I was dreamin’ when I wrote this
Forgive me if it goes astray
But when I woke up this mornin’
Coulda sworn it was judgment day
Yeah, they say two thousand zero zero party over
Oops out of time
So tonight I’m gonna party like it’s 1999
If you are a music executive you can only dream of the heady days of 1999. In that year the music industry was at its zenith. CD sales in the U.S. generated close to $14 billion in sales and the business was immensely profitable. Post Grammy parties were the stuff of legend. Music executives shuttled from one five star hotel to the next with limos and drivers at their beck and call. But then the great unraveling began with the emergence of digital media, a format for recorded music that was not invented by or sanctioned by the recording industry.
Dan Schwartz in his thoughtful article, How Wall Street Destroyed the Music Industry (http://www.pstracks.com/2011/05/20/how-wall-street-destroyed-the-music-industry/), points the finger at a new crop of MBAs, devoid of creativity, that tried to deliver ever improved quarterly earnings to the Street at the expense of the music fan. This set the stage for a technology-fueled consumer backlash that drove a decline in CD sales to $3.7 billion today with only a small proportion replaced by digital sales. Forrester research estimates that combined revenue for physical and digital sales will eventually level off in 2014 at about $5.5 billion.
There is no question that greed played a role in precipitating this decline. But when it became clear that a major transformation in consumer behavior was underway, why didn’t the music industry make the kind of radical adjustment required to remain relevant?
It would be overly simplistic to site a single reason but if I was forced to choose a key culprit, I would have to give the nod to the lawyers. My disclaimer here: Many of my friends and colleagues are music lawyers who argue that they were just following company directives.
Since earliest times, music was with us and shared through live performance. Of course there were many innovations along the way, the first documentation of musical scores on parchment in the ninth century being prominent among them. The changes in technology and the structure for music licensing that impacts us today emerged at the beginning of the twentieth century. Not surprisingly, it started with a lawsuit. It was over the introduction of piano rolls which could reproduce music in a lifelike manner. The resolution was a requirement to secure a “mechanical” license for sound reproduction.
Another lawsuit was initiated over the performance of a song in a New York hotel. This was a catalyst for the growth of Performance Right Organizations like ASCAP and BMI (PROs) to license the performance of musical works first in live venues and then on radio and TV. As technology advanced, music labels were formed to record and market musical performances. They licensed the reproduction and sale of their master recordings.
This mix of copyright owners applied their licensing regimen to the nascent digital world. They argued that a stream is really a performance. But wait a minute; a stream comes from a copy on a server and that is a mechanical. They argued that a download is a reproduction and thus a mechanical. But wait a minute; the playback of a download is a performance. So streams and downloads are really just modern day piano rolls and singers at Shanleys Hotel. And none of this matters unless you license the master from the label that made the recording in the first place.
So for much of the last decade the lawyers for the PROs, the Publishers (Mechanicals) the Labels and sometimes the Artists themselves duked it out, putting emerging digital music services and consumers in the crossfire.
When we first started MediaNet (aka MusicNet), the music people, while not necessarily up to speed, were definitely engaged. We met with the Ahmet Ertegun, the legendary founder of Atlantic Records. After listening to a detailed presentation on our plans to distribute music in digital form, he pointed out that after all the work that was done to create an album business; “the consumers have put us back in the singles business.” The partners at QPrime, the long time management agency for Metallica, had a different take. When I flipped open my laptop to give them a demo, they told me to shut it off. They said, “Metallica doesn’t like the Internet!” For Charles Goldstuck, the president of Bertelsmann’s music labels, it was all about the music. He spent hours taking us through his upcoming releases so that we could think about how to market them digitally.
Then the lawyers for the labels, publishers and PROs took over. The discussions in the years that followed were focused almost exclusively on licensing terms. They had two goals in mind. The first was to extract the maximum amount of royalties for the party they represented. Fair enough, but digital business models weren’t going to work if the retail price was more than consumers were willing to pay or the margins were so slim that retailers had little motivation to sell music. The second goal was to protect what they had, essentially play defense. Not a big surprise since lawyers are trained to look at every worst case scenario and erect defenses in case it comes to pass.
The result was a lost decade of legal wrangling that was all about establishing precedents for rates and controlling how digital music was marketed, delivered and consumed. The initial shift to mobile phones as a media device provides a vivid example. As a user you could buy a music download on your PC, plug your mobile phone into the PC to transfer the track over, and then listen to it on the phone. However, if you were to try to download the track directly to the phone you needed to use a service that had an OTA (Over The Air) license and pay a higher per track cost for the privilege. If you then took your phone into a coffee shop and wanted to stream the track using WiFi, you needed to use a licensed on-demand streaming service or cloud service with a subscription plan. I’m not sure what would have happened if you then decided to download the track using WiFi instead of OTA. No doubt the phone would have self-destructed on the spot. Same device, same person, incomprehensible set of use cases and rules.
Baby Boomers have become the core customers for what is left of the CD business. A new generation has grown up digital and they consume media through an interchangeable collection of smartphones, tablets and laptops at home and on the go. They don’t care about ownership as much as access. They want to listen to the music when and where they want without an NFL size rulebook.
In addition, a massive ecosystem has developed for marketing and distributing music directly from independent artists to their fans. Essentially the artist has become an entrepreneur. While many talented musicians may be able to sustain a career this way, it is no small irony that most artists would still jump on an opportunity for a contract with a major label.
The music industry seems to finally be making the adjustments to put them in sync with the latest crop of digital music services and their customers. The skeptics view is that this is only happening because so many of the business affairs people at the labels were laid off they no longer have the capacity to wage battle. I choose to be more generous. The digital tsunami was traumatic for music companies and while they will never replicate the business they had in 1999, there is still an important role for enlightened labels and publishers.