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.
In the latest chapter of the resurgence of vinyl records, Tom Petty's reunion band, Mudcrutch this week released a vinyl version of their recent album. The package also includes an "Audiophile CD" that is made from the same master as the vinyl record. To quote one review:
