An increasing number of countries are adopting new laws aimed at curbing online infringement, most involving graduated response systems intended to combat illegal file-sharing. One critical question will be the extent to which these laws achieve their goals, and have an impact on consumer behaviour - moving consumers from illegal sources to legitimate online services. While these laws are still in their infancy, and most are either not yet implemented or just beginning to be applied, there are initial indications of a correlation between public awareness of such a new law (and of new risks from file-sharing) and increased take-up of legal offerings. This suggests that even in these early stages, the introduction and publicising of anti-file-sharing legislation is having some positive influence on the overall digital market.


FRANCE

After years of damage from digital piracy, France has led the way with legislation to tackle the problem. In 2010 the French market is showing a noticeable improvement. While the new law is not yet implemented, the extensive publicity surrounding its adoption has communicated to the public the government’s commitment to put a stop to illegal file-sharing. This seems likely to have contributed to the market increase.

The “Creation and Internet” or HADOPI law entered into force in October 2009. The new law enables the administrative authority HADOPI to send warnings to users that they are infringing copyright. After two warnings within a period of six months and a third infringement within a year, the authority transfers the files of repeat infringers to the criminal courts, where a single judge will be empowered to order the suspension of the user’s internet access for up to one year, as well as other criminal penalties. The government has now adopted the necessary implementing decrees and the graduated response system is expected to begin operation this fall.

The French music industry had seen a continuous sharp decline for seven years, with music sales falling by 52% in value between 2002 and 2009. In the second half of 2009 the market started to recover. By the end of 2009 physical sales were down by only 3%, and in the first half of 2010 they were up by 2.5% in trade value. While these are modest results in the context of the sharp declines of the previous years, they mark a significant shift into positive territory.

Digital sales are also seeing improvements, with 2009 seeing strong growth in online sales (+67%), although these results were offset by a 44% decline in mobile revenues. In the first quarter of 2010 total digital music sales in France were up by 29%, with online revenues up 51% and streaming services doubling in value.

This improvement in the French market can be attributed to various factors. As to the physical market, strong sales of international repertoire in 2009, led by recordings of Michael Jackson and The Beatles, coupled with a recovery in local repertoire sales from the end of the year, helped drive the rebound. The digital market in France is also growing strongly, and streaming services such as Deezer and Spotify are increasing in popularity. These services help draw users of P2P to legitimate services and drive digital album sales.

The beginning of the market recovery coincided with the adoption of the HADOPI law. It appears likely that the intense media coverage of the new law has had an educational impact even before its actual implementation, helping persuade consumers to migrate to legitimate services.

This conclusion is supported by consumer research carried out between adoption and implementation of the law, which pointed to a likely positive impact on the market.

• 69% of French consumers said they would stop illegal downloading if there was a risk of seeing their internet connection suspended or being fined €1,500

• 77% of French consumers would be willing to check on others in their household (children, relatives) if there was a risk of their internet connection being suspended

• 66% of French consumers would be encouraged to use legal sites if HADOPI warning notices were sent as a consequence of illegal downloading

SOUTH KOREA

In South Korea improvements to the legal environment, combined with a range of legitimate offerings, appear to have contributed to a marked increase in legitimate music sales and revived investment in local music.

Conditions for the music industry have improved in South Korea since 2007. The government has brought a more copyright-friendly approach to a market previously plagued by online piracy and a decimated physical music sector.

In July 2009 a new graduated response law came into force. The law authorises the Ministry of Culture and Tourism to order online service providers to issue warnings to infringers and suspend their accounts after three warnings for a period of up to six months. The law also provides remedies against infringing online forums and allows the Ministry to order ISPs to close such forums for up to six months. Ministry orders may be issued either on the basis of rightholders’ complaints or at the government’s initiative. The law has now begun to be implemented, with letters sent to ISPs notifying them of user infringements.

There are already signs that the improved legal environment is having an effect. There is now greater activity in the legitimate music sector, including new deals between music companies and new partners seeking licences for music distribution. Legal MP3 subscription services offering a wide range of domestic and international repertoire, such as Soribada, M.Net Media, LoEn Entertainment and Neowiz Bugs, have taken off.

Alongside these new services, major operators such as social networking sites Cyworld and Naver have notified their customers of the change in the law, thereby boosting consumer awareness of the potential risks of file-sharing.

South Korea has also seen the return of investment in local repertoire, after years of high piracy levels restricted investment in the sector. Music companies are again investing in new talent, marketing and A&R.

There are already some indications that publicity around the new legislation has had an impact on consumer behaviour. Research conducted by the Korean government in October 2009, shortly after adoption of the graduated response law, showed that 42% of respondents were aware of the new law. Of those, 52% said they had been informed via TV, the remainder via the internet. After the implementation of the law, 21% of respondents said they had tried a legitimate music service.


SWEDEN

Sweden has seen both high-profile anti-piracy legislation and litigation, combined with the growth of popular legitimate alternatives such as Spotify and the involvement of ISP Telia in providing a music service to its customers. This combination helped bring about a sharp rise in music sales in 2009, with overall sales up 10% and digital sales doubling year-on year. The picture in the first half of 2010 remains positive: digital sales have doubled compared to the same period in 2009, now representing 32% of record company revenues in Sweden. The overall market was up by only 2% during the period, however, due to a decline in physical sales.

The high-profile legal developments in Sweden in early 2009 appear to have had a significant and positive immediate impact on consumer behaviour. In April 2009 the IPRED law was enacted, bolstering the music sector’s ability to take action against illegal file-sharing. The new law enabled rightholders, via a court order, to require ISPs to provide the identity of individual infringers. At around the same time, in March 2009, the trial of the Pirate Bay founders ended in criminal convictions for the four defendants, and attracted huge publicity. Coinciding with these developments, Spotify gained popularity by receiving a lot of media attention as the legal alternative to The Pirate Bay. The combination of these factors appeared to have an immediate impact: overall internet traffic in Sweden fell in the region of 40-50% in April 2009, according to infrastructure monitoring company Netnod. At the same time it was reported that several BitTorrent trackers including Nordicbits, Powerbits, Piratebits, MP3nerds and Wolfbits had closed down.

Research carried out by GfK in June 2009 found that 60% of music file-sharers had stopped using P2P or reduced their activity after the introduction of the IPRED law. Of those, half (49%) said they had moved to using Spotify. By October 2009 Spotify had reached 17 per cent of the Swedish population.

Although internet traffic in Sweden has since then gradually risen to the levels seen prior to April 2009, this does not necessarily reflect an increase in music piracy. Numerous studies indicate that an increasing share of internet traffic is being accounted for by streaming, video services and direct-download services like RapidShare and Megaupload, which involve bigger files such as films and TV series. And Spotify traffic itself is contributing substantially to the rise – in 2009 alone there were more than four billion streams from the service.

Digital music sales in Sweden have continued to see strong growth with Spotify driving much of this increase, although other services like iTunes are also growing.

The combination of both increased deterrence and legitimate alternatives has resulted in a significant market turnaround in Sweden. The IPRED law and The Pirate Bay verdict were instrumental in creating an opportunity for a shift in behaviour, which was harnessed by Spotify and other legitimate services. These combined factors continued to have an impact in 2010, with first half figures suggesting further more modest growth, but without additional legal reform this initial recovery is not likely to be sustainable.


TAIWAN

In Taiwan, a challenging music market has seen some improvement on the physical side, but has stayed flat on the digital side, where a newly-enacted graduated response law has not been publicised or yet been implemented.

A new law providing for graduated response took effect in July 2009. The law requires ISPs to notify subscribers that their accounts will be suspended, in whole or in part, if they are subject to three notices of infringement. Failure to comply with the termination requirement will disqualify the ISP from eligibility for safe harbours against secondary liability for their subscribers’ acts of infringement.

There has been some improvement in the market in Taiwan, with overall music sales up 3% in 2009. It is not surprising, however, that the new graduated response law has not yet had much impact on consumer behaviour online, as public awareness has not been developed due to the lack of publicity or implementation.
 

UK

Coinciding with press coverage of the introduction and debates over the Digital Economy Act (DEA), digital revenues have increased in the past few months in the UK. At the same time, P2P users reported decreased usage due in part to consideration of the DEA.

The DEA, which establishes a graduated response process that can lead to possible sanctions including temporary suspension of repeat infringers’ accounts, was passed in early April 2010. Under the new law, ISPs will be obliged to notify subscribers whose accounts have been reported to be infringing, and to keep records of reported subscribers on an anonymous basis. These obligations will be underpinned by an “initial obligations” code issued or approved by the regulator Ofcom. The Secretary of State will have the power to oblige ISPs to implement technical measures to limit internet access for repeat infringers, including suspension of accounts, from 12 months after the initial obligations take effect. The law also empowers the Secretary of State for Business to enact regulations to allow courts to block any site which “the court is satisfied has been, is being or is likely to be used for or in connection with an activity that infringes copyright". It is expected that the first subscriber notifications will be sent and the initial obligations code will be in place in early 2011.

Again, although the new law is not yet in operation, there are some indications that the publicity around its enactment has had a positive impact on the UK music market. Digital revenues increased by 48% in 2009 and 27% in the first half of 2010. In addition, research by Harris Interactive carried out in November 2009 found that news reporting on possible deterrent measures, including those contained in the DEA, were preventing some P2P usage. Among the 29% of P2P users who claimed to have decreased their file-sharing, 19% gave as a reason concerns about new deterrents (“recent news about the government thinking about penalties” or “about filesharers getting into trouble”, or fears of getting caught, ISP monitoring, warnings or disconnection).