Quit litigating and start innovating

It's heartening to see that the UK music industry has kicked off the New Year full of optimism and with an open-mind to the potential of the Internet to re-energise its business. Echoing the kind of forward-thinking attitude that typified the decision by the Recording Industry Association of America (RIAA) to sue file-swappers last year, the British Phonographic industry has launched a lawsuit against online discount music retailer CD Wow, and possibly Amazon.com as well.

This week, the BPI announced that it has begun proceedings against CD Wow for importing CDs from outside the European Economic Area and selling them here for around £8.99, about £4 cheaper than the going rate in the high-street. While CD Wow probably calls this clever business practice, the BPI has another term: parallel importing.

The case is due to go to the high-court next month and, given the precedents around parallel importing, things don't look good for CD Wow. Back in 2001, Tesco lost its case against Levis over its right to sell cheap jeans imported from the US, where lower trade prices would have allowed the retailer to sell jeans at a 40 percent discount.

But if the BPI wins, it will probably be a short-lived victory. Just how much belligerent behaviour does the record industry think its customers will put up with? And given the twin pressures of CD piracy and peer-to-peer file-swapping, it seems ludicrous that industry executives are focusing their attention on legitimate retailers who are actually making money for them.

The CD Wow case seems harsh enough, but it now looks like the BPI may go after Amazon.com, according to reports in the Financial Times. Not content with seeing its traditional business eroded by piracy and file-swapping, the BPI has settled on the public-image coup of investigating one of the Internet's biggest success stories. That should really help get the kids back on side again.

This whole deal seems like PR suicide: moves like this will probably see more young people than ever file-sharing or buying from CD Wow just to stick two fingers up at an industry doing a very good job of portraying itself as unimaginative and out-of-touch. Not a great combination for companies whose target market is in its early teens and twenties.

The last few years have been tough for music execs, but at the same time, their intransigence has undoubtedly exacerbated the impact of the Internet on their business. The RIAA claims CD sales have dropped by 10 per cent since 2001 and around 7 per cent in 2002, and it puts the blame firmly on file-sharing. But the reality is that the negative PR whipped up by last year's lawsuits against file-swappers probably achieved very little. The real drain on the music-industry's bottom line comes from piracy not file-sharing.

According to the International Federation of the Phonographic Industry (IFPI), one in three CDs sold is a pirate copy. Some experts claim that at around £2.86bn, the pirate-CD market is so big that it may be worth more than the legitimate music market of every country in the world except the US and Japan. Given the average price of a pirated CD is around $4, none of which finds its way back to the industry, deciding to sue the likes of CD Wow for giving too small a cut of CDs that retail for twice that seems a little harsh to say the least.

But piracy is not the only issue. Another reason for the decline in CD sales is that the industry simply isn't making as many. The CD just isn't that popular a format anymore -- certainly not one worth launching two huge lawsuits to protect. According to RIAA figures cited in a BBC report, during the last two years the US music industry has dropped production by around a quarter. Experts put this drop down to the fact that music isn't as important as it used to be to teenagers. The record industry is now competing with mobile phones, computer games and DVDs for a slice of the youth market.

Given the changing dynamic of its business, it's hard not to think that the record industry would be better off embracing new technology than firing off random lawsuits that will serve only to alienate its customer base and damage its legitimate sales channel. Promoting legitimate file-sharing businesses and technologies such as SACD, which is a new high-quality CD format that cannot as yet be pirated, or DVD-A seems like a more positive approach to the problem. The main issue is that at the moment, it's the criminals and entrepreneurs who are pushing the technical envelope, not the music industry. Until, the RIAA and BPI start really innovating and dictating the technical direction of their business, they are always going to be left behind -- and forced to redress the balance through the courts.