California State University, Chico
The most recent technological “big bang” in music delivery, following the pace of its telephone and television predecessors, exploded into the mainstream alarmingly quickly. By 2000, personal computer penetration had topped 50% of American households, and half the U.S. population surfed the web (Pew Internet Project, 2000a). The digitization of music to easily transferable MP3 files had transcended the motion picture market and spread to the independent label music scene.
The confluence of these technological forces provided the opportunity for music consumers to discover music on the internet, in the form of MP3 files, and to download those files to their hard drive and portable flash memory units. It allowed a distinctly youthful music audience to own and use music acquired outside the mainstream music business, a record industry that reported worldwide unit sales income of $36.9 billion (IFPI Report, 2001) and U.S. sales of $14.3 billion (RIAA Report, 2001).
The early phase of this explosion found users downloading songs from independent artists aggregated at sites such as MP3.com. However, by the fall of 2000, a more potent transmission system of musical files had evolved. Internet users, utilizing peer-to-peer software, opened all the MP3 song files on their hard drive to sharing with anyone connected to the central server. Available songs ranged from top hits to the most obscure and ancient recordings. Peer-to-peer file sharing programs that did not use a central server, such as Freenet, proliferated as well.
By the spring of 2001, Napster was reporting 71 million users sharing 2.8 billion files per month. 40% or more of these users resided outside the United States (Evangelista, 2000a) and 50% were over 30 years of age (Greenfield, 2000, p. 70). What had barely been a blip on the music industry radar screen in 1997 was, by January 2000, seen as a threat to the oligarchic record company control of mainstream music and its considerable profit generation. If consumers were to receive their music at little or no cost on the net, record labels, retail stores, radio, and some artists wondered how they would get paid.
This paper will examine the digital delivery revolution, which David Sanjek has located “as a part of the recurrent collision of business and technology” (Sanjek, 1998). We will examine this latest explosion within the contextual framework of web theorist Ron Sobel’s tripartite field of issues: ownership of content, ownership of the pipeline, and refinement of copyright laws (Sobel, 2000).
It is also useful to be mindful of Evolab founder Jim Griffin’s hypothesis that the change in the way we acquire and listen to music will be accompanied by a shift from the present business model (sale of product units) to the very different subscription service model (the music-on-demand model) he calls the “Celestial Jukebox”) (Griffin, 2000). John Perry Barlow has described this transformation as moving from nouns to verbs (Barlow, 2000, p. 241).
First, a little historical perspective. For the past 50 years, major record companies have dominated the domestic music business, having created a symbiotic relationship with music distribution and promotion partners, radio and retail, and acquired a significant portion of music publishing. In 1954, the top 8 labels sold 85% of US units; in 1973, they sold 83% (Chapple & Garofalo, 1977, p. 93). In 1996, the Big 6— TimeWarner, Sony, Phillips, Seagram, BMG and EMI—still dominated, controlling 80% of a U.S. market selling 1.1 billion units with a $12.7 billion value (RIAA, 1998).
Those 1996 Big 6 labels were owned by international conglomerates and five out of six corporate boardrooms were located outside the United States, a huge shift from the label head of the 60s prowling the clubs in New York, San Francisco, and Los Angeles in search of new talent. Concomitantly, by 1996, the revenue generated from music unit sales constituted a diminishing percentage of the parent corporation’s income. Sony Records U.S. (Columbia, Epic, and its affiliates) generated only 4% of the parent Sony’s gross earnings (Hoovers Online, 2001a), and other labels produced between 10 and 13% (Hoovers Online, 2001b). The larger the parent company, the more distant the corporate leadership.
Not only was there a concentration of record label ownership, but fewer records began to account for a greater proportion of sales. Companies skewed their creative strategies more towards supporting hits and less towards artist development. In 1999, .03% of the 29,000 U.S. releases sold over 25% of the total records produced. Courtney Love points out that only 250 titles, about .86% of total releases, sold over 10,000 units each (2000). This figure would generate a gross income of less than $200,000 per record (2000). When we examine a standard new artist recording contract, we will find that sales of 10,000 units generate no artist income.
It is imperative that we understand the digital delivery future within the context of the current record label-dominat-ed business model and its contractual oppression of the artist. Robert Fripp, King Crimson guitarist and independent label head, has called contractual relationships between major labels and most artists “often improper and now indefensible” (2000). Courtney Love has likened them to a feudal plantation society supporting the artist sharecropper (2000).
The analogy is a perceptive one. In addition to being the gatekeepers—choosing which music they will, or will not, sign and promote—labels are the bankers. With recording, manufacturing, distributing, and promoting a major-label release of a new band costing $500,000 to $1,000,000, record companies don’t act as benefactors but as venture capitalists. They essentially loan the artist the money for the project and then recoup their investment from the artist’s contracted percentage earnings on CD sales. However, and most importantly, even in the unlikely event that the musician earns enough to repay the record label, the label still owns the record. Like a sharecropper, the artist must borrow the money for seed, farm the land, buy from the company store, sell to the company, and never get ahead.
The economics of a major-label record contract for a new artist are especially punitive. According to industry attorneys Donald Passman, Brian McPherson, Mark Halloran, and others, new artist contracts typically call for the artist to retain 10% of the SRLP, or suggested retail list price (Passman, 1997). At $16.98, with a standard 25% packaging deduction, the base commission for each CD sold would be $1.27. Deduct breakage, promotional copies, and reserves against returns, all normal expense clauses, and the artist earns fifty cents ($0.50) for each unit sold.
Such a new artist contract would call for a loan (or fund) of around $150,000 for recording, equipment rental, practice facilities, and other expenses associated with the recording process. In addition, the label would usually split the cost of a $100,000 music video and charge $75,000 in independent radio promotion and $100,000 in tour support to the loan as well. The total $375,000 would be paid back or recouped by the label at the fifty-cent per unit royalty rate. Thus, new artists would have to sell 750,000 records just to see a penny in earnings from the sale of their CDs. Even then, according to David Bowie management consultant Andrew Frances, the artist would still have band expenses including the manager’s 20%, the lawyer’s 5%, the business manager’s 5%, and so on (2001).
Although the artist generally has to sell 750,000 records to see any return, according to Love, record labels start making money at 35,000 units sold. On sales of one million units (a platinum record) the band would make $125,000, deduct management and other expenses and split what’s left. Each member might clear $15,000. The label meanwhile would clear 65% of its gross or a net $6.6 million. An unscientific sample of six months in 2000 revealed a total of 53 platinum records but only 8 from new artists. Even if this profit is exaggerated, it is clear that labels win and artists lose.
The potential of digital delivery to change the ratio of label-to-artist earnings is enhanced by recent shifts in consumer trends. The labels are bucking the 15-29 year olds’ decade-long decline in CD purchasing (Chilton Research Services, 1998). With real wages still falling and manufacturing jobs being replaced by lower-paying service positions, youth are buying less music. Focus groups conducted by research firms evidence a shift in priorities from purchasing music to buying other forms of entertainment as well as clothing.
In addition, youth and young adults in the 1990s have accounted for a significantly smaller percentage of CD purchasers: the size of the 15-19 year old share dropped 31% between 1990 and 1999, the 20-24 year old share dropped 24% and the 25-29 year old share dropped 28% (RIAA, 2000). While total CD sales are up—forty-five plus consumers have made up the decline—youth of the nineties have less of a desire to purchase music. With Napster peaking at 80 million and net users bouncing to other services, a significant proportion of Americans have experienced the feel of free music (Graham, 2001).
What does this do to the 100 year-old business of selling “music containers” like shellac discs, vinyl records, cassettes, and CDs? With the digital transmission of music, record label ownership of the sound recording copyright, container distribution, sale and concomitant profits is in jeopardy. The retail record store system, already in dire straits, is further endangered.
A number of questions arise from this new transmission mode and consumption pattern. If there is no income from the sale of individual products, how will artists make their money? I would maintain that 99.9% of the new artists with major label contracts and many on indie labels earn no income from the sale of recordings anyway. Au contraire, anecdotal evidence suggests that many artists signed to indie contracts or their own labels earn a steady and significant income from the sale of records. The collapse and destruction of the plantation relationship can, in the long term, only benefit the vast majority of artists.
Under the old business model, not only did the record labels act as content owners and gatekeepers, by deciding who to sign and who to promote to its symbiotic partner radio, they also gleaned a significant income from control of manufacturing and the delivery pipeline. Major label CDs are manufactured at plants and distributed through warehouse systems owned by the label. Profits are accrued at every step in the process.
The battle for control of the new digital distribution pipeline includes not only the incumbent majors but also a host of new and extraordinarily powerful corporations like Microsoft and AT&T. Should the new delivery system evolve to an on-demand, unlimited-content, subscription-style sys-tem—what Griffin calls the Celestial Jukebox—ownership of the pipeline could generate considerable control and revenue.
The Big 5, who still own sound recording content, are developing and acquiring delivery services and content aggregation mechanisms. The following is a brief summary of this consolidation. Vivendi Universal SA, a Paris-based conglomerate purchased Universal Music group from Seagram, itself a consolidation of Universal and Phillips/Polygram. Vivendi also owns Cegetel, France’s #2 long distance, internet and wireless company, Canal+, a cable TV system, Havas Publishing including Houghton Mifflin and water, power, and waste companies in 25 countries. Their income last year was $41.7 billion with profits of $1.4 billion.
Their musical holdings include: Universal Music group (15 labels and UMG publishing), MP3.com (845,000 daily users and an average of 5.8 million monthly streams), Emusic.com (an independent download site), and MyMP3, a musical locker service. Vivendi, Yahoo, and Sony are also partners in PressPlay, a subscription content stream and download service (Hoovers Online, 2001b).
Sony the second-largest consumer electronics firm in the world, owns Aiwa, Sony Music, Sony/ATV Publishing, Sony Pictures, and Telemondo Communications Group with an income last year of $63 billion and profit of $1.1 billion (Hoovers Online, 2001a). Bertlesmann AG, with sales of $15.8 billion and a $641 million profit, has its base in publishing including Random House, Gruner and Jahr (Stern, Family Circle), RTL Radio Group, Barnes&Noble.com, and Lycos Europe. Their music holdings include BMG music and affiliated labels Arista and RCA, Napster, MyPlay locker service, CDNow web music store. Bertlesmann is also a partner in a subscription service called MusicNet—using a Real Networks platform and AOL portal (Hoovers Online, 2001b).
AOL/Time Warner includes cable TV systems serving 13 million customers, AOL with 29 million subscribers, TimeWarner Telecom and Publishing, Little Brown, and many TV and sports holdings. Record labels include Warner Brothers, Atlantic, Electra, Asylum, London, Sire, Reprise, Maverick, SubPop, and Warner Chappell Publishing. EMI, the last and smallest of the “Big Five” with an income of $3.8 billion and profit of $280 million, includes labels such as Capitol, Virgin, Chrysalis, and EMI Publishing (Hoovers Online, 2001b).
Vivendi, Sony, and AOL have ownership in wireless, cable television, or telephone line transmission. However, unlike before the digital revolution, when the labels were the largest entity in the system, even larger players have entered the fray. Microsoft plans to offer MSN Music Service, designed to deliver superior than MP3 quality music over the web through their portal MSN—which is already challenging Yahoo and AOL. They are also attempting to replace the MP3 file format with their own Windows Media format and bundle it with their other software holdings, which dominate the market. Viacom’s MTV and VH1 are instituting streaming radio services.
In addition, during the Napster debate phase of this digital evolution, consequential corporate players such as the Computer and Communications Industry Association with members AT&T and Oracle and the Consumer Electronics Association with members Microsoft, Hewlett Packard, IBM, 3Com, Sony, and Nintendo filed briefs supporting Napster (Evangelista, 2000a). In an increasingly common dynamic, during the recent Digital Media Association suit against the RIAA on downloads definition, DiMA members AOL (TimeWarner), CDNow and MyPlay (BMG) found themselves playing both sides of the issue (King, 2001).
Whether the medium of transmission is via telephone lines, TV cable, or wireless, Griffin maintains that labels will have to give up control of the quantity and destination of their product as music is streamed to the consumer rather than purchased in the form of physical recordings (Griffin, 1999). For the past few years, label strategy, through their trade association the RIAA, has been nuclear litigation—attempting to forestall the shift to web distribution rather than develop a new business model that monetizes digital delivery. Their suits against Diamond Rio, MP3.com, and Napster have slowed the process, while at the same time giving the labels time to invest in the digital future.
Through the Secure Digital Music Initiative (SDMI), headed by MP3 innovator Leonardo Chiariglione, the major labels attempted to control the use of downloaded music. SDMI assumed that consumers would still want to own music and that its use could be controlled. It has failed to find a viable technology to reach these goals. Consumers may be ready to shift from an ownership to a use model and there is plenty of historical precedent for this movement.
Griffin calls radio the “Napster of the 20s” as it also gave music away for free. The growing record labels protested, but they soon came to realize that radio was their best marketing tool as it promoted their music beyond live audiences and eventually afforded songwriters and publishers substantial income. Radio chains and major labels merged: Radio Corporation of America purchased the Victor Company and Columbia Gramophone formed Columbia Broadcast System (Griffin, 2000a). Similarly, sports franchises were reluctant at first to allow television into their venues, citing concerns for lost attendance. In fact, TV promoted football and basketball, increased attendance and provided substantial revenues to the leagues (Ibid.).
Currently, long distance telephone services AT&T and Sprint offer plans that cease to count usage and destination in favor of a flat subscription fee. Cable television and portal services like AOL work on much the same model. These services feel free while in use and reinforce the argument that music will come in a wireless “timestream” paid for by subscription. Reinforcing this argument, as Griffin points out, is that much of the planet is unwired and will remain so. Because the cost of wiring vast expanses of the second and third world is prohibitive, wireless will eventually become the global choice (Ibid.).
A potential future, void of unit sales, is frightening to the majors. Thus, they have turned to the legislative arena to assure continuity and profit retention. When Napster revealed their fingerprinting software, able to identify songs in transmission and proposed a revenue stream similar to radio royalties from a compulsory or blanket license, the RIAA rejected it out of hand.
The RIAA has used the current trend of corporate protection in recent copyright law revisions to bolster their arguments and to retain control of product. In colonial times copyright law favored the artist and author, giving creators a window of time before their work entered the public domain. The 1909 revision, driven by the populist, anti-monopoly sentiment of the time, further enhanced the rights of artists to be paid and encouraged wide use of copyrighted music. The 1976 revision and new legislation in 1992 and 1998 however favored corporate copyright owners and their profit retention.
Due to the rapid pace of digital delivery evolution, copyright and other laws have yet to adequately address issues such as who gets paid for digital distribution and how much. Stanford’s Paul Goldstien has hypothesized that there is a 20year lag between the creation of technology and protection through legal statutes (Sanjek, 1998). If there is no unit sale, there is no sound recording copyright and no mechanical royalty for the songwriter or band based on product purchase. How do songwriters get paid? Sobel cites the debate on differences between intellectual and physical property, noting that traditional methods cannot compensate the parties with a streaming delivery technology. He envisions the eventual creation of blanket licensing much like the performing rights royalties that evolved following the development of radio technology (Sobel, 2001).
What impact will Griffin’s celestial future, with service replacing product and the cost for delivery falling to a negligible amount, have on the artist and the audience, the two currently marginalized constituencies? The answer is, in great part, dependent upon the relative success of the major corporate entities in their quest to maintain profit levels. Using the big bang metaphor, there is as yet, little solidification of planetary bodies. Content ownership for catalogue will remain with the sound recording copyright holder, but that designation as a revenue generator may be minimized by the delivery configuration.
Due to recent digital studio, mixing, and mastering technologies, bands are less dependent upon the labels to record their work. Artists who are already established have the resources to create their own work. Without the need to manufacture physical recordings, the record labels’ venture capital role is also minimized. In addition, their marketing functions may also shrink as it is the artist, not the label that is branded. In a wholly web-based marketplace, new aggregation websites, some separate from the labels, could challenge label promotional functions.
The career potential for unknown artists has grown over the past ten years. Increasingly, they act as self-sufficient, business-savvy entities rather than entering the “chew them up and spit them out,” star making machinery of the mainstream system. Bands who record and release their own product receive a considerably greater proportion of generated revenue than those signed to large indies or majors. According to former Polygram Vice President Jim McDermott, the majors’ system was designed to fail for nine out of ten artists (1998). An artist on a major label selling 10,000 units sees no revenue from that album; a band on its own label can make up to $10 per unit and sales of 10,000 can generate $100,000.
In all probability, a streaming system with a blanket license payment rate will emerge and increase the proportion of artist revenues over the current system. I would go even further and propose that the total deconstruction of the current methods of payment for music will benefit all but the richest artists and be beneficial for the consumer as well. Twenty years ago, the consumer was promised that, in due time, the price of CDs would be significantly reduced. This never took place and the popularity of file sharing is one result.
Audiences will appreciate the low cost of subscription, its ease of use and its access to the widest variety of music. The current system is expensive and exclusive. In this era of label dominance, cost goes up and choice through mainstream radio and from labels declines. In the past five years, radio consolidation has also accelerated. Clear Channel Communications now owns 1240 radio stations in 247 of the 250 largest markets in addition to SFX, the country’s monolithic concert promotions company (Boehlert, 2001).
The radio industry was able to derail local low-wattage FM franchising, thus limiting new sources of musical variety on the airwaves. However, the growth of net radio provides another opportunity for almost unlimited diversity. The majors are fighting a rear-guard action to attempt to make net radio too expensive to pursue by defining radio streaming as airplay and purchases.
The celestial system and digitization, says Griffin, will bring the ultimate in diversity, the “renaissance of creative expression.” Today, “we kill art regularly,” he intones, “due to the need to balance the costs of distribution with its rewards. We only release certain CDs and not the whole catalogue, live concerts, or alternate tracks. In the future, it could all be available and dead art will come back to life.” (Griffin, 2000).
Let us return to examine the impact of Ron Sobel’s three basic issues—content ownership, pipeline control, and legislative adjustment—on the artist and music consumer. I agree with Lee Marshall that these will continue as arenas of contestation and that peer-to-peer file sharing is here to stay (Marshall, 2001). Unfortunately for these two marginalized constituencies, record companies will not only retain all sound recording catalogue copyrights at current income proportions but they are likely to control new content, albeit at a diminished rate.
Even with the eventual elimination of unit sales, record labels will remain fast-track venture capitalists, marketing machines, and corporate partners of pipeline controllers. If you want into the new system, they will retain their presence at the gate. The extent to which they retain control of the gate will, in part, be based on the legislation. A blanket license solution, where all artists are paid per stream, could diminish the proportion of label income.
I agree with Ron Sobel, however, that eventually transfer point counters embedded in the pipeline will tabulate a blanket license-type solution (Sobel, 2001). This will be an improvement for less mainstream artists who, because they rarely receive mainstream radio airplay, don’t receive performance royalties. Another outcome of the stream-counter blanket license solution would be the democratization of income within bands. Currently in the U.S., the songwriter is compensated for airplay; the rest of the band receives no significant income from this source. With music streamed on demand, and with the elimination of the sale of individual units, band members will most likely share in the revenue generated through the counter, replacing income from the sound recording copyright.
It is the pipeline arena where the most change is likely to occur. Whereas the web was the locus of early battles for control, the present war is being fought to determine where music transmission is to take place. The combatants are substantial, considerably larger than previous music industry entities. Global in scope, companies like Vivendi, Microsoft, and AT&T battle to determine the format and vehicle for future delivery. The winners will receive a fee for service from content owners, paid by users—but in this vertical world, they could all be Vivendi or Microsoft.
The victors will determine the cost of use, a major concern for the consumer. I am using the plural because I believe that there is a trend for mega-corporations to create partnership solutions to these types of challenges, rather than waste resources in battle. Content licensing necessitates this type of collaboration. Finally, the legislative solutions, with lobbying power favoring corporate entities will codify the type and cost of the delivery and models of payment.
Will the efficiency of a new web-based, digitally delivered system drive the cost down and allow accessibility to nearly everyone? Will there be other ways to monetize the delivery system, such as the sale of customer information and consumption patterns to potential content owners and other businesses? Or will we, as Pete Townshend decried, “Meet the new boss, same as the old boss.”
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Dr. Paul Friedlander is Director of the Music Industry Program at California State University, Chico. He is author of Rock and Roll: A Social History, (Westview/Perseus), the Encyclopedia Americana “Rock Music” entry, and many book chapters and journal articles. He is past-president of the International Association for the Study of Popular Music/American Chapter. Dr. Friedlander has been an invited speaker and has presented papers in China, India, Australia, North Africa, Cuba, and Eastern Europe as well as all over the United States. As a musician, he sang with Pete Seeger’s Children’s Chorus at Carnegie Hall, played bluegrass banjo at southern music festivals, hit notes with New York homeboys The Chapters, played folk music in Moscow’s Gorki Park, and rock and rolled across the U.S.A.