Where were you the day the free music died?
As we power down from the extended Independence Day weekend, you may not realize that the days of freedom as some of you may know it are binary numbered. Of course, I'm talking about the tens of millions of you out there who see the pursuit of happiness and illegal music downloads as inalienable rights.
It probably won't happen until next month, but the Recording Industry Association of America (RIAA) was dead serious last week when it announced that it would be filing lawsuits against individual users of peer-to-peer file sharing networks. It meant business when it went after Napster. It meant business when it decided to make an example out of a few college students earlier this year.
The group lost its battle against swapping software makers Grokster and Morpheus three months ago. But the reason the case was dismissed -- because the companies can't be held liable for the illegal uses and abuses of its software -- doesn't bode well for the end user. In most cases, your Internet Service Provider knows who you are and what you're doing -- and the record companies are now armed with the legal firepower to start taking names.
You won't find too many vocal fans of the RIAA. The organization has become the dirty-work scapegoat for the record labels and recording artists who want to see an end to the piracy -- but only from a safe distance, away from the splash zone of fan alienation. With its advocates silent and its detractors many in the wired world, the vilified organization knows the score. While it won't be refreshing its tarnished image with its battle against Joe Swapper, it also recognizes that it has little left to lose in a war that already sent its chief packing when Hilary Rosen announced her resignation earlier this year.
No hits, all errors
The music industry is flawed. If you had to align the sector with professional sports, baseball would be a good fit. The owners are losing money. Many star players are under fiscally unfeasible contracts. The fans are resentful of being gouged with high prices. Oh, and when the long ball is scarce, stealing is often the only way to get ahead.
But as bad as the state of baseball seems to be, the music business has it far worse. At least baseball gets a good chunk of money through sometimes lucrative broadcasting contracts -- those who stay at home and watch the game on TV or stream the play-by-play online are still a valuable resource. The record labels aren't as lucky. They have failed to skim any kind of serious green off the broadband-blessed teens.
But in both industries, the plight of the owners remains the same. They can spend time and money in developing talent without making a penny in secondary revenue streams -- where the real money is being made these days. A baseball team won't be able to cash in on the sponsorships that star athletes are privy to, and a record label isn't getting a cut of the tour receipts and merchandising sales that are often the result of the record company's marketing efforts.
That has little choice but to change in the music world. The recording industry can't bank on the prerecorded CD as its only source of revenue. It's a loss leader now.
Music version 2.0
The music industry is dominated by five major record labels. Sony (NYSE:SNE), AOL Time Warner (NYSE:AOL), EMI (NASDAQ:EMIPY), BMG, and Vivendi Universal (NYSE:V) should know better than this. In most cases they are diversified entertainment behemoths, built to cash in on the various layers of the consumer's leisure-seeking experience. They are not small. They are usually not this stupid.
With the RIAA penciled in on the frontline, one would think that the five majors would be huddling away in the war room, formulating a plan for the time when the battering ram of public opinion becomes so strong that it crashes through the brittle RIAA and its wafer-thin copyright shields.
It will happen. The industry is assuming that everything will be just peachy if the RIAA is able to scare away enough of the MP3 swappers to render the file sharing sites useless. The lawsuits are coming. Some of the cocky kids laughing at the notion that they are untouchable will probably deserve it. But none of this addresses the reality that prerecorded music sales may have already been irreparably devalued.
CD sales have fallen every single year since 1999 to produce a cumulative 26% slide in shipment sales. The music industry points to the file swappers. The file swappers point right back, arguing that labels are putting out substandard swill. Let me take the unpopular position of saying that both sides are wrong.
Music is as popular as it has ever been. How else could one explain the ratings success of celebrity-making shows like American Idol and the Star Search revival? How else can one explain that the number of MP3 downloads continues to grow every year? How else can one explain that over the past five years the annual take of the music tour business has grown from $1.3 billion to $2.1 billion? Have you noticed how quickly Hot Topic (NASDAQ:HOTT) has been able to expand its chain by selling alternative music garb?
Music is hot. The CD is not.
Sing a new song
Record labels have resorted to layoffs and blowing off some prospective artist signings. Record stores have been shuttered. But if the RIAA tries to sell this as the handiwork of the MP3 revolution, don't buy in. The wounds are self-inflicted because the industry failed to grasp the situation and diversify accordingly.
The CD is a great promotional tool, but it can no longer be relied on to be any label's bread and butter. Everyone seems to know this. So why has the recording industry been so reluctant to relocate from its house of cards? Probably because packing takes a long time.
For years, the industry has been geared towards generating the thickest slice of CD sales. It hasn't minded footing the bill for costly studio sessions or state-of-the-art music video shoots because it simply recoups those sums before it has to dole out sale proceeds back to the artist. But while plumping out its distribution channels and marketing services, it missed the beat on the transition from the medium to the message.
Forget digital distribution as a moneymaker. While Apple (NASDAQ:AAPL) shocked the world when it managed to sell three million tracks within the first month of rolling out its iTunes Music Store, it is still a niche market. That's good for gravy, but it's going to be an empty feast if Yahoo! (NASDAQ:YHOO) and Amazon (NASDAQ:AMZN) roll into the market with lofty expectations. If this market is so promising, why did Ecast close its downloadable music operations last week?
The record labels need to realize that their future doesn't lie in CD sales. When it signs a new artist, it needs to spend less money on bankrolling the disc's appeal and more in buying a stake in the artist's gigging and merchandising potential. Will the artists mind? Under the old guard mindset, sure. But how about under the more idealistic scenario in which the labels and artists are working together as shrewd cost-cutters when it comes to fluff and mutual partners when it comes time to maximize career-enhancing opportunities?
Nothing sharpens forward-thinking business practices more than a vested industry, something unseen in an industry unfazed by its ridiculous rate of turnover. As it stands, an industry that lives for high fidelity is low in fidelity. Long-term thinking and loyalty will return once the label and the artist start on the same page. Will that eventually lead to a record company with a revenue-sharing plan where all of the artists have a financial interest in the label's catalog as a whole? Maybe.
At that point -- when something as simple as downloading piracy can be dismissed as a promotional act committed by a potential concertgoer, T-shirt buyer, or word-of-mouth promoter -- won't all of the parties be better off than they are now? The swapper will be more of a marketing opportunity than a defendant. The file- sharing networks and the music makers will have the open dialog necessary to create a working business relationship. The labels will welcome the battering ram because, let's face it, every arm carrying it in is attached to a pair of ears.
The day when the recording industry approaches a trading network as a facilitator and not an annihilator is when the sector will be in harmony once again.
Rick Aristotle Munarriz speaks from experience. His band Paris By Air was once signed to Sony's Columbia Records and he has been able to exploit the online medium to generate 400,000 streams on MP3.com. He is also a member of the 1Sound.com founding group for aspiring indie artists. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.
