What's with "taxing" music downloads, eh?

Just back from my visit to Calgary for a conference.

In a decision Thursday that made headlines here in Canada but was largely ignored elsewhere in North America, a government body decided to retroactively impose a mandatory 3.1% royalty on legal music downloads to compensate songwriters and composers.

Among the very limited news coverage south of the 49th parallel, Slashdot proclaimed "Canada May Tax Legal Music Downloads," based on a secondhand report in Electronista (called "Canada to tax legal digital music downloads"). Any money collected under the coercive power of the state is a form of taxation. On the other hand, the money is not being paid to the government, but to SOCAN (Canada's answer to ASCAP).

In the only decent story on the subject, the Global and Mail notes that the new 3.1% royalty adds onto the 7.9% fee being made to music publishers. On a 99¢ (CDN) download, the label gets 60¢, these royalties run 11¢, the bandwidth is about 1¢ and the credit card companies (for small transactions) get 10-20¢. While the iTunes Store has set a 99¢/song ceiling on prices, one executive predicted these royalties could push pricing past one loonie (CDN 1.00). Canada also has a tax (or mandatory royalty) on blank CDs and music players to collect royalties for artists.

In some ways, that's double jeopardy because [if it's at all like the US] the songwriters were already getting compensated by the record labels out of that 60¢; however, I suspect (as on the US) the royalties were based on a physical good rather than an information good. When I did my “digital music" case 5 years ago, I estimated that 28% of the wholesale price of a CD was for manufacturing and distribution, which record labels used as an excuse to limit songwriter royalties. With digital downloads, everything but the royalties is gross profit: if the download volumes ever match physical ones (they won't), record company profits should be higher than they are today.

Despite this potential inequity, I think it's a bad idea to set royalty rates via government fiat. Exhibit A is the March 2007 decision by the equivalent US panel to increase record label payments by Internet radio stations (beyond those of other countries) to more than 100% of revenues. Over the centuries, the only accurate way of setting prices has been through negotiations between with multiple competing buyers and sellers. Whether or not the artists were getting a fair price beforehand, the actions of the US Copyright Royalty Board and now the Copyright Board of Canada have only reinforced that point.