Canada: Music Industry Sees Bright Digital Future

Canada's music industry this year faces the challenge of moving digital music from a niche market to mainstream status while grappling with the role of new online outlets.

As in the United States, the sale of physical CDs at traditional retail and online stores still represents the bulk of consumer spending on music in Canada. But Canadian rights holders are anticipating that digital outlets—online music services, ringtones and other platforms—will soon generate significant revenue streams.

"We're at the dawn of the greatest era in the history of the music business; I say bring it on," says Michael McCarty, president of EMI Music Publishing Canada.

"This is our future," Universal Music Canada president/CEO Randy Lennox says. "Between digital downloads and [master ringtones], there's a significant business out there."

At the same time as the legitimate digital music business evolves, and with more product available through more platforms than ever before, Canadian rights holders are aggressively seeking protection of their interests.

Graham Henderson, president of the Canadian Recording Industry Assn., acknowledges that there are significant differences of opinion between publishing and label sectors in divvying up new revenue streams.

"Publishers want what their rights have historically been worth," he says. "The record companies obviously disagree. There will come a compromise, because each side recognizes the need to get over this struggle."

McCarty agrees. "In order to accelerate business, the music industry has to make the new-media people's lives easier," he says. "But those people have to understand that various parties hold rights that have to be licensed and paid for."

Legitimate digital music services have represented only 1% of the Canadian distribution market, but efforts to steer Canadian consumers toward those channels has intensified since the Nov. 30 opening of the iTunes Music Store. It joined such digital download services as Puretracks, Napster, Archambault and Best Buy Canada's Bonfire.

Henderson predicts that digital music will account for 5% of Canadian music sales within this year.

However, EMI Music Canada VP Rob Brooks questions whether iTunes, with its 99-cents-per-track downloads, is the model that will ultimately drive growth for Canada's music business.

He points out that with the growth of digital music services, record companies face a seismic shift in their existing business model: one that sells 99 cent singles rather than a $15 album.

"Apple screwed the [music] industry on a global basis," Brooks says of the 99 cent downloads. "Steve Jobs was interested in selling iPods and more hardware. If Apple started at $1.99 [per track] we could have chiseled the pricing down as consumers reacted. But you can't price up."

Nettwerk Productions CEO Terry McBride counters, asking, "What costs do we really have? We release on CD anyway. We don't have marketing or promotion costs. If we could get rid of pirating, this would be rocking. It is already showing signs of being vibrant."

Casting a shadow over Canada's music industry, however, is a 2004 federal court decision that downloading or uploading unauthorized music files to the Internet does not constitute copyright infringement under current Canadian law. CRIA has since filed an appeal against the decision, which will be heard April 20.

Several sources forecast that successful digital music services will eventually offer multiple business models, including pay-per-downloads, subscriptions and streaming radio.

"For now, the subscription-based services are going to be duds, because they don't support the iPod," says David Basskin, president of the Canadian Musical Reproduction Rights Agency. "What I see coming is a subscription-based service that offers a combination of tethered convertible downloadable files for a bulk rate or on a sliding scale."

Sources argue that the business potential for master ringtones—which use the actual recording of a song—will expand with improvements in technology and more sophisticated cell phone networks.

This growth, they predict, will continue as carriers introduce new music-focused services and as mobile phone manufacturers introduce high-quality players into their handsets.

Basskin, however, argues that the potential of the ringtone business may be less than expected.

"The reason it may be a short-term play has to do with changes in technology," he says. "There are now cell phones that allow you to move songs from your computer to the phone and use them as a ringtone. There's also software that takes sound files or tracks off a CD for use as a ringtone."

Currently, many digital music files remain lodged in home computers. But the future, observers say, lies with digital content that can be transferred among disparate entertainment players.

"Ringtones and ringtunes are interesting sideshows, but they are not the long-term future of the music business," Basskin predicts. "There is a considerable opportunity to be had in online distribution of music to telephones just as there is to computers."