Wednesday, January 07, 2009

The Music Business: The Future is Bright, The End Is Nigh

The following essay was the basis for a talk I gave at a recent Dartmouth Digital Musics Symposium

1. A Brief History of The Music Business

Technology and technological friction created the music business. New tools took what had been ephemeral and transient – music – and captured, tamed, and sold it, caged in a perforated paper roll or pressed into a platter. Those tools were exotic, expensive and rare. Thus, access to the ability to record and duplicate music was controlled.

Even as technology enabled the music business, technology began to shape and change music in ways great and small. Most of the 20th Century’s points of musical interest come from this shaping and changing, ranging from Thaddeus Cahill’s Telharmonium to musique concréte to synthesizers and the computerization of music.

The technology also disrupted the existing music business. In 1906 John Phillip Sousa wrote a magazine article called “The Menace of Mechanical Music.” The piece was written for two reasons (one of which I’ll address later). The first was a public plea for composer’s copyrights – piano rolls weren’t considered music and thus ineligible for royalties.

Piano roll manufacturers were creating scores of piano rolls and selling them, and composers got nothing! “Piracy” of music like this was impossible to stop – a talented musician can hear a composition once, play it from memory and transcribe it – that’s how Mozart famously “stole” a mass from a church. There was no way to stop it.

The piano roll situation was especially bad for composers since people who had “reproducing pianos” and bought piano rolls would likely not buy the piano sheet music – why did they need a score for a human when a machine would be doing the playing?

Partially due to Sousa’s public and political lobbying, copyright law was changed. A significant result was creation of the mechanical royalty. Mechanical royalties in the USA have two very interesting qualities: they are compulsory licenses and they are offered at statutory rates.

A compulsory license means the copyright holder cannot refuse to grant someone a license. Surprisingly, this was something requested by the composers, who were concerned that one monopoly company (Aeolian, the Apple of their day) would buy up all the rights and control the market. As a result, the laws were written such that once a composition has been publicly released, anyone can get a license to make a mechanical copy of the composition – the copyright owner is compelled by law to grant the license.

“Statutory rate” means the cost of that license is set by Federal law. The rate is currently about 9 cents per copy. It’s a per-copy created rate, which means even if you make 1,000,000 piano rolls and then burn them all, you still owe royalties. This prevents the rights-holder from creating a monopoly and has the side effect of treating all compositions equally.

The compulsory licensing of compositions at statutory rates is how many composers make money – those royalties are an essential component of the music business.

All of that was required because people realized it was impossible to stop people from creating copies of compositions – if I sing a melody to you, you could sing it right back to me. Or to your friends later. Or in a concert hall.

From an economic perspective, these radical changes in law had the effect of changing the incentive structure – if you were required to allow people to copy your work, and they had to pay you a fixed amount of money if they did so, the winning strategy is to actively work to get people to copy your work! The music publishing industry started to dramatically expand in terms of size, revenue, and reach.

Sound recordings complicated things. Of course, sound recordings were much more difficult to duplicate, and nearly impossible to duplicate well without access to the original master and/or lots of exotic, expensive, and rare equipment.

Sound recordings are different from compositions, and so is the copyright law that refers to them. Composing had been around for hundreds of years, and people had ample time to consider the business thoroughly. Sound recordings were new, and the record companies (then and now, typically the owners of sound recording rights) had no desire for government regulation of the fruits of their investment in the nascent business and expensive equipment. So no compulsory licenses at statutory rates. The record companies effectively controlled the reproduction of sound recordings.

Or at least, they did until the digital era.

Digital recording brought tremendous benefits to the music business. Better sound quality and the ability to re-issue and re-sell almost every record they had previously sold. The CD helped lift the music business out of its early-80s doldrums and into a prosperous period. The CD was the ultimate reproduction format.

The CD was also the beginning of the digital revolution. A few short years after the commercial launch of the compact disc, recordable CDs hit the market, alongside consumer CD burners.

Personal computer technology started its rapid evolution. Processors got faster. Storage grew bigger. Connections between computers grew and began to accelerate. The Fraunhofer Institute created a perceptual data compression scheme known as MP3.

And then in 1999, a college student created Napster, which wrapped an easy interface and massive connectivity around what was previously a complex affair – swapping digital files of music on the Internet.

Suddenly, almost literally overnight, copying music had become effortless. A click, and a copy was made – of both the sound recording and the underlying composition. And there was no way to stop it.

2. Rhapsody and Today’s Music Business
In 2001 the first version Rhapsody launched. A week later, Apple introduced the first iPod.

These two products embody the digital music business. My colleague Tim Quirk says “iTunes is yesterday disguised as tomorrow.” iTunes sells digital singles and albums, in a no-frills, no-excitement vending machine available online. The iTunes Music Store was started primarily to combat accusations that iPods and iMacs encouraged music piracy. Today, iPods hold thousands of songs, but the number of purchased songs per iPod continues to remain around 20.

iTunes is not fundamentally different from buying CDs in a record store. The pricing is about the same. It is certainly convenient, and the selection is immense relative to any physical CD store. But there are drawbacks – the audio fidelity has been compromised, files lack CD booklets and liner notes, and the listeners who purchase files can’t sell them when they tire of them. And until very recently, all the purchased music only played on Apple’s portable devices.

When iTunes launched, its sales were negligible relative to the CD business. 8 years later, iTunes is the number 1 music retailer – not Tower (now gone), not Best Buy, not Wal-Mart. And Wal-Mart has been allegedly contemplating removing CDs from its stores for a while now.

Of course, the record business is now actively working to undermine iTunes, as they see iTunes’ success not as their potential salvation, but as iTunes having “built a business on their backs” – a phrase they’ve applied to radio, the sellers of record players and CD players, MTV, and just about everyone else involved in their business ecosystem.

Rhapsody offers a different model. Users pay a monthly fee for unlimited listening, not ownership. It’s a business model relatively new to the music industry, though Rhapsody does owe a spiritual debt to Thaddeus Cahill and the Telharmonium.

Rhapsody faces many obstacles, including the incredible (and well-deserved) success of Apple’s products. Another challenge Rhapsody faces is rights clearances. Getting publishing rights is relatively easy – the publishing companies have built their businesses around making licensing easy. Music publishing companies have been licensing their content for a long time – it’s what they’re incented to do by the licensing structure. The more they license, the more copies are made, the more money they stand to make.

Getting the rights to sound recordings has been and continues to be a challenge. Every label requires separate negotiations. Labels have been poor custodians of their intellectual property and frequently do not know whether they have the rights to enable Rhapsody’s streaming (the publishers are better but also far from perfect). Newer music frequently contains samples of older music, which exponentially complicates matters. And the labels themselves are bound by the same rules – they have to be sure about whether they have the rights to make copies in the first place, and in many cases, the costs of locating the original contract with the artist, having an attorney read the contract, and tracking down the rights holders becomes prohibitively expensive – a money-losing proposition. It’s easier and less costly to let the work remain out of circulation.

So a good deal of music remains unavailable on Rhapsody (and to a lesser extent, not available on iTunes) - but it can be found on the “black markets” of the Internet – frequently with complete scans of the CD booklet and full audio fidelity. And for free (if you don’t mind breaking federal law and “stealing” from artists).

The recording copyright owners have monopolies on their sound recordings, and they believe their businesses are best served by tightly controlling copying, and defining the costs of copying themselves

3. The Music Business is Dying
The music business has seen sharp declines almost every year since Napster launched and digital file trading went mainstream. The black market is not solely responsible – there is far more competition for the entertainment dollar. Music fans now spend money on video game hardware and software, mobile phone hardware and software, video, and ironically, a new iPod.

And copying music is so widespread that some of the newest generation of music fans believe music is, or should be, free.

The losses for the last several years have been severe – 5-20% declines, year after year.

On January 1, 2009 Nielsen released the final music business statistics for 2008:
• Total physical and digital units sold down by 8.5% in 2008.
• Physical units dropped by 20% (363 million units sold).
• Digital unit sales increased 32% (66m units)

Atlantic Records (part of the Warner Music Group) was the first major label to have digital revenue exceed CD revenue, and it happened in 2008. The “Classical” genre dropped by 22%.

The average per-capita expenditure for music has been in decline, too – it’s down to about $36 per person.

4. Music is Thriving
But oddly, there is more music available than ever before – recordings long out of print can be found, shared, and heard. Nearly 35,000 albums were released last year, both new and old music.

The dramatic democratization of computer music technology has placed tools of unprecedented power for composition, performance, and recording in the hands of the masses.

Unfortunately, most of these are clearly “consumer products” and the fastest-growing are the ones most toy-like and least instrument-like. The continuing simplification of popular music is an inevitable and audible result.

The Internet has democratized the means of distribution. Anyone can make and distribute their own music now, as well as those of others. That doesn’t mean it’s going to all be any good.

5. The Future?
I mentioned that Sousa had a second point to his 1906 article. In “The Menace of Mechanical Music,” Sousa speculated about the potential cultural effect of recording technology, and thus, the music business:
“…the tide of amateurism can not but recede, until there will be left only the mechanical device and the professional executant”
The tide of amateurism has definitely receded – where some degree of musical proficiency was once considered an essential part of education, today music education is in decline. Most people cannot play instruments at all. They do not sing on a regular basis. And perhaps most appallingly, do not think they should be even trying to create or play music because they’re not “professionals”.

Most are content to listen to the latest “professional executants” on their new mechanical device, plugged into their headphones, increasingly isolated not just from the rest of the world, but from each other.

Also isolated from the music itself. Today, music becomes merely a background for doing something else. Attention can barely be sustained for an entire 3-minute song - much less an album-length work - before clicking “next.”

In Sousa’s time, nearly every home had a parlor – a room where a piano or other instruments were available. People regularly visited homes to make music, singing together, playing together. It was a social activity, and whether or not you were “good at it” was less important than the participation. Professional musicians still existed, but nearly everyone was an amateur musician.

Perhaps the music business is the anomaly – a phenomenon brought into being by technology and technological friction. Technology created the music business and it continues to guide it and shape it. Only now, it’s shrinking it, or putting it in a more appropriate role.

I have a hard time believing today’s music business will survive. I expect the major labels will shrink to simply managing established rights catalogs with the occasional “blockbuster”/"sure thing" pop record aimed at the mass market and lowest common denominator. The music business will be much smaller, and only a part of our larger communal music experience.

People have been making music together longer than they have been speaking, writing, and trading currency. They’ve only been selling recordings to each other for a tiny amount of time.

The desire is clearly there. Karaoke, Rock Band, and Guitar Hero provide pale imitations of a community music experience and remain popular activities around the world. It’s no coincidence that major social events (marriages, funerals, church, etc.) all typically feature group musical activity. Research has shown that singing in groups has beneficial health effects.

Perhaps instead of agonizing over the shrinking music business, we should focus on the opportunity to take music out of the headphones and speakers, off the stages, and back into our homes and communities. Spend less time worrying about the few currently making music and more time worrying about the many who aren’t making music.

3 comments:

Nick said...

I agree with a lot of what you have outlined here. I have said for several years now that copyright provides the copyright owner the ability to do two things; it allows the owner to control how their works are used and it helps enable them to get paid for the use of those works. It is going to be a tough pill to swallow for many but we live in this new era where control, in many circumstances, does not exist anymore (This will be particularly difficult for European copyright owners due to the fact that they copyright laws include moral rights, which does not exist in US Copyright Law). I think the industry should focus on the later. I am certain the industry as a whole, can figure out how to fairly compensate people for the use of their creative works. This is exactly what you described above with music compositions. The industry realized they could not control the use of musical compositions so they focused on compensation.

When one considers what a musical composition is, it is nothing more than information. When one considers what a digital file of a sound recording is, it again, is nothing more than information. This is a radical shift to and industry that considered sound recordings be physical products. An industry whose main commodity is a physical product operates on completely different principles that than an industry whose main commodity is information.

Here is why this transaction will be very messy. At the core of the music business is copyright law. Copyright law is insanely complicated and inconsistent (I really recommend the book "Digital Copyright" by Jessica Litman. She discusses the history of copyright law and how it grew reactively to changes in technology. No wonder it is not consistent). As the music industry moves away from a physical product business and towards more of an information based industry, it will more and more rely on information law. Information law is even more complex and inconsistent than copyright law (I recommend the book "Shamans, Software and Spleens" by James Boyle. He explains that many of our industries, not just the entertainment industry are moving towards an information economy and information law and its history is poorly prepared to deal with shift).

The entertainment industry is like a soap opera these days. Everyday the plot thickens and in an instant can make radical plot twist. You have long time friends becoming mortal enemies, People in bed cheating on other people. I am completely hooked. I can't wait to see how things work their way out.

Ray Guillette said...

Wow, what a great article! You've clearly pointed out some very important social mechanisms in play that deserve some re-examination. In particular, the connection you describe between technological innovation, law, and incentive (behavior) is striking. It has me wondering what the optimal re-arrangement is for the tools of today. How can the (truly) popular professional musician play for their meals? Any speculations? Based on your article, I'm thinking that Rhapsody may be positioned to better outstand iTunes in the test of time.

Most of all, I am heartened by the last section of your article, "The Future". Bring it on home! Let's make it happen... I hear you've got a great music salon :-)

~~~

WE are the music-makers,
And we are the dreamers of dreams,
Wandering by lone sea-breakers,
And sitting by desolate streams;
World-losers and world-forsakers,
On whom the pale moon gleams:
Yet we are the movers and shakers
Of the world for ever, it seems.

With wonderful deathless ditties
We build up the world's great cities,
And out of a fabulous story
We fashion an empire's glory:
One man with a dream, at pleasure,
Shall go forth and conquer a crown;
And three with a new song's measure
Can trample an empire down.

We, in the ages lying
In the buried past of the earth,
Built Nineveh with our sighing,
And Babel itself with our mirth;
And o'erthrew them with prophesying
To the old of the new world's worth;
For each age is a dream that is dying,
Or one that is coming to birth.

~ Ode
Arthur O'Shaughnessy. 1844–1881

Anu said...

Copyright law will change. It's inevitable.

There will be compulsory licensing at statutory rates for sound recordings (either by law or de facto) - the only question is when. Probably more like 5-10 years.

I'll be writing some more about that soon.

As for the future, Ray, "professional" musicians will derive less revenue from selling music. They'll charge their fans more (making the hardcore fans who are willing to pay make up the loss from casual fans) directly or indirectly, and they'll look for other less-piratable revenue sources.

A good example is the web cartoon Achewood. The cartoon is free every day. The author derives revenue from selling t-shirts and books of the cartoons. And he'll even customize the books with a personal dedication and cartoon for an additional fee.