."

The actions of some local governments, alongside the work of organisations such as the AAA and the IFPI, have had a considerable effect on reducing the levels of physical piracy.

With the growing contempt being shown for other forms of piracy, perhaps we shall see further steps being taken to tackle copyright infringement and the lack of performing rights in the area. Only then shall we achieve the more 'wholesome' business environment we all desire.

As Eddie Esho of SIDI says: "The UAE has done excellent work in combating physical piracy and bringing levels down, and we [businesses] are benefiting through sales. Now is the time to carry that through to all aspects of copyright law."

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