EMERGING TECHNOLOGIES AND INTERACTIVE MEDIA

When this book was first published, the iPod had not been invented. The industry was still in the beginning stages of learning how to harness the power of the Internet to promote and distribute music. Today, peer-to-peer (P2P) file sharing over the Internet is the only way many enthusiasts discover and consume their music. This easy accessibility of music has enabled the music industry to flourish.

THE RECORD BUSINESS IS ONLY A PART OF THE MUSIC INDUSTRY

The music industry is booming, but the record business is struggling. Since the advent of digital music, compact disc sales have steadily declined. According to Nielsen SoundScan, in the first quarter of 2006, the record business sold 112 million CDs to U.S. consumers, down from the previous year. During the same quarter in 2007, that number dropped again to only 89 million. Album sales fell 18 percent between 2000 and 2006, after accounting for paid digital downloads from online stores like iTunes. Worldwide sales are down commensurately throughout the rest of the world.

Some attribute the downfall of CD purchases to the digitization of music and the advent of personal computers with CD-recording capability, which led to widespread copying and burning of music tracks on home systems. Others blame the combination of high-speed Internet connections, the advent of MP3 files and players, and P2P file sharing for diminishing sales. But the actual fault may lie with the record companies themselves, who vigorously battled against new technology instead of channeling those resources into discovering ways to make it work for them.

THE RECORD BUSINESS HAS A HISTORY OF CLINGING TO THE PAST WHILE FIGHTING INNOVATION

• • Record executives argued the standardization of cassette recorders and tapes in the 1960s, complaining that teenagers taped and swapped their favorite vinyl albums, and advocated for a tax on blank cassettes to make up for lost revenue from bootlegged tape trading. In the 1980s, legislators finally granted music labels a portion of the earnings from every blank tape sold.
• • Record labels barely acknowledged the 1982 arrival of MTV—whose staff had to beg record companies for copies of already produced promotional videos to air on the burgeoning music network. Before long, MTV was the most powerful music station on the planet, reaching tens of millions of young music-buying fans. MTV forced record companies to reevaluate how they did business. Artists’ looks and potential video appeal became major factors in executives’ decisions to sign them to a recording contract. Resources had to be allocated for video production and marketing, sometimes cutting into funds previously allotted for recording. Today, music channels like MTV, VH-1, CMT, BET, and other video outlets have become an integral part of a record label's marketing strategy.
• • When the CD entered the marketplace in the early 1980s, the recording industry began a shift from analog to digital recording. Many resisted digitization of music because they felt it lost the warmth and pure organic sound of analog. The release of digitized music on CD opened the door for bootleggers to make infinite numbers of near-perfect copies of recordings. By the early 1990s, personal computer manufacturers saw the potential of audio applications and began developing affordable consumer machines that included CD-ROM devices and high-quality speakers that could be attached or built right into the computer itself. Soon music fans were swapping tracks and copying and burning their own CDs. The recording business fought back with new legislation. The Audio Home Recording Act of 1992 required manufacturers of digital records to pay a 2 percent royalty rate to copyright holders to compensate for the ease of piracy that digital recording allows and required that recorders contain a device to prohibit serial copying.
• • In the late 1990s, instead of embracing MP3 as the new dominant format, record labels banned together and attacked. In 1998, the Recording Industry Association of America (RIAA) filed a lawsuit against Diamond Multimedia, the manufacturer of the Rio MP3 player. That same year they filed the first of many suits against Internet “pirates” for posting audio files online and allowing anyone to download them for free. And then Napster came along.
• • Ready or not, the recording industry was forever changed in May 1999 by the unveiling of Napster. The first P2P network, Napster made it possible for users to share and swap music files by remotely accessing each other's hard drives. The major record companies, namely EMI, Sony BMG, Universal, and Warner, felt so threatened by Napster that they joined forces to sue it out of business. Months after its launch, the RIAA filed suit against Napster for alleged copyright infringement. After two years of legal battles, Napster was ordered to remove all copyrighted material from its network, and the service shut down in July 2001 (after filing bankruptcy and selling off assets, Napster re-opened in 2004 as Napster, Inc., a paid subscription service). At the time of its closing, Napster had around 14 million users. Experts in the industry assert that billions of dollars in revenue were lost by suing Napster and trying to thwart P2P file sharing, rather than negotiating a model that would benefit everyone. Seemingly overnight, other P2P file sharing services, such as Grokster, Kazaa, and Morpheus, sprang up. The RIAA filed suit against them in October 2001. Because these networks did not use a centralized server, as Napster did, it was ruled they could not be held liable for illegal activity of file sharing that may take place within their networks. The enormous publicity surrounding the legal scuffles did not scare off users, as the record companies had hoped. The harder they fought against this new distribution channel, the more popular it became.

ARE RECORD COMPANIES AT FAULT FOR THE BROKEN SYSTEM?

Some blamed diminishing CD sales on P2P file sharing; others place the blame with the record labels themselves. Over the last several years, label executives have made a series of botched opportunity decisions. Among their biggest was a failure to address online piracy at the outset and make peace with Napster.

In 2000, the music industry's top executives gathered for secret talks with Napster CEO Hank Berry. Those present included CEOs from Bertelsmann (BMG), Universal, and Sony Corporation. They discussed assessing a monthly subscription fee of around $10 from the estimated 38 million users. Napster publicly offered $1 billion to settle the dispute and to form an agreement to move forward. Labels executives caught cross-fire from retailers who did not want product sold online for less than in-store prices and from artists who feared their promotional deals and sales through Wal-Mart and Best Buy might be jeopardized. In the end, the record labels never completed a deal and instead forced Napster to close in July 2001.

Over the next two years, the labels continued to file lawsuits against unauthorized file sharing sites and failed to offer the public a viable legal alternative. A few labels made unsuccessful attempts at starting their own subscription services: PressPlay, a joint venture between Sony Music Entertainment and Universal Music, carried only those two companies’ music, and MusicNet—backed by EMI Recorded Music, BMG Entertainment, Warner Music Group, in partnership with streaming media company RealNetworks—which carried BMG, EMI, and Warner Music titles.

Consumers criticized both services for catalog limitations, their inability to interface with many MP3 players, and restrictions on burning tracks to CDs. Both services failed, while the public demand for and consumption of MP3-delivered music continued to grow.

In the fall of 2003, the RIAA began a full-blown assault on illegal downloading by filing numerous copyright infringement lawsuits. As of 2006, more than 17,000 lawsuits against music fans had been filed. Many were settled or dropped, like that against a 65-year-old Massachusetts grandmother, Sarah Seabury Ward, who was accused of illegally sharing many hip-hop tunes. Ward claimed she knew little about downloading and uploading songs online until a process server pounded on her door late one night.

The RIAA maintained the lawsuits were meant to spread the word that unauthorized file sharing can have consequences. But file sharing did not go away. In 2006, there was a 4.4 percent increase in the number of P2P users, and an estimated 1 billion tracks were downloaded illegally per month, according to research group BigChampagne. Still, record companies were slow to devise a model that would adequately service the online consumer.

In the midst of all the legal wrangling, Steve Jobs and his team at Apple Computers launched iTunes, an online music store, in 2003. Jobs was able to finally lead the recording industry into the digital age by convincing the five major record companies to license their catalogs of songs to Apple for distribution on iTunes. In addition to having a legitimate online music store, Apple also provided users with “rip, mix, burn” tools that made it easy for consumers to make their own CDs. In the first year, iTunes sold 70 million songs at $0.99 per song, earning nearly $70 million in legal Internet music sales. While CD sales diminished, the purchase of downloaded digital music increased. Music fans bought 582 million digital singles in 2006, up 65 percent from the previous year, and purchased $600 million worth of ringtones. However, these new revenue sources did not make up for the shortfall record companies were still experiencing.

Record executives were not happy to see iTunes/Apple/Steve Jobs making such a healthy profit off their product while their own earnings were shrinking. In late 2007, Universal Music Group announced they would not renew their long-term agreement with Apple. As a temporary solution, and possibly to strengthen their own bargaining power for a higher royalty rate, Universal formed an “at will”—meaning the record company could pull their titles at any time—arrangement with iTunes. This also opened the door for the record company to make deals with other online distributors. According to Nielsen SoundScan data, Universal's titles account for one out of every three new releases in the United States.

TRADITIONAL MAJOR RECORD COMPANIES MAY BE ON THE VERGE OF EXTINCTION

The Internet and emerging technologies have broken their hold on the distribution of recorded music. While some artists find ways to raise funds or barter time in the studio, advances in technology have made it possible for others to purchase hardware and software that enables them to produce quality recordings at home. In the past, once the recordings were finished, artists struggled to get marketing and distribution—national exposure and distribution required the backing of a major record label behind them. Thanks to the Internet, that is no longer the situation.

The advent of social networking sites and web radio have enabled artists to reach potential fans all over the world. Artists can produce their own video and get it played on YouTube, MySpace, Facebook, and other Internet sites and sell their recordings and merchandise over the web. Online exposure can build a fan base that supports live performances, where many acts make the majority of their income.

For some artists, the remaining functions that record labels fulfill, namely artist development, publicity, and radio and retail promotion, no longer (if they ever did) seem to warrant the financial and artistic rights signed away in a traditional recording contract. More and more artists are beginning to question the premium cost of being with a major record company and are instead opting to develop their own game plan.

In the late 1990s, after creative disputes with Warner Brothers, Prince publicly announced he felt like a prisoner to the record label by writing “slave” on his face. After Prince's contractual obligations with Warner were fulfilled and he was “freed” from the major, he turned to the Internet for distribution. Through his web site, Prince released an EP with seven different versions of the song “1999,” and a three-CD collection of previously unreleased material.

In 2007, Prince proved he not only was a musical visionary but had marketing ingenuity as well. He gave away his new album Planet Earth with the Daily Mail in the United Kingdom. The bold move paid off. When Prince announced performances at London's 02 Arena, the 140,000 tickets sold out in 20 minutes, causing the Internet booking site to crash. He added six more shows, making a total of 21 sold out performances.

Paul McCartney, whose young fans were born decades after his Beatles’ fame, chose a fresh-thinking partner over his old-school record company for the release of his 2007 album Memory Almost Full. He ended his long relationship with EMI Records after discovering they wanted six months to adequately set up and promote his new release. McCartney wanted to get the album out to his fans much sooner, so he partnered with Starbucks to become the first release on their Hear Music label.

To publicize the album release, McCartney made one track available via iTunes and later performed at the iTunes Music Festival in London. He also held free concerts in several cities and kept his fans updated on his MySpace page. However, one of the biggest events the Starbucks alliance made possible was a Global Listening Event to celebrate the album's release. More than 10,000 Starbucks stores in 29 countries and territories worldwide participated by playing the CD in store all day long. An estimated six million people were introduced to McCartney's new album in a single day and they could purchase it while picking up coffee.

Hard-rocker band Radiohead's recording contract with EMI/Capitol Records expired in 2003. The group has since foregone the traditional record label to handle recording, distribution, and marketing as they see fit. For the release of their seventh album In Rainbows in late 2007, they allowed online consumers to name their own purchase price. According to New Music Express, the average price paid was about $10.

The Eagles also went it alone without major record company support for their 2007 album release Long Road Out of Eden. The band formed an exclusive deal with mass merchant Wal-Mart to distribute the disc.

Back in 2005, country superstar Garth Brooks struck an exclusive multiyear deal with Wal-Mart stores for his entire catalog, which he took with him after his Capitol Nashville agreement was mutually terminated.

Established artists are not the only ones choosing to forge their own path, rather than signing on with a traditional major record company. Delbert McClinton and John Hiatt released albums through indie label New West Records. Ani DiFranco, Michelle Shocked, Jonatha Brooke, and Amee Mann have formed their own labels. Mann, her husband Michael Penn, and their manager Michael Hausman even formed United Musicians, an organization that provides support services to indie artists.

Some artists leave or forgo major labels because of creative and financial differences. The expensive overhead at major record companies means that many artists must sell a million records before earning any profits. First, they must recoup costs for recording, marketing, promotional tours—including limo rides and dinner for record executives working on their behalf—and other accumulated expenses. Considering that the artist is recouping these expenses at a rate of about 50 cents to $1 per album, they may never get out of debt to the label. Contrast that with an independent artist who might make $5-8 profit off each disc they sell and have complete creative control.

For the majority of artists, the main source of income is live performances and merchandise. For example, according to the The Wall Street Journal's figures, Madonna's four CDs released prior to her split from Warner Music sold 10.4 million copies in the United States, while her last three tours earned $385 million in ticket sales.

RECORD LABELS ARE NOT DEAD YET

The downturn in sales may look bleak; however, the music industry continues to generate profits, and investors remain interested in the business of selling records. For example, an investment group purchased the Warner Music Group in 2004 for $2.6 billion, and EMI was taken over by a British private equity firm for $4.7 billion in 2007. These big financiers would not spend billions of dollars to acquire a company unless they believed the venture would yield strong dividends.

Record companies are attempting to alter their traditional business model and make a concerted effort to develop fresh marketing strategies and create new sources of revenue.

• • Perhaps record companies are learning from past mistakes made with Napster. Instead of filing copyright infringement lawsuits against YouTube, they struck a deal. In 2006, the Warner Music Group Corporation, Sony BMG Music Entertainment, and Universal Music Group agreed to license their copyrighted songs and other material to YouTube.
• • EMI made a bold step in May of 2007 by allowing iTunes Music Store to sell its catalog without the copy protection that labels had previously insisted upon.
• • Also in May 2007, Warner Music Corporation announced the creation of Den of Thieves, to help drive digital music sales as the demand for compact discs declines. The unit develops and produces original programming for network, cable, DVD, broadband, and mobile platforms. Content is distributed in conjunction with artist's releases.
• • Some record labels are negotiating deals that encompass music publishing, touring, merchandising, product sponsorships, and other non-recorded music sources of income, to offset the increasing costs of doing business. Some new artists see any deal with a major record company as a necessary step to break through to superstar status.
• • After years of legal battles to prevent music fans from listening to music without paying for it, Warner Music Group struck a deal with Lala.com that allows users to stream music from the record label's catalog for free. The hope is that consumers will eventually purchase the songs to download on their iPods and other music-playing devices.
• • Record companies have a long history of licensing music for film, television, and advertising communities, but they are increasingly turning to videos games, subscription services, cell phone ringtones, and other avenues to generate revenue.
• • Sony BMG Entertainment's strategic marketing guru, Donna Clower, is forming partnerships with big name brands like L'Oreal and Verizon to cross-promote the company's recording artists and their music with other products. For the release of Christina Aguilera's single “Candyman,” she aligned with Verizon's LG Chocolate cell phone. The commercial campaign for the Chocolate featured Aguilera's new single and promoted sales for the song's ringtone. The deal included licensing fees and successfully set up the release of Aguilera's album.

WHERE ARE THE JOBS?

It is impossible to predict how rapidly changing technology will affect the music industry in the next decade, or even the next five years. It is increasingly important that those competing for jobs in the music industry have a college education and stay abreast of how new technology is revolutionizing the business.

Fortunately, no matter what problems the record companies and other areas of the business face, music remains a vital industry. There will always be a need for people who can write, record, and produce songs and market and deliver music to fans.