Three cases point to music's future

Steve Knopper’s Appetite for Self Destruction was an engrossing, almost impossible to put down potboiler on the state of the music industry.

Arriving in early 2009, it provided an uncomfortably brutal successor to a literary thread that began with the best-selling warts and all 90s industry trilogy, Hit Men, The Mansion on The Hill and Stiffed, each of which exposed the grimy underbelly of the machine that sold us millions upon millions of platinum encrusted records and made a fairly large number of people very, very wealthy - and ruined many more. More, it offered up the collapse of an industry long comfortable behind a barrier of self-entitlement.

The original trilogy told an unfinished story, coming as it did before the late 1990s – industry unexpected - arrival of digitally delivered of music.

Knopper’s book detailed, in some gruesome detail, the way that this self-entitlement led the industry to quickly consume itself.

His story, however, after hundreds of pages, which read like a novella of the JFK assassination – you know the bullets are coming and there is nothing you can do to stop the inevitable – stumbles in the last few pages when he tries to deal with the future.

To do so was an impossibility – bravely attempted – but 2008, when the book went to print, is a hell of a long time ago in the digital music landscape. The dust from the crash it documented, albeit overstated as below, hadn’t fully settled.

In the interim the bigger music companies have adjusted. And mostly by doing everything they battled loudly and expensively against throughout the prior decade. They’ve embraced digital as a saviour, have come to terms with the public desire to purchase tracks rather than albums (almost all those collapse in sales figures, both unit totals and dollar figures – the same ones that were and are used to justify three strikes laws and more – were derived from this trend, driven mostly by the customer) and in the second decade of the 21^st Century they’ve also become champions of subscription, via sites like Spotify and Rdio, more or less as vocally advocated by the likes of former Clash and Pink Floyd manager Peter Jenner and others, with a predicable chorus of horror led by the IFPI.

Not as ravaged by piracy as you think
Michael Masnick’s The Sky Is Rising study may have caused substantive ripples this year with its gathered data indicating that, no, the entertainment industry, and in particular the music industry haven’t been quite as ravaged by piracy as they would have you think (in fact its total value increased from $US132 billion 2005 to in $US168 billion in 2010 as revenue from new areas offset the decline in disc sales).

The industry needs to believe in rising piracy to ensure the more draconian copyright laws that they are now asking for (and our politicians here seem happy to comply with, despite often having a less than tenuous grasp of what they’re agreeing to or what the data really says) – and Masnick handily demolishes the RIAA response here, but much of what he’s saying isn’t new.

These reports from 2004 and 2009 give you a rough idea of what was really happening and how the stories of fiscal collapse by being fed to us by the recording industry – the major label parts mostly as indies increasingly worked the freedom offered by the digital world and welcomed the opportunities – was at best disingenuous and based on half truths.

The simple fact was that industry had found ways to turn the cents they could extract from hundreds of different transactions into a gross figure that replaced the dollars they were earlier earning from single transactions. The balance shifted substantially away from retail return towards the performance part of the income equation. And in doing so, it became possible to extend the money earning potential of a hit record endlessly.

This was the real long tail and you can see the effect of this very smart reworking in those linked figures.

And more people were earning more money from the fact that more people than ever were listening to more music than ever before – and far more people were making more music than ever and finding some way to make some money from it.

Album sales plummeted but gross income rose.

The Dotcom connection
In New Zealand the recording industry has become, as a part of this transformation, income pro-active in way it was never before and is about to link for purchase or streaming every hit record available to an interactive New Zealand Top 40 that will go back to 1975.

Chris Caddick, RIANZ CEO is actively working on and encouraging an overdue initiative to get every New Zealand recording still identifiably owned onto digital platforms as part of a broader initiative to ensure that we document our musical culture.

Which somehow takes us to the wack-a-mole raid in Coatsville in 2012 that was perhaps just one-too-many-Hollywood-gangbuster-flicks past the tipping edge of ludicrous in its execution

You had a combination of over zealous Feds, unquestioning Kiwi politicians greenlighting a very questionable operation, a media-fest of glamorous tack, and a ridiculously lucky geek who probably couldn’t quite believe his luck as he stumbled upon a scheme that was making him millions but had no idea how to take the obvious next step and work out how to monetise, i.e. by getting safely into bed with the content corporations as YouTube did, and will likely spend the next part of his life looking at an endless sequence of courtrooms and barred windows.

The unavoidable fact though is that Kim was making money out of piracy and, yes, he knew it.

Everyone did.

But I guess the degree of legal culpability for providing and maintaining the conduit is really the question, and one that perhaps should have been addressed before the seizures and uncomfortable assaults on our sovereignty were enacted - whether real or just popularly perceived. (Kim Dotcom brought up the conduit question in a Cambell Live interview earlier this week, claiming that other online "cyberlockers" and file sharing services, such as Microsoft's Skydrive, run on the same model as his now-defunct Megaupload. More here. A key difference: Megaupload had a rewards programme that dished out cash for people who uploaded files that proved popular downloads. - Editor)

However, despite the charges and I think the inevitability of Kim’s long term disappearance, this seems unlikely to make any substantial difference in the grey distribution of copyrighted material. It’s a sideshow and that’s all it is. The only real significance is the way that it indicates that the film industries – who are driving this - have yet to learn the hard Napster lesson that the recording companies eventually understood, even if it took most of a decade:

Embrace vast customer databases rather than assaulting them.

A battle over royalties
Of perhaps bigger significance to the record industry this particular decade is the Eminem vs. Universal Records case. 

Or more correctly, the FBT (being the rapper’s producers and the ones via whom he was signed to Universal) vs. Universal Music Group suit.

The essence of the case is that FBT is claiming that tracks Universal sold via digital retailers are, for a variety of contractual reasons, licensed to outlets like Apple’s iTunes rather than sold as per a traditional CD, and as such should be treated as miscellaneous income rather than a sale.

The problem for the record company is that there is a hefty difference in the way they then account to the artist: the traditional record contract pays an artist between 5 and 20% of the retail or wholesale price of a record (less a ‘packaging deduction’ and other modifiers such as a 50% drop if the artist is TV advertised) whereas FBT’s argument would give the act 50% of 100%.

Universal has now lost the first two court battles, and the matter has been referred to a jury for damages. That’s all detailed here, as is an interim audit that has some hair-raising disclosures, not least the fact that UMG are trying to bill the cost of the case back to the artist.

The potential downside is huge for not only Universal, but all the record companies, as the lawsuits begin to flood in. One estimate puts the potential cost to the labels at around $2 billon, which may be overstating it but gives an idea of the enormity of that downside.

Add to that the fact that it also slashes future income streams as the world’s music moves almost exclusively to a digital delivery model in the years to come (and yes I know we all love vinyl now, but that is a minor niche). And it provides yet another reason not to sign to a big label.

Can you resell a digital file?
There is another potential complication as yet unexplored: the major labels are suing a company called ReDigi who offer a service whereby they resell the digital files you’ve bought on iTunes etc. Of course the problem for the label is that if the file has been sold, in a digital shop, it can surely be resold. If it’s distributed under other terms, as they seem to be arguing, it becomes miscellaneous (i.e. 50/50 split) income under almost all longstanding contracts. It’s hard to have it both ways.

Add to the mix the fact that catalogue exploitation is central to the revenues of the big labels, and new artists are no longer assigning catalogue to major labels in the way they were. Oh, and older copyrights are expiring – hence the drive to extend copyright term.

It’s a pretty mixed series of clouds that indicate that, despite the billions of dollars the recording industry is still generating, the ructions that have wrought the way we listen to and buy music may not be over just yet.

Simon Grigg is an independent New Zealand music industry professional of some 35 years. His current project is a comprehensive NZ Music database.

He can be found at simongrigg.info and blogs at opdiner.com.