14 January 2008 @ 8:26AM >> The Economist reports on the music industry’s woes:

In public, of course, music executives continued to talk a good game: recovery was just around the corner, they argued, and digital downloads would rescue the music business. But the results from 2007 confirm what EMI’s focus group showed: that the record industry’s main product, the CD, which in 2006 accounted for over 80% of total global sales, is rapidly fading away. In America, according to Nielsen SoundScan, the volume of physical albums sold dropped by 19% in 2007 from the year before-faster than anyone had expected. For the first half of 2007, sales of music on CD and other physical formats fell by 6% in Britain, by 9% in Japan, France and Spain, by 12% in Italy, 14% in Australia and 21% in Canada. (Sales were flat in Germany.) Paid digital downloads grew rapidly, but did not begin to make up for the loss of revenue from CDs. More worryingly for the industry, the growth of digital downloads appears to be slowing.

“In 2007 it became clear that the recorded-music industry is contracting and that it will be a very different beast from what it was in the 20th century,” says Mark Mulligan, an analyst at JupiterResearch. Last year several big-name artists bypassed the record labels altogether. Madonna left Warner Music to strike a deal with Live Nation, a concert promoter, and the Eagles distributed a bestselling album in America without any help from a record label. Radiohead, a British band, deserted EMI to release an album over the internet. These were isolated, unusual deals, by artists whose careers had already brought years of profits to the big music companies. But they made the labels look irrelevant and will no doubt prompt other artists to think about leaving them too.

The prime function of a record label is to scout, identify and promote talent. Distribution is obviously key to the business, but it’s largely a function of logistics and technology, and it’s tangential to the consumer’s interest in the product.

Talent identification and promotion is the real business value as far as consumers are concerned, simply because there are lots of people producing music, most of which probably wouldn’t appeal to any given person. So the role of record labels—first as a filter selecting talent, then as a megaphone promoting it—is a useful function. But this role doesn’t necessarily have to fulfilled by labels. Friends who share your musical tastes might do it, for example. But in order for your friends to turn you on to some good music, they have to be introduced to it somehow.

Social networking sites online amplify the ability of individuals to act as filters and as promoters of what they like. People list their favorite bands on sites like Myspace, and their friends can click over to the band’s profile and often listen to a few tracks for free. More people can be exposed to more music through their friends on Myspace than in real-life casual conversation, so an increasing portion of the role played by record labels is now be handled by individuals, online.

Market changes might force labels to become smaller, but the same technology that’s destroying their current business model will also let labels do more with less. If individuals are taking on more of the role of promoter, any promotion done by record labels will be amplified in a way that didn’t happen in the past. Special-interest niches can be targeted like never before, and the amateur music enthusiasts with influential online presences can be identified and courted by labels seeking to tout the next great act.

Record labels won’t disappear altogether, because there will always be a role for professional filters. Talent needs to be scouted, and promotion will always be helpful in connecting people to new music. But the balance of power in the music industry is shifting, seismically. Labels will be smaller, but they have the potential to be sleeker. And if this gives artists an opportunity to keep more of the revenue their work generates, that won’t be a bad thing.

12 January 2008 @ 12:21PM >> Matt Walliser writes in to say:

In your January 2 article titled “From Rainbows to Downloads” you suggest (emphasis mine)

when songs are stored as data and can be moved around like any other computer file, consumers will only ever need to buy one copy. As long as open formats are used, people will be able to play their music on any device devised in the future.

In February 2006 I wrote to you in regards to iTunes reaching 1 Billion downloads, loosely predicting that the music industry’s reluctance to evolve would only serve to strengthen Apple’s dominant position in the marketplace (or something like that). Recent anti-trust lawsuits filed against Apple with respect to monopolization of format simultaneously reinforce both your point (above) and mine. For clarification’s sake: I’m neither condemning nor condoning the actions Apple has taken that have brought about the lawsuit (predatory pricing of their hardware being the most credible, imho), I’m merely calling it like I see it.

Even though the music business has been fighting the trend towards Apple’s online distribution dominance since at least 2005, ironically, one reason Apple has so much power today is because of bad decisions made by the music labels themselves.

For years, labels have demanded that digital music be burdened with copy protection technology. In order to get permission to sell music through the iTunes Music Store, labels required Apple to implement copy protection, which they did. That technology, called FairPlay, is one of the less onerous copy protection schemes out there, but it does mean that music files purchased through the iTunes Music Store can’t be played by non-Apple devices (although they can be burned onto standard CDs, which can then be used in any standard CD player). In other words, the labels’ insistence on copy protection ended up giving Apple the ability to lock customers into its file formats, thereby making it more difficult for those customers to switch to devices sold by Apple’s competitors.

Steve Jobs has called on the recording industry to abandon copy protection, and after one label granted permission, Apple now sells some songs in MP3 format without copy protection. Competitors like Amazon are now selling music in unprotected MP3 format as well. Maybe the recording industry is slowly waking up.

Still, I can’t help thinking that Steve Jobs is secretly smiling to himself, knowing that the long-running short-sightedness of the music business is part of the reason that Apple enjoys such dominance in online music distribution. If music labels had allowed sales of unprotected MP3s right from the start, Apple’s iPod would probably be just as dominant in the market for portable music players, but the iTunes Music Store would likely be a different story.

2 January 2008 @ 8:57AM >> Two of my favorite creative minds in music—Thom Yorke and David Byrne—recently sat down to discuss the future of the music business. Last October, Yorke’s band Radiohead released its latest album, In Rainbows. But rather than releasing it through a traditional music label, Radiohead let fans download the music directly from its website. And rather than charging a fixed amount for the album, users were given the option of naming their own price—down to and including zero.

The sinking fortunes of the music industry establishment may have been instigated by technological change, but they are worsened by the industry’s unwillingness to let consumers buy music that isn’t locked to specific formats or media. It’s like peering into the future of the movie industry.

In both cases, you have industries whose fortunes have been protected for decades by the commingling of content and medium. Record albums weren’t just vinyl, they were vinyl with embedded music: the music couldn’t exist without the physical medium. As tapes replaced records and CDs replaced tapes, higher fidelity and increased convenience of each new format gave consumers a reason to re-purchase content that they already paid for in lesser formats. But when songs are stored as data and can be moved around like any other computer file, consumers will only ever need to buy one copy. As long as open formats are used, people will be able to play their music on any device devised in the future. There goes the upgrade gravy train.

Like the music industry, the film industry is rightfully concerned with piracy, because once music and movies aren’t tied to a physical medium, they can be copied endlessly. But consumers don’t care if this inconveniences the industry; people have shown that they want the convenience of digital content, and they are willing to pay for it. So the more that record companies lock down digital content in order to fight piracy, the less incentive legitimate customers have to buy the product in the first place. What good is the “music as a file” model if it is artificially burdened with the same limitations as physical media?

The movie business hasn’t been hurt by the shift away from physical media yet. But that’s only because technology hasn’t advanced far enough. It takes a lot more data to store a high-definition movie than an album’s worth of high-fidelity music. When a typical consumer’s Internet connection becomes fast enough to download high-definition full-length movies in a matter of minutes, the home market for movies will be subject to same technological dynamics affecting the music business today. And that future is only years away.

But that isn’t the film industry’s biggest problem right now. After all, people won’t pirate content that they don’t want to watch in the first place.

The problem with the film business is that too many insiders forgot that the rest of America doesn’t necessarily share the same view of the world as their friends in Hollywood. Instead, Hollywood has become its own echo chamber, which is why distributors keep pushing out flop after flop of military-bashing films. In Hollywood and at film festivals, such fare is highly praised. But in theaters around the country, the audience for films like Redacted is comprised mostly of empty seats. It’s almost as if Hollywood is producing films only for itself.

My experience in trying to get distribution for Indoctrinate U only confirms this. People in the film business just don’t take seriously the possibility that there’s a market for documentaries outside Hollywood’s typical Michael Moore/Al Gore worldview. I don’t know to what extent that’s out of political bias or the result of a simple Catch-22: they don’t see a market for anything different, but that’s because they’ve never tried distributing anything different.

That leaves us in the position of having to self-distribute Indoctrinate U. And because the Internet will allow us to put the film in people’s hands in the fastest, most cost-effective way possible, we’ll be able to conduct a little experiment of our own. Indoctrinate U will not be available on DVD right away. Instead, we’re going to focus our efforts on seeing whether the Internet can be used to route around the gatekeepers in Hollywood—without the shackles of physical media. (Although unlike Radiohead, I’m afraid, we’re not in a position to give our goods away for free.)

Who knows? Maybe the market can be proven without Hollywood’s help. I think it can. And once the market is proven, we’ll finally know who in the film business wants to serve customer desires instead of the dogma of Hollywood groupthink.

8 October 2007 >> BBC News reports of a company getting sued for copyright infringement because their employees are listening to the radio and—gasp!—the radio “could be heard by colleagues and customers.”

30 November 2006 @ 8:52AM >> The CEO of the world’s largest music publisher is attempting to extract money from everyone who buys a digital music player.

Universal Music Group’s Chairman and CEO Doug Morris said of iPods and similar players, “These devices are just repositories for stolen music, and they all know it. So it’s time to get paid for it.”

By accusing everyone who bought a digital music player of piracy, Universal hopes to coerce manufacturers of these devices to pay a per-unit fee, a surcharge that is then passed on to the consumer. (Universal apparently figured out that running a profitable business is much easier without the burden of convincing customers that your product is worth buying.) That’s exactly what the music giant did with Microsoft, which now pays Universal for every Zune music player sold.

Now, Universal is targeting the iPod. And with 25% of the market, Universal has quite a bit of leverage against Apple. The company can threaten to pull all of its music from the iTunes Music Store unless Apple complies with a demand to impose a per-unit fee on all iPods. If successful, anyone who buys an iPod will be considered an assumed pirate, and Universal will receive money, regardless of whether any music from that label ever ends up on one of those iPods.

Is this really a road that music publishers want to go down? Aside from the obvious ill will it engenders from honest customers, such a move runs the risk of changing the purchasing calculations of people who own these devices. In effect, it legitimizes piracy in the minds of consumers.

If you’re an honest customer who purchases music today, your decision making may change if you know that record labels charge you simply for buying a music player. You’re already paying once up front—before you’ve even spent a dime to fill the device with music—so why pay again for the same thing when you want to download music? People will feel entitled to download whatever music they want, because they will know that they’ve already been billed for it.

Treating your customers like crooks is never a good way to encourage repeat business. And imposing a blanket music surcharge simply for buying a player is a surefire way to get people thinking that they’ve got a right to download music that they’ve already paid for.

If record labels wanted to ensure that paying customers today become pirates tomorrow, they couldn’t have designed a better way.

25 February 2006 @ 11:38AM >> Reader Matt Walliser writes:

Evan,

Recent news about iTunes hitting their billionth download made me think a little more about your post a while back about the recording industry not adapting to new mediums. If they’re not careful, they’ll obsolete themselves to Apple’s iTunes. Apple has made it so convenient to get music onto your iPod, that people don’t seem to mind paying a buck for a song. The lawsuits brought forth by the RIAA agianst people who download music can only serve to push people towards iTunes. If Apple creates their own label and plays their cards right, they could have channel dominance from top to bottom. The best part is, it’s being handed to them by the very channel they’re about displace!

While I’d hate for any one company to completely control music distribution, the massive success of iTunes is a wake-up call to an industry that has been hitting the snooze button on every previous wake-up call since the dawn of the Internet era. Maybe this time, the industry will pay attention.

17 December 2005 @ 10:57AM >> There are many reasons why music CDs make unwise purchases.

But for those parents who still don’t quite get it, here’s a website that will help you make the right purchase for your kids.

5 December 2005 @ 12:59PM >> A systems analyst recently discovered that Sony’s CD copy protection scheme can damage your computer’s operating system installation and leave your system vulnerable to hackers. Recently, the Department of Homeland Security took notice, leading to a rebuke from Stewart Baker, the department’s assistant secretary for policy, who chastised Sony: “It’s very important to remember that it’s your intellectual property — it’s not your computer.”

4 November 2005 @ 12:16PM >> Three years ago, I warned about music CDs that were deliberately corrupted by manufacturers in order to prevent copying. Because such CDs were really not CDs at all—they violate the published standard for music CDs—some computers had trouble handling them, and the corrupted discs could cause those computers to crash.

Now Sony Music, in an attempt to stem piracy, is putting out a new form of CD containing copy protection code that hides itself on your computer. The software, which is technologically similar to spyware and computer viruses, has no uninstall feature, and attempting to remove it manually can render your CD drive inoperable.

The Washington Post reports:

The CDs in question make use of a technique employed by software programs known in security circles as “rootkits,” a set of tools attackers can use to maintain control over a computer system once they have broken in.

People may differ over what exactly a rootkit is, but the most basic ones are designed to ensure that regular PC monitoring commands and tools cannot see whatever has been planted on the victim’s machine. Because rootkits generally get their hooks into the most basic level of an operating system, it is sometimes easier (and safer) to reformat the affected computer’s hard drive than to surgically remove the intruder.

Sony’s anti-piracy program installer pops up when you drop one of these content-protected CDs into your drive. If you agree to install it, there is no “uninstall” feature. [Mark Russinovich, who discovered Sony’s rootkit software,] was able to use his knowledge of rootkits and the Windows operating system to zero in on the offending driver files needed to run the software. Unfortunately, he found that removing the program also erased the system files that power his CD-ROM drive, rendering it useless.

Russinovich also discovered that the Sony program drivers are configured to load themselves in “Safe Mode” (a diagnostic mode of Windows that is useful for fixing problems with the operating system), which he said could make system recovery extremely difficult if any of the program drivers has a bug that prevents the system from booting.

2 September 2005 @ 10:35AM >> In a posting aptly entitled “Recording industry announces plans to screw up remaining business model,” John Paczkowski at Good Morning Silicon Valley notes that some in the music industry are upset about Apple’s success with its online music store. Apparently, the store isn’t sufficiently bleeding customers dry, which may have something to do with its success:

The New York Times reports that some record labels, jealous of the profits Apple is making on sales of the iPod, are pushing the company to abandon the $.99 uniform pricing approach that has made iTunes so successful and instead adopt a multitiered model that would price songs by their popularity. New songs, they say, should be priced at up to $1.49; older, less popular songs at $.99 or less.

“I just think the music companies are now at a point where there’s too much money on the table not to insist [Apple accept variable prices],” Paul Vidich, a special adviser to America Online and former executive vice president of the Warner Music Group, told the Times. “The question is what do they want the profile of the business to look like going forward?”

Indeed. And beyond that, is the market for paid downloads established enough to sustain such a pricing adjustment in its dominant service? A sudden shift away from the $.99 sweet spot could send consumers fleeing back to the file-sharing networks.

Ironic, isn’t it, that the recording industry, which two years ago had no digital music strategy to speak of, is today trying to muscle the company that gave it a digital music revenue stream. “As I recall, three years ago these guys were wandering around with their hands out looking for someone to save them,” said Mike McGuire, an analyst at Gartner G2. “It’d be rather silly to try to destabilize [Apple], because iTunes is one of the few bright spots in the industry right now. [It’s] got something that’s working.”

For years, the recording industry has resisted the notion that its current business model is obsolete in the era of music-as-files. Even though the iPod and other MP3 players have effectively separated music from its physical medium, the industry itself has done little to embrace the mechanism that more and more people prefer for their music enjoyment. Instead, they’ve been busy suing teenagers who download music illegally and trying to prop up an outmoded distribution model. Music no longer needs to be trapped in circles of plastic, but the music business is so paralyzed by panic that they’re ignoring what customers want.

Is the industry so short-sighted that it would take the risk of knifing the most successful legal online music system? Probably. But disrupting the iTunes Music Store may just send many currently paying customers back to the illegal downloading.

If individual songs cost $1.49 each, many CDs would cost more if you bought them online than in a store. This doesn’t make any sense; the incremental cost of each album sold online is basically zero, whereas each CD obviously has the cost of materials embedded in the price. Many people will feel ripped off to pay a premium that provides them with nothing, so they probably won’t go back to legal online music buying. But it’s even less likely that they’ll go back to buying CDs, and that’s precisely the danger for the music industry.

31 May 2005 @ 10:54AM >> For the first time in history, a cell-phone ring tone tops a major music singles chart. I have no idea what to make of this, but that won’t stop me from declaring it some sort of significant cultural shift.

Prediction: The near future will be littered with scores of low-fidelity re-renderings of yesterday’s icons.

21 May 2003 >> The success of Apple’s new online music venture shows that people are willing to pay for things that they could otherwise steal. The trick is relaxing the restrictions that competing systems have imposed on paying customers. Will the music industry take note and completely abandon intrusive “digital right management” schemes? Let’s hope so. If they need any more convincing, they should heed the lesson learned repeatedly by the software industry: pissing off paying customers isn’t good for business. More >>

3 June 2002 >> “How would you feel if you went to your local music store, bought a tape of your favorite band’s latest release, and discovered that playing it in your car damaged the stereo so severely that your entire car needed to be brought in for servicing? Or what if the tape you just bought were incompatible with your walkman, so you couldn’t listen to it at the gym or while jogging? What would you think if you found out that the music industry intentionally manufactured tapes so that their customers would suffer this damage and inconvenience?” More >>