Thursday, January 22, 2004

The past five years have been tumultuous ones for the music industry and its relationship with the Internet and recordable compact discs. In the past, critics have scoffed at recording industry histrionics such as its erroneous claim that "Home Taping is Killing Music." Today, however, the ability of consumers to copy, distribute and receive high-quality song files for free all over the world nearly instantaneously is giving industry execs and representatives heart palpitations. For the first time their shrillness may not be hyperbole. These technological innovations mark a decisive shift in the way that we will produce, distribute, discover, share, pirate, and appreciate music.

Beginning in the heady days of Napster, college students, a demographic responsible for a significant portion of CD sales and empowered with enormous bandwidth, pounced on file-sharing like a pack of hungry wolves on a wounded rabbit. Many rationalized their large-scale theft by arguing that CDs were overpriced and that artists generally make little from CD sales. Their "sharing", they felt, was only hurting a bunch of overpaid suits in a recording industry that focuses too much on big stars, has caused the homogenization of radio, and largely has contempt for independent music.

If the music industry crumbled because of file-sharing, well, it deserved it.

And music sales dropped - from $14.3 billion in 2000, to $12.6 billion in 2002, though no one is exactly sure what caused the drop. The Recording Industry Association of America (RIAA), which represents most record companies, sued Napster and shut it down. But there were still Grockster, Kazaa, and other peer-to-peer software utilities out there to fill in the gap, allowing users to continue to siphon large quantities of music off of each other's hard drives.

Mitch Bainwol, Chairman & CEO of the RIAA cited the "devastating effects that the massive illegal copying on peer-to-peer networks is having on the music industry," in Congressional testimony in September 2003.

While the industry has yet to be devastated, the RIAA couldn't allow this to go on for much longer. After attempts at knocking out Kazaa and other sharing software became bogged down, the industry resorted to a more direct, if heavy-handed, approach: it began suing people suspected of sharing large quantities of files directly in September of last year.

The RIAA began employing a fast-track subpoena provision written into the Digital Millennium Copyright Act, passed in 1998, that allows it to obtain IP addresses from Internet service providers by simply asking for them - instead of having to go to court to obtain each one.

Since then, the RIAA has filed over 900 lawsuits citing file-sharers with "egregious" copyright infringement, and claiming the maximum damages of $150,000 per song. Those sued have quickly settled for various sums.

In no time a story of a 12-year-old's mom settling with the RIAA for a few thousand dollars hit the news, as did a misguided suit against a 66-year-old Massachusetts artist that never file-shared.

"It's a PR nightmare," says David Payne, an attorney in Madison, Wisconsin specializing in trademark and copyright law, who has also worked in the music industry. "The public created a new distribution model, and what the recording industry should have done was embrace that new model and given the people what they wanted. They should've adapted their old business model to the realities of the new marketplace."

"It's a terrible strategy to have to scare people into having to support your outdated business model."

The Music Industry's Bad Karma

Payne is referring to the industry's dogmatic allegiance to breaking big stars like Britney Spears and Eminem, as opposed to cultivating moderately popular acts that generate long-term "back catalogue" sales, its reliance on consumers overpaying for music (often for music they have already purchased on vinyl or cassette), as well as its fear of and contempt for new technology.

"The Napster model demonstrated that the market was saying a few things," says Payne "we don't like to have to buy an album's worth of material at a time; we'd like to have the option of going on a song by song basis; we're rebelling against the price: if you want one song, you have to pay $18.99 [for the entire CD]; we'd like to have a huge catalog of music that's bigger than what all the corporate radio stations play. It was a reaction against what the recording industry was trying to push on the public."

The music industry was slow to respond and when it did, it did so with characteristic obtuseness. A few companies teamed up and attempted their maligned idea of "digital distribution" with the services PressPlay.com and MusicNet. Neither service allowed users to copy the music to CD, and the prices per song were outrageously high, especially given that unrestricted MP3s were available for free all over the Internet.

Meanwhile, Compact Discs on average cost $14, and many cost as much as $18. Consumers have seen little savings in the 20 years since the CD has emerged, despite the fact that CDs are cheaper to produce and distribute than vinyl or cassette.

When big retailers like Best Buy and K-Mart began slashing CD prices in the 90s, it shook the industry. In response, the recording companies colluded with music-only retailers like Tower Records and Coconuts to establish Average Minimum Pricing on CDs, to preserve inflated profits and preclude real price competition.

They evidently didn't hide their actions very well, and in 2000, the States' attorneys general sued the music industry and big chain stores for price fixing. But the parties settled, and the industry left with little more than a slap on the wrist. Then, New York Attorney General Eliot Spitzer went after them again, and won a $143 million settlement in 2002.

Last year, Universal Music Group announced that it would be lowering its Suggested Retail Price on CDs to $12.99, and would cut its wholesale price for some buyers.

"Universal is lowering the prices to level they should have been at 15 years ago," Payne says.

The RIAA has a page on its website called "Cost of a CD" - evidently to address widespread skepticism about high CD prices. The industry makes the claim that CDs would cost $34 if adjusted for inflation. By the RIAA's logic, we should also be paying $10,000 for a new computer, but I recently saw a Hewlett-Packard for only $400.

The industry justifies the costs in a CD by saying that only about 10 percent of artists make a profit - the rest are losing propositions. "That's probably true," says Payne ""But that's the industry's fault. That has to do with their business model. Because their business model dictates that an album is a loser if it doesn't go Gold, if it doesn't sell 500,000 copies. The industry claims that it has to recoup its costs, but the current business model is based on the idea that the only way that music can be successfully marketed is to record an entire album's worth of material at a time, produce an expensive music video, and spend a ton of money on promotion. They spend like crazy."

Next: The Music Industry's Bad Karma Part II ~>

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