I started Bemuso in 2002 to provide information about music distribution for DIY artists. At that time big record labels were suing people who made file players and anything that moved online. Major labels never gave artists a fair deal and they are very inefficient. They routinely dissipated 90% or more of their income (and still do) making almost no profit. Their plans for the future were short-sighted, based entirely on safeguarding record sales. I described all this in The Money Sponge one of the first Bemuso articles.
2007 was a watershed for recorded music. Changes started by the web (1991) and MP3 (1995) finally went mainstream in spite of rather than because of the record industry. There is still some way to go before they take full effect but 2007 was the year it became obvious. Nobody seriously thinks big label subscription sites will replace iTunes any more (although Apple has now embraced subscriptions for the iPad and rentals for Apple TV). By 2008 DRM and the Major record labels were sidelined and I posted the first draft of this long overdue update to The Money Sponge.
The distance the record industry has travelled in coming to terms with filesharing can be demonstrated by four simple examples:
The Majors shut Napster but not Grooveshark, and they are promoting Spotify. It’s a mixed picture, partly because the 1998 Digital Millennium Copyright Act (USA) provides a “safe harbor” for web sites who take-down infringing material when notified. But for all their rhetoric about filesharing the Majors are obviously attracted by the idea. When they do license they aren’t exactly demanding—YouTube ran for years without licenses and even now hosts a great deal of infringing material.
So their position has developed but become contradictory and while they are too hard on individual filesharers they are clearly too soft on big filesharing companies. And they are unrealistic about streaming income—it’s no substitute for record sales.
It is now generally accepted that the failure of the big labels to license Napster in July 2000 was a serious mistake (there were negotiations but the labels couldn’t agree). The greed and hubris of their preferred strategy—selling SDMI copy-protected files and subscriptions through their own online shops—was doomed to failure. They were badly advised and not smart enough to see it.
From 1995 to 2010 Doug Morris was head of the largest Major label group, Universal. The record industry was his whole life—40 years of vinyl and 20 years of compact disc. In a 2007 interview for Wired he admitted he knew nothing about technology and didn’t know how to manage those who did (Steve Jobs came to the same conclusion when he negotiated the iTunes Store deal in 2002/3). Morris ran UMG when they invested tens of millions in Internet and copy protection ventures, he advised governments on the music business and (through the RIAA) sued filesharers. When he called the shots over UMG’s response to Napster he was 62 years old. He turned a deaf ear to customers and presided over the decline of the business, with the other 3 Majors. A few decades earlier they had dominated recording technology. Columbia Records (1948, vinyl LP) and RCA Victor (1949, vinyl single) masterminded a hugely successful format change and laid the foundation for the biggest market growth in recording history. But by the time CDs were introduced in 1982 technical leadership had moved to consumer electronics firms Sony and Philips and although the Majors pressed CDs for a few years even that job was finally outsourced.
(Now in his 70s and no more savvy about the web Doug Morris has moved from Universal to head Sony music.)
Today the mainstream record business is stagnant. CDs provide less than half their income and the rest is roughly split between licensing and digital sales. Since 2000 they have done little except cut costs and piggyback on the growth of other businesses. Mainstream CD sales decline every year. The decline in physical sales is particularly painful because they had such big margins, especially CD albums.
CD copy-protection is dead and DRM lingers only for subscriptions. Even Apple who had the most to gain from proprietary file protection, campaigns for and sells DRM-free music. But the record industry no longer has a universal format like the 45 or the CD—the tracks you buy online won’t play everywhere. And they don’t belong to you, you can’t re-sell them secondhand.
Now universal access has a new enemy: subscription log-ins. You can only share the streaming music experience on Facebook if you have the same service. And, of course, your subscription account playlists etc. disappear if you change services or stop paying. Turntable.fm shows how successful social streaming could be.
Big labels make frequent announcements for shareholders and Wall Street but they are out of commercial ideas. Their main ploy is to get revenue from related businesses: touring and merchandising with 360° artist deals; hardware royalties from file players (e.g. Zune); “all-you-can-eat” licenses from mobile phone users (e.g. Nokia); sharing advert revenue (e.g. Imeem, now bust). They act as though they still have a monopoly on their main product, the recording, but those days are gone.
The record charts tell us all we need to know about today’s record industry. The biggest artists are largely from past decades and megastar income is from world tours rather than hit records (footnote).
The once-Big Four are shrinking in a shrinking market. Apple Inc is far bigger than all the Major record labels put together. The record industry is smaller than the electronic games industry. It’s a minnow in the entertainment sector. The only Major label group asset that retains long term value is music publishing. (Lucrative master rights for 1950s and 1960s recordings started to expire until governments gave them another 20 years income—these are the Major labels’ crown jewels and when the master rights run out they are worthless.)
(The crisis in High Street record retail is deeper than the decline in physical sales. For some years record sales and big discounts have been moving to supermarkets. Most chart CDs are now bought with the groceries or online at unbeatable prices. High Street record retail would be in trouble even without the CD sales crash.)
Most indie labels have always been sharper than the Majors and better able to move with the times. They are more in touch with their audience and exploit new technology effectively, but the downturn in record sales has hit them too. 360° or general profit-sharing deals are more convincing with indie labels but the desire to get signed by any kind of label is not what it was. Indie labels have a future in promotion and management where they have real skills and they aren’t afraid of the Internet, but aspiring musicians no longer look to record labels when they start out.
For every musician, writer and performer the obvious first step is now DIY. Recording and distribution are within reach for everybody who has a computer. For many artists DIY is all they ever need, and many ex-big-label acts also find the flexibility of DIY compelling. Corporate middlemen still dream of rounding up the best talent and milking them like they used to, but they can’t compete with the freedom and low overheads of life in the wild.
This is where Doug Morris went wrong. There is no need for a new music business model. Everyone has the tools they need.
This century began with the Dot Com Crash when a stock market bubble driven by anything and everything Internet finally burst. A web site, a slideshow and a string of buzzwords was no longer enough. For a while financial common sense returned and investors sought viable business and real income but Dot Com frenzy is back. Now they call it Web 2.0.
Web 2.0 theory is that social networking tools (blogs, wikis, forums, podcasts, etc.) and user-provided content will create a new world where the rules of commerce are re-written. But the poster children of Web 2.0 (Wikipedia, YouTube and Facebook among others) are unremarkable functionally and enormous black holes for cash. It’s as though the Dot Com Crash never happened.
(To give credit where it’s due, Web 2.0 fortunes have been made siphoning venture capital and equity from gullible investors but that’s not relevant to the entertainment industry and it doesn’t have a long term future.)
Web 2.0 projects complain they can’t “monetise” their virtues. In other words they aren’t viable businesses but they think they should be. I mention them because their babble and speculation are everywhere in online entertainment today.
Think tanks, media consultants and futurology gurus have spawned numerous reports, blogs, seminars and books (The Long Tail, The Wisdom Of Crowds, Wikinomics, etc.). Let’s look at the boffins’ current plans for music.
Peter Gabriel’s We7, SpiralFrog, and others offered free downloads subsidised by embedded adverts. Advertising isn’t popular, it’s distracting. People don’t like it. The first thing people did with TV recorders was skip embedded advertising. The idea that artists can replace sales with advertising revenue is a pipedream. No one has made this work.
Embedded advertising must be “protected” by some kind of DRM or log-in, and that’s not popular either.
The big idea of Facebook and other communities is to build consumer profiles of users for advertising, sales or viral messages. This model has two big weaknesses. People rarely provide accurate information about themselves online and they actively take steps in public places to conceal who they are and what they’re doing. Online privacy is a major concern. Facebook has been forced to remove several intrusive features (like Beacon) and Phorm is under threat for covert ISP customer profiling. Google dropped a similar clanger with Buzz.
Making money from third parties by tracking customer behaviour is unproven. Every business on Earth tries to expand and exploit their own customer data but the idea that complex data can be abstracted and sold-on is fraught with obstacles.
If that wasn’t enough there is now considerable doubt that ratings are a useful basis for advertising on the web. Conventional wisdom says the value of TV advertising increases with audience numbers but a viral message online can get millions of “viewers” overnight without generating any significant demand for the product. Such fads are forgotten as quickly as they arise.
The attraction of these communities as music venues is also limited. MySpace, Facebook, Bebo, Second Life, Imeem and others promised Web 2.0 careers for musicians and other creative disciples but they are all “gated communities” or “walled-gardens”, ghettos with their own micro-audiences. Yes, Facebook has a lot of accounts but it costs nothing to create one. MySpace (now in decline) was the all-purpose music shop window of choice online with hundreds of millions of users. But why would any artist join or spend time on them all? The audience is everywhere and admission is free.
It is still possible that MySpace or Second Life, and perhaps others, could find viable niches if content resolution (multiple log-ins, multiple subscriptions) can be overcome but the record industry seems determined to pursue big bang “solutions” rather than scale through diversity.
On the face of it, this is right up the record industry street. Music is the biggest virtual product of all time. Second Life, World Of Warcraft and Farmville have sold their customers virtual islands, weapons, tractors and even virtual money. The attraction is community activity and status, and that seems ideal for music fans. Numerous independent artists (like Marillion, Imogen Heap and Trent Reznor) have taken their business online but they didn’t need Web 2.0 mumbo jumbo to do it. Astonishingly, despite the rhetoric there is no record industry innovation in this area.
“Music discovery” broadcasters including Spotify, Last.fm (Audioscrobbler) and Pandora (Music Genome Project) take social networking a step further. Wider audience choices and genre classifications are used to generate custom playlists. Many listeners are enthusiastic but like other Web 2.0 applications music discovery has yet to pay its way, let alone turn a profit.
Once again the supposed silver bullet is advertising or linking would-be buyers to affiliate retailers. The terms of the Facebook/Spotify deal are not public but they probably share advertising, licensing or sales commission. None of this creates revenue or grows the business it merely sub-divides the existing pie.
Web 2.0 can’t “monetise” because these online clubs (however large) add little value of their own—the tools are not scarce or complex. The value is in the audience, the content they provide and copyright material (owned by other people). Copyright is seen as an obstacle to Web 2.0 because it stops middlemen selling other people’s stuff. The best content is copyright. Copyright needs licensing and licensing costs money. A lobby group of academics, bloggers and Internet consultants who favour free distribution and oppose copyright would like to to redefine ownership. Creative Commons spurns the value of content, and like other “freetard” schemes, assumes sharing is better than selling. Nevertheless the content people most want isn’t legally available for third parties to sell or exploit. Communities can and will devise new ways to share content but they can’t make everything people want for nothing. Things of value will always be bought and sold.
An example often quoted in support of copyright relaxation is Open Source where collaborative development builds highly complex and valuable products with some free distribution and support. There’s no question the web has made such things possible and useful but they don’t replace bread and butter commerce and show no sign of doing so. Open Source exists within a commercial world. Would artists and composers willingly provide free components (their work) for Internet commerce?
YouTube and Grooveshark licensing enforcement could be improved with some simple technology. Until then commerce based on “free music” looks like a vindication to freetards.
PlayLouder is a rare so-called music ISP or MSP. Their broadband fee includes a license for certain tracks through their site. It’s a combination of a music site and an ISP. Some commentators take this idea further and propose a blanket license (effectively a music tax) for ISPs. Other trade bodies (IFPI, BPI and ERA) go further still and seek a copyright policing role for ISPs, with support from the government. The Digital Economy Act passed by a dying Labour government in 2010 made ISPs identify customers to the BPI but its legality is being contested.
But mandatory royalty collection or copyright enforcement by ISPs is very unlikely. What would it mean for file-sharing? Would file-sharing then be legal? What about broadband customers who opt-out? What about content providers who opt-out? What about other creative content (copyright text, graphics, video, film, etc.)? Would everything be available free for a monthly charge? How could the charge be affordable if every content provider was compensated for loss of sales? How would content creators be identified and paid? What about encrypted traffic?
For all its faults the existing commercial and legal copyright system does at least work after a fashion. There is little chance that a practical replacement for Internet music distribution could be designed, agreed and implemented by academics, trade bodies and government officials. And in any case, what hope can Web 2.0 entrepreneurs have that a commercial stake in high value content will be gifted to them?
The record industry instinctively seeks new gatekeepers to replace their old grip on broadcasting and retail. The bad news is there’s no new model that puts them back at the centre of the music or entertainment industry. Web 2.0 isn’t the answer. In the past record industry middlemen added too little and took too much. If there is a new model it’s defined by efficient labels, distributors, retailers, market demand, publishing, performance and master rights. These are things the record industry never quite got the hang of.
Water doesn’t need the plumber. The plumber doesn’t make the water.
A lot of fashionable web sites (like Spotify) who pay Major labels for music are paying from Venture Capital not income. The ride will only last until the money runs out. And now Spotify has launched in the USA (2011) the big labels are thinking seriously about the risks of undercutting iTunes. They have a share in Spotify and not in Apple (they hate Apple) but what if Apple is making them more money?
Before the record industry, music entertainment was always a multi-media experience. Music happened live or not at all. Then, for 50 years after World War Two the record industry controlled music entertainment on the back of audio sales. In the 1970s touring was commercially risky—today it’s the only place mainstream assets really do get monetised. The record industry’s Golden Goose is exhausted. Its erstwhile magic is now commonplace.
The record industry thought music entertainment was all about audio products, and for a while it was. Artists were simply part-time workers they could own full-time. Even the video boom of the 1980s was exploited as a tool for selling records. There are still some pure audio applications: radio, walkman, car and other background uses but the big radio/recording artist is history. Artists will always make records but not mostly records. Records are now the soundtrack for other products. Popularity will be fostered by multi-media exposure: cinema, TV, web and live performances. Radio is no longer king, the role of hitmaker has fallen to cinema, advertising and TV “talent shows”. Shy recording artists hoping to launch a career from their bedsit have never had a high success rate. In future things will be worse for them unless they collaborate with video, Internet or live performers.
Multi-media is not predominantly electronic or digital it’s about the whole experience (or 360° in a way the Major labels could never understand). People were multi-media before there was a name for it, and they still are. Now everyday technology is multi-media too.
Pundits still speculate about the “new music biz model” and discuss the “future of the music industry”. But who else needs a new model? There won’t be any new centralised certainty or mainstream monoculture. Nobody controls recording, airplay or distribution now. The closest thing to the old world is Apple’s domination of Internet retail but anyone can sell things online if there’s a demand. A kind of traditional mainstream still exists but it is bypassed by billions of low volume interactions on the Internet. Artists and fans are no longer shut out of airplay and retail.
Major label artists are still hampered by irrational reluctance to getting their stuff heard online. But eventually file-sharing—especially the low value audio part of the package—will be an everyday promotion tool. This is unfortunate for artists who grew up making money on records alone but music CDs will inevitably decline (although the CD/DVD format has many uses and a good future) as record sales are replaced by online and multi-media income.
From The Economist A Change of Tune 5 July 2007
Seven years ago musicians derived two-thirds of their income, via record labels, from pre-recorded music, with the other one-third coming from concert tours, merchandise and endorsements, according to the Music Managers Forum, a trade group in London. But today those proportions have been reversed—cutting the labels off from the industry’s biggest and fastest-growing sources of revenue. Concert-ticket sales in North America alone increased from $1.7 billion in 2000 to over $3.1 billion last year, according to Pollstar, a trade magazine.
The best seats for The Police’s world tour this summer cost over $900; the group’s entire catalogue on CD costs less than $100.