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Internet: A Sour Note for the Music Biz?

Internet: A Sour Note for the Music Biz? Tom Hespos

Every major entertainment medium from movies to games to books has been impacted significantly by the rise of the Internet. Most have settled into the digital realm quite well, making adjustments not only to the ways they advertise and promote, but also to their distribution, market research and sales. It’s clear that the entertainment industry sees a bright future for itself among the ones and zeros, except in one category – music.

The music industry has never seemed totally at ease online. While its entertainment brethren dive into the digital swimming pool head first, the music category cautiously dips its toes in the water. To be fair, if there is an entertainment category that has had its business model disrupted by the Internet, it’s music. One can almost understand its hesitance.

“By its very nature, the Internet is a competitive threat to the record industry because it renders the record industry’s supply chain irrelevant,” says Al Crisafulli, freelance music writer and owner of indie label Dromedary Records. “Think of it – the Internet completely eliminates the need for the manufacturer, the distributor, and the retailer. Worse yet, the Internet could eliminate the need for the record label itself, because it can serve as a direct conduit between the artist and the consumer.

“In other industries, as companies started to discover all the opportunities presented by the Internet, they scrambled like mad to get online and reframe their business models to take advantage,” he says. “The record industry has spent years trying to shut it down. What does that tell you?”

Some might answer that question by pointing to illegal downloading of digital music files, a clear threat to the record industry’s current business model. However, other forms of entertainment that are easily copied in digital form have managed to maintain a profitable existence in the digital age. Movies, video games and books have managed to survive and even thrive. What seems to be the problem with music? Shouldn’t the music business have figured out a way to tweak its business model by now?

“Online music distribution could be a key means not only for legitimate distribution, but also to help smaller music labels, individual artists, new technology providers, and individual music fans to actively promote, distribute, market, and sell music at a significantly lower cost than is the case through traditional music distribution,” says M. June Casalmir, anti-trust lawyer for Powell Goldstein Frazer & Murphy LLP. “It could result in a more diverse range of music that is not only conveniently available to music fans, but could provide incentives for artists to really become more creative and ‘cutting edge’ in how they write, record, and market their music.”

Perhaps it is the notion of lowering the cost by cutting out the middle man that scares the music industry so much. Like we said, if there’s an entertainment category that has had its business model disrupted by the Internet, it’s music.

Can the Internet Ever Be a Legit Channel?

Casalmir says a few things need to happen before the Internet can blossom as a legitimate distribution mechanism for music. Broadband access needs to be both available and promoted actively to music fans. Additionally, all parties need to agree upon and implement copyright protection technology that doesn’t stand in the way of easy access, she says. There’s also the issue of preserving a level playing field so that smaller competitors would have adequate incentive to innovate.

“Labels are loathe to allow users to buy on an a la carte basis with full rights to make copies (i.e. burn onto a CD),” says Rob Chmiel, CFO and COO of Altnet, a company that merges peer-to-peer and digital rights management technology to allow content providers to create direct relationships with consumers. “My guess is most of this has to do with royalty payments back to the artists,” he says.

“The advent of ‘singles’ and [the industry] wanting to make all their money off one song will easily make you want to not spend 18 dollars on a Britney CD and instead download the only song produced by Neptunes, ‘Slave for Love’ because well, really who wants the whole album,” says Jauretsi Saizarbitoria, entertainment editor for Jane Magazine. “The same thing [applies] for a million other rap artists, R&B singers, and rock bands. There's usually only one good song, maybe two.”

Kevin Chernett, executive vice president at MusicVision, which represents a network of music sites that includes several official artist Websites, agrees. “As long as the consumer has the choice to download music for free or pay $20 per album, the Internet will never become a legitimate distribution channel,”

Indeed, it does seem silly for a consumer to pay money to acquire something he can get for free. But in attacking online file-sharing, is the record industry losing out on an opportunity to make more money by restructuring its business model?

“[E]ssentially, I view the Internet as this amazing secret weapon that labels have been too stupid to employ,” says Crisafulli. “It can allow artists to reach out to fans and develop long-lasting and profitable relationships. It can put information and art into people’s hands immediately. It can merge audio and video messages together. It can provide upstream and downstream communication (and commerce). Record labels have chosen to spend their money developing CD copy protection technology, and figuring out ways to turn the Internet into a giant Personics system, which was their last failed attempt at taking advantage of a new technology. Essentially, they’ve spent more time and money alienating consumers then they have developing applications for the technology. Sooner or later, someone is going to harness the technology in just the right way, reinvent the pieces of the record industry that need reinventing, and put a lot of major entertainment conglomerates into serious financial trouble. I can’t wait.”

Connecting Directly with Music Fans

Thanks to the Internet, music fans can connect directly with artists in ways they couldn’t conceive of 10 years ago. Often, this connection centers on the official Website community for the artist. Chernett calls these communities “the perfect launching pad for offline and online promotions.”

Such sites can serve to harness the energy stemming from the sometimes fanatical devotion of music enthusiasts to a particular artist. (Remember the Kiss comic book that contained real blood from the band members mixed in with the red ink? Or velvet Elvises? Beatle wigs?)

“Artist online communities are a great way for fans to get closer to their favorite artists and we see a rise in their popularity among music consumers,” says David Goldberg, vice president and general manager, music for Yahoo. “We here at Yahoo! have tapped into those communities with our subscription online artist fan clubs. Initially, we have started with The Eagles and The Dixie Chicks and hope to expand to other artists. These music groups and communities are a great way for fans to get access to pre-sale tickets, exclusive content and keep up-to-date with what's going on with artists.”

Adds Crisafulli: “Those artist-centered online communities appear to be taking new shapes as the artists themselves get more Web-savvy. Years ago I watched artists learning netiquette with the rest of us – it was painful to watch Courtney Love engage in flame wars online with AOL users, and devastating as a King Missile fan to watch that band implode as a result of an AOL flame war. Today artists understand how the net works a little better, and as a result I’m seeing more positive communication between the artist and the fans.”

With artists able to connect meaningfully with their fans via the Internet, how long before savvy artists decide to go direct to the consumer with their product?

“Some forward-thinking artists have also begun to realize that they have the option of using the Internet as a DIY tool,” Crisafulli says. “A DIY artist selling 40,000 CDs directly to his fans over the Internet can make the same amount of money as a major label artist with a gold record – half a million sold. Janis Ian, a great folk artist who the music industry let become irrelevant fifteen years ago, has seen a 300% increase in merchandise sales since she took control of her career and began offering her music for free download.”

Perhaps the model that will end up working will involve the artist selling not only her music, but the entire experience of interacting with that artist. Music artists often have major impact on consumer attitudes, especially on the merchandise they buy. It’s no coincidence that artists like Sean “Puffy” Combs and Jennifer Lopez have their own clothing lines. Artist likenesses are placed on everything from T-shirts to lunchboxes to posters.

Leveling the Playing Field

Many music fans who understand the stresses the music industry is currently under are looking forward to a level playing field, where major label releases and the typical fare on MTV will compete alongside offerings from individual artists recording and distributing music themselves. In such an environment, media vehicles that can introduce consumers to new artists will represent a key to artist success.

“Yahoo/Launch.com’s rotation of music by genre based on an individual user’s preferences could be just as successful as MTV’s use of videos in broadcast arena to introduce fans to new artists,” says Casalmir.

“I’ve used MP3.com dozens of times to search through their charts for new artists I’ve never heard,” says Crisafulli. “Essentially, the companies that have been the target of record industry litigation represented the best opportunities the labels have had to break new artists.”

Says Goldberg: “We work closely with all the major and independent record labels to raise the profile of their developing artists through our monthly emerging artist program, thus helping our users discover new music.”

What Will Bring About Change?

One thing is certain – the record industry will cling to its business model and attempt to preserve the status quo until something comes along that can topple it. Along the way, one critical issue needing resolution concerns where the ultimate responsibility lies for copyright violations in cyberspace. When asked who bore the responsibility, end users, ISPs or peer-to-peer networks, everyone we spoke with for this Spotlight gave us a different answer.

“The law currently says that all of these parties are potentially liable for copyright violations that result from illegal distribution,” says Casalmir. “At the same time, though, each of these parties is also a critical player in making sure that copyright violations do not occur, and each of these parties could play a very important role (in lobbying and in participating in the copyright litigation process) in legal developments in this area, so to automatically ‘slap their wrists’ without considering the repercussions might put a copyright holder in a precarious position.”

Says Crisfulli: “The question itself is flawed because it supposes that I accept the assumption that copyright laws were written to protect artists whose digital audio files were being swapped by thousands of users over peer-to-peer sharing networks. Of course, that’s silly, because these technologies could not even be conceived when existing copyright laws were written.”

Perhaps the catalyst for change will end up being the invisible hand of capitalism. Over the course of American history, numerous examples exist of disintermediation as the end result of streamlining technology.

“A major label doesn’t have a relationship with consumers,” says Crisafulli. “The major label hides in the background and lets the artist be the brand. So if a high school kid buys the latest American Hi-Fi album and realizes it’s horrible, he doesn’t say, ‘That’s it – I’m never buying another Universal CD again.’ He has no idea who Universal is. So he’ll run out next summer and buy the next New Found Glory CD without even thinking about it. There are very few industries in which the distributor has less accountability than the record industry. If AT&T provides shoddy long distance service, it’s bound to lose customers. If Delta planes have uncomfortable seats, the airline will lose passengers. If Mattel makes bad licensing decisions, it’ll sell fewer toys. But if a record label releases 100 bad CDs in a row, consumers will keep trying and trying – just ask Clive Davis.”

Adds Saizarbitoria: “I think the downloading phenomenon is yes, piracy, but it’s also a backlash by consumers just saying, ‘I’m mad as hell and I’m not gonna take it anymore.’ I think the music industry is deeply affected more because well, music in general, sucks today. For a film, you literally have to watch the whole thing. But I believe artists now are being very lazy and not actually producing full length masterpieces like [Pink Floyd’s] ‘Dark Side of the Moon.’ Can you imagine only wanting to download ‘Money’? What about non-hit ‘Brain Damage’ with that little eerie laughter in the middle? The album experience would not have been the same without an A-Z experience.”

In the end, if the labels don’t own the relationship with the consumer, and the industry doesn’t fundamentally adjust to the tide of change that has swept over it, how long will it be before the current music business model becomes an old one-hit wonder?

Tom Hespos is President of New York agency Underscore Marketing. He is a frequent contributor to industry trade publications and has been writing a regular column about online marketing and advertising since March of 1998. His clients include Wyeth...

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