Music Industry Lures ‘Casual’ Pirates to Legal Sites

Music Industry Lures ‘Casual’ Pirates to Legal Sites

By ERIC PFANNER

Published: July 19, 2009

PARIS —

Record company executives say there are three kinds of music fans.

There are those who buy music, and those who get a kick out of never paying for it.

And then there are those whom Rob Wells at Universal Music Group calls “dinner party pirates”:

the vast majority of listeners, those who copy music illegally because it is more convenient than buying it.

If those low-level copyright cheats could be converted to using legal music services, the digital music business would get much-needed help.

Yet even industry executives acknowledge that until recently, they were not giving those listeners many ways to do what they wanted:

to sample new music and to play it back anytime, at little or no cost.

Over the past year, however, as sales of CDs have continued to fall and paid-for downloads from services like Apple’s iTunes have fallen short of hopes, record companies have moved to embrace casual file-sharers.

Legal services offering free, unlimited streaming of music, rather than downloads, are proliferating.

According to a survey published last week, they are taking some of the wind out of the pirates’ sails.

“Consumers are doing exactly what we said they would do,” said Steve Purdham, chief executive of We7, a service that says it has attracted two million users in Britain in a little more than half a year by offering unlimited access to millions of songs.

“They weren’t saying, ‘Give me pirated music’;

they were saying, ‘Give me the music I want.”’

The music industry has high hopes that the growth of sites like We7, whose investors include the former Genesis musician Peter Gabriel, can change the reputation of Europe as a hive of digital piracy.

Similar businesses include Deezer, in France, and Spotify, which was started by two Swedish entrepreneurs and has grown rapidly in Britain and elsewhere.

All of them are licensed by the music industry and hope to make money from advertising.

Last week, Microsoft said it, too, planned to offer a music streaming service in Britain, via its MSN Web business, though it provided few details.

Meanwhile, the survey by two research firms, Music Ally and Leading Question, showed that Britons were adopting such services in large numbers.

Among British teenage music fans, 65 percent said they listened to streamed music at least once a month, with 31 percent saying they did so every day.

The survey showed a striking decline in the number of British teenagers who said they had regularly engaged in unauthorized file-sharing;

only 26 percent said they had done so as of January, when the survey was taken, compared with 42 percent in December 2007.

Music industry executives say that does not mean the piracy problem has been solved.

The survey results did not distinguish between licensed and unlicensed streaming services or others, like YouTube, where both kinds of music can be found.

Illegally copied music still accounts for the vast majority of digital listening, they add.

Still, executives say there are some promising signs.

Rather than cannibalizing existing digital businesses, they say, the new services are often attracting people who previously shared files illegally.

According to research by one of the major record companies, nearly two-thirds of Spotify users say they now engage in less piracy.

Spotify says it has two million registered users in Britain and another two million in Sweden, Spain and France.

Paul Brown, managing director of its British arm, said it wants to expand to the United States by the end of the year.

it would go up against a number of digital businesses that also offer free music in various ways, including MySpace Music, Imeem, Last.FM, Pandora and others.

While Pandora has said it expects to be profitable by the end of the year, analysts say most other free streaming services are still losing money.

Some advertising-supported free music sites, like SpiralFrog, have already gone out of business.

“You only have to use these services for a while to realize that there’s not a lot of advertising on them,” said Paul Brindley, chief executive of Music Ally.

Analysts say the European services like Spotify, We7 and Deezer are different from most of the American streamed offerings because they focus on the music, rather than using it to build, for instance, a social networking service.

They also give users more control than, say, Pandora, which is more like an online radio service, with preselected programming, rather than on-demand listening.

To try to supplement advertising income, Spotify offers users a premium service, priced at £9.99, or $16.32, in Britain, which eliminates advertising.

The company also plans to add other enhancements to the premium service, including a mobile offering for Apple’s iPhone and other devices.

Mr. Brown declined to say how many users were upgrading to the premium service, but added:

“Each new addition creates customers who say, ‘Hey, I want that.’

It’s not just about the ads.”

Over all, he said, revenue has doubled every month since the company began its commercial operations in Britain in February.

Costs are rising, too, because Spotify and similar services pay royalties to rights holders, including music companies, every time a track is streamed.

Those payments are turning into a promising revenue source for the record companies.

In Sweden, a market where piracy has been rampant, Spotify is already the biggest digital revenue earner for Universal Music, even though it has been operating for less than a year, said Mr. Wells, senior vice president of Universal’s international digital operations.

Analysts say record companies have agreed to reduce licensing costs slightly in recent months, with the typical going rate dropping to about 0.8 cent a track from 1 cent a track.

The labels are also striking different kinds of agreements, insisting on equity stakes in some cases, or a share of revenue from advertising or subscriptions, in an effort to ensure that they benefit from the growth of the new services.

“Now they have to turn these into sustainable businesses,” said Dan Cryan, an analyst at Screen Digest in London.

“You can have 1,001 start-ups, but if they all close down after two years, you’re not any better off.”

LBN-MUSIC INSIDER:

***Tommy Mottola, who ran Sony Music Group in its heyday, was rumored to have lost many millions in the Bernie Madoff Ponzi scheme.

But it isn't true, he says.

"I lost money, but not to Madoff," Mottola said.

"A lot of people I know got killed, but I was not a victim."

Mottola, happily married to Latina superstar Thalia, said he was affected as was almost everyone by the drop in the stock market, but he's upbeat for the future --

"Things are incredible. I have a bunch of new businesses."