May 11, 2009

State of the Music Industry

LONDON, ENGLAND - FEBRUARY 27:  Rock band U2 p...Image by Getty Images via Daylife

Citing a 42% drop off in sales for U2's No Line On The Horizon, this article, which appeared in the Irish Times Print edition, digs into the current state of the music industry, and how it has become affected by file-sharing and download sites like iTunes.

Click here to read it on the Irish Times, or read below.


MUSIC INDUSTRY: Once upon a time, the record industry was about hits. Michael Jackson’s Thriller , Bruce Springsteen’s Born In The USA and the Backstreet Boys’ Millennium were multi-million selling releases that allowed the industry to live high on the hog throughout the 1980s and 1990s, writes JIM CARROLL

Back then, music fans spent a small fortune during the format switch to CD and these windfall profits meant major label bosses could sit back, strike up another cigar and believe the good times would never end.

Fast-forward to 2009 and you have an industry in the depths of despair. CD sales are on a permanent downward slide – look at the remarkable 42 per cent drop in first-week US sales for U2’s current album, compared to the previous release, for example – and digital revenue is never going to be enough to match physical sale losses.

All the action is now happening in the live music business and the labels are trying unsuccessfully to elbow their way into that trough.

Remarkably, most of these woes are self-inflicted. In Steve Knopper’s book Appetite for Self-Destruction: The Spectacular Crash of the Record Industry in the Digital Age , he points out again and again that the labels ignored how changes in technology and consumer habits would impact on their business. Even when dot-com companies were begging labels to sell music online in the mid-1990s, they resisted. As Knopper notes in the book: “They were making big money, they had the Spice Girls, they had all the time in the world. Why change?”

And there’s nothing new about the industry-wide reluctance to embrace change.

"It is rather striking how those in the record industry have resisted technology over the decades," says Knopper. "They resisted recorded music, radio, MTV, pretty much any new idea that threatened the profits they were already making.

"On the one hand, it's understandable - the guys who traditionally ran record labels were old-school. Their idea was to find talent, record that talent and distribute the music to record stores. That's all they knew how to do, so any new idea was a threat to them. You're not dealing with the most forward-thinking people here.

"What really struck me was by the time Napster came along, every single label had hired people to deal with the internet, but those at the top weren't listening to the advice they were getting. They had been burned on technology before, they remembered things like quadrophonic sound and eight-track tapes, and didn't want to spend a lot of money releasing the new Coke of the record industry and lose again.

"When you want your business to continue doing well, you have to look at these inflection points as they arise. You have to deal with them properly or your business will be destroyed, and that is what is happening now."

Knopper is a seasoned music business analyst and his book, the result of 18 months of research and over 230 interviews, focuses on the industry-wide ignorance, arrogance and hubris as the labels threw their business away.

He points to the lawsuits that followed file-sharing pioneer Napster as a big turning point. "I don't think when Napster happened initially that they thought they would lose the business. I think that occurred after two or three run-throughs of legal action.

"First, they sued Napster out of existence. Then, they reacted to Limewire and Kazaa and Grokster and all the other file-sharers by suing them.

"Then, they started suing their customers. And then they got that hugely favourable Supreme Court decision in 2005.

"But none of this stopped file-sharing. The number of users continued to grow by the millions worldwide. It was at that point that I think they knew legal action was not going to work, long after everyone else had figured that out. They didn't have the moral or legal high ground and they were screwed. Even iTunes wasn't stopping file-sharing."

Knopper feels things would be much different today for the industry if they had done a deal with Napster's Shaun Fanning.

"Napster was more than just Spotify and Lala rolled into one, it was also Facebook and MySpace. It anticipated social networking by several years, it was built on music and had 27 million users at its peak.

"Sure, if they had done a deal, they would have lost some of those 27 million people who just wanted to pirate music and there are a lot of them out there. But it would have got a lot of other people who would have went 'wow, this is a great service' and would have been prepared to pay 15, 20, 50 bucks a month for it."

Instead, they did a deal with Apple's Steve Jobs, which worked out well - for the computer company.

"When the labels look back now, they remember that Jobs was just going to do this iTunes music store thing for the Macs," says Knopper.

"But not long after that, he extended iTunes to the PC and they felt bruised by that. You could argue that Steve Jobs was just being a savvy businessman, but Roger Ames [ of Warner Music] and Doug Morris [ of Universal Music] were savvy businessmen too. These were the top guys, incredibly sharp guys who knew their way around a business deal, and they shouldn't have let Steve Jobs get away with it.

"I think the problem was the labels had no real leverage at that point. In 2002, the only way a consumer could download music on the web was illegally, and that had been going on for three or four years. During that period from 1998 to 2002, from the beginning of Napster to the beginning of iTunes, the only way to get music online was to pirate it.

"The labels were very desperate at that point and were ready to do a deal with whoever came along. They felt they were lucky it was Steve Jobs and not Shaun Fanning's uncle they were dealing with. But they weren't so lucky because they ended up making much the same deal as they did with MTV, when they gave away all their videos for free and have regretted it ever since."

Knopper believes a lot of the current inertia can be put down to those at the top. "The deals the labels are doing with Q-Trax and Spotify and Google in China are really interesting, but the people who are running the labels now are the same people who were running the labels during the Napster era.

"You have to wonder if these guys like [ Warner Music's] Edgar Bronfman, and Doug Morris are the ones who are going to usher in the technology solutions at the labels. A lot of people at tech companies have been waiting a long time for the real tech guys to come in and take power at the labels. That change is what it is going to take for new ideas to really gain credibility."

Knopper outlines two potential futures for the labels. "What I wish it would look like in 10 years' time is something like this: for a start, you'd have the high-tech people in charge. These tech people are smart and are not just relying on unit sales to make all their money. They know that revenue is made up of ad revenue from streaming, ring tones, licensing rights from Guitar Hero .

"The new companies should be smaller, more nimble and not have huge overheads in the form of gigantic executive salaries. They can react quickly to change and go in the direction the artist wants to go and that's different for each artist," he says.

And the other option? "What I worry about is that Live Nation are going to merge with Ticketmaster, they will buy Warner and it will be the same deal that you've always had. Record sales will be the minor part of the equation and ticket sales the major part.

"They'll figure out how to make money from the ticket scalpers out there and then you've got a couple of companies with large revenues trying to hold onto it. Meet the new boss, same as the old boss."

(This article appears in the print edition of the Irish Times)

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