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I’ve been doing a lot of thinking lately about the future of the music industry. It started at Y Combinator last summer. An inordinately large number of the groups there were music related. I wasn’t sure if that was because hackers like music and want to do startups in the space because of that, or if Paul and company just thought the music industry is large and broken and therefore a good place to look for homeruns. It’s probably a little of both.

Also there’s been a lot of news in the space over the last month or two. Radiohead is getting much of the credit (and rightfully so) for opening up the debate with their release of In Rainbows, which is available for download at their store for any price you wish to pay. It’s the first time a major artist has totally sidestepped the recording industry, and it has definitely garnered a lot of debate. A couple other incredibly popular acts made or begun to make similar moves as well, and one of them, I’ve concluded, has delivered what will be viewed in twenty years as the current recording industry’s deathblow.

I can’t claim to have totally figured out the future here, but I think I can at least narrow it down quite a bit by using simple logic. I’ll break down my facts, opinions, etc. here, and then attempt to draw a conclusion from them.

Things aren’t going well for the recording industry.

This comes as news to no one. Sales are plummeting, and record labels are blaming illegal file sharing. The industry seems to be in a tailspin, and its major players are grasping at straws by hampering legitimate online music retailers with obnoxious, ineffective DRM, as well as suing their customers and making life generally uncomfortable for everyone involved. The situation isn’t pretty, and it’s getting uglier every minute.

DRM is a failure.

Though not mathematically proven (which would be virtually impossible) it logically seems as if DRM must actually cost artists and labels money on recorded music sales. It does nothing to prevent the root source of piracy because record labels still release CDs, which have no DRM and account for the bulk of music sold. Even if their DRM were unbreakable (and it certainly is not) it wouldn’t achieve its aims unless no music was released without it. With the bulk of music still sold DRM-free, it’s worse than useless.

Piracy still is, in many cases, easier than paying for music, even in the era of iTunes. And the DRM imposed prevents many willing and able consumers (myself included) from ever purchasing a track. Steve Jobs knows this, and the record industry is starting to figure this out, though I still don’t think they have any idea what to do about it. Luckily for them, I’m on the case.

Fans are fed up with the recording industry.

This seems to be self-evident. Ask any college kid what they think of the RIAA. Between years of price fixing, attacking the internet radio industry, suing its customers, and the general lack of imagination found amongst the acts it promotes these days, the major labels have lost their luster.

Artists are fed up with the recording industry.

The recording industry has long abused artists. For a detailed look into why, please see this transcript of a speech given a few years ago by Courtney Love.

It’s not really surprising that it ended up this way. On one side of the equation you have a bunch of Ivy League MBAs working for large, publicly traded corporations. On the other you have a few guys from a trailer park or ghetto with a guitar and/or a turntable and a dream of being a huge star. You don’t have to know much about the music industry to figure out which group is going to end up with the profit there.

Artists need the recording industry less and less ever day.

Back in the analog era, there seemed to be little bands could do about the abuse. They needed the supply chain and distribution system. The best they could do for themselves, when their contract was up, was to try to shop around, but when everyone you’re negotiating with plays golf at the same country club there isn’t really much point.

In the digital era, though, there is no more supply chain. Anyone can distribute an album freely if they wish. Thanks to Bittorrent, any artist could get his latest CD in front of every music fan in the world for no additional cost beyond the DSL connection in his home.

And since record labels have pushed artists to the point where their only strong source of revenue comes from the non-recording aspect anyway (touring, merchandise, sponsorship) it’s well worth it for them to do so. Every person who downloads a Radiohead CD, off of which they could have made a buck or two, is one more potential concertgoer, from whom they might gross as much $10 to $20.

The record labels never would have let Radiohead give away the goods. They’re middlemen and they are certainly not going to cut themselves out. But for the band, doing so will give them wider exposure, selling more tickets and merchandise. In the end Radiohead could be better off, even if nobody ever paid a single cent for the album.

Micropayments won’t work.

A lot of the anti-DRM, tech industry crowd has suggested micropayments (an as yet to be developed, easy solution for paying small amounts to whomever you wish) as a replacement revenue stream. This will never materialize. People will never pay for something they can have for free, at least not in significant quantities.

This, like the Facebook vs. MySpace debate, is yet another example of people in the tech industry having no clue how the other 99.9% of the population actually lives and thinks. People who write software, a form of intellectual property not as dissimilar to music as it may appear, feel a little more kinship with musicians than the general public (and are probably more likely to have a little spare change rattling around in their pockets) and therefore might actually pay for something they weren’t required to. And they assume that because they would, and their friends would, that enough of the rest of the population would to make it a viable economy.

They’re way wrong. People don’t pay for things they can get for free. It’s contrary to human nature. That’s why we’re having this discussion in the first place.

It’s nothing like tipping, as some may suggest, where there is a real person who can see you and who you know has no real income outside of that. It’s done alone, in the privacy of your own home, and you know that if you steal a Pearl Jam song, Eddie Vedder isn’t going to give you the evil eye.

Musicians, to most people, aren’t even real. We view musicians much the way we view athletes, as oversexed and overpaid. We feel little incentive to donate to someone whose life appears to be 100 times better than ours. Most of us have little spare money and a lot of debt, and marketers are constantly minting new necessities (cell phones, iPods) that we have to pay for. To think that, in the face of all of that, voluntary micropayments could even replace ten percent of the revenue made from CD sales in their heyday is beyond preposterous.

Even if consumers had the desire to use micropayments, it seems unlikely the industry will ever be efficient enough to enable it. While it could potentially become cheaper than PayPal (whose fees are a little hefty) the effort involved can’t decrease by much. One would still be required to sign up an account, verify their checking or credit card (which, in and of itself, requires one to be older than the people who have traditionally bought the most music), fund said account, and then transfer payment to the artist. Those are all major steps, and as anyone who has ever designed a consumer-facing website will tell you, some large percentage of users will turn away at each of them.

Making good music costs money, which new musicians don’t have.

Even without the expense of pressing or distributing CDs, there is a significant cost barrier to recording an hour of music. A major label record typically costs over a half a million to produce. Tours don’t organize themselves and t-shirts don’t grow on trees.

And, most importantly, music doesn’t promote itself. What Americans listen to is largely a function of where record labels spend their marketing dollars. Radio time is still for sale, despite the passage of laws designed to prevent such behavior, and it always will be. Even in the forthcoming era of ubiquitous, high speed, wireless internet (IP radio in your car or on your iPod isn’t that far away) marketers will ensure that you find the music they want you to. They might do it through MySpace or Pandora rather than KROQ as mediums change, but it won’t really be any different. As Led Zeppelin would say, the song remains the same.

Making money in the music industry will always require capital, which musicians, until they’re successful (and, thanks to heroin, oftentimes even after) do not have. So where will it come from? I think the answer was just revealed to us by none other than Madonna.

The Material Girl recently signed a contract with Live Nation, the exact terms of which are unknown, involving a combination of recording and touring. This, I think, is the future of the music business. Recorded music has become a valueless commodity, but live music never can. The experience of a concert can never be digitized and uploaded. It can’t be cheapened. And it’s also the largest remaining source of revenue for artists. In fact for many it’s virtually the only.

Promoters like Live Nation will gamble on new artists. They’ll give the albums away freely, or at least very cheaply, because they’re nothing but a marketing ploy to get customers in the door. They’re already becoming more efficient than ever at putting asses in seats by using sites like MySpace (and, in the future, probably ones more like Songkick) and they’ll only get better. They have a revenue model that’s not only impervious to the internet but fully embraces it. And it’s profitable enough to spend a little money on exploration.

In the end the record labels won’t be able to keep up, as they’re fighting against both the artists and the consumers. They’re a middle man, and they’ve been loathed for decades by both ends. And now that technology has eliminated the supply chain and concert promoters are stepping up with the seed investment necessary to develop new talent, they serve no function.

Response to Madonna’s contract so far has been minimal, with Live Nation’s stock slumping. But that’s because people are viewing this as a risky, long term deal with a performance artist who may already be past her prime. And perhaps that’s true. Who knows? I’m not a Madonna fan at all, but I have to admire how she has managed to remain relevant for so long. I don’t think it’s safe to count her out.

So this one might go south for them, or it might not. But it doesn’t matter, because this is much bigger than one old lady who likes to sing about sex. It’s the opening salvo in the war for control of the music industry in the digital age.

What the Record Labels Can Do

The writing is pretty much on the wall, so for a record label to have a chance they should do the following:

1. Ditch DRM. This seems to be in progress, and I expect it to be complete in one to two years. Good job fellas. Of course I (and anyone else under the age of 32) could have told you this five years ago, but you were out golfing and didn’t get the memo. I don’t blame you, I would have been too.
2. Acquire Live Nation and their competitors. You’re going to lose money on albums, or at least make nowhere what you used to. Make it up on tours. Be a one stop shop. You can abuse artists on touring contracts as badly as you do on recording. You graduated from Harvard, they dropped out junior year of high school in Detroit. You can do this.
3. Use the internet to auction off concert tickets. Right now all of the good ones go to brokers, who flip them for much more. This costs money to those selling the tickets (who could have sold them directly for the higher prices) and for the consumers, who have to pay the middle man’s salary.

    

   Sell the good seats online via Dutch auctions. You’ll put the brokers out of business, make customers happy, and keep the extra cash for yourselves.

4. Stop suing your customers. Apologize for it, and return all fines to those you took them from. This is going to help salvage good will, which you’ll need for…
5. Do what every other industry does when it becomes commoditized. Create a premium, super high quality audio product. It worked for purses and beer, it will work for you. Convince me that I need a 13.1 speaker set and a tuner that is RIAA certified.

    

I’m just speculating here as to how to go upscale, but like I said, you got your MBA from the Wharton School. I’m just a dumb American consumer. Make me want to buy something that I can’t download and make fun of people who purchase cheap knock-offs. If you can’t convince me that I need to pay for something I happily lived the first 27 years of my life without, you might as well start flipping burgers because it doesn’t get any easier than that.

This entry was posted on November 13, 2007 at 2:30 am and is filed under Me Thinking So You Don't Have To . You can follow any responses to this entry through the RSS 2.0 feed Both comments and pings are currently closed.