Digital Music: Should it be Free?

Digital Music: Should it be Free?

• No, the artists and songwriters need to make a living

Tonight’s Seminar

•1) How people have made money from the music business until now

•2) The impact of unauthorized file-sharing

•3) Does the music business have a future?

•4) Electronics Business VS. The Labels

•5) ISP’s VS. The Labels

•6) Music Business VS. Music Business

•7) Steve Gordon’s vision of the future

Herbie Hancock

• “I’m deeply concerned about the outcome of the online music conflict, and with good reason: playing music happens to be my livelihood. For the hard work involved in being a middleman, the label is certainly entitled to a decent profit. But not a killing. To make huge amounts of money on the backs of artists who are not fairly compensated sours the relationship and creates bad will that lasts a long time. Believe me, I’m not happy about the business model that the record companies have been running until now. They have proven again and again that they are far from angels, far from having even a casual interest in giving artists and songwriters a fair share. They have been ripping off artists, writers, and the public for close to a century, to the point where I can honestly say I don’t trust them at all. Knowing what they do about past bad faith makes artists bristle when the industry says it’s just trying to “defend artists’ rights.” Who wouldn’t resent being used as a pawn this way?”

Herbie Hancock (Continued)

• “Napster, on the other hand, is no solution. So far, it’s even worse than the labels. On the way to making millions for its owners and investors, Napster has yet to give anything to artists other than the chance to spread their music, for free, and whether they like it or not. Its supporters hide behind claims that labels misuse artists and consumers, as if that entitled them to take everything they want absolutely free. Excuse me, but just because record executives give artists a bad deal doesn’t mean that everyone else can then go and do worse. Although the appeal to consumers is obvious-who wouldn’t want free music?-the law, and common morality, forbids stealing. I’m not afraid of technology, and hope that a system can be worked out that enables consumers that would also reward artists. Maybe this is even the beginning of what might grow into something great.”

Royalties & Recoupment

• Typical Artists Royalty: 10% - 15% of retail selling price AFTER RECOUPMENT.

• 15% X $15 = $2.25

• Production Costs……………..$200,000

• Independent Promotion……...$100,000

• Video Costs…………………...$100,000

• Total……………………………$400,000

Royalties & Recoupment

• Royalty = $2.25

• Cost = $400,000

• Recoupment at Records Sold = approximately 175,000 units

Deductions

• Royalty = $2.25 / unit

• Deductions:– Packaging…………………25%– Free Goods……………….10%– Net Sales………………….10%– CD Reduction……………..10%

• Real Royalty = $1.00

Recoupment After Deductions

• Costs $400,000

• True Royalty = $1.00 / unit

• Recoupment at 400,000 units

Unauthorized File-Sharing

• Sales down 10% - 15%

• Whose ox is gored?

• Superstar Artists

• Record Companies

Jacko

Unauthorized File-Sharing• In Digital Songstream (2003), Brad Hill

writes:– “The internet has proved an upsetting force, weakening the once

supreme synergy of broadcast radio and per-unit sales of recorded music. The net has driven a wedge between consumers and the music industry in two major ways:

• Webcasted music (internet radio) gives listeners one-click access to thousands of alternative programmers around the world, rendering the geographic limitation of “terrestrial” broadcasting, and its corporate-controlled playlists, dated anachronisms.

• Effortless global distribution of recorded material at the grassroots level (file-sharing) peels the music from the disc and generally reduces the value of per-unit sales.

Apocalyptic thinkers believe that these forces represent a wrecking ball that has already crashed through the media world as we know it and destroyed any legitimate marketplace for commercial music.”

Does the Music Biz Have a Future?

• That depends

• Competing Financial Interests

• Electronics Business VS. The Labels

• ISP’s VS. The Labels

WIRED Magazine Article

The Year the Music Dies by Charles C. Mann

• As recently as 10 years ago, the media conglomerates that own record labels regarded them as cash cows - smaller than Hollywood but more reliably profitable. Now all five major labels are either losing money or barely in the black, and the industry's decline is turning into a plunge. In the next year, whether together or separately, the labels will have to set about totally reinventing the way they do business, a horribly difficult task for any institution.

• The record labels blame piracy for their woes. And they're right - in part. Before writing this paragraph, I logged on to Kazaa. At 10 on a Monday morning, hardly peak time, 3.1 million people were on the network - more simultaneous users than Napster ever had in its heyday.

• The industry rightly believes that if it can make file-swapping more difficult, and legitimate online services easier and less expensive, it can turn the kids on Kazaa into paying customers. Pursuing this two-pronged approach, the companies are spending millions on their own Internet services (pressplay from Universal and Sony; MusicNet from BMG, EMI, and Warner), on lawyers to chase away pirates and peer-to-peer networks, and on anti-piracy ads featuring the likes of Britney Spears.

Does the Music Biz Have a Future?• But this won't be enough. To survive, the industry

will need the active assistance of friends it doesn't have. The labels may be able to kill Kazaa, but they won't be able to stop even more decentralized networks like Gnutella without help from Internet service providers, cable operators, and telephone companies. All their efforts to get DVD-like protection for CDs ultimately depend on the goodwill of hardware manufacturers and Capitol Hill. The online subscription services will flounder without cooperation from performers, songwriters, and record stores. And the ability of Britney to change the hearts and minds of music fans depends on public sympathy.

Electronics Biz VS The Labels

• “Burn your own music”– Display for MP3 player at the Sony Music Store in New York.

• “Sony Music wants to entertain you. Sony Electronics wants to equip you. The problem is that when it comes to digital media, their interests are diametrically opposed.”

– Frank Rose (WIRED Magazine, February 2003)

Electronics Biz VS The Labels

• “Our intent is to provide rich content and services to users without any frustration, without any stress. Initially, because of our content group, we tried to protect the rights of labels and artists too much, so this made it very difficult for consumers to use the machine.”.

– Kunitake Ando, President Sony Corp.

Salon.com Article

The world's biggest Internet provider is also the world's biggest media company. As the entertainment industry prosecutes users who share music, will AOL take a stand?

“AOL’s Jekyll and Hyde Act” by Farhad Manjoo

“One day last summer, a person using Verizon to access the Internet logged on to Kazaa, a popular peer-to-peer music-swapping service, and started downloading MP3s. It was the sort of thing that millions of people do every day; the only difference this time was that an analyst at the Recording Industry Association of America was monitoring the action.”

“The RIAA's efforts to obtain this single Verizon subscriber's identity has ballooned into a major courtroom battle over the scope of the Digital Millennium Copyright Act, the 1998 law that outlines protections for online content. The litigation has split the ranks of Internet service providers and content companies: ISPs, who say they worry about their subscribers' privacy, have generally sided with Verizon, while copyright holders have supported the RIAA.”

“AOL’s Jekyll and Hyde Act” by Farhad Manjoo

In January, U.S. District Judge John Bates ruled in the recording industry's favor, ordering Verizon to hand over the Kazaa user's name and address.

The ISPs are worried that they'll be flooded with requests for their subscribers' information, and that they'll have no way to determine the accuracy of these claims.

"You could simply walk into a courthouse, sign a form, and send us a subpoena," says Les Seagraves, the chief privacy officer of EarthLink. "We would have to turn over the name and address of that user. And of course that could get abused -- and there's really nothing we could do about it. The volume of these things would increase, and we'd find ourselves in the subpoena-compliance business, not the Internet business."

Verizon plans to appeal the ruling, and dozens of ISPs have supported its position. But AOL Time Warner has said nothing about the case. The company's online unit has declined to explain what it thinks of the legality of the type of DMCA subpoenas the RIAA seeks, or whether, like other ISPs, it fears being inundated with requests for its users' private info.

Music Biz VS. Music Biz

Authorized On-line Services - MusicNet - Pressplay - Listen.com (Rhapsody) - Full Audio (MusicNow)

Problems

1) Downloads

2) Portability

3) Content

The Labels’ Fixes

STATE OF THE ART The Internet as Jukebox, at a PriceBy DAVID POGUENEW YORK TIMES 3/6/03 BEFUDDLEMENT (n.): 1. Confusion resulting from failure to understand. 2. Loss of sense of direction, position, or relationship with one's surroundings. 3. The state of the recording industry as it tries to sell music on the Internet.

THE only thing record companies know for sure is that they want to kill off the insanely popular Sons of Napster: free music-sharing services like KaZaA, Gnutella and Morpheus. After all, the millions who use these services are in effect stealing music, depriving the five major labels of perfectly good money. But watching the record companies as they try to find a formula for a successful paid alternative is like watching five people play blindman's bluff on stilts.

The Labels’ Fixes (Continued)

Monthly Fee

Listening Online

Temporary Downloads

Burnable Downloads

Included

Burnable Downloads Additional Charge

RhapsodyLISTEN.com

$5

$10

Unlimited

Unlimited

None

Unlimited

None

None

None

$1 apiece

Pressplay $10

$18

Unlimited

Unlimited

Unlimited

Unlimited

None

10

$6 for 5 songs,

$10 for 10 songs

RealOne

MusicPass

$10 100 Songs

100 None None

MusicNet on AOL

$9

$18

Unlimited

Unlimited

Unlimited

Unlimited

None

10

None

None

MusicNowFULLAUDIO

$5

$10

Unlimited

Unlimited

None

Unlimited

None

None

$1 apiece

$1 apiece

Limited Portability• Even if you pay for downloads:

“You still can’t move these files to another computer or e-mail them.”

“Nonetheless, this approach is the closest the music services have come to a compromise between what music fans want (flexibility to use what they have bought) and what the record companies want (preventing file swapping).”

The Net as Jukebox by David Pogue

NEW YORK TIMES 3/6

Limited Content

The Artists

“…some of the biggest performers, or their agents, refuse to play the online-music game. You won’t find much of anything from Madonna, Led Zeppelin, the Rolling Stones, Pearl Jam or the Beatles, for example.”

The Net as Jukebox by David Pogue

NEW YORK TIMES 3/6

Other issues resulting in limited content:

Samples

Guest Artists

Music Clearances

Limited Content

Limited Content

“Most of these services offer pretty much the same 250,000 songs … That's certainly enough music to cover, say, an aerobics workout, but it is by no means every pop song every written.”

“You'll encounter big holes in the Billboard

Top 100 list, for example.”

The Net as Jukebox by David PogueNEW YORK TIMES 3/6

A Possible Solution:Compulsory Licensing

• All Masters

• Digital Distribution

• Including the Songs

How a Compulsory License Would Work

c|net News.Com (January 18,2003) reported that Hilary Rosen, Chairman & CEO of RIAA

“…suggested one possible scenario for recouping lost sales from online piracy would be to impose a type of fee on ISPs that could be passed on to their customers who frequent these file-swapping services.”

Advantages of the Compulsory License Paradigm

1)The labels would get paid

2)The artists would get paid

3)Music would be cheaper

4)More diversity

And if a solution is not found……….