RIAA: eCommerce Public Enemy #1

    March 23, 2007

With the future of industries such as online radio and peer-to-peer networking hanging in the balance, the pendulum of power is shifting from the hands of the suits at the RIAA into the hands of the public. Those who feel they have been wronged by the organization are collectively beginning to fight back.

I’ve covered the ongoing exploits of the RIAA pretty extensively over the past few months; a fact of which I am sure all of you are keenly aware. What you may not be aware of, however, is just how important the outcome of this saga is in the grand scheme of online commerce.

What you have here is the classic battle of the old guard against the new wave when it comes to how the RIAA views the music industry. The organization, as well as the various labels that it represents, is still quagmired in this antiquated model of revenue generation that revolves around unit sales and royalties, despite the fact that compact disc purchases continue to plummet and more artists are looking to market themselves independent of the major record companies.

While yes, more audiophiles are embracing the digital marketplace to satisfy their musical appetites, the unfortunate truth for the record labels is that the real revenue is generated from concerts and merchandising. The album isn’t the moneymaker anymore; it’s just another promotional tool.

The kicker, however, is that music itself still has monetization potential, particularly in the realm of streaming online content. By allowing Internet radio stations such as FineTune, Last.fm, and Live365 to adopt advertising supported models the record companies would stand a better chance of seeing a consistent revenue stream from the production end. If this philosophy sounds familiar, it might be because this is the backbone of the current business model for terrestrial radio.

Go figure.

This philosophy, of course, centers on the notion that it’s all about the money; this is clearly not the case. What the RIAA and the record labels really want is control; they want control over how consumers can enjoy their own content, and how artists are allowed to distribute their own music. For years the RIAA has been able to get away with demonstrating dictatorial discretion in its dealings, but now the shoe looks to be shifting to the other foot.

Take, for instance, the stance of NPR against the royalty rate hike that was passed through the U.S. Copyright Royalty Board (CRB) three weeks ago – a decision that could spell disaster for the entire Internet radio industry. Rather than bend over and take it like the RIAA would expect, NPR has returned serve by filing a motion for rehearing with the CRB and questioning their understanding of all the technical details surrounding the issue.

Then you have the University of Nebraska, who was kindly asked (pressured) to reveal the names of students associated with several IP addresses that the RIAA had deemed to be connected with massive infringement via peer-to-peer file sharing. Not only did the school refuse to comply with the request, citing that it rotates IP addresses so often that it would be impossible to identify any one student, but it also has demanded that the RIAA reimburse the university for expenses that were incurred while researching the matter.

That’s a bold move by UN; we’re talking massive grapefruits here.

Finally, let’s look at Capitol v. Foster, where the RIAA has been ordered by the presiding judge to pay the legal fees of the defendant, but is also being made to turn over its own attorney’s records to Ms. Foster’s counsel. Refusing to admit defeat, the RIAA has filed numerous motions of appeal to both of the judge’s rulings, which have been summarily denied in each instance.

So why is this news? What makes this ongoing feud between the RIAA and music enthusiasts so important to the landscape of technology and eCommerce? I’ve been asked those questions, which I think are absolutely valid, and as such I’d like to shed some insight into the implication that this whole sordid tale could have upon anyone looking to conduct business online.

At the root, you have an organization that is trying to, in effect, change U.S. laws as it pertains to online transactions – laws that are already on the books when you consider the way the music business operates offline. Two sterling examples of this can be found within the practices of Digital Rights Management (DRM) and the aforementioned efforts by the RIAA to impose stiff royalty rates on streaming audio content providers.

Let me explain in a little more detail what I’m talking about here.

If you go to a store and buy a CD, you own that disc. You can play it on any CD player that you choose, you can burn a backup copy for yourself, and you can even turn around and resell it to a secondary merchant. Even going back to the cassette tape, 8-track and all the way to vinyl, this is the way that the industry has operated, and it’s been a successful system.

Now, let’s look at online merchants such as the iTunes music store. If you buy a track from iTunes, you can only play it within the iTunes program, or on your iPod. That’s it. You can’t make another copy of it, and you can’t listen to it on any other type of portable device, all because the RIAA thinks this is the way it should work “online” – a stance that is completely counterintuitive to the model that has been the backbone of the music industry for decades.

We’ve briefly touched on distribution, now let’s look at promotion. FM Radio has arguably been the single greatest promotional platform for musical artists. The premise is simple; tune your radio dial to a station and listen to some great music for free, understanding that this free music is made available by the advertising that you have to endure every so often. This very simple model of “free content with advertising” has not only permeated radio, but is the underlying foundation of network television as well. Clearly, this is a strategy that has worked over the long-term.

Oh, but wait. We can’t let this kind of model creep its way into Internet radio, asserts the RIAA. Instead, the organization is looking to cram hefty royalty rates down the throat of streaming content providers on a per song basis, a strategy that terrestrial radio stations would not only consider asinine, but also would fight tooth and nail against.

What you have here, essentially, is the RIAA arbitrarily looking to undermine the laws and industry precedents that have been in place for decades all for the sake of clinging to control over an industry that is rapidly slipping through its fingers. Is this the kind of standard that we want to set for entrepreneurs looking to taking existing business models and translate them into the online environment?

This mentality discourages innovation and forward thinking — a mindset that everyone in the eCommerce sector should carry a healthy fear toward as well as a passionate pursuit against.