by : Business, October 2009

A Decade to Remember: Changes in the Music Industry, 1999 – 2009

The digital music revolution started with peer-to-peer file sharing late in 1999 and changed forever the terms of recorded music transactions. Consumers suddenly could enjoy unprecedented access to near limitless amounts of music and media. Record companies and some artists decried the wide spread abuse of intellectual property, and lawsuits from the Recording Industry Association of America (RIAA) eventually started in earnest. The RIAA sought to protect not only the integrity of copyright law, but also the revenues of the rights holders (artists and record companies).
The Value of Musicians’ Rights and Retail Prices
Evidence suggests, however, that the devaluation of music started back in the 1990’s, even before file sharing begun. Two instances of this will be given below.
In the United States, the Copyright Royalty Board (CRB) is responsible for setting royalty rates for both the manufacturing of records, the digital transmission of music over the internet, and a number of other transactions concerning the ownership of intellectual property. However, since 1976 the mechanical rate for sound recordings (SR) in the U.S. has not been keeping up with inflation, thanks in part to RIAA lobbying in congress. After accounting for inflation, today’s rate of 9.1 cents per song per album as set by the CRB is around 10% less than the rate set in 1976.
Today, artists and record companies find themselves scrambling to make up for lost revenues, which has finally translated to the arduous-and-ongoing adaptation of the digital medium- as it was not more than a decade ago completely uncharted and un-monetized territory to the recording industry. Some would argue the reluctance on the part of record companies in paying more attention to the potential stored in the digital medium and in the Internet is a culprit in the huge decline of industry revenues since the late 90’s. It has been said that as much as 95% of music that is digitally consumed today is done so without proper compensation to rights holders.
One of the drawbacks of selling music as a physical good is an obvious one: if it is tangible, it takes up space. Retailers need a lot of it in order to have a diverse enough catalogue of music in their store that can appeal to the widest possible audience. By nature, this is one of the many strong points of a digital medium- all of a sudden you have unlimited shelf space, and ‘rent’ instantly became a negligible expense for online retailers. This, along with not having to buy or hire trucks to distribute the physical good, led to the advent of the digital download marketplace. Apple’s iTunes music store was among the first to capitalize in junction with their newly released portable mp3 player, the iPod.
“Digital sales” include all downloaded singles, albums, kiosk and music video purchases, mobile downloads, subscription-based-model revenues, and digital performance royalties from internet radio and streaming sites. Since the introduction of the digital music marketplace, much has changed. Wal-Mart, America’s leading music retailer, opened its online music store in March 2004 while undercutting iTunes by 11 cents per song download. Amazon.com opened its own online music marketplace in September 2007. In early 2009, the leading online music retailer (Apple iTunes) began to incorporate a variable pricing strategy poised at $1.29 for major label hits, the standard $.99, and the bottom bin $.69 price level.
One main improvement for the industry in this respect is that labels now have control over pricing, NOT the retailers, which had historically been the case because of the costs involved in distributing and storing/displaying physical media. This makes room for extra pricing strategies on the side of the labels—giving them, in effect, more control than they ever had.
In 2008, digital downloads in the U.S. accounted for 32% of all music purchases, a 28% increase over 2007 (in units sold) , and that number continues to grow as consumers become increasingly comfortable with making digital purchases of music online and through handheld devices. As many new gadgets are in continuous development and evolution, such as the next generation of smart phones like Apple’s iPhone 3GS, R.I.M’s Blackberry lines, and the Palm Pre, music will continue to play a key role in the utility of these and subsequent devices.
Gaming and Full Access To All Recordings
Video games account for 35% of total digital revenues worldwide. It is no surprise then that the music industry would eventually come to share a greater common interest with the gaming industry. In 2005, the first of the Guitar Hero franchise games was released with great success. Since then, competing franchise Rock Band has formed, and both titles have enjoyed continual popularity.
Apart from sales numbers, this speaks volumes to the importance of listener interaction with music. Gamers today strap on a guitar-controller or drum pad or a microphone and play along to their favorite songs, feeling as though they are directly in control of the music being played. This has been a new and profitable outlet for artists and record companies whose songs are requested for licensing into these games. Even acts such as Aerosmith and The Beatles now have their own music-video-game titles, while content expansion has been made possible through download from the gaming systems’ Internet connection.
Through this multi-faceted process of re-monetization, a new model has emerged: the ‘full music access’ model. In this model, Internet users are offered music and content bundled with their Internet access, including a subscription option for an added fee. Nokia is one of the leaders in the field, and its “ Comes With Music” program offers unlimited music access for a year (once a year is up, users have the option to download files permanently; eligibility for the program is granted when a consumer purchases a Nokia phone, specially priced to incorporate CWM). Sony Ericsson has developed a model similar to Nokia’s via its “PlayNow” Plus service on special edition Walkman phones. TDC, a mobile and broadband service provider based in Denmark, introduced PLAY in April 2008- a bundled music service that offers unlimited access to 2.2 million songs for mobile and broadband customers without additional charge. This has helped TDC capture a large share of the Danish market. Other service providers in the UK, Ireland, and France have followed suit with the knowledge that music enhances the utility of Internet and mobile access. That added utility has demonstrated the ability to help providers retain their existing customers, while expanding their market share.
ISPs then, have begun to play an ever increasingly important role as the conduit between content providers and consumers. While most have steered away from policing their networks for file sharers, it has become clear that in order to have the consent and access to the world’s top sound recordings rights holders (the major labels), ISPs must participate in the process of discouraging illegal downloads.
More Controversy on Artists’ Rights
Internationally, it is common practice for broadcast performance royalties to be paid out to record companies and artists for the use of their original sound recordings in over-the-air radio broadcasts. Not so in the U.S. as lobbyists and the National Association of Broadcasters have up to now had success in preventing such a measure from being introduced into legislation. This has two negative effects. First, internet radio and streaming sites have historically found it difficult to compete with terrestrial radio because of the relative high cost of streaming royalties charged against stations like Pandora and Last.fm. Second, this is a huge loss of revenue for artists not only by preventing performance royalties pouring in from US terrestrial radio stations, but also internationally. U.S. artists cannot collect performance royalties from international stations unless the US reciprocates with Europe.
This may change. In May 2009, a House of Representatives Judiciary Committee approved the Performance Royalties Act. If passed by the House and the Senate, and signed by President Obama, terrestrial radio stations would at last have to pay record labels for the right to play sound recordings (in addition to the fees they already pay songwriters via BMI, ASCAP, and SESAC, which conforms to international standards). The bill is still a work in progress, and it was approved despite the lack of completion of any directed study concerning the impact of such a bill on radio stations nationwide. Much to the chagrin of the National Association of Broadcasters (NAB), the issue is finally being addressed after it was tabled in order to pass an updated Copyright Act in 1976. Some inequalities still have yet to be addressed however, as small broadcasters in radio will likely pay 20 times less than what small webcasters have to pay for broadcast performance rights for stations with revenues less than 100,000 annually- while the small broadcaster with revenues up to 1.25 million would pay 5000 dollars per year, about 1/30th of what webcasters of similar revenue numbers would have to pay. The NAB maintains that payouts of these royalties will do serious harm to the revenues of terrestrial broadcasters. However, Congressman Rick Boucher has urged broadcasters to begin negotiating with the RIAA for the implementation of a fair rate, as the CRB is likely to set one for them if they don’t (see an update in our Music Law section, p. 4)
Multiple Rights Deals and Partnerships
These days truly are the Wild West for record label business models, and multiple rights deals (commonly referred to as 360 deals) are all the rage. Instead of only earning a return on records sold by a given artist, record contracts are increasingly stipulating the importance of secondary streams of income to labels- merchandising, tour revenues, and other earnings. This has been perceived as a coping mechanism for the sharp decline in record sales revenues over the last decade. Record labels insist that they now have an ever-greater vested interest in the long-term success of their artists, one that requires that a label develop a strong branding strategy for their artists.
Labels make the argument that such a branding strategy requires a larger investment in their artists including greater tour investment, and as such deserve a percentage of the various revenues they generate. They also point out that a larger initial investment would also be justified if the label were guaranteed sources of ancillary income, potentially provoking a more patient response if an artist or band doesn’t sell well from the onset.
However, in times of vastly declining record sales, some artists have turned away from relying on record sales and have embraced giving their music away for free as an investment in the potential for greater tour revenues. To those managers and artists, Multiple Rights Deals are anathema, as the last thing they could wish for is their label to take a cut out of such a valuable asset.
Time will better tell the triumph or failure of the 360 models, but it should be taken as a good sign that labels are ready and willing to change the way they do business if it means greater profits in the long run. Let’s just hope these and future models refrain from doing any more damage to artists at a time when many young talents turn away from a career in music due to its substandard livelihood potential.

By Michael Benson

Comments

Leave a Reply