The dinosaurs of the recorded music industry must evolve or die

There was a time when music companies objected to the playing of music on the radio. Instead of seeing early radio technology as a positive opportunity for the music business, they refused stations the right to rebroadcast their recordings. It is with the same fear of the unknown that music companies are currently fighting the latest methods of distribution instead of developing new business models to utilise them.

Predicting reduced sales of sheet music and LPs, the early days of radio saw big record companies battling radio stations, until eventually, the former saw the potential in promoting music through the latter. Ironically, today we find a large proportion of cost and effort devoted to radio promotion, driving sales through traditional outlets. The companies’ apprehensions have now transferred to new technologies such as MP3 and AAC (or MP4 as it is colloquially known). For much the same reasons as they once feared radio. Most music companies have seen the MP3 boom as a mortal threat to their business and have acted with extraordinary vigour to stamp out peer-to-peer file sharing services such as Napster, Australian-owned KaZaA, Gnutella, Limewire and iSwipe, accusing them of encouraging piracy and copyright infringement.

Recently, EMI, Sony and Universal moved into battle mode by entering Australian universities to arrest students who had large numbers of MP3s on their servers. They now intend to spend millions on legal action against these “perpetrators” of alleged piracy and ultimately intimidate other MP3 users in an attempt to stamp out the epidemic of file sharing.

However, in fact the biggest problem facing the music companies is not the spread of MP3s or file sharing, but rather, their own unwillingness to embrace and adapt their business to this revolutionary technology. Indeed, digital music sharing through peer-to-peer networks is proving to be the most efficient method of promoting and distributing music that has ever evolved.

Against a backdrop of rapid change in communications technology and the media, there has been an unmistakable trend in recent times toward a more intricate music culture. A growing number of artists are releasing music to ever smaller captive audiences. The days where a superstar performer or group – Madonna, Michael Jackson, Prince, The Beatles, The Rolling Stones – would release an album destined to dominate not just the music, but also the media and fashion of the times, appear to be over. Even the days of middleweight acts taking the market by storm and hanging around for another album have virtually disappeared. Instead, the tendency is for smaller, more specific releases from artists who are closely in touch with their fan base or subculture. As in other aspects of the emerging world market, we can see a “global village” phenomenon of dispersed groups of people enjoying a product over a vast geographic and economic sphere.

Peter Chernin, News Corp COO, said at a News Corp Conference in 1998:

With big events at one end of the spectrum and niches at the other, what happens to the middle? The answer is that choice and fragmentation are killing the middle, which lacks the grabbing power of the big event or the custom tailoring of the niche. The general interest magazine – dead. The variety show – dead. The all-purpose department store – dead.

Therefore, the traditional record company may be right to feel threatened by this widely used digital technology and the virtual marketplace it has created. Until recently, the music industry was able to manipulate the buyer by placing restrictions on product licensing, aspiring toward a monopolistic control of traditional retail and distribution methods. However, this approach neglected the ability and desire of individuals to be fans, to invest time and effort into enjoying the artist. A key to the promotion of music artists is proving to lie in allowing the public the freedom to find out, to cultivate a knowledge, passion, even zealotry for their musical tastes, and ultimately even to take part in the development of the artist. The resources of rapidly consolidating record companies are stretched too thin to take advantage of such activity.

The costs of the traditional music company are too high to cater to small groups of special-interest fans. But understanding and catering to the fan is crucial to surviving in the changing music industry. The fan will actively research their musical interests, relying on peer-to-peer networks as a tool to do so. This is the same person that marketers refer to as the “80/20 driver”: 80 per cent of profits come from this 20 per cent of customers. This species of music-lover will go to great lengths to download, to explore and to discover. Fans use the Internet as a means of communication, finding outlets in newsgroups, blogs or discussion boards to talk about an act of interest to them, find similar acts and ultimately to invest money in the artist by purchasing music, merchandise, tour tickets, or other paraphernalia related to their heroes. Such fandom is not exclusive to the few major high-profile Madonnas of music, but can just as easily be oriented toward the local band down the road.

Unfortunately music companies whether by structural restraints or ignorance continue to operate as if the messages and news about their artist can be controlled through tightly held relationships with radio stations, music press and music television. In fact, the information to which a fan/investor will have access is far more detailed and varied than anything a Promotions Manager will ever have the time, resources or ability to control. Like any product manager, they are forced to move on once the priority status has passed. The fan, however, will keep ranging well beyond the borders and jurisdiction of local media outlets or a promotions plan.

If this is the way music companies act about the message, the way they treat the product itself is equally outdated. The rise of parallel imports, online purchasing and more important still, MP3s, has seen the territorial jurisdiction of licenses, sub-licenses and territory based record labels becoming redundant. Earlier this year, in a move music magazine NME described as “draconian”, dinosaur-like industry bodies like the Australian Recording Industry Association and the Australian Music Retailers Association adopted a code of practice that restricts the sale of CDs to persons under 18, based on profanity (Government communiqué on the new Code). This does nothing to deter the fan; instead it drives them to import or download the music, thus restricting the revenue to the artist.

Put simply, digital networks are displacing traditional methods of production, distribution, and retail sales, allowing the customer direct access to music. Downloading enables direct market access for any artist, record label or potential supplier. It removes the barrier of expensive overheads contained in the traditional model. The biggest of these is, of course, the middleman: the record distribution company.

Could the reason for the music industry's reluctance to embrace the technology be their realisation that it represents a write off of millions of dollars invested in the traditional infrastructure of CD production, logistics, distribution and retail framework that has been the industry’s sole means of accessing the customer base? There remains a market for CDs, as they still offer a much higher quality of music (for the moment) and a tangible product that fans will buy. But the situation is rapidly changing.

It has taken Apple, with its new iTunes Music Store, to provide the first customer-friendly means of digital music delivery. An outsider to the music industry (albeit one used by a vast majority of music creators and artists), Apple has modified its popular iTunes software to include a window where people can search for, and purchase over 450,000 songs for $US0.99 each. It's simple, one click and you've got the song for $US0.99. It is then possible to share any purchased song with three different computers, download it onto an iPod or burn it to CD. Seemingly this was too much to ask of record companies, who attempted to create online music sales through competing companies, Pressplay and Musicnet. Both proved cumbersome and difficult. Users paid a monthly subscription and were allowed to download a fixed number of songs which they could then access on just one computer, and only for as long they continued paying their subscription. To BMG’s credit, they dared to invest in Napster, hoping it would somehow evolve a viable user-pays model, however this never eventuated and Napster went broke.

In the end, most record companies chose to obstruct the technology rather than adopt and adapt it, bringing us to the current situation of record companies spending millions chasing individual university students. This is not to say that those record companies will necessarily be obsolete in the download world. What might the record company of the future look like? They are valuable sources of A&R (Artist and Repertoire) expertise. A&R personnel find, develop, invest in and refine the image and releases of the raw talent they have discovered in the hope that the outcome will be the creation of great content. The promotion and marketing of this same act is also extremely important in a mass-appeal market. However, the record company should not hold a monopoly on marketing and promotion. Instead, like the rest of the corporate world, each act would be outsourced to specialised marketing and promotion companies which understand the subtleties of each culture and subculture and try to “control” less and “cultivate” more. With lower overheads and better returns on acts, it opens potential for longer life cycles for the bands, and with this a further opportunity to create a true fan base at an international level.

This modular approach of providing A&R, that is continuing to invest in the image, songs and outcome of the musical product, while outsourcing marketing and promotion, would take the role of the music company away from the all-service company, to one responsible for just one or two links in the value chain. Whether by accident or design, Festival Mushroom Records has been the only major Australian record label so far to move towards this model. By enhancing its core competencies in control and development of the copyrights of particular acts, they change their focus to “the good old days” of investing in quality acts and spending time developing them.

Artists under the new model will be able to distribute and market their music within a modular and flexible market, whether purely through MP3 (where cost of sales is virtually zero, allowing for greater returns on lesser sales for a breaking act, for example, Little Birdy’s new release) or investing in production of CDs (for larger, older or deceased acts who are not catering to savvy fans, such as Elvis Presley) or, in a majority of cases, a hybrid of the two formats, MP3 and CD.

Whatever the outcome, these will prove very interesting times for the music industry. Structural problems can be disguised as competitive pressure from computer games and DVD sales or continue to be blamed on “downloads and piracy”, but some of the major players are yet to react to, or even admit to, the real problems facing the industry. While it may be a few years before we see an act independently break by selling digital music over the internet, unless the music companies find a means of focusing their role in “filtering” good acts and creatively developing great content, as opposed to distribution networks, it seems they will be left behind.