Content owners must heed the warnings from the music experience

OC&C Strategy Consultants

At the same time, some eight billion tracks were exchanged by users of pirate sites offering free music downloads - and up to 2.7m people at any one time are logged on to them.

The report is based on interviews with more than 50 US and UK record company executives, online retailers and digital service providers.

The music "majors" - the five companies who dominate much of the industry - have invested heavily in two online services, MusicNet and Pressplay, to head off the threat from free services, of which Napster was the best known.

Napster was effectively shut down by legal action in 2001, and MusicNet and Pressplay have since launched limited services.

MusicNet: Touted as industry's answer to Napster

But the report says that a host of sophisticated peer-to-peer file swapping services, such as Gnutella, Morpheus and Aimster, have emerged to take Napster's place.

User base

These services now boast a user base larger than Napster's - and are proving harder to shut down.

Napster, which relied on a centrally-maintained computer server to manage traffic and locate music files for users, has proved vulnerable to legal action for copyright infringements.

It is still in the throes of reorganising itself as a legal, paid-for service.

But the new generation of music file-swapping services lets users search the computers of other people in the network to find the music they want.

Once the file is found, it can be directly downloaded from that computer - without the central server or company structure to target for copyright infringements.

Impact

The report claims the impact of these file-swapping services has already been felt in conventional music sales.

Napster: Still due to relaunch as paid-for service

The report estimates that 5% of CD sales were lost to digital piracy in 2001 - a figure which could rise to 10% in 2002.

The effect is also seen in the rapid, international exchange of pre-release copies of new singles.

The report estimates more than 200,000 copies of Britney Spears' single I'm A Slave For You were downloaded before the record's official release in October 2001.

The OC&C report concludes: "Labels will have to accept lower priced and lower margin models for digital sales in order to compete effectively with pirate services."

The report ends with a warning to other owners of intellectual property.

"Content owners must heed the warnings from the music experience - film, software, games, books, scientific journals and many other types of content are increasingly widely available online," it says.