Canadian Heritage Committee on Oct. 28th, 2010

[The Chair, Conservative, Michael Chong]

Welcome to the 26th meeting of the Standing Committee on Canadian Heritage on this Thursday, October 28, 2010. We meet today pursuant to Standing Order 108(2) about our study of the emerging and digital media: opportunities and challenges.

We have in front of us today on our first panel two witnesses representing two different organizations. From the Canadian Independent Music Association we have Mr. McKie, who is the president and chief executive officer. Welcome. And from the Songwriters Association of Canada we have Mr. Quarles, who is the executive director.

Without further ado, we will begin with an opening statement from Mr. McKie.

[Duncan McKie, President and Chief Executive Officer, Canadian Independent Music Association]

Thank you very much, Mr. Chairman.

I really appreciate this opportunity today to address your committee, and thank you to the committee members for inviting us.

First of all, I apologize for speaking English only. If you have any questions in French, I will try to answer them.

[An hon. member]

Try to make an effort.

[Duncan McKie]

All right, I will make an effort. My wife is from Val-d'Or so I have to speak French.

Thanks again.

The Canadian Independent Music Association, formerly known as CIRPA, has represented the interests of Canada's English-language domestic music production companies for 30 years. Today CIMA has over 170 member companies, including recording companies, music publishers, managers, agents, and other musical professionals from across the country.

CIMA is primarily concerned with the continued production and commercialization of English-language Canadian music and the support of the businesses and creative individuals who make Canada's music production industry unique in the world.

Canada produces some 2,000 new musical titles—that is albums in English—every year. This productivity has remained constant over the past several years despite the substantial issues faced by the industry with the advent of widescale file sharing. Canada has developed a system of regulated Canadian content requirements for radio, combined with financial supports from the Department of Heritage and others mandated by the CRTC to produce this outcome.

The Canadian system is much admired and often envied by other countries that did not have the foresight nor the political will to implement similar systems. Most of Canada's current musical production and most of the recent catalogue of musical works have been digitized and producers are aware of and are meeting the needs to distribute their works throughout the world in digital form with the correct formats and meta-data to allow the tracking of sales and distribution. This effort has been ongoing for some time, and it's beginning to show results as Canadian companies collect on international sales.

However, the digital age also brings with it a new means of promotion and a wide array of tools to encourage sales through creative marketing. It allows the media to access markets for new materials and makes worldwide distribution possible with considerably lower costs than in the physical world. Using social media and other tools makes it possible for our creators to connect in new and different ways with a much broader marketplace, and therefore brings Canadian creativity to a new audience.

The Canadian music industry has been one of the first of the cultural sectors to embrace this new reality and use it to our competitive advantage worldwide. The Canadian music industry has been one of the most innovative in developing a global marketing and distribution system, one where it's possible to sell Canadian content online in the newest and largest emerging marketplaces, like China and India and growing economies like Brazil, Russia, and Korea, as well as traditional marketplaces like the United States, the United Kingdom, and the European Union, where sales of recorded music are more robust, and in many cases improving.

Despite this progress, we are still hampered by widespread digital piracy in Canada, both at the level of individual consumers and on a more organized basis from P2P--peer to peer--sites, which operate without restriction. This has meant a well-documented, precipitous decline in domestic record sales. This decline has negatively impacted the ability of the domestic Canadian producers to create sufficient income to pay their debts and to reinvest in new materials, and most importantly, in Canadian artists and musicians.

Some pundits have suggested that this is only an issue that affects the largest players in the international music industry, but this is a fallacy and deflects attention from the Canadian situation, where small domestic players are more severely at risk than the international entertainment companies that operate in Canada.

Canadian sales of digital musical content are about half of that in the United States, and where Britain and Germany respectively have over 50 and 40 legal domestic download services, the Canadian number is less than half that, and many are simply white label copies of one another. And where mobility systems such as Nokia's come with music, and many others proliferate outside Canada, the Canadian market has been remarkably stagnant with respect to new music mobility services. We feel the lack of innovation in this area in this country is a major impediment to the expansion of sales opportunities for domestic producers.

In response to these challenges, domestically owned Canadian companies have become less dependent upon recorded music as a source of income and have developed other channels to create revenue. This new model, sometimes called the 360 business model or the holistic model, develops the artist's income potential through the sale of recordings in physical and digital form and includes revenue from publishing rights, TV and film licensing, live performances, and merchandise sales. Much of this business is done on the Internet and doesn't require a face-to-face business interaction. But at best, this is a promising transitional strategy, one that puts recorded music at risk and puts an enormous burden on the artist to tour.

Clearly that solution has its limits, and without some income from the recordings they produce, artists' careers will be short-lived, and the anticipated decline in recordings will certainly diminish Canada's reputation and cultural output.

Canada's creative industries must compete and succeed in a global marketplace. This is not news. But more than ever before, with the decline of the domestic market, success abroad will be critical to the long-term prospects of a musical act. At the same time, those countries where we are seeking access and success are increasingly active, using the same virtual tools the Canadians use to sell their materials and tours in North America.

European acts create their works and perform largely in English. MySpace pages representing foreign musical artists now number in the millions. Given this high level of competition, making a record and putting it out for sale on MySpace or YouTube just doesn't cut it. Where ten years ago a strong, independent Canadian artist might expect to sell 50,000 records in Canada, today 5,000 is considered exceptional. Award-winning acts will only sell 20,000 copies, at best, of their most recently released albums.

These numbers will not pay the bills. In the face of this limited success, Canadian acts are using public support and their own resources to tour abroad and to expand their audiences and create a market for their works. For example, as many as 350 Canadian musical acts might travel to Australia in any given year, and 140 might attend a South by Southwest music festival in Austin for three days in March.

This activity is critical to sustaining our industry. Although it may seem counter-intuitive that Canadians should perform abroad to sustain a cultural industry at home, we feel it is the only way we can continue to create sufficient commercial income to sustain our work. The more promising an act, if European and U.K. markets are examples of recent success, may foretell better prospects for Canadian popular music.

In order to continue to create and commercialize our popular music, governments at all levels must continue to invest in Canadian companies and artists, especially where access to foreign markets is concerned. As the organization most actively engaged in the development of music export opportunities, CIMA has led Canadian missions around the world. Our destinations include the U.K. and Europe, as far east as Bulgaria, Japan, China, Singapore, and Australia, South America, including Argentina and Brazil, and the United States, which continues to be our most important music export market.

With the help of the Ontario government we have engaged part-time representatives in London, Los Angeles, and Singapore to assist our companies and artists who wish to tour or sell in those regions. We provide an efficient and effective means of accessing these markets and supporting the Canadian musical brand in both languages.

We must thank the Department of Canadian Heritage for the ongoing assistance provided by the Canada Music Fund, and we can assure you that this assistance is used responsibly and productively. But more help is needed if we're to succeed in our goal of increasing Canada's worldwide music market share. In that light, benefits received in the form of copyright loyalties and levies, such as the private copying regime, will be critical to our ongoing success and should not be reduced or allowed to atrophy.

In the end, we should all remember that the success of Canadian music companies and their artists will be to every Canadian's benefit. Canadians recognize this and have always endorsed public sector support for their creative industries. Every Canadian takes great pride in the international success of artists such as Michael Bublé, Leslie Feist, Arcade Fire, Metric, and Bruce Cockburn. If you help us, we'll keep up the good work.

Thank you.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. McKie.

An opening statement now from Mr. Quarles.

[Don Quarles, Executive Director, Songwriters Association of Canada]

Thank you very much. I appreciate your inviting us here today.

My name is Don Quarles. I'm the executive director of the Songwriters Association of Canada. Je veux parler en anglais. I hope that's okay. My French is limited. Thank you very much for inviting us to speak.

Just as a quick summary, the SAC is a national non-profit arts service organization. We've been around for a little over 27 years. For the most part, we're advocates for Canadian songwriters, but we're mostly known for the educational work we do with aspiring songwriters right across the country. We've been very fortunate to be the beneficiary of some funding from Canadian Heritage, through the Canada Music Fund, via the SOCAN Foundation. We've been delighted to have been able to put on literally hundreds of events over the years that funding has existed.

Music file sharing is perhaps the most challenging problem facing the music industry, but at the same time it is potentially of enormous benefit to music creators and offers stakeholders a rare opportunity. I know that seems like a bit of a controversial statement, but it's something we certainly believe. We believe that music file sharing, once monetized, becomes its own solution, much as the case was with broadcasting when it was the perceived problem of the 1920s.

Netflix, the iPad, Kindle, and other devices and models are now providing significant legal alternatives for the film and book industries. Other cultural industries are working their way through the issues of the digital age, where one-size-fits-all does not necessarily work.

In the case of music, on the other hand, a decade after the advent of Napster, legal music services such as iTunes constitute less than 10% of music acquired over wired and wireless networks. The vast majority of performers and songwriters will never make a living on earnings from live performance, merchandise, and other sources.

There's a common myth that we hear these days: why not just hit the road and tour? Do 300 dates per year, sleep on floors, and drive a 12-year-old Ford Econoline van. You will still come back broke. That's usually the way it goes, not to mention, how do the songwriters who aren't in the band get paid, or the producer, or the recording studio, or anyone else for that matter? Yet millions of iPods, iPhones, and other music players are sold annually and tens of billions of songs are file-shared.

The SAC is a strong supporter of copyright. Really, we've looked at several different models and reached out to everyone who might be able to help with developing a solution, including sister creative organizations; labels, both indies and major labels; futurists; and international copyright experts. In the end, the SAC did what all great songwriters do: they take the best ideas and they put them into one.

The idea and solution were inspired by two tested and robust methods of monetizing copyrighted works. The first is the collective administration of performing rights, and the second is cable television. First of all, the performing rights method has been around for 160 years or more and going strong. Revenues—certainly in Canada—are up 40% in the same 10-year period that labels have seen a decline of almost 50%.

Similarly to performing rights, we propose that file sharing be licensed, not taxed or levied. The end user would be licensed; revenues would be pooled; and pro rata distribution, based on non-intrusive data collection, would be made to songwriters, performers, labels, and publishers. Consumers would continue to use the technology of their choice, such as BitTorrent, Gnutella, and social networking sites.

The other model, the cable television model, is where ISPs and mobile providers would become business partners. Basically, we could all access a choice of packaged content. One might argue that access and content have already been monetized. The bottom line is that we are hoping to bring that back to the creators.

There has been some discussion as to what you charge for something like this. It could be $1, it could be $5 a month. In order to give you some sense of the math, in Canada if it was $3 a month per household licence fee, that would generate upwards of $360 million annually. To put that in perspective, SOCAN, our performing rights organization in Canada, currently earns $250 million for performances. To compare that to the U.S., you could probably multiply that by ten and you would come up with a similar estimate.

There are other benefits for such a model--just in case you're worried about something other than money. Music file-sharing technologies offer a worldwide paid distribution system for creators at every level of accomplishment and every musical genre. For established creators, this model offers unprecedented global marketing and a distribution tool. For the aspiring writers, niche genres, and ethnic and aboriginal creators, it provides an opportunity to develop a global audience. Record labels aren't usually interested in this group yet, but they can still reach out and find an audience and make enough to keep developing their craft.

For record labels and music publishers, file sharing offers significant new and ancillary revenue streams. Their expertise in artist development, marketing, and promotion will be critical to the careers of emerging performers and songwriters.

Most artists and songwriters are trying to find a way to cut through the noise. That's always been the problem for artists and it still will be, and no one can help more than record labels.

ISPs can reduce their bandwidth costs, develop and participate in new synergies, and differentiate their services. They can store or cache popular songs on their own proprietary servers, develop their own portals, and sell value-added services, etc.

Ultimately, for the audience or the fans or those of us.... Sometimes we're referred to as users, consumers, or pirates. Unlike our colleagues at labels and publishing companies, songwriters and artists have a direct relationship with their audience. This audience likes what the artist is doing and therefore they've created a relationship. The point is we would like to give it to them and we would like to ensure that we get paid for it. It sounds like a win-win.

So for a reasonable monthly fee people continue doing what they're doing, no behavioural modification is required, and anti-infringement measures would finally make sense. According to a University of Hertfordshire study done in 2008, 80% of file sharers would pay for a legal way of doing so.

If you couldn't buy bread, you would have to steal it. It doesn't make sense to go after illegal file sharers until and unless you provide a legal option. If 80% are willing to pay and the other services, such as iTunes, are another 10%, now you're dealing with a 10% infringement problem and not a 95% infringement problem as we are today.

Like the clubs of Paris in the 19th century and the broadcasters in the 20th century, infringement has preceded licensing. Licensing these infringers led to innovation, growth, and great music.

Copyright owners are usually chasing users, not the other way around. And the notion that licensing will stifle innovation is simply not borne out by history. People have always shared music and they always will. Sharing music has always been a part of our culture. And those of us who make music are an essential part of that culture. We embrace it.

Those who work with us to monetize it will have a long--and we believe profitable--future ahead. The Songwriters Association of Canada, in concert with other creator groups, consumers groups, collectives, and rights holders, is working towards the initiation of a business-to-business pilot project to put these ideas to the test in the near future. We invite our colleagues and all stakeholders to explore exciting new options with us and we urge the standing committee to support this initiative in order to ensure that there will be a future for Canadian music creators.

Thank you for your attention and your consideration.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Quarles.

We'll have about 40 minutes of questions and comments from members of this committee, beginning with Mr. Simms.

[Scott Simms, Liberal, Bonavista—Gander—Grand Falls—Windsor, NL]

Thank you, Chair, and thank you to our guests.

I'll be splitting my time for my first question.

Just very quickly, we have received so much testimony here in the past couple of years about what is out there and this nebulous concept of the new business model, it's nice to see that you've come with some concrete examples. But I see the trend here, which is going towards the idea of that collective as opposed to getting in a situation where it's the user who pays directly, and if there is an infringement of that then obviously you go after that individual.

We're horrified by the fact that there are people going after young kids through courts, through litigation and that sort of thing. I have to come to terms with how the revenue is going to be pulled in from that collective and distributed evenly. Could you just give me a brief explanation to zero in on what you are talking about? A lot of people do not understand the concept of the collective and the licensing situation. Could you give us that very briefly? And then Mr. Trudeau will ask the next question.

[Don Quarles]

Absolutely.

The collective will probably work in a way that is not dissimilar to the way other collectives work. SOCAN is a good example. They basically distribute to artists and songwriters and music publishers. The private copy folks will also have a distribution.

I will walk you through the process. Essentially our concept is to create a paid access point licence fee, which in my case I would pay to Rogers. Essentially those moneys would then be pooled together and would go to a collective, and their distribution would have to be transparent.

Tracking is currently done by a number of firms. We've worked with one in particular to get data. That is a company called BigChampagne in California. Essentially they track BitTorrent traffic. They track files shared. In fact they do it for the major labels to tell them how much money they've lost. That's the irony.

In any case, money would be pooled. We're proposing it would be paid out on a pro rata basis. So let's say Bryan Adams gets 10,000 files shared that week and I get two. I'm going to get my share of that pie. So that is essentially how the collective would then distribute the money.

[Scott Simms, Liberal, Bonavista—Gander—Grand Falls—Windsor, NL]

It's no reflection on your talent, I'm sure.

[Don Quarles]

Yes.

[Justin Trudeau, Liberal, Papineau, QC]

You mentioned a $3 per household fee to the Internet service providers. I personally think this is a really interesting idea. It's one I've heard of before. I'm glad to be substituting in on a day when you are appearing, because I'd love to ask you a few more questions about how it works.

What's the average cost to a household for Internet service per month? Obviously there are different plans, but in Canada what are we talking about, roughly?

[Don Quarles]

I don't know. I can only speak to my own situation and those I'm aware of, but typically I think people are paying anywhere from $25 to upwards of $100 a month, depending on what they're getting.

[Justin Trudeau, Liberal, Papineau, QC]

How many different Internet service providers are there in Canada? It's not like cable companies, of which there are a limited number. I get the impression there are a lot of smaller operations. What sort of feedback have you gotten from the Internet service providers themselves to the idea that you might be tacking an extra fee onto what they're offering?

[Don Quarles]

I think right now they are balking at everything, because the Supreme Court has said they're not liable for what goes through their pipes. That being said, we have had some private discussions with a couple of ISPs that are very intrigued with this idea, because the way we've laid it out we want them to be a partner and not an adversary in this.

[Justin Trudeau, Liberal, Papineau, QC]

I think the idea is elegant, in that you don't have to pay individually for the songs you use, and all Canadians are sharing in the behaviour that all Canadians are engaging in as monitored by various analyses and surveys and traffic monitoring.

One of the concerns I have is that right now we are talking about Napster or Gnutella, and music sharing out there in general. But the increasing use of BitTorrent and larger files and downloading of Hollywood movies and such I think begins to fall outside the $3 return for musicians. So are we worried, or is there much thought put into keeping it limited to music? Are there worries that we're going to open up the floodgates and suddenly everyone will be open to movies as well?

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Trudeau.

Go ahead, Mr. McKie and then Mr. Quarles, and then we'll go to Mr. Pomerleau.

[Duncan McKie]

I want to make a comment or just inform you of other studies that exist on the same topic.

You're probably aware of the French three strikes laws that are now enforced. The studies that underpin those were done by an economist at the University of Paris. He's a very accomplished individual. He estimated that the value of music to an ISP with respect to delivering new customers, let's say, was approximately 20 euros a month. Even though you might peg it at three, our objection is that it's not enough, because our system has lost over $600 million in record sales since 2000. A great proportion of that, of course, has been lost by our labels. And we're the creators. We're not the songwriters, but we're the creators of the licensable goods in many cases and own the copyrights--

[Justin Trudeau, Liberal, Papineau, QC]

Are you against the idea?

[Duncan McKie]

I'm not against it, but I think it has some challenges and I think we have to understand the facts.

[The Chair, Conservative, Michael Chong]

Thank you very much.

Mr. Quarles, do you have a brief comment to that, or shall I go to Monsieur Pomerleau?

[Don Quarles]

It's our objective, of course, to ensure that the amount.... We'd be delighted if it was $20 a month, as you can probably imagine, but the reality is that we realize this is a part of the industry that's broken and that can't be fixed. Quite frankly, if you try to stop it, it's just going to appear again somewhere else times ten.

[The Chair, Conservative, Michael Chong]

Thank you very much.

Mr. Pomerleau, you have the floor.

[Roger Pomerleau, Bloc, Drummond, QC]

Thank you, Mr. Chair.

I want to thank both of you for very clear and interesting presentations.

Mr. McKie, you are in the creative space. We certainly agree that creators have to be protected. In the digital world, it is creators who are at the root of the organization's profit. No creators, no creation; no creation, no distribution; no distribution, no market; no market, no profit. So, the creator is definitely the most important part of the process. One might even say that the creator is the goose with the golden egg.

We have seen-—and all the groups which testified before you have said so--that the more there is concentration of the digital market at the international level, the less money the creators make. We saw that the new digital platforms, like MP3s, are not monitored and that people use them to make copies without having to pay anything. That is why my colleague, Mrs. Lavallée, who is a regular member of this committee, tabled here and then in the House a proposal to ensure that a fee would have to be paid when people purchase audio devices like MP3s that have an internal memory. This proposal has been tabled and debated in the House.

What do you think of this option, Mr. McKie, which would allow us to collect funds for the creators?

[Duncan McKie]

Well, the original law, which applied to tape recorders, essentially, the private copying levy, didn't just apply to tape recorders. If you read it, it's technologically neutral. It says, essentially, that any device that is capable of receiving an audio recording should in fact pay a levy. There should be a levy imposed on those devices.

But the judge in the Superior Court who made the decision most recently that digital audio recorders would not be subject to the levy made an error, in our view. Now, judges make errors. We feel he made an error. We did not have the resources to challenge that decision in the Supreme Court of Canada, unfortunately.

There's a legislative solution, but I know it's not very palatable, obviously. People don't like to impose costs against consumer goods, but, frankly, I think at the level of the law a mistake was made. The private copying levy should apply to any device that is capable of recording music. This is our official position and we've stood by that position all the way along. We don't feel, however, that that's a licence for people to download illegal materials. They are two different matters, and one should not confuse them.