The Grateful Dead were among the first to figure it out more than 30 years ago. Authorize your fans to trade non-commercial copies of your performances. Encourage them even. What goes around comes around and you’ll make millions on their interest and loyalty. You just won’t sell that many commercial recordings. Or maybe you will. Either way, you’ll have to work your butt off touring.
The entertainment industry’s collective desperation and paranoia perennially keeps them from figuring it out.
Stan Liebowitz is most widely known for his attempt to disprove the theory of network effects which holds that once a product gains a critical mass of users, a lock-in occurs and all other similar products—including those that are qualitatively better—are unable to gain traction in the market and eventually disappear. The most common examples used in popular literature are the Betamax videocassette recorder, the Dvorak keyboard, and the Microsoft Windows operating system. Leibowitz also claimed that a breakup of Microsoft would cost U.S. consumers US$50 billion in higher prices.
Liebowitz has most recently turned his sights on the recording industry, and in a recently released report he asserts that file trading on the Internet has not had an impact on recording industry revenues. Even though he’s at a loss to explain why this is the case, Liebowitz believes that online file trading will eventually pose a serious revenue threat. It just has to, conventional thought tells us. Conventional thought and Liebowitz are both wrong.
It’s refreshing to hear an economist utter that he “doesn’t know” why something that should be happening isn’t; in this case, why file sharing doesn’t seem to be causing harm to the recording industry. And that’s just what Liebowitz did in a recent interview with Salon. Leibowitz, in the interview, estimates that roughly five times the number of CDs sold in the United States are downloaded from the net each year but can’t explain why it isn’t impacting recording industry revenues. “Look, if downloads are substitutes [for CDs] in any significant way,” he told Salon, “We should see really big declines—unless there’s something else going on.”
Indeed, something else is going on. We’re collectively downloading a shitload of music on the net and we’re buying as much as we ever did. That’s and, not or logic. The logic is borne out by research from Minneapolis-based Ipsos-Reid. The same tools that are used by the pirates to distribute bootleg recordings are also used by music-industry customers: fully 25% of all Americans older than 12 own a CD burner and 19% have downloaded music on the net. The most telling metric in the Ipsos-Reid research is that more than 80% of those who download music report that their CD purchasing has either remained the same or increased. That’s reinforced by the industry’s own revenue reports. Total 2001 sales were about US$13 billion which was unchanged from 2000; this year’s sales are off by about 5% or so, but that’s likely as attributable to the economic downturn as it is anything else.
You’d think by now the recording industry would have at least bought a clue, but you’d be wrong. If it’s not the pirates that are the problem, and if it’s not that damned Internet file sharing that’s the problem, it must be the businesses that sell used CDs. Yeah, that’s it; it’s the businesses that sell used CDs that are the problem. In the never-ending quest to find an enemy that doesn’t live in the mirror, the recording industry is now setting out to extract royalty payments from the sale of used CDs.
This is a good one; stay with me here. The recording industry claims that the growing market for used CDs is cannibalizing sales of new CDs and “promoting piracy by allowing customers to buy, record and sell back discs while retaining their own digitally pristine copies.” So the recording industry says that it wants a 6% flat royalty on all used CD sales.
There’s only one problem in this most recent recording industry foundering: it’s a violation of the doctrine of first sale. The U.S. Supreme Court was verbose but clear:
“In our view the copyright statutes, while protecting the owner of the copyright in his right to multiply and sell his production, do not create the right to impose, by notice, such as is disclosed in this case, a limitation at which the book shall be sold at retail by future purchasers, with whom there is no privity of contract. This conclusion is reached in view of the language of the statute, read in the light of its main purpose [210 U.S. 339, 351] to secure the right of multiplying copies of the work, a right which is the special creation of the statute. True, the statute also secures, to make this right of multiplication effectual, the sole right to vend copies of the book, the production of the author’s thought and conception. The owner of the copyright in this case did sell copies of the book in quantities and at a price satisfactory to it. It has exercised the right to vend. What the complainant contends for embraces not only the right to sell the copies, but to qualify the title of a future purchaser by the reservation of the right to have the remedies of the statute against an infringer because of the printed notice of its purpose so to do unless the purchaser sells at a price fixed in the notice. To add to the right of exclusive sale the authority to control all future retail sales, by a notice that such sales must be made at a fixed sum, would give a right not included in the terms of the statute, and, in our view, extend its operation, by construction, beyond its meaning, when interpreted with a view to ascertaining the legislative intent in its enactment.”
The five major recording companies—BMG Entertainment, EMI Group, Sony Music Entertainment, Universal Music Group, and Warner Music—that comprise the bulk of the industry were thumped last week with a class action lawsuit charging that their copy-protected CDs should be banned or at least required to carry clear warning labels. The lawsuit charges that the copy-protected CDs are “‘defective products’ under California’s consumer protection statutes and are sold alongside conventional CDs with no distinction made between the two.”
Meanwhile, New York magazine media columnist Michael Wolff sums up the fall of the recording industry by saying it’s becoming the publishing industry minus the literacy:
“In other words, there’ll still be big hits (Celine Dion is Stephen King), but even if you’re fairly high up on the music-business ladder, most of your time, which you’d previously spent with megastars, will be spent with mid-list stuff. Where before you’d be happy only at gold and platinum levels, soon you’ll be grateful if you have a release that sells 30,000 or 40,000 units—that will be your bread and butter. You’ll sweat every sale and dollar. Other aspects of the business will also contract—most of the perks and largesse and extravagance will dry up completely. The glamour, the influence, the youth, the hipness, the hookers, the drugs—gone. Instead, it will be a low-margin, consolidated, quaintly anachronistic business, catering to an aging clientele, without much impact on an otherwise thriving culture awash in music that only incidentally will come from the music industry.”
The artists who take the time to deconstruct the situation realized long ago that the jig was up for the recording industry. This was recently summed up most eloquently by David Bowie in a New York Times profile of and interview with Jon Pareles. Bowie minced no words:
“I don’t even know why I would want to be on a label in a few years, because I don’t think it’s going to work by labels and by distribution systems in the same way. The absolute transformation of everything that we ever thought about music will take place within 10 years, and nothing is going to be able to stop it. I see absolutely no point in pretending that it’s not going to happen. I’m fully confident that copyright, for instance, will no longer exist in 10 years, and authorship and intellectual property is in for such a bashing. Music itself is going to become like running water or electricity. So it’s like, just take advantage of these last few years because none of this is ever going to happen again. You’d better be prepared for doing a lot of touring because that’s really the only unique situation that’s going to be left. It’s terribly exciting. But on the other hand it doesn’t matter if you think it’s exciting or not; it’s what’s going to happen.”
Unfortunately, the touring business is being corporatized and consolidated even faster than what happened with radio. Clear Channel owns more than 1,200 radio stations in the United States and recording artists and independent promoters are charging that the company is leveraging its considerable airplay resources to force artists to contract with its concert promotion subsidiary. Artists are going to have to break free from the grasp of these corporate monkeys or risk having their flesh ripped from their bones.
The short-term solution for the recording industry is simple: continue to sell your units of atoms in the form of CDs at about one-half the current prices and sell all-you-can-eat subscriptions to the component bits—the real, complete, open, non-DRM, and non-protected bits—on the net at, say, US$30 per month. Oh, and realize that your days are numbered in any case. The smartest artists and fans have already realized that they don’t need you.
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