Future of the Music Industry

One of the benefits of my current life as a consultant is the opportunity to look at the inner workings of a number of different industries.  Often the problem that occasions my engagement is technical, but the solution entails strategic issues of how to address a changing market landscape.  The music business is no exception.  There are similar problems in other industries where the cost of distribution approaches zero, such as movies, news, and software, but I'll save that for future post.

There can be no doubt that the music industry as we have come to know it is in trouble.  According to the RIAA, revenues have declined from $14.1 billion in 2000 to $10 billion in 2007.  The problem is not that people aren't listening to music any more, but that they are receiving it in ways that bypass the traditional gates where the tolls were collected.

In the business model that obtained over the last few decades, the record labels functioned much like venture capitalists.  Just as a software entrepreneur (or team) with an idea would hope to get a VC to invest and vault the company to the big time, an aspiring artist (or band) would hope to sign with a major label would would invest in session musicians, studio time, engineering talent, and sometimes even wardrobe, hair, and plastic surgery in order to create a marketable product.  The label would use its cash and connections to promote the music on the radio and in retail outlets in the hope that it would catch on with consumers.  Most records never made back their initial investment, but those that became major hits could be very lucrative, and even those that didn't make back more than their initial investment and yield the artists a royalty check made them famous enough to make money playing live performances.   There were just three ways a consumer could listen to music: buying a record, listening to the radio, or going to a live performance.  While a consumer could copy a record to tape, the process was cumbersome and yielded mediocre results, so purchasing a recording (vinyl, tape or CD) was the most convenient way to obtain music and was a good source of revenue for everyone in the value chain from artist to retail store. Radio was another source of revenue, but was primarily a promotional vehicle, as evidenced by the statutory exception from paying performance royalties and the periodic payola scandals in which the labels would publicly be collecting royalties from radio stations while secretly paying those same stations (or their employees) to play the records.

Digital technology changed all of that.  Not only could consumers make perfect copies with ease and share them by burning their own CDs or sending them over the Internet, but the very way people discovered and consumed music changed as well.  Radio's influence as a promotional tool declined the the need for a physical artifact disappeared.

Radio, with its chicken-and-egg relationship to sales has waxed and waned in its value as a promotional vehicle.  Getting radio airplay was a key way of getting the exposure that would result in sales, and high sales of a record was the best way of getting "heavy rotation" of airplay.  Breaking a new song into the cycle required persuading the disk jockey to add it to the playlist, a process that occasionally involved methods of persuasion that were more financial than artistic.  In response, and in an effort to become more scientific in seeking listeners, radio stations centralized the music selection process and made it more rigid, reducing the promotional utility of airplay and paradoxically reducing listener interest.  Fortunately just as AM radio was ossifying into the rigid Top 40 format, FM caught on and the creative cycle repeated.  Then as FM became similarly restrictive, MTV came on the scene.  But then MTV became just as restrictive and then pretty much stopped playing music in favor of reality shows.  Now consumers are much more likely to discover new music via the Internet, a vehicle that is much more diffuse and places a higher value on what one's peers recommend instead of what a record label is promoting.

Just as the ability to force-feed music to consumers has declined, so has the perceived value of a recording.  Consumers have discovered that physical artifacts which need to be repurchased for each new type of device and carried from place to place are less convenient than digital files which can be played anywhere, and as Chris Anderson has pointed out  the price of digital products is inexorably approaching $0.00.  The problem isn't just the unsanctioned copying which the entertainment industry refers to as "piracy" but a shift in attitude among a new generation of consumers who are accustomed to getting all sorts of information for free.

The entertainment industry has always tried to maintain that there is a bright line between what is free and what is not, but the consumer has never seen it that way.  From the consumer's point of view, there is a continuum with purchasing a physical object such as a CD or DVD at one end and listening to the radio (with commercials) at the other.  In between are things like public radio (listen for free if you dare, but you really should pledge every so often) and making a tape of a song or TV show.  Giving a friend a copy of the tape was probably over the line, but no one cared as long as it didn't happen that often.  Ripping a CD to an MP3 and sharing the file with a friend feels the same, but since it is easier and the quality is better it happens more often, creating a major headache for the record company.  As much as the RIAA tries to liken sharing a file to stealing a CD, to most people it feels  more like reading a book by the light of their neighbor's porch.  To further complicate matters, the distinction between streaming a file and making a copy is an arbitrary one.  In the old days of FM radio, there really was a distinction.  The signal moved at the speed of light from the radio station to the listener's ear.  In the digital world, data is buffered and cached at many places along the way, so storing a file is really just a matter of how large is the cache and how long is the data kept around.  In fact some video-on-demand services keep the first few minutes of every movie on the hard drive in the user's home in order to minimize the delay when the user orders a movie.

Some factions of the entertainment industry hold out hope that there is a technical solution - Digital Rights Management - but this is a mirage.  As any computer scientist can explain, it is fundamentally impossible to create a completely secure system to play protected content, since the mechanism to unlock the content exists in a device that is under the control of the very person one is trying to protect against.  At best such systems discourage the casual copier, while interfering with many legitimate uses such as playing content on multiple devices.  An in the end such interference actually plays against the content providers, as when Apple's DRM prevents anyone from Apple from selling music that can play on the iPod.

Finally, even if the content owners could completely and absolutely control every aspect of what a user did with their files, there is still the problem of competition.  When the same material is available for streaming, and similar material is available for free from all the up and coming artists who can now afford to distribute their content on MySpace, it's hard to get people to pay a lot. They might pay a dollar or two for a track, but they aren't going to buy an album's worth of tracks unless they are all worthwhile, so the total revenue will still be lower than it was in the golden age of the CD.  Besides, a lot of CD sales were from people who already owned the same material on vinyl.  Now that the whole back catalog has been reissued and repurchased, people aren't going to shell out yet again for the same content.

So what is to be done?  We have a long way to go before we get to Chris Anderson's $0.00.  People will still pay for quality and convenience.  Look at iTunes, which has now surpassed Wal-Mart as the number one retailer of music.  Or look at bottled water, although the foodies are rediscovering the joys of tap water.  Another example is Public Radio, which manages to raise $2 billion a year through voluntary contributions.

And what about Quality?  The CD was widely seen as an improvement in the quality of sound, since it was free of the pops and crackles of a less than perfectly maintained vinyl record, but the CD embodies the compromises of the early 90's technology such as the 16-bit sampling necessary to fit 74 minutes of music on a 120 mm disc.  (The 74 minute capacity was an attempt to capture the longest-known work of classical music, Beethoven’s 9th Symphony.  Ironically, if performed with the metronome markings specified in Beethoven's score, the 9th symphony comes in at 59 minutes and 43 seconds. [Correction:  The Red Book Audio standard specifies a maximum length of 78 minutes and some discs hold as much as 80 minutes])  Subsequent efforts to squeeze the sound onto portable devices and send it over slow connections required lossy compression that further reduced the quality.  Most of this deterioration has gone unnoticed by a general public more likely to listen to music while driving or exercising than sitting quietly in a darkened room, but the subliminal effects of these distortions may have been underestimated as evidenced by Apple's ability to charge a premium price for 256 kbps AAC encoding on iTunes.

Most media businesses rely on multiple revenue streams, such a subscriptions and advertising.  The music industry has temporarily benefited from an accident of manufacturing costs which allowed it to subsist on product sales alone, but this era is drawing to a close.  Fortunately, music lends itself to diverse uses, including physical media, radio, downloads, streaming, merchandise, brand licensing, movie rights, tv commercials, ringtones, and live performances, all of which can be monetized through some combination direct payment (e.g. subscriptions or sale) and advertising.  Indeed, such a realization is behind some recent moves such as:

• JayZ signing with Live Nation
• Ian Rogers leaving Yahoo Music for Topspin Media
• Douglas Merrill leaving Google for EMI
• the recent MySpace deal with 3 of the 4 major labels
• artists such as Trent Reznor and Radiohead leaving the labels and selling direct to their fans.

What all these deals have in common is an assumption that the old model no longer works.  The established artists no longer feel well-served by the major labels, and the emerging artists are no longer waiting for the labels to invest in their future.  Artists were making music long before the invention of the record, much less the recording industry, and will be making music long after, but thr sources and uses of capital will change.  The successful artists of the future will find way to make use of tools such as social media to build awareness and a fan base, and will find new combinations of free and paid products and services to thrive and prosper.  The question for people in the music industry will be who will get paid, and how.  The question for listeners (and voters) is what kind of music will we get?

Next:

A look at some proposed soultions, including Fred Wilson's streaming, Warner Music's ISP tax and John Kelsey and Bruce Schneier's Street Performer Protocol.

Comments

[Dave Dupre]

As usual, a very good read. Personally, I miss the CD and the album before it for two reasons. First, I'm usually interested in the artist, not the individual track. It takes too long for me to research and find individual tracks. Second, I spent a LOT of time and money building a great music and movie system for myself and my family. One downside of this is that it exposes any weakness in a recording. With side-by-side testing, it is very easy to pick out the 128-bit MP3 from the WMA or Apple Lossless recording. As a result, I built my music server to only store lossless rips of my existing CDs (300Gig worth). I fear the new music world will not be that great for those of us that actually do sit in a room and enjoy some great music.

Don't even get me started with recording volumes. Of course, I can't find the article again, but a while back one of the audio mags had a great article exposing how iPods, etc. are causing most new music to be recorded at such high volumes that everything clips. It's an old speaker sales trick. Put two speakers next to each other, and the louder one will usually be perceived to sound better. Unfortunately, it doesn't sound too great running through a great audio system. It also drives me nuts when I have a playlist going and suddenly I have to dive for the volume control because a newer recording comes up.

I'm interested in hearing more about the new solutions.