Building A Brighter Future

Making AND Selling Great Music

August 12, 2005
San Diego, California
Mitch Bainwol
CEO, RIAA

Retailers And Labels Are In The

Same Boat
Touring

Merchandising

Public
Performance

Sales

$$$

Labels
Publishers

$$$

$$$

Songwriters

$$$

$$$

Artists
PRO's
Retailers

$$$

$$$

$$$
$$$

$$$
$$$

Big Takeaways

We're finally on offense against illegal P2P. Grokster case provides moral
and legal clarity. Even so, more work needs to be done.

Eliminating piracy - physical or digital - is not our goal. But we can contain
piracy - and thereby foster an environment for retail to flourish.

Players in the music community need to pull together to sharply pivot into
the new world. We all must bend, adapt and experiment.

User lawsuits are working. We will maintain our resolve and enhance
deterrence.

Burning is becoming a bigger problem than P2P. The root challenge though
is identical.

Our future isnt binary. It isnt physical or digital; it's both. Consumption will
rise - we need to find ways to monetize it.

Record stores are at the center of the fight. You are in closest contact with
the consumers. You can make a difference.

The 4 Questions
Where Were We In The Fall Of 2003?

Image

Sales Pattern

Digital Prospects

Positioning

How Did We Respond?

Whats Our Present Status?
How Do We Build A Brighter Future?

Where Were We?

Only Good News Was Our

Image Wasnt In The Tank
Favorable

Unfavorable

Congress

55%

41%

Movies

52%

39%

Music

50%

39%

National News Media

50%

42%

Pharmaceuticals

44%

51%

Tobacco

21%

74%

Kazaa, Grokster

18%

12%

Source: VCR, Survey 9/29 10/4 2003 among Voters

Under Pressure

Where Is The Bottom?

Total Units Shipped 1994 - 2004
1200

Millions of Units

1100
1000

Down 31%
900
800
700
600
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Year

For 2005, As of the first week of August, SoundScan reports

album sales down 7.8% compared with 2004

Digital Prospects?

Promising but Speculative

Major Impediments to Pivoting Into Digital
Space

Complex law / rights ownership

Artist reluctance (disaggregation / timing)
Interoperability
Existence / Awareness of legal alternatives
Fair use theology run amok
Absence of deterrence

Industry Positioned Poorly

Bad Guys Instead of Victims

Dinosaurs / Business Model Problem

Culture Instead of Business

Piracy Cool, Stigma Free Even Costless

All the Clichs Were Against Us

Music Wants To Be Free

Anything Goes

Genie Is Out of the Bottle

Was There Harm?

Downloading Is Not
Harmful

"The Effect of File Sharing on

Record Sales, An Empirical
Analysis Oberholzer &
Strumpf 2004

Downloading Is Harmful

"Pitfalls in Measuring the Impact of Filesharing Liebowitz 2005

"The Effect of Digital Technology on the Sales

of Copyrighted Goods: Evidence from Napster"
Hong 2005
"Peer-to-peer Networks: Creative Destruction
or Just Plain Destruction?" Liebowitz 2005
"On-line Piracy and Recorded Music Sales"
Blackburn 2004
"Piracy on the High Cs" Rob & Waldfogel 2004
"The Effect of Internet Piracy on Music Sales:
Cross-Section Evidence Pietz & Waelbroeck
2004
"Measuring the Effect of Music Downloads on
Music Purchases Zentner 2003

Which Study Enjoyed

National Pub?

Oberholzer & Strumpf 2004

Study: File-Sharing No Threat to Music Sales (Washington Post)
Study: File downloads don't affect sales of CDs (Boston Globe)
Internet not to blame for slow music sales (SF Chronicle)
Music sharing doesn't kill CD sales, study says (CNET)
Happy Medium Music and the Internet (ABC News, Nightline)

Perfect Storm
Generation of Kids

Love Music
Cool to Collect
Facile with Technology
No Money
NO Rules
A Million Excuses to Steal
Parents Happy Theyre Home / Computer Safe
Broadband Coming of Age

How Did We Respond?

Lawsuits (Users)
Education
Physical Anti-Piracy
Grokster (P2Ps)
Messaging

Why User Lawsuits?

Kids and Parents Didnt Know the Law

35% Illegal
25% Legal
40% Dont Know / Refuse

No Risk No Deterrence

_
]

65%

Lettermans Top 10 Questions Asked by Saddam

Hussein When He Was Captured 12/15/03
10. "Be honest...have you ever seen a nicer spider hole than this?"
9. "Who's got a coat hanger -- this beard itches like a son of a bitch!"
8. "Anyone have a mint?"
7. "Is this about the illegal music downloads?"
6. "Am I going to be on 'Cops'?"
5. "Which describes me better right now -- 'haggard' or 'grizzled'?"
4. "How did you get past my impenetrable styrofoam brick?"
3. "Do I get the 25-million-dollar reward?"
2. "How's the war going?"
1. "Will you go easy on me if I tell you where Martha Stewart is hiding?

Lawsuits

Education Worked: 35% - 25% before

65% - 10% almost overnight

Attitudes Shifted: Should be Illegal Improved 40 Net Points

Most People Thought Lawsuits OK

Deterrence Established

No Free Zone for Next Generation - Reoriented Expectations

P2P as share of broadband declined and is only up modestly during a

period of phenomenal broadband growth

Bottom Line: Containment

P2P Share Of Broadband

Households
Broadband User Growth Compared With P2P Usage
70

Millions of Users

60
50
40

Broadband

30
20

P2P

10

-00
De
c- 0
0
Ma
r-0
1
Ju n
-01
Se
p-0
1
De
c- 0
1
Ma
r-0
2
Ju n
-02
Se
p-0
2
De
c- 0
2
Ma
r-0
3
Ju n
-03
Se
p-0
3
De
c- 0
3
Ma
r-0
4
Ju n
-04
Se
p-0
4
De
c- 0
4
Ma
r-0
5

Se
p

Ju n

-00

Source: Pew Internet Project, NPD MusicWatch Digital

Education

Artists

Government

ISPs

Universities

Artists

FTC

Government
Congress

States
November 6, 2003
Dear Mssrs. Falco, Rosso, Yagan, Bildson, and Weiss, and Ms. Hemming,
We are writing to encourage you to voluntarily take the following three common-sense
steps to reverse this troubling trend and help educate and protect P2P users.
1. Provide a Clear, Conspicuous, and Meaningful Notice & Warning to Users

about the Legal Risks of Using P2P Software

2. Incorporate Effective Copyright and Pornography Filters
3. Change the Sharing Default Setting

Letter signed by: Senators Lindsey Graham (R-South Carolina), Dianne

Feinstein (D-California), Gordon Smith (R-Oregon), Dick Durbin (DIllinois), John Cornyn (R-Texas), and Barbara Boxer (D-California)

Governor Schwarzenegger Prohibits Use

of State Resources for Illegal
Downloading of Copyrighted Material
"So many of the entertainment industry's talented
musicians, actors, writers and programmers devote their
careers to creating products that enrich our society. We
need to do our part to protect the creative and
intellectual property they work so hard to create for the
rest of us." said Governor Schwarzenegger. "Today
California is taking a stand against use of state
resources for illegal downloading of this material and
standing in support of the work of these talented
Californians."

FBI

ISP Sensitivity Enhanced:

Then

Exactly where and

how to find the good
stuff

 And Now

* Copyright infringement liability:

Using popular file sharing software like KaZaa, Limewire, Morpheus, Grokster or BitTorrent to download
and share copyrighted music, videos, software and other materials, without the permission of the
copyright owner is illegal, and the financial penalties and potential criminal liabilities can be significant.
The fines for illegally downloading copyrighted material can be up to $150,000 per work-that is, for
every song, movie or game-in addition to legal expenses in processing your case. The copyright law may
also subject you to criminal liability in certain instances.

Universities

Legal Options at Universities

(03)

Today
California State University
campuses:
Sacramento
Humboldt
Stanislaus
Chico
East Bay
Sonoma
San Jose
Maritime
San Francisco Monterey Bay

Fresno
San Luis Obispo
Channel Islands
Los Angeles
Dominguez Hills

Long Beach Northridge

Pomona
San Bernardino
San Marcos Fullerton
San Diego
Bakersfield

Middlebury College

Cornell University
Rochester Institute of Technology

University of Wisconsin- Eau Claire

Thomas College

University of Rochester

University of Washington at Seattle

University of Minnesota

Penn State University

Baruch College

Eastern Michigan University

California State University*

Tufts
Hofstra

University of Colorado at Boulder

Purdue UFt. Wayne

Northern Illinois University

Marietta
College

Yale
Rutgers U.

Purdue University- Calumet

Drexel
U. Of Delaware

Purdue University
University of California*

University of Missouri
University of Denver

DePauw University

Wright State
University

Ohio University

Virginia Tech

U. of Maryland
The George
Washington
University

Vanderbilt University
Lyon College
University of Tennessee
University of Southern California
University of California
campuses:
Riverside
Berkeley
San Diego
Davis
San Francisco
Irvine
Los Angeles Santa Barbara
Santa Cruz
Merced
Yellow stars denote campuses covered in the recently
announced Cdigix opt-in partnership with UC and Cal State.

Henderson State University

Western Carolina University

University of
North Carolina

UNC, Wilmington
Duke University

Wake Forest University

N.C. State University
Texas A & M
Tulane University
Trinity University

*Adelphi University
*Goucher College
*North Carolina A & T State University

University of Miami

Dirty Deeds Done Dirt Cheap

Physical Piracy

Challenge: Pirates Have Become More Sophisticated,

Even as Barriers to Entry Decline

Mass production of high quality counterfeit CDs

Links to organized criminal syndicates

Multiple venues for distribution:

Retail Locations
Flea-markets
Street Vendors

RIAAs Response

Devote More Resources

Strengthen Leadership

New Director of Anti-Piracy Operations - Brad

Buckles (Former Head of ATF)
New Director of Investigations - Patti Galupo

Increased Searches / Warrants

Opened More Offices

Up 23% to 1649 in 2004

Collaboration with MPAA

One Way or Another

Anti-Piracy Highlights

Increased Seizure of Raw Materials for Counterfeiting

Seizures of Manufacturing Equipment Such As

Computers, Burners, Scanners, and Copiers Up Over
50% for 2004

Renewal of the Retail Blitz campaigned aimed at retail

establishments selling pirate product

Focus on major flea markets with 61 active

investigations.

Results
Counterfeit/Pirate Seizures

Millions of Units

10

(Cassettes, CDs, CD-Rs, Labels)

9.6 Million

8
6

6.9 Million
5.8 Million

4
2
0
2002

2003

2004

+65%
02 04

Grokster Decision

More Than A Case

Shatters the Complexities

Garden Variety Theft (Justice Breyer)

Sony doesnt obviate secondary liability where
infringement actively encouraged

Speaks to Culture As Much As Law

Audience: Downloaders / Elites / Parents
9-0 Especially Powerful

I Think I Smell A Rat

Grokster Supreme Thought:

The unlawful objective is unmistakable.

or
We can smell a rat when we see one!

Pre-Ruling, The Majority of

Consumers Sided With Our Position
Adults 18 - 54

MGM
50
Grokster - 39

MGM
43%
Dont Know
8%

Lean MGM
7%

Neither
3%
Grokster
31%

Lean Grokster
8%

Source: Public Opinion Strategies

The Unanimous Decision Had A Big

Impact on Attitudes
Age 18-54
June 2005 - After Hearing Both
Sides
80%

80%

+11%

70%
60%
50%

July 2005 - After Hearing Court

Decision

70%

50%

39%

40%

30%

30%

20%

20%

10%

10%

0%

0%

MGM
Source: Public Opinion Strategies

+50%

60%

50%

40%

70%

Grokster

20%

MGM

Grokster

Consumers See More Lawsuits As Both A

Likely & Positive Outcome Of The Decision
Perceptual Map of Adults 18 - 54

Outcome Likelihood (by % Certain or Very Likely)

70%

Industry more aggressive going after

file sharing companies
60%

Negative Outcome,
High Likelihood

Positive Outcome,
Industry more aggressive going after
High Likelihood
file sharing individuals

Negative Outcome,
Low Likelihood

Positive Outcome,
Low Likelihood

50%

40%

More consumers will pay to

download
Kids will learn the right
lesson

30%

Record industry more likely to

invest in new and more artists

Innovation will be slowed

20%

10%
3

Source: Public Opinion Strategies

Perception of Outcome (1 Worst - 10 Best Scale)

All Good, But

For Broad Public, No Matter How
Compelling the Story, It Hasnt Been
Heard Nearly Enough

56% Havent Seen, Read, or Heard About the

Case

Most Consumers Support Suing Illegal

Downloaders, File Sharing Companies, or Both

Adults 18-54
34% Sue File Sharing Companies

Sue Neither
25%
4% Sue P2P Users
1% Dont Know/ Refused

Source: Public Opinion Strategies

Sue Both
36%

Consumers Make Little Distinction Based

on Number of Files Downloaded
Adults 18 - 54
70%

68%

65%

1000 Files

100 Files

Percent Agree

60%
50%
40%
30%
20%
10%
0%
Source: Public Opinion Strategies

Over and Over

So What Does All Of This Mean?

We Need To Tell Our Story Over and
Over Again
Message Heard Loud and Clear by P2Ps
Public Approval For User Suits

Ramp Up Numbers
Lower Threshold

Messaging

Rather than Old vs New, Tech vs Content, Plastic vs Digital

Real Issue is Legal vs Illegal

Property Rights Property Rights Property Rights!

We Are Morally Right; They Are Morally Wrong Bad Actors

They Cause Real Harm

Economic

Jobs

Culture

Whats Our Present Status?

Cultural Signals

New Product Explosion

Leno

My Generation

But Have We Lost A Generation?

If I told you I wanted a song, I could get it in three

seconds. Not even having to download it myself I
could get it in three seconds from any number of
sources.

I think it should be illegal, but I download because its

something I do.

Ill be downloading when Im 50

you cant charge me $20.00 for a crappy CD that

lasts 45 minutes long

Its not our responsibility to just stop downloading

Quotes from college and recent grads during focus group June 05

Click Click Boom!

Digital Consumption Exploding

350

Cumulative Tracks Sold

300
DIgital Tracks Sold (Millions)

Launch of Yahoo Music

Service & Grokster Decision
307

Rhapsody Launched

Tracks Sold In Quarter

250

224

200
155

iTunes, Napster 2.0, and

WalMart Music Downloads
Launched

150

110

100
70
42

50
19
0.0

0.3

0
1Q '03 2Q '03 3Q '03 4Q '03 1Q '04 2Q '04 3Q '04 4Q '04 1Q '05 2Q '05
Period

Yet Remains A Fraction Of

The Market
Consumer Spending On Recorded Music 2004
1.7% Downloads

0.8% Subscription

97.5% Other Distribution

Its Not An Either / Or World!

Future Is A Hybrid
Digital Consumers Are Big Physical
Consumers

Digital Consumers Are Big

Physical Consumers
Estimated Music Spending
(Last 12 Months)

$200
$180
$160
$140
$120

$173
$148

Spending On CDs Only

$53

$81

$87

$100

$9

$80
$60
$40

$95

Source: NPD

$92

$78

$48
$0
$48

$20
$0

Other Spending

Paid
Downloaders
(past 2 years)

Digital
P2P Users (past Buy CD's Only
Subscribers
2 years)
(13 years & up)
(past 2 years)

The Lines Are Crossing

More Adults Now Say They Have Downloaded
Using Legal Services Than Free P2P
14%

Age 18 - 54

13%

13%

12%

12%

11%
10%

Ever Used P2P

10%

9%

Ever Paid to Download

8%
7%
6%

6%

June 2004 Net Illegal

June 2005 Net Legal

5%
4%
June '04
Source: Public Opinion Strategies

June '05

What Do We Know About

the Habits of Todays Fans?
Emerging Challenges?

Some Buy More, But Most People Are

Buying Fewer CDs
All Ages Purchasing pattern

50%
40%
30%
20%

42%
28%

10%
0%

More

Source: The Taylor Research & Consulting Group, Inc.

Less

With The Most Significant Decline

Among The 16 24 Year Old Age Group
16 - 24 Year Old Purchasing pattern

50%
47%

40%
30%
20%

28%

10%
0%

More

Source: The Taylor Research & Consulting Group, Inc.

Less

Music Acquisition Is Only About

Half Through CD Purchases
How Music Was Acquired In The Past 12 Months (Dec 2004)

Burned (from
others)
18%

29% Burning / Ripping

CD's
51%

Ripped (from
others)
11%
P2P
16%

Paid
Downloads
4%

Source: NPD

Key Point
Burning and Ripping Are Becoming
A Greater Threat Than P2P

Burning Down The House

Burning Is A Real Problem

About 12% of Households Burn CDs

63% Burned 1 to 5 CDs In A Month

20% Burned 6 to 10 CDs

17% Burned More Than 10 CDs!

Source: NPD

We have no objection to
personal use burning

Top Burned Artists in April

(MusicWatch Digital Apr.05)

50 CENT
MARIAH CAREY
GREEN DAY
METALLICA
THE GAME
THE BEATLES
EMINEM
LINKIN PARK
LUDACRIS
NELLY

Source: NPD

# Songs Burne d
7,144,000
2,829,000
2,593,000
2,568,000
2,426,000
2,069,000
2,019,000
1,782,000
1,744,000
1,561,000

How Do We Build a Brighter

Future?

Specifics
Pivot to New Products and Services

DualDisc

Kiosks

Copy Protected CDs

Win The Message War

DualDisc

Combined CD / DVD On A Single Disc

Major Labels All Developing DualDiscs

Tremendous Consumer Acceptance

and Interest

Releases include Bruce Springsteen,

Rob Thomas, Kelly Clarkson, John
Mayer and many others

Kiosks

Allow consumers to create their own mix CDs

Can be used to expand in store catalog offerings

Standardization Initiatives

Packaging
Media
Security
Reporting

Copy Protected CDs

Includes copy protection, secure burning capability

Capable for use with both Windows media and

iTunes

Proven in Europe past two years, significant US

rollout 2005 (Sony BMG)

Technology evolving to address consumer

expectations

Win The Message War

We all need to be message ambassadors to win this

culture war.

The Court has given us a gift - moral clarity has been

established. Seize the moment.

We need to demonstrate adaptability to move debate

beyond issues of models to the core questions of
property and right versus wrong.

The Solution Depends on

Everyone Doing Their Part
Music Fans

Appreciate and respect copyright law

Enjoy Music

ISPs

Educate: whats legal & illegal;

advertise responsibly
Cooperate with copyright owners

The Solution Depends on

Everyone Doing Their Part
Recording Industry

Meet legitimate consumer demands;

Foster legitimate online systems
Work with technology community; Educate

Congress / Government

Highlight and enforce the law; Protect

U.S. Intellectual Property
Educate and protect consumers

The Solution Depends on

Everyone Doing Their Part
Artists & Publishers

Allow for digital distribution of works

Technology Companies

Manage interoperability issues

Enable seamless consumer experiences

The Solution Depends on

Everyone Doing Their Part
Parents

Talk to your children about what is legal

activity online
Be aware of kids online activity

File Sharing Networks

Go legit
Filters for illegal material

The Solution Depends on

Everyone Doing Their Part
Educators

Teach importance of copyright; Basics of

the law and Right v. Wrong
Academic institutions should value
thought

Retailers

Get the message out

Sell only legitimate products
Listen and respond to customers

Im Optimistic About The Future

Labels and retailers are experimenting to meet consumer

expectations

Kids increasingly are getting the right signals from their

parents, ISPs and their schools
Government is assuming a bigger role in enforcement and
education
Technology is making music more ubiquitous than ever
fostering demand
Lawsuits and the Grokster decision, have clarified the law
and affirmed the significance of our property
Our music family has pulled together well to fight for our
future