The Record Biz Today: On Which End of the Food Chain?
Reported by Tess Taylor
Though he was too polite to say so, Digital Music News editor Paul Resnikoff hinted strongly that the record business is now on the bottom end of the music industry’s food chain. He may be right.
His observation came at the packed Association of Independent Music Publishers (AIMP) luncheon last week, where the discussion centered on digital rights management (DRM). DRM is one hope the record and music publishing industries have of controlling music, or at least making it more difficult to steal.
Photo (L-R): Founder & Editor of Digital Music News Paul Resnikoff; BMI’s VP of New Media & Strategic Development, Richard Conlon; consultant in the record and music publishing industries and panel moderator Thomas A. White, Benchmark Capital’s Dave Goldberg; and Universal Music Group’s EVP of Business Strategy Larry Kenswil.
Moderated by the deft and thoughtful Thomas A. White, a consultant in the record and music publishing industries, the panel included Universal Music Group’s EVP of Business Strategy Larry Kenswil; Benchmark Capital’s Dave Goldberg; BMI’s VP of New Media & Strategic Development, Richard Conlon; and Founder & Editor of Digital Music News Paul Resnikoff.
DRM is a class of technologies encoded within electronic media (digital files) to control, prevent or limit their unauthorized copying, and to identify and manage the owner’s interests. Sound recordings with DRM protections benefit owners and artists as well as owners and writers of the underlying song. DRM is now used as an anti-piracy device.
So the big question is, does DRM help or hurt sales?
Hard to say.
White outlined a few of the economic consequences of unlicensed uses, which are playing out before our eyes. These include industry consolidation, record retailers going out of business, displaced sales of authorized product, loss of jobs and less investment capital for talent and market development. Retail sales are down over 20% from this time last year. Most damaging of all is that even though their appetite for music has never been greater, consumers value it less. Music now acts as a lure to sell advertising, and other consumer products and services, which are frequently of little or no intrinsic value.
The biggest problems with DRM, say its critics, are lack of interoperability on different playback systems and ability to time-shift. DRM limits legitimate, permitted uses of content. And since CDs can already be converted to unrestricted MP3s for sharing over the Internet and through personal exchange, why bother with DRM? It can make permitted uses of music more complicated, which consumers accustomed to ease-of-use won’t tolerate.
Against this backdrop panelists explored the ramifications of putting digital locks on music, including:
- Who’s winning the digital war?
- Future of the record business
- Value of publishing vs. record company assets
- Solutions to piracy
- Sources of untapped revenue
- Public perception of music and its value
DIGITAL WAR
Are we winning? asked White, referring to our industries hope for a result that will protect copyright and revenue streams.
"How do you define winning?" Kenswil asked.
Keeping your money.
“No,” said Kenswil. “Will we ever win? No. Can we get it down to a dull roar? I hope so. This will be over one way or another in five years, but right now it’s up in the air.”
PREDICTION
The record business will look more like the publishing business in future, that is, smaller and less concentrated, said Goldberg (meaning fewer major labels and even more small “indie” ones). He foresees a painful transition in the next few years but is optimistic, noting that music consumption is up and that the publishing business is doing well.
ASSETS
Goldberg’s “smaller and less concentrated” prediction isn’t exactly reflected in Universal’s acquisition of BMG Music Publishing for $2.09 billion, which now makes it the world’s largest music publishing company. The deal was consummated one day after the AIMP panel discussion.
Universal has invested heavily in publishing in recent years, said Kenswil, because publishing assets have appreciated in value while record assets haven’t.
“Publishing is a low risk business,” he continued. “And what happens when people who take the biggest risks stop? Lack of investment capital will affect the entire business.”
Kenswil implies that if the business of exploiting copyrights is so challenged as to make it impossible to make money from music (investing in signing new artists, market and artist development, etc.), then investors will bypass this business for others. This also suggests that when the money dries up, so will the creativity, which is probably true.
But Universal’s purchase of BMG Music creates an even more concentrated industry, which is a huge risk and bad for the business as a whole. This means fewer jobs. Indeed, BMG Music employees have been aggressively combing the marketplace because they know the lay-offs are coming soon. When those inevitable lay-offs occur, many of them, sadly, will not find re-entry into the music marketplace. The likelihood of them migrating to industries competitive with ours is higher, and can our industry afford such a brain-drain now? Also, more market share and power will be concentrated in the hands of fewer companies. This means fewer publishers and less competition in the marketplace. It means Universal can issue “take it or leave it terms” to its roster.
Except for big-name artists with a history of success, these terms are not likely to be favorable, but how many other games will there be in town? Less than ten years ago the "Holy Grail" for artists was to get a record or publishing deal. Today, many artists avoid these deals (especially record ones) at all costs. This compounds the problem of eroding retail sales: new talent that galvanizes the public’s interest enough to purchase music is not plentiful these days, reflecting the sea change in this attitude among artists.
Even big name artists are doing things differently. On the record side, even Paul McCartney is stepping outside the traditional model. He will release his new album on June 5 through an arrangement with Starbucks instead of through EMI, his longtime home.
TECHNOLOGY CAN’T STOP PIRACY
With or without DRM, it’s easy to get music for free. According to Goldberg, DRM limits sales in the permanent download world, and it won’t solve the [piracy] problem either way. It’s easy to take DRM off and no technology can prevent piracy. If you can listen to music, you can record it, he said. It may not be digitally perfect, but most people don’t notice or care.
To DRM or not DRM?
That is the question for rights owners. Consumers can now choose tracks without DRM (iTunes now charges $1.29 for non-DRM tracks from EMI’s catalog). But what is the hidden cost of DRM, that is, lost revenue from those choosing NOT to buy. This is impossible to measure. How much do you spend on technology to help stop piracy? What’s the point of diminishing returns? No one knows.
UNTAPPED REVENUE: LYRICS
One likely area for increased revenue is lyrics. Demand for lyrics is huge, but it’s difficult to get them. Perhaps this is because licensing lyrics legally is complicated and publishers have yet to recognize this area of potential revenue. Creating a central, digital infrastructure is key, and this would reap enormous benefits, Goldberg said.
The difficulty in finding lyrics, according to Resnikoff, is a microcosm of the free music problem. When you go to a free lyric site, he said, you get annoying pop-up ads, the lyrics are wrong, you can’t cut and paste, and sometimes the site crashes. Yahoo Music is good but you can only get about 60% of what’s out there. “I can get what I want with P2P, he said, “but it’s a lower quality. People are accustomed to getting as much as they want and there is no end in sight.”
OUTSIDE PRESSURES
Where does this tidal wave of consumer resistance to paying for content come from? How much of this is real and is any of it manufactured? White touched on this important point, which didn’t get the attention it deserved due to time constraints. He pointed out how the public’s perception of the value of music is influenced by the press and CopyLeft organizations.
Certain industries have latched onto the voracious appetite of consumers for free music and created a populist movement demanding more free music, suggests White. These include the computer, consumer electronics, cable/telco and ISP lobbies whose profits hinge upon access and availability of rich, endless content. Their goal? Shift music and record industry profits into the pockets of the computer and consumer electronics industries.
A close look at who funds and supports the Copyleft movement and a “follow-the-dollar” analysis of how these industries benefit from free or low-cost content makes this theory more than plausible.
Music is valuable and when it’s available for free, this provides consumers with an urgent reason to spend their money on physical products such as the latest computers and components, high end sound systems and high definition plasma screens, wireless communication devices, and Internet services and cable TV companies. These corporate interests want all “content” to be stripped of its property protection, so that they can control consumer access and keep all the money for themselves. Not coincidentally, these are the same companies who are investing millions of dollars to encourage consumer theft of intellectual property and decimate the entertainment and copyright industries. They want to impoverish these industries so that laws which protect intellectual property can be changed with little or no opposition.
Is it beyond reason that one industry would want to pilfer from another? Billions of dollars are at stake.
Says Kenswil, CopyLeft started it [campaign for free music] then monied interests who saw advantages for themselves jumped on it. To exacerbate the problem, many journalists have CopyLeft leanings and in spite of who pays their salaries, they tend to be more populist. Kenswil posited that money to support anti-copyright interests comes from the Consumer Electronics Association, all hinging upon the Betamax issue.
WHO’S BEHIND THIS AND WHY?
In his program handout, White listed Public Access to Information and Copyright Reform Advocates with overlapping management: Electronic Frontier Foundation (EFF); Free Software Foundation; Union for the Public Domain; Creative Commons; IP Justice; Public Knowledge (IP lobbying group and preservation of the public domain); freeculture.org (student organization); and DigitalConsumer.org.
A review of the boards of directors and management of these organizations reveals overlapping and common elements. They are inter-connected through common policy makers, such as outspoken anti-copyright advocate Stanford professor Lawrence Lessig and the Electronic Front Foundation’s Robin Gross, who are active in several of them. It’s anybody’s guess what their real financial base and structure is. Their Web presence creates images of substance. These people are active, there has to be funding.
Part of the smoking gun is the absence of disclosure about where their money comes from (especially the EFF). They use the law to conceal their funding sources.
Who is behind the free music movement and why? Why are they working so hard to undermine intellectual property? It’s easy if you follow the dollar. They say they represent the public interest and protect free speech. That’s just a thin camouflage. Here is who I think it is: computer, electronics and device manufacturers, cable and wireless networks, and Internet service providers. We call them the Big Dumb Pipe, businesses that facilitate consumption of media and want to fill their pipes for free. They benefit enormously from free (or cheap) music; this shifts the profits away from creators to them. Lobbying organizations acting as public interest non-profit ones is classic deception.
Some of these corporate lobbies have the effrontery to tell Americans that stealing the property of others is morally acceptable and in fact, doing so is an entitlement under the public’s so-called “digital rights.” Superficially, their argument sounds appealing. 'Act out of emotion, self-interest and greed. Simply take what you want because it’s there and you can probably get away with it.'
To illustrate the disparity between money spent on devices versus music, iTunes issued a press release last year when it sold its one-billionth download that the average iTunes user has spent between $150 - $400 on devices and less than $8 on music. You see where music is on the perceived-value scale. This phenomenal shift in value has occurred from the music and content industries to the consumer electronics and device industries in the last 10-20 years because they’ve appropriated our value by enabling people to copy our intellectual property and take what they want, and the divide is widened by the organizations wanting to defend the public's so-called “digital rights.”
And so it’s no surprise to find virtually no artists on Boards of the above-named organizations. Instead you’ll find academics, lawyers and technologists, all of whom support the intellectual construct of creating a society where information and knowledge is free. Virtually every one is connected directly or indirectly to technology. Ironically, the founders made millions because of strong IP laws (especially Mitch Kapor, Founder of Lotus Development Corp.) and now they not only turn their backs on it but also try to dismantle it.
The Internet was conceptualized as a means of sharing information between university researchers and providing secure military communications. This may, in part, suggest why many of the arguments to erode copyright or eliminate access restrictions come from the academic community, and are then capitalized upon by anti-copyright commercial interests. The academics participating in the debate are sometimes the closest thing to true believers, operating in isolated environments, certainly mostly (if not solely) interested in educational and knowledge acquisition aspects of the Internet, and not in its commercial aspects. They see something that was created for a purpose being subverted by commercial corporate interests, but are frequently unrealistic in their position that all information and knowledge should be free. This doesn’t mean that there isn’t an important place for original intent of the Internet to be observed. People who want to dedicate their works to public domain are free to do so. But that’s an election and shouldn’t be imposed on them.
SOLUTIONS
One of the mobile carries offers a mobile phone with Napster built in. Music comes with the higher bandwidth plan, and the cost is hidden in the overall bill. Kenswil said this is a glimpse of the future.
I spoke to former president of Capitol Records Joe Smith yesterday and asked his view of the current landscape. It’s unfortunate the way things have turned in the business, he said, but the record industry constantly beat back anything that looked like a solution. Smith tells me he was involved with a company called Supertracks (a provider of secure Internet music distribution services) but no label would give them any titles to run with, so the company folded.
It may be that the record industry’s desire to hold the sand (music) too tightly in its fist has caused it to leak out. Now our industry is even more concentrated, run by corporate entities that don’t even care about the music. How important do you think the music division will be to the non-music parent companies of major multinationals if CD sales continue to plummet at a rate of 20 – 30% per year? How important is the music to these corporations, other than as a means to sell other stuff?
CONSUMER DISLOYALTY
Legitimate P2P services have not done well, says Resnikoff, because consumers aren’t loyal and they want free stuff (not just music). It’s great – people’s appetite for music is more voracious than ever. They’re just unwilling to pay for it.
LITIGATION
Naturally, record companies and other owners of intellectual property (music publishers, movie studios, book publishers, etc.) do want consumers to pay for their products, and therein lies the conflict. Litigation has been one of the industry’s solutions (albeit an imperfect one) to this problem.
I spoke to Kenswil about Universal’s latest lawsuit against MySpace (November 2006). Just one year prior MySpace Records formed with Interscope (November 2005), so the lawsuit seems an odd reversal of strategy.
The love-match didn’t last.
This lawsuit, Kenswil told me, will be the first test of the Digital Millennium Copyright Act (DMCA) safe-harbor provision. This provision was designed to protect hardware and technology manufacturers and ISPs from being held liable for the illegal use of their products and services. As long as these parties do not “induce” infringement (under the classic definition from the Grokster Supreme Court case1), and follow notification and take-down procedures to remove infringing copyrights, they are granted “safe harbor” under the law. MySpace works with GraceNote2 to detect and remove copyrighted songs uploaded by users, and announced a similar system for MySpace Video.
MySpace issued a press release calling the lawsuit “meritless” and that they don’t “induce, encourage or condone copyright violation in any way.”
Universal’s lawsuit breaks new ground because MySpace, rather than acting as a conduit for infringing copyrights, is housing Universal’s materials on its site, according to Kenswil. This provision was made into law when ISPs complained that they were mere conduits of illegal file trading and couldn’t be held responsible for illegal use of their essentially neutral service. Says Kenswil, this safe-harbor provision was conceived for ISPs as neutral conduits of illegal activity for which they could not be held responsible but MySpace is a different animal. It is more than a conduit, it is a destination, and therefore MySpace should be exempt from this provision.
How long could this take to settle? I asked. Three to four years, he said. “And if we win,” he said, “it’s big money. As in, nine figures.” Even if Universal does win, three or four years of litigation is expensive and drains a company’s bottom line and employee morale.
I heard that News Corp. recently sent a memo to all its companies and affiliates, ordering them not to do business with any Universal companies in light of litigation. Says Kenswil, we’ve seen no effect from this whatsoever.
Corporate politics. Whee!
Ultimately, caught between Scylla and Charybdis of plummeting mechanical royalty income and sales (physical CD sales are down between 20-30%) and rampant file-sharing, record companies and music publishers are pressed to find any solution, however imperfect.
I hope they do.
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1. The Grokster Case (MGM Studios, Inc. v. Grokster, Ltd. 545 U.S. 913 [2005]) is a United States Supreme Court decision in which the Court unanimously held that defendant P2P file sharing companies Grokster and Streamcast (maker of Morpheus) could be sued for inducing copyright infringement for acts taken in the course of marketing file sharing software. The plaintiffs were a consortium of 28 of the largest entertainment companies (led by Metro-Goldwyn-Mayer studios). The case has been called the most important intellectual property case in decades. Though this was a major victory for the plaintiffs, some say it was a victory for file-sharing. After all, file-sharing itself was not declared illegal. In the words of Congressman Rick Boucher, "While the Grokster file-sharing service may be in some jeopardy, another file-sharing service that has not done what Grokster did … would have no problem."As Gigi Sohn, president of Public Knowledge, a Washington, D.C., lobbying group that focuses on digital rights says, "You would be hard pressed to read this case to say that innovators will have to design their tech differently. I think the court was pretty clear in stating that the technological design is not a factor in determining inducement."One can interpret the Supreme Court ruling mean that as long as file-sharing software makers don't encourage piracy, they can stay out of trouble. 2. Gracenote maintains and licenses an Internet-accessible database containing information about the contents of audio CDs. Computer software applications such as iTunes that are capable of playing CDs use Gracenote's CDDB or a competing service. In addition to its CD track-identification system, Gracenote operates a digital file identification service which allows digital music files (such as MP3s) to be identified, and a media management service for the generation of playlists, and recommendation of music.
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