XM Radio vs download services – implications

XM Radio is in legal trouble with the RIAA; the courts have refused to dismiss the case regarding their player/recorder, “Inno”. The allegation is that XM is acting as a means to infringe on copyrights by offering a service+device that allows the recording of digital streams. These recorded streams (as files) can then be played back at will and in any order.  The technical term for in-any-order is “Disaggregate” (where aggregation means the selection of songs by the radio provider).  

And any order-of-play is really the crux of the whole issue. There are essentially two models that can be licensed today:  1. Radio/streaming and 2. Purchase (CD or digital download). 

Conceptually, radio is nothing more than the creation of an audio signal (stream or wireless) with music (in this case) that is selected by someone other than the listener; where the content is not controlled by the listener before the act of listening. The provider must pay a fee (rather nominal, but a fee anyway).

Purchase is nothing more than buying the rights to control a recording of a piece of music – and where control means to play that recording at will (as long as you don’t profit from it). If you profit from playing the music, and you control when/how it’s played, then you can get licensed as a radio.

I know it’s a bit more complex than that,  buy the point is really a question of who controls the order and timing of the performance of a sound recording and how much you have to pay for that control. If you’re a radio, you pay less per play than if a user is buying tracks.

So, in that view, XM Radio is infringing by collecting a fee from users under a radio license and then giving the users the tools to control the content however the user wants.  It’s also why the RIAA wants it stopped (money).  Here in the download space what they are doing is known as a subscription model.  XM obviously feels differently, but I tend to agree with the court – just conceptually, I am clearly not a lawyer.

But from a business standpoint, here’s how I see it going, and an easy way for XM to get out of this mess and potentially make a ton of money: Divest their Inno division (if it isn’t a division, make it one and spin it off), and license the radio stream to them as a device manufacturer.  Doing this would require easing their licensing rules I suspect, but it would be worth it.  Then they can offer licenses to other device manufacturers.  I think device manufacturers would jump on it. Generate renewable revenue based on licensing. Licensing without intent to encourage infringement.  Device manufactures would be protected under the “Audio Home Recording Act.”

If that doesn’t get XM in the clear fully, the labels can recoup fees in a few other ways:  1. charge a “tax” to XM or device manufacturers for each device licensed (like Microsoft’s Zune arrangement),  make a Napster like arrangement where users have to pay a nominal fee per song saved, or simply license the XM feed for downloads and turn it into a strong wireless download service (right now the best there availble for that is downloading to your cell phone – ugh).

But in general terms the question of who controls what, when is still problematic. Historically it’s a radio versus LP issue and how much each party has to pay. It might be time for a new paradigm, with a combination of ad revenue sharing, per download charges and licensing fees. As we move closer to smart networks and network based services, that questions is going to become more and more important – and not just for music services.

Posted on January 19, 2007 in Competition, Market

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