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Has The Music Industry Lost Its Mind??
These are times
that try the souls of music industry executives everywhere. The industry,
once the symbol of all that is young and hip in America,
is now looking (and acting) old and cranky. And whose fault is it for
their rapid decline? According to them, it’s you. In part one of a
two-part rant, Jim Cofer delves into the state of the music industry,
compares it to the DVD market, exposes the industry’s response and
discusses why their business model sucks.
Please note: this article was
originally written in 2002.
State of the Industry
Let me begin with
one indisputable truth: record sales are down. No one is arguing
about this. According to research firm SoundScan (the record industry’s
official tallier of sales), 2001 marks the first year that sales declined
in the ten years they have been tracking such things1. Last
year, the top 10 bestselling albums sold 25% less than the year before and
(for the first time in ages) no single album sold more than 5 million
copies2.
As a result of
these poor sales, layoffs have come aplenty in the industry. Many storied
labels such as A&M, Geffen, Chrysalis and IRS have shut down3.
The industry is in full-panic mode, preaching gloom and doom to anyone who
will listen.
But how much are
sales really declining?? After all, the only organization with a
shadier reputation for recordkeeping is Major League Baseball. Well,
while sales of full-length compact discs are down slightly, the
vast majority of the industry’s losses of the past couple of years are
coming from sales (or lack thereof) of CD singles and cassettes. The
industry has done everything in its power to kill the CD single, while
cassettes continue limping towards obscurity.
While one might
attribute the decline in sales to a bad economy or the lack of anything
actually interesting to listen to, the real enemy – according to the
industry jackboots at RIAA – is the Internet. If one were to take RIAA at
their word, you’d think that the poor record industry executives were
having to sell their $10,000 suits just to put food on the table.
Technology – according to RIAA – is the devil and will strangle the entire
music scene if given the chance.
CDs vs. DVDs
This is obviously
nothing but the excuses of an industry caught with its proverbial pants
down. One need only look at the DVD market to see how false this is.
In just five
years, DVD has gone from a videophile-only specialty to become the fastest
selling consumer electronic device in history4. Even with the
current lackluster economy, sales of DVD players are up 39% this year,
while retailers like Circuit City and Blockbuster Video have recently
announced plans to either leave the VHS market altogether or drastically
reduce their stock of tapes in favor of DVDs5. Why is it that
consumers are turning away from CDs to buy DVDs by the handful??
In a word –
value. Just about every DVD not only comes with the feature film (often
both in widescreen and full-frame formats) but also a slew of bonus
features, including trailers, director’s commentaries, deleted scenes,
storyboards and the like. And DVD prices have fallen quickly – where DVDs
once routinely sold for $25-$30, retail giants like Wal-Mart and Target
often use them as loss leaders, letting new releases go for as little as
$15. This had sometimes leads to the idiotic situation where one can buy
a DVD cheaper than one can buy the soundtrack CD. For example, the week
the Harry Potter and The Sorcerer’s Stone DVD was released, my
local Wal-Mart offered the DVD for $15.95 and the soundtrack CD for
$18.99. Am I the only one that sees something wrong with that picture??
I must not be, for on a recent visit to Best Buy I walked through a nearly
deserted CD section to get to the crowded DVD and video game aisles. Just
today on a trip to my Super Wal-Mart, I had to squeeze into the crowded
DVD aisle to pick up a copy of Amélié. At that same moment, there
was exactly one customer in the CD section. And her hands were
empty.
The
Industry’s Response
Faced with such
declining sales, the music industry has done something nearly unheard of
in modern American capitalism: they blame you. Where any
other business would try something different – like lowering prices or
offering more value for your entertainment dollar – the industry has
actually raised prices and decreased selection. To anyone
that has taken an economics course in college, this might sound
backwards. It is.
"We're giving consumers lots of extras.”
-
Craig Kornblau, president of Universal Studios Home Video.
"We tend to ask how can we make more money
and sell more product, not deal with consumer gripes."
-
Jim Urie, president of Universal Music.
But yet, there’s
more. Radio is a vast wasteland which – like the music industry that
spawned it – is an oligopoly more interested in revenues than in music.
MTV and VH1 – vehicles that fueled the New Wave revolution in the 1980s –
spend ever-increasing amounts of airtime showing mediocre programming like
The Osbornes than actually delivering new music to the masses. And
assuming that one even finds a band he or she likes enough to see in
concert, be prepared to pay: it’s no longer uncommon for concert tickets
to cost a c-note or more. In fact, the average ticket price “rose 11.3
percent to $50.81” while at the same time the inflation rate
rose only 3.6 percent6. The industry is pricing itself out of
its own market.
And while the
movie industry has (warily) embraced the Internet for ticket purchasing
and building fan “buzz”, the music industry looks to the Internet only in
fear. But given the sorry state of radio and television, it’s almost no
wonder that kids turn to that Whore of Babylon – the Internet – to find
new music.
RIAA has blamed
the Internet for everything from El Niño
to the decline of Western Civilization. It’s absolutely frightening to
hear the music industry big wigs literally spew the fear and hate that
they do towards the Internet. Industry legend Miles Copeland once said “I
have a strong suspicion that the Internet revolution will turn out to be
like the French Revolution”7 – and that’s one of the nicer things that’s been said. Hilary Rosen, head of the RIAA, has all but
called anyone that uses the Internet a “thief” and actually explained the
industry’s position on Internet piracy to the U.S. House of
Representatives as such: "Piracy is not a private offense. It hurts
everyone by diminishing the incentive to invest in the creation of music.
It should not, therefore, be viewed as a crime only against [the
industry]...but against each of us."8. Yes, Ms. Rosen is
actually saying that piracy should no longer be a “private crime”
between the copyright holder and music pirate, but a “public crime” equal
to murder and armed robbery. And she is advocating that the United
States cede control of copyright enforcement to the copyright owners
themselves. Rather than filing a complaint with a branch of the
government and having it investigated and prosecuted by the state, Rosen
wants the government to trust the industry to enforce copyright law
itself.
"'I'll be judge, I'll be jury,' said cunning
old Fury:
'I'll try the whole cause, and condemn you to death."
- Lewis Carroll, The Mouse's Tale,
from “Alice
in Wonderland”
Can you imagine
any other industry asking the government for the power to police itself?
Imagine Microsoft being given the right to prosecute people using pirated copies of
Windows. Imagine Random House with the power to control what you can
and cannot make photocopies of at your local library!
Not only has RIAA done everything within its power to go after
file-sharing networks like Napster and AudioGalaxy, they have also begun
targeting individuals. Thanks to provisions of the Digital Millennium
Copyright Act (DMCA), the labels can use the suspicion of trading
in copyrighted music to threaten your ISP with legal action, which of
course forces your ISP to choose between keeping you as a customer or
getting sued by the industry. As you might expect, given those choices
ISPs are dropping alleged copyright violators like a hot potato. Many
ISPs will warn their customers via cease-and-desist letters, yet
others will simply cut off your DSL or cable service without warning,
simply because RIAA suspected that you were trading music. And
that’s perfectly legal under the DMCA (more on the evil that is the DMCA
later).
Why Their Business Model Sucks
So how did it come
to pass that the music biz got itself into such a quandary? Well, much of
it has to do with history. But most of it also has to do with how music
is sold as well as the public’s perception of how the industry works. The
music biz is a Byzantine world of a million layers, each populated by
greedy bastards with their hands out. Let’s begin with an example of one
fictitious band, Danger Kitty.
Danger Kitty is
formed by a bunch of friends. They practice a lot and get a small-time
manager that gets them gigs at local clubs. If they have a decent
manager, he or she will even be able to get them regional gigs or maybe
even a cross-country tour. But in addition to attracting fans, the band
is also trying to attract attention of “A&R people” – the music industry’s
version of talent scouts. Once an A&R person spots the band, they bring
them to the attention of their bosses, who agree to sign the band to a
contract. Danger Kitty celebrates their success, only they have no idea
of what’s to come.
Because they
probably don’t have an album ready for distribution, the record label will
offer them a cash advance. The band will then take that money and rent a
recording studio, hire a producer and editor, commission an artist to
create the album art, hire a director and pay him to make a music video
and do just about everything else needed to create a modern record.
Should Danger Kitty go over budget, they can either pay the difference out
of their own pocket or beg the label for more money.
So the record
company takes the completed product, makes a jillion copies of it and
starts up its mighty marketing machine. The label will spend money on
parties, in-store appearances, radio spots or anything else they can think
of to generate interest in Danger Kitty. By now of course they have a
huge monetary investment in the band, so any sales that Danger Kitty books
go straight into the record label’s coffers to repay them for the cash
advance and promotional costs9.
Now if Danger
Kitty is a hit, the label will quickly recoup their costs and start to
post a profit. Of course, if the album tanks, the label is out lots of
money. As one might imagine, the labels produce far more flops than
hits. In fact, many industry insiders guess that “19 out of 20 albums
fail to make their investment back”10. The industry is always
quick to point this out when asked about revenues, but this questionable
statistic begs two questions: 1) why are you putting out so many bad
albums; and 2) how is that different than any other industry? After all,
Hollywood has been using profits from blockbusters to pay for the flops
for ages. Just about every company has a product that fails - the
costs of which are absorbed by the products that do sell. Why should we
cry for the music industry when it happens to them?? After all, no one is
crying for Microsoft after the disaster that was
Microsoft BOB!
And not only that,
the labels have one awesome tool at their disposal that many other
industries do not – a back catalogue. You see, once the label has paid
for the development costs of an album, they make huge profits on any
additional sales. For example, the New York Times reported last year that
Sony will book around $2 in profit for every copy of Jennifer Lopez’s
J. Lo album that sells - until the costs are recouped when their profit
skyrockets to just under $10 per disc. That’s not gross income –
that’s profit. So as you can imagine, every disc whose development
has been paid for is a cash cow for the industry. Every copy of Duran
Duran’s
Rio or
AC\DC’s Back in Black that sells today generates almost pure profits for
the labels. So even if half of a label’s new releases sell poorly in a
calendar year, the label can count on heavy revenue flows from the
millions of older discs that sell each year due to breakage, loss, theft, people
that are just now converting to CD or impulse nostalgia purchases. Back
catalogues might seem to be a luxury that only the larger labels could
afford, until one steps back and realizes that only 5 companies (“The Big
Five”) control around 80% of all pre-recorded music sold in the entire world11.
But of course, all
of this is assuming that the consumer actually wants the entire
album. And here is where technology is really biting the industry in the
ass.
Because the labels
have done all that they could to kill the single ever since vinyl started
its decline, consumers have been forced to purchase entire albums. Of
course, this is a bad move. Teens and college kids – the very people on
whom the industry counts the most – usually have tight budgets and are
loath to spend $20 for a CD just for one or two good songs. And many of
us who are older – those folks for whom $20 barely registers a dent in our
checking accounts – refuse to buy an album for one song just out of
principle. So this is where Napster came into the picture. And this is
the dirty little secret that the industry doesn’t want you to know: the
vast majority of records that are “pirated” online are of two types: very
popular discs and those albums that people don’t want to buy because –
aside from one or two good tracks – the album sucks. So a hugely popular
artist like Eminem ends up selling only 3 million copies of his newest CD
instead of the 5 million he might have if online piracy weren’t so
easy and David Bowie sells far fewer copies of [insert name of your
favorite crappy Bowie album here] even though the disc has two top
20 hits on it.
Notice that I
italicized the word “might”. Because music piracy – like software piracy
– isn’t something that's easy to track. The music and software industries are
quick to point out that piracy costs them X billions of dollars in lost sales every year, but
how can anyone prove the consumer’s intent?? If the industry could
come up with a completely secure distribution system that would prevent
anyone from converting a CD to MP3, does that automatically mean that I
would rush out and buy a “legitimate” copy of The Eminem Show
because I couldn’t download it anymore? Of course not. Likewise,
graphics software powerhouse Adobe often complains that their Photoshop
program is one of the most pirated programs in use today. Priced at
around $699 per copy, it’s not hard to understand why. But again, how can
Adobe claim $2 billion in “lost sales” when most people – if required to
purchase a license for a graphics program – would choose something cheaper
like Paint Shop Pro?
See?? Now we get to the meat of the matter: it's basic economic
theory that people will always do what is economically expedient
to do, provided that no major social or legal barriers lie in their way.
And the economic truth is that people don't want to buy the record
industry's crap anymore. For around forty years, the main method
of exchange for music was the single. These records usually had
two songs on them and cost around $2 at their zenith. You didn't
have to lay out a lot of cash to buy a song you liked and you only
bought what you wanted. But then CDs hit the market and the music
biz figured out that if they killed the single, people would be forced
to pay $15 instead of $2. Profits were up!
So the industry has gotten fat on this model. The music industry's
customers - sheeple, as I call them - simply lined up and paid
full-price for the one or two songs that they used to pay $2 apiece for.
And this is yet another thing the music biz doesn't want you to know:
piracy concerns aside, the other main reason that the industry hasn't
gotten into electronic distribution in a big way is that they don't
want five million people paying iTunes 99¢ for Britney's Me
Against the Music
single ($4,950,000) when it can get two million people to pay $13.99 for
the full CD ($27,980,000).
As if that's not greedy enough, at 99¢ per song the only people
making money on online music sales is the music industry itself.
In a conference call in July of 2003, Apple CEO Steve Jobs stated that
for every 99¢ track sold, RIAA gets 60¢, credit card processing takes up
another 10¢ and administrative costs like software authoring, website
maintenance and bandwidth costs take another 25¢. So for every
track sold, Apple makes a whopping five cents in profit. In
fact, Apple is actually using iTunes as a loss leader to sell
more iPods12. How are other services without the luxury
of overpriced hardware supposed to make money?
The Great Black Hole: RIAA, The Artists and Your Money
A couple of paragraphs ago I mentioned economic expediency. People
do things because it's in their economic interest to do so.
Contrary to what RIAA would have you believe, most of the downloaders
out there aren't wild-eyed freaks burning the flag and spitting on the
cross. They're average folk, just like you and me. In fact,
60 million people have used file sharing software. This
isn't some fringe thing people - this is mainstream. It's twice as
many people that watch the number one rated TV show CSI.
This is almost a third of all licensed drivers in the United States.
And part of the reason that people download is that they simply doesn't
feel that it's a crime. Who are the real criminals? The record
companies, if you ask me. Take a look at
this
page, which is a piece written by Steve Albini,
"an independent and corporate rock record producer most widely known for
having produced Nirvana's In Utero". It's simply disgusting how a
label can take in millions of dollars on the sales of an album, yet the
artist who created the work gets close to nothing for their troubles.
Also - and this is hardly “scientific data” - but it’s been my
experience that “pirates” who download an entire album and like it tend
to buy it. Take my obsession with Saint Etienne, for example.
I downloaded a couple of their albums, loved them and quickly ordered
copies from Amazon. Those albums that only contain a good song or
two are the ones that people tend to download most. And the good
songs are kept and the rest wiped into cyber-dust.
What’s To Come
In
part two of his discussion about the ills of the music industry, Jim will
continue his discussion of why the music industry’s business model sucks
(including why your favorite artist only gets a nickel for every $20 CD
sold), wonders aloud why even the biggest music retailers like Tower have
less to choose from than they did a decade ago and muses on what to expect
from the Big Five Fascists in the months and years to come.
Notes
1)
http://www.alternet.org/story.html?StoryID=13577
2)
http://story.news.yahoo.com/news?tmpl=story&cid=&ncid=762&e=6&u=/ap/20020711/ap_en_mu/audiogalaxy_1
3)
http://www.riaa.org/Guest_Column031500.cfm
4)
http://www.calendarlive.com/top/1,1419,L-LATimes-Movies-X!ArticleDetail-64586,00.html
5)
http://www.usatoday.com/life/cyber/tech/2002/07/09/dvd-sales.htm
6)
http://story.news.yahoo.com/news?tmpl=story2&cid=638&ncid=579&e=11&u=/nm/20020715/en_nm/leisure_concerts_dc_2
7)
http://www.riaa.org/Guest_Column031500.cfm
8)
http://www.versionfest.org/article.php?sid=78.
9) Miles Copeland (of the “French Revolution” quote earlier in the article)
is the older brother of The Police’s drummer Stewart Copeland and was the
band’s manager. Ironically enough, part of the reason that The Police
became so successful (and rich) is that he never allowed the band to take
an advance from a record label nor would he allow a label to pay anything
towards a tour. A rebel then, a square now.
10)
http://www.riaa.org/Guest_Column031500.cfm
11)
http://www.music-industry.org/resources.html
12)
http://www.theregister.co.uk/content/6/33850.html
13)
http://www.bayarea.com/mld/mercurynews/news/local/7258117.htm |
