Distributed Computing
Industry Association

Contents

• Introduction
• Situation Analysis for Recorded Music
• Changes in Consumer Behavior
• The Music Industry's Response
• The Opportunity
• Common Interests
• DCIA P2P Music Models
• Model A
• Model B
• Model C
• DCIA Background
• Ideology
• Mission
• Organizational Structure
• Member Voting Rights
• Involvement Drives Results

Winter 2004 White Paper

Introduction

Distributed computing, examples of which include software such as "file-sharing" or "peer-to-peer (P2P)" applications, represents an incredibly powerful and widespread advance in modern technology that has already been adopted by approximately 80 million consumers worldwide, and this number continues to increase at an impressive rate.

The shared resource deployments brought about by distributed computing represent a revolution in the way that people interact with one another, disseminate information, distribute media, conduct research, and solve increasingly complex technical problems. Simply put, distributed computing is a reality that cannot be ignored.

The intent of this paper is not to set forth arguments for the merits or liabilities of the technology, but rather to encourage the realization of its massive potential for commercial use when adopted by the music industry specifically. Models for content distribution and monetization structures, which offer benefits to all stakeholders, including consumers, technology, entertainment, communication, and software companies, will be presented and explored.

Situation Analysis for Recorded Music

Changes in Consumer Behavior

Music sales are in decline. According to 2002 and 2003 RIAA data, US retail music sales have fallen to levels below $990 million per month. The recording industry's retail sales are forecast to continue declining at a compound annual rate of 2.1% over the next four (4) years if current industry conditions persist.

At the same time, as referenced above, P2P adoption among consumers has exploded, which, among other significant outcomes, has resulted in some uses of the technology that infringe copyrights; although authorized, legal file-sharing is also rapidly increasing.

It is clear that new and creative models of packaging, distributing and pricing content, particularly music, are immediately necessary. The emergence of P2P has already begun to generate innovative business practices among industry early adopters, and the collaborative process DCIA promotes will help all parties achieve a system whereby sellers and buyers can join in mutually satisfying transactions that build a healthy and sustainable business, marrying commerce with science and creativity, and addressing the legitimate needs and desires of consumers.

The Music Industry's Response

To date, the recording industry has generally resisted P2P, while encouraging more traditional marketing of content on the web in a limited way. Some actions which have been taken by members of the recording industry include:

• Licensing content to non-P2P Internet sites for limited online distribution.
• Suing P2P software companies to slow technology proliferation.
• Lobbying Congress to curtail P2P expansion in various ways.
• Suing consumers to drive mass market away from P2P services.

As of yet, the major music labels have not yet engaged in legitimate online sales of music via the largest new marketplace for content, peer-to-peer file sharing.

If a similar strategy were implemented by the music industry in the offline world, the consequences would be devastating. For example, if labels refused to sell music through large brick-and-mortar retail chains like Wal-Mart, Target, and Best Buy (which were not factors in music sales twenty years ago), music sales would be crippled, nearly to the point of collapse.

The Opportunity

The 80 million consumers who currently utilize P2P represent only a fraction of the number who will embrace this technology as appealing new applications are developed and online access continues to proliferate in both first-world and developing nations around the world.

Exposure to creative content increases demand, and P2P offers a highly efficient distribution channel, as well as one which is uniquely configured to allow consumers to control their sampling, assessment, and acquisition behaviors. The exposure of creative content to tens - if not hundreds - of millions of consumers occupying the world of P2P will greatly expand the total market for this material. In contrast, the tactic of suing individual alleged copyright infringers may avert some small-scale infringement in the short term, but does little to increase sales and is not a viable long-term commercial solution.

Once content rights holders partner with other important stakeholders to develop viable business models for P2P, many current infringers will be converted into paying customers, which will result in significantly increased short-term and long-term revenue. Independent studies indicate that by wholeheartedly embracing a licensing system for online distribution of content including P2P, the music industry could grow retail music sales at a nearly 10% compounded annual rate over four (4) years - far outstripping projected GDP growth.

Common Interests

Content creators are interested in ensuring that copyrighted material is not infringed upon and can be monetized for the benefit of those who produce it.

Technology companies are interested in ensuring that the dissemination of information is quick, efficient, and responsive to the needs and desires of consumers.

However, it is crucial to understand that all involved parties are ultimately interested in the same result, a fair and effective business model that allows content and technology to live in harmony - with opportunity and profit for all. The following models are presented as potential solutions to reach this goal with respect to recorded music.

DCIA P2P Music Models

Three (3) models have now been proposed by DCIA: the first was presented to attendees at DCIA's Fall General Meeting on October 8, 2003; the second to attendees at The Western Show on December 4, 2003; and the third to attendees of DCIA's Press Conference on February 5, 2004.

For each model, Phase 1 represents the first major action that can be accomplished without the development and implementation of significant new technologies and/or changes in business infrastructures. Phase 2 of each represents a mid-term stage of implementation, providing additional necessary time (e.g. 18-to-24 months) for the development and implementation of new technologies and/or business infrastructures. Phase 3 of each model depicts the full, long-term (e.g. 24-to-36 months) implementation of all aspects set forth in the particular model, including significant technical, operational and marketing adjustments.

These models represent both holistic solutions for further consideration and also platforms to expose elements and options surrounding key issues that can help guide further discussion and lead to subsequent blueprints for viable new business practices. As well, solutions that prove effective for recorded music will, inevitably, help guide approaches for other content, media, and applications sectors.

Each model is based upon input from technology providers and music industry representatives, independently sourced music industry research and analysis, and the marketplace experience of DCIA Members. Detailed assumptions as well as supporting mathematical formulas are available upon request to DCIA members. Non-members may contact DCIA to schedule a private and confidential meeting at which this detailed information may be reviewed.

Each model is intended to represent all interests fairly, with opportunities for copyright protection, technological development and massively increased revenues for all stakeholders. Feedback on the proposed models is strongly encouraged, and those wishing to comment may do so via confidential correspondence with DCIA representatives or publicly within the context of DCIA meetings.

It should also be noted that the next steps are for a consensus of diverse industry interests to determine which of these models, or which aspects of them, should be further explored and refined for potential implementation. In this regard, it is clear that individual components of each of the current alternative plans carry different levels of benefit for different stakeholders, and pose different challenges of implementation. Quite possibly, business or legislative changes associated with full implementation of a model, or a blend of models, may be difficult enough that one or another component will have to be delayed or even set aside. The point is to assemble a set of elements that together promise to sufficiently and fairly monetize P2P file sharing in ways that are attractive to consumers and business interests, and that at the same time can be implemented within a time frame acceptable to all parties.

The direction that the DCIA ultimately takes in this regard will be ratified by its Members.

Model A

Presented at the DCIA Quarterly General Meeting, October 8, 2003

Implementation Stages

Sell content to consumers in the P2P marketplace - first by using DRM, then through universal ISP-based billing.

Implement and build-out the new business model in three phases:

• Phase 1: Make the content of top-five major labels available for sale in the P2P marketplace with existing credit-card billing
• Phase 2: Expand payment options for consumers by adding the option of charging music track downloads to phone bills
• Phase 3: Implement ISP-based billing that will allow for universal payments for the majority of downloads of copyrighted content

Model A - Phase 1 - P2P Music Sales with Existing Credit-Card Billing

Expand current business model of selling limited range of legitimate content in the P2P marketplace by adding top-five major labels.

Implementation and build-out:

• P2P distributors establish DRM - WMA library of content with existing digital assets and new assets provided via licenses from majors.
• Populate licensed content in priority position on search screens and activate use of credit-card payment.
• Post-rollout, majors continue to deliver new content into Kazaa and other P2P applications in the marketplace
• Promote to users the benefits of legitimacy and quality of content.

Target the approximately 600 million licensed downloads per month with a portion of those being paid for by credit-card registration, with low conversions to transactions initially, but showing growing acceptance and promise.

Prepare for phase 2 - telco-based billing:

• Negotiate payment deals with telcos to enable bill-to-phone.
• Evaluate regulatory issues to ensure consistent fair rates.
• Record artist bill-to-phone messages, introduce value-add and other up-sell.

P2P Adaptation of Business Practices from Successful Search Engines

As with sponsored links on search engines, licensed music will be placed at the top of P2P search results.

The monetization of P2P content searches is in its infancy -- comparable to 1992 in the traditional web search market.

Model A - Phase 2 - Expand Payment Options with Telco Billing

Expand P2P legitimate sales by making user experience more seamless with a bill-to-phone option.

Implementation and build-out:

• Turn on bill-to-phone features in DRM payment gateway.
• Promote use of phone and artist voice connectivity as benefit over unlicensed music.
• Monitor results and begin to add complementary smaller label and independent music into P2P platforms.

Project growth to approximately 1.7 billion licensed downloads per month with some expansion of proportionate credit-card utilization and much larger share of telephone usage so that monthly retail revenues in this time frame rapidly ramp to over $40 million per month.

Model A - Phase 3 - Implement ISP-Based Billing

Make payment of online music through P2P systems universal using ISP-based billing and file-hash-signature monitoring

Implementation and build-out:

• Work with ISPs collectively to enable bulk-billing solutions and pricing that resembles previously negotiated telco rates.
• Explore possible need for legislation to ensure that solutions develop for capturing data tags on traffic flowing between ISPs and end users.
• Negotiate with router manufacturers to provide a packet header and file hash turnstile billing solution to be implemented at the ISP level.
• Work with the music industry to establish databases of copyrighted files using file hashes.

Target 1.8 billion downloads of copyrighted files per month with sales revenue rapidly ramping to approximately $900 million per month with credit card and telco billing enduring as niches. Online music sales will grow to outperform traditional music sales.

ISP deliverables:

• Implement router solutions within a fixed time frame.
• Bill for registered copyrighted music flowing through their networks.
• Agree to suitable payment terms for music content.

Model A - Projections - Phases 1 & 2

Without the broken market, the industry would normally be expected to grow in line with GDP (2.7% per year).

If the music Industry does not embrace the new online distribution model, it will likely continue to see an erosion of sales (forecast to be -2.1% CAGR over 4 years).

In the short-term, credit card- and telco-based billing models create a niche retail segment and help to modify online consumer behavior.

Model A - Projections - Phase 3

The new business model will yield market expansion greater than the traditional model - growing at a 9.9% CAGR over 4 years.

The advent of ISP-based billing will radically change the way consumers consume music online -- They will be required to pay for downloads.

Traditional sales will never fully disappear because many will prefer not to interface with a computer or will want to buy special edition releases.

Model A - Overcoming the Gating Factors

Overcoming Political Gating Factors

• Commercial players to agree to and convey support for business model.
• Considered legislative actions need to be consolidated and focused upon solutions.
• RIAA members need to stop discrediting P2P and engage in substantive discussion.

Overcoming Trade Gating Factors

• Granting open licenses from major labels and establishing cohesive music industry view.
• Securing functional bill-to-phone suppliers at reasonable rates.
• Continuing to build successful user interfaces at application levels.

Overcoming Revenue Growth Gating Factors

• Lack of instant micro-billing (without registration) is key impediment to growth.
• P2P software companies must initially support a contiguous DRM solution.
• Telcos & ISPs must support final phases of new industry model.
• RIAA consumer education - to continue.
• Labels need improved digital production and marketing techniques.

Model B

Presented at the Western Show, December 4, 2003