A New Way: Business Model for File Sharing

We've been waiting for a comprehensive plan to replace the current business model with regards to music and other content over the Internet. Check out this one from Harvard University Professor Terry Fisher, as discussed in the Register:

Fisher actually lays his philosophical armory down for us to inspect at a very early stage, and it's thus. Economies have had a lot of trouble with public goods that are 'nonrivalrous' - if you use it you're not depriving someone from access - and 'nonexcludable' - it's actually hard to make them exclusive. Examples of the latter include roads, defense, and culture. It's a real danger that if no one pays, then nothing gets done: the roads crumble, the country becomes vulnerable, and aspiring pop stars give up their dreams of one day snorting cocaine from an expensive prostitutes thighs.

But our flippant illustration of the final example is not entirely accidental. Many artists forsake fame for fame's sake - but the beauty of alternative reward models is that there's no disincentive for them to become popular, either. To cite an example, when we've discussed flat fees before, someone usually writes in with some anguish to complain how this would only reward Michael Jackson for being popular. But what's wrong with that? There was a time when he was very popular, and deservedly so.

So let's start at an accountant's year zero.

Calculating lost revenue
In the year 2000, the record labels earned $7 billion on retail sales of $13 billion. For the sake of argument, let's assume that in the first year 20 per cent of retail sales were lost to unlimited copying. That's $1.4 billion, although they'd save $210 in manufacturing costs, and approximately $145 million in mechanical royalties. That brings the compensation to $1.045 billion for the recordings royalties and $138 million for songwriters, plus an amount for lost radio-related royalties.

For the movie industry, calculating the potential loss is extremely difficult. Firstly it's hard to estimate how much the industry earns now from DVD and VCR sales and rentals, and cable and satellite deals. And it's even harder to gauge the loss from file swapping. Even with the advent of Bitorrent, downloads are slow, and few have the patience or resources to find value in them compared to the availability on offer at plentiful late night retail outlets. Fisher reckons five per cent, rather than twenty per cent for the music business, of a $10 billion industry, or $479 million.

So combined, that's $1.677 billion to keep the RIAA and the MPAA happy.

But of course that's not all it would cost: the model requires an organization to calculate and distribute the royalties, performing the duties of ASCAP or BMI today. ASCAP reported that its 1998 administrative overhead was 16 per cent, so Fisher generously estimates 20 per cent. (It's pretty generous, as we'll see, because the digital overhea ds may actually be much lower). This takes - and bear with us, because it also generously throws in a 10 per cent charge for inflation between 2000 and 2004 - the net result to $2.306 billion.

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Article Author: Eric Olsen

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