The Music Industry's Downward Spiral

Listening to Nine Inch Nails' Pretty Hate Machine with my friends Liz and Laurie is one of my fond but hazy college memories. Almost 20 years later, Nine Inch Nails' Trent Reznor has ditched the traditional music industry, having announced that his band is now liberated from record labels. (Oasis and Jamiroquai may be heading that way, too. My Foolish colleague Rick Munarriz covered the developments earlier today.)

A long time coming
You could probably see this coming. According to CNET's blog, Reznor's been showing his displeasure lately with his label, Interscope -- owned by Vivendi's (OTC BB: VIVEF.PK) Universal Music Group -- and told fans at an Australian concert in reference to his music: "Steal it. Steal away. Steal and steal, and steal some more and give it to all your friends." According to the article, he was expressing frustration at how much the labels charge for CDs.

"Steal it" is hardly a new idea. Back in 1992, when I bought Gub, an early album from mercurial industrial supergroup Pigface (which has had an ever-changing lineup of musicians, including Reznor in those early days -- and he was on that album), the packaging had a sticker on it that pretty much said the same thing. A good paraphrase of that sticker would be: "Steal this album, and if you won't steal it, at least copy it and give it to all your friends." It's a little ironic, since that album was on the Invisible label from Martin Atkins, which certainly wasn't a major. But the point was probably not only to make an antimaterialistic, troublemaking message, but also to help spread the word abut the band and get people to come to the shows.

Of course, the music industry only grudgingly tolerated copying before the Internet provided the framework for massive file-sharing, and the industry's getting meaner all the time and hitting closer to home. At the recent high-profile trial over file-sharing in Minnesota, an industry lawyer was quoted as saying that making a single back-up copy of an album, such as you might do when you load it onto your computer and iPod, is stealing. According to Salon, the lawyer said that's "a nice way of saying 'steals just one copy.'" That makes me wonder whether they think they can come after you if you sing a song in the shower.

I never bought Pretty Hate Machine, although I had it in my dubbed tape collection. However, in the subsequent years, I bought up a whole lot more Nine Inch Nails for my CD collection; two of my all-time favorite albums are The Downward Spiral and The Fragile. My point is, you could call me a thief in 1989, or you could call me a lifelong fan in 2007.

Creative Destruction 101
When I wrote about the RIAA's legal victory earlier this week, expressing my opinion that the music industry's shortsightedness is probably a fatal error, I received an irate rebuttal from one guy who seemed to think that I don't believe artists should get paid, and of course that's not the case. I know some people seem to take it as a point of pride that they never pay for music, and I can't get behind that.

However, I have a funny feeling that most music lovers are itching for the opportunity to support their favorite bands without feeling like they're getting gouged by middlemen. After all, digital piracy really began to take off when CD prices did, and many argue that the industry doesn't pass money on to most artists in any meaningful way, even while it complains that piracy hurts artists.

Reznor made his announcement on the official Nine Inch Nails website, and although it doesn't reveal any more details, it will be interesting to see what Reznor plans with his next album. Will he do something similar to Radiohead's "pay whatever you want" campaign? Or maybe bundle it with a Sunday newspaper the way Prince recently did?

Investors can see this entire drama as an apt lesson in Joseph Schumpeter's economic idea of "creative destruction," which is only a losing situation for those who don't evolve.

The future of music is bright. Music is more popular (and more easily distributed) than ever, and that includes diverse niche offerings. Musicians can distribute digitally on Apple's (Nasdaq: AAPL  ) iTunes. News Corp.'s (NYSE: NWS  ) MySpace has teamed with Snocap to help artists deal directly with fans as well. Some musicians just set up a website and a PayPal account.

The RIAA -- and its members, including Sony (NYSE: SNE  ) and Bertelsmann's Sony BMG, Warner Music Group (NYSE: WMG  ) , and Universal -- may have enjoyed a legal victory last week, but their long-term worries remain. Having several major bands give them the heave-ho within a week seems to be a significant sign that the time is ripe. When it comes to the traditional music industry's business model, these developments sound like yet another crack in a broken record.


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