Late last week the Irish high court issued their ruling in the case between Eircom and the Irish major record labels. As the Irish Times reports:

The companies and Eircom propose a “three strikes and you’re out” protocol for dealing with illegal downloaders under which Eircom will first give notice to the downloaders their activity is illegal and should be stopped. If it continues, they will be warned they risk having their broadband slowed down. If infringement continued, Eircom would send a third warning their internet access would be cut off altogether and they would be cut off.

You might agree or disagree with the recent ruling, and you might have an opinion on whether file-sharers are in the right or completely wrong, but that doesn’t interest us right now.

As the judge noted, this case is about copyright, and particularly about the ability of an artist to profit from their creative works. This is not a question of morals, it’s one of business. What interests us, and what should be of interest to everyone in the music industry is the simple question - will it work?

We think it will not work: it won’t lead to increased revenues for artists or record labels, it won’t create any more jobs in the music industry and it won’t help any more musicians make a living from their music. Here’s 10 pretty thorough reasons why:

1. It’s Been Tried Elsewhere

When analysing a big ruling like this, basing decisions on data becomes pretty important. Luckily, Ireland is not the first country to implement such a rule. Have a look at the graph below, on April 1st the 3-strikes law came into effect in Sweden and the country’s Internet traffic dropped dramatically.

This drop was widely attributed to the drop in illegal file-sharing, but soon enough, after the initial shock wore off, levels returned to normal and then surpassed the figures from March. (source)

2. File sharing will become more stealthy

As with many other activities, when the incentives are high and the risk is low, laws like this often just push the activity underground, instead of stopping it.

In cases like the Swedish directive above, we saw some pretty significant steps in this direction. The Pirate Bay launched a private, encrypted (VPN) file sharing service days before the Swedish legislation came into effect, and weeks after services like Mullvad, which offer you the chance to “Communicate anonymously and without getting spied on” saw huge numbers of Swedish citizens signing up to their service.

3. It’s Deja Vu All over again

Silicon Republic, a leading Irish technology site, wrote an article about the decision titled “The day the music [piracy] died in Ireland.” Is this headline any different to those written the day that Napster was shut down?

The same could even be said, as Adrian Weckler noted, about the obvious similarities between the case and the righteous outrage over cassette tape copying.

4. (dis)Connect With Your Fans

Here at Amp we spend all of our waking hours working with musicians to help them connect with fans through the Internet. The notion that an industry can somehow benefit by disconnecting it’s fans and potential customers is, quite frankly, insane.

This, in our books, will be the biggest reason for the unavoidable failure of the ruling. We’ve yet to meet anyone who can explain how kicking people off the Internet and pissing off potential customers is a viable business model for the the future?

5. Who is a “Pirate”?

Not only do we think it’s a bad idea to punish, annoy and disconnect your potential customers, but the thought gets even worse when you consider who exactly these file-sharing deviants are.

We’ve seen many studies over the years (BBC 2003, Guardian 2005, IFPI 2009) that all indicate the same thing - fans who file share also purchase plenty of music. Even the industry’s own reports, such as the Jupiter research (link to PDF) commissioned by the International Federation of the Phonographic Industry, show that compared to music buyers, music sharers (pirates) are…

• 31% more likely to buy single tracks online.
• 33% more likely to buy music albums online.
• 100% more likely to pay for music subscription services.
• 60% more likely to pay for music on mobile phone.

With these facts in mind, the question becomes “should we disconnect our highest value customers from our lowest cost distribution channel?” Yet somehow IRMA think the answer to that question is yes!

6. What is file-sharing?

Just as the concept of a “pirate” falls apart on closer inspection, trying to define “illegal file-sharing” also presents it’s own troubles. Here’s two quick examples from our own experience to illustrate the point:

We send music files to music bloggers and journalists day in, day out. These people are a vital part of the music ecosystem, helping to promote new artists and bring music to new audiences. As we’ve seen with the recent music blog takedowns by Google, laws like this can have plenty of unintended, negative consequences for music bloggers. Is it now only a matter of time before an Irish music blogger or journalist gets their Internet disconnected? If so, it will be a loss to the musicians, the fans and the industry as a whole.

And what about legal downloads on P2P networks? Here’s a link to The Brilliant Things‘ recent EP on both The Pirate Bay and Mininova. We used these sites as distribution channels as they are a great way to attract new fans at zero cost. Will these fans now get warnings from Eircom? Will they be able to access the downloads in the first place? Neither scenario is good news for the band.

7. P2P Killed The Radio Star?

Upon hearing the High Court ruling, Willie Kavanagh, chairman of IRMA, commented “The whole music industry has been decimated by illegal peer to peer traffic and our losses amount to over €60m per annum.”

We worry about some big assumptions in his figures, and his implications:

What does he mean by “the whole music industry?” Time and time again this statement is repeated by people in the industry, but what he should be saying is that “the recorded music industry - the selling of plastic discs - is on a downward trajectory.”

When we look at “the whole music industry,” the picture is completely different. And don’t just take our word for it, the industry groups themselves have been finding the exact same thing. Take for example, the PRS in the UK, who recently reported (PDF) that 2009 saw a 4.7% rise in the industry’s total revenue.

Ticket sales, digital downloads and performance royalties are all on the up, and combined they more than make up for the fall in physical sales. Better still, Musicians are making even more money directly from these sources, as record labels no longer get as big a cut.

8. Long Live The VHS?

Once you realise, from point 7, that the issue isn’t that “piracy is killing the music industry,” it becomes obvious that the “problem” is that fewer and fewer people are buying plastic discs.

There is no doubt that Willie Kavanagh and IRMA (The Irish Recorded Music Association) have noticed a drop off in CD sales in recent years. He blames it all on “illegal peer to peer traffic,” but what other factors could be at play here?

Take a look at the graph below, made from the RIAA (The Recording Industry Association of America)’s shipment database, which shows that digital sales are gradually replacing physical sales.

This graph looks like any other industry change - CD replacing Cassette, DVD replacing VHS - but many keen observers will spot the obvious revenue gap here - physical albums are being replaced by digital singles. Newspapers have noticed this too, their revenue is dropping as people no longer read poor quality articles that were bundled in the paper with the interesting ones. This is great for consumer choice, bad for sales revenue, but nothing got to do with piracy.

So one might assume that people are pirating albums now? Not so fast. Look at the recent sales figures which show a flattening of digital sales in the first 3 months of 2010. Once you look a bit closer at the numbers you see that there are two distinct changes:

1. Digital single sales have dropped 8% vs. 2009, since the major labels started increasing track prices from $0.99 to $1.29. No huge surprise there.

2. Digital album sales have increased by 16% year over year. Why? As Futurehit.DNA notes, “Simultaneous to singles increasing to $1.29, many albums are now often on sale for either $7.99 or $5 as part of Amazon’s monthly program. This means albums have shifted from a 10x cost to the price of a single to a 4x to 6x cost. Albums are now a perceived better value so consumers spend more.”

So again, these are massive changes in the industry with huge revenue implications, one as a result of distribution and the other because of pricing, but none of them have anything to do with illegal file sharing. So why would one assume that rulings against file sharing would do anything to improve the situation?

9. Prepaid Broadband

If your Eircom account gets barred for file sharing, just walk into any Vodafone, O2, Meteor or 3 store (there’s around 500 in the country, you’ll find one!) and ask for a prepaid broadband connection and modem. Use that for your illegal file sharing, if they disconnect that then just get another SIM card - they’re free! They’re not really traceable either as you don’t have to give your name or address to purchase one.

This is the simplest way we can think to illustrate the fact that if people really want to pirate your music, they’ll find a way. It also illustrates how technically difficult the ruling is to implement.

If I’m downloading music IRMA will send my IP address to Eircom to have me warned and disconnected. But what about the other people in my house on the same IP address? What if I’m at work, or in a café or a library or on a train? Who gets disconnected then?

This raises all sorts of technical issues that we barely want to waste time discussing.

As Adrian Weckler puts it: “I really wish that the music industry — and old men who sit as judges in courts — would use a fraction of the energy spent mustering up righteous outrage about ‘the internet’ and ‘file-sharing theft’ in coming up with new commercial music models.”

10. The Business Is Logic All Wrong

Several of the points up above make the case that technically, this ruling won’t stop piracy, and the rest make the case that stopping piracy alone won’t save record sales.

This is the biggest point that we fail to wrap our heads around - how do IRMA and the labels believe that punishing, irritating and disconnecting their customers is a long term, sustainable business strategy?

The music industry as a whole isn’t dying, it’s thriving, but if you define your role in the industry as only a “seller of plastic discs,” then no amount of legislation is likely to save you.

In Summary

You can agree with all of these points without ever having to agree or disagree with the principle or legal merits of the ruling. You don’t need to debate whether “file-sharing is wrong” or discuss whether or not copying a digital file is actually “theft.”

All you need to realise is that rewarding your customers for good actions is better than punishing them, that connecting with your fans is infinitely more desirable than disconnecting them, and that any potential business model will be more successful if it capitalises on market trends, instead of trying to fight against them.