Getting paid for music

Today, Hanson and Rosenthal discuss ways for labels and artists to capitalize on webcasting. Previously, they debated the distinctions between online and broadcast and whether webcasting should be open to hobbyists. Later this week they’ll discuss the promotional value, economic challenges and shifting categories of airplay.

Use honey, not vinegar
By Kurt Hanson

Let’s start today’s exchange, Jay, by going back to Monday’s installment. As you may recall, when we were discussing the issue of “hobbyist” webcasters, you said:

Think about what you just said for a moment: Following that logic, the U.S. recording industry might just as well turn off the lights and go home!

Why? Because you’re implying that no matter what you do—get people excited about music again, get stellar reviews in the press for a great new band, showcase an artist on Letterman and Leno—there’s no point to it, because the people who learn to like an artist’s work are simply going to illegally download it.

I think that sums the essential malaise of the record industry, Jay. It seems to me—and to friends of mine who’ve left the major labels in recent years—that the music industry has given up on trying to sell music, and is just trying to legislate and sue its way into protecting whatever cash it can as it fades into its demise.

But it doesn’t have to be that way! Let me suggest six ways the music industry could take advantage of the growth in webcasting—and other related technological developments—to maximize its health.

(First, though, I would like to circle back to your above quote for a moment. When I discovered an artist named Bruce Springsteen back in 1973, I lived in a dorm where there were more copies of Greetings from Asbury Park, N.J. dubbed onto TDK SA-90 audio cassettes floating around than there were actual copies of the LP. In other words, as you say above, “more often than not” people had an “illegal” copy. But records still sold! In fact, it was thanks to the illegal copies that Springsteen gained new fans who later went on to buy actual legal copies of his future releases! If you think about this from a lawyer’s perspective instead of a marketer’s perspective, things go haywire, because your instincts are to try to stop the dubbing, but if you succeed, you’re worse off than if you didn’t. Whoa, there’s a parallel here! If you think about Internet radio royalties from a lawyer’s perspective instead of a marketer’s perspective, things go haywire, too, because first you get the laws worded in your favor, and then you field the more aggressive legal team, and then you win a super-high royalty rate. But it shuts down an industry that was actually good for you; so by succeeding, you’re worse off than if you hadn’t.)

So, trying to get back on track now, here are my six suggestions:

1) Take advantage of the Long Tail: To expand on what I wrote on Monday, Internet-delivered radio is revealing the true “long tail” of consumer demand for different musical genres. Example: Even though reggae isn’t a popular enough format to deserve one of the 20 available slots on a given city’s FM band, there in fact is a reasonable amount of consumer interest in a reggae-formatted radio station. (In any given city, perhaps only a few thousand people. But nationally, that’s hundreds of thousands of people!) And there is a reasonable amount of interest in traditional jazz, Broadway, blues, Celtic, electronica, bluegrass, yoga music, classical oboe... This is the direction that music sales will move in—fewer sales of the big hits (which you may think is caused by casual CD burning or peer-to-peer file sharing, but very well could be primarily due to this phenomenon) and more sales of everything out there at the long tail. Labels who adjust to this change in consumer behavior will have a better chance of thriving.

2) Rethink CD pricing: A typical music CD contains about 50 minutes worth of audio and sells for about $12—and a Best Buy shopper back in 2001 might have thought that was an OK value. But in 2007, in the “TV Series on DVD” section of the store, that same Best Buy shopper now sees that somehow the video industry has managed to pack 20 hours’ worth of video, plus audio, often with incredibly expensive production values (e.g., Alias season 3), into more attractive packaging, and somehow offer it at a price point of $30. So, you hold one in each hand—in your left hand, 40 minutes of audio for $12; in your right hand, 20 hours of video plus audio for $30. And you think, “Hmmm...” Other industries are learning that you have to compete on price and value, and that sometimes when you lower prices, you increase your total sales volume. Given the improved value your indirect competitors (DVDs, video games, etc.) are offering, I really don’t think your clients can hold the $12 price point.

3) Rethink download pricing: Technology has handed the music industry a potentially wonderful new opportunity—tens of millions of people now own MP3 players that hold up 20,000 songs each. What a potential market for download sales! But what’s the ideal price point? Let’s take a teenager as our example: Jeremy owns an MP3 player that holds 20,000 songs. At the right price point, you can get him to buy a lot of songs. Is the right price point $1 or $1.30 a song? Do you reasonably think that Jeremy is a prospect to pay $20,000 or $26,000 to fill his MP3 player with music? No, he isn’t! That simply cannot be the right price point. (It’s also ludicrously high on its face—when there are no costs of shipping a physical product, the price should obviously be lower than when there’s a physical product. Consumers know this.) Find the right price point, and you’ll invigorate your industry. (BTW, I know you offer “rental” plans that can fill an MP3 player for $15/month. But they lack broad appeal because we live in an “ownership” society.)

4) Rethink your approach to peer-to-peer file sharing: Record labels in the 1930s tried to prevent radio stations from playing their LPs because they thought it would hurt sales—after all, why would someone buy the disc if the radio was playing it for free? As it turned out, airplay actually helped sales! The Bing Crosby records that got airplay sold a lot more copies than those that didn’t. The same may be true of P2P. Remember, the music industry’s best year ever coincided with P2P’s strongest year ever (i.e., the year Napster was at its peak). People sampled vast quantities of music via P2P and they bought the stuff they liked on CD. It’s counterintuitive but it might be true.

5) Quit being a jerk to your customers: Every month, the record industry causes an untold amount of pain for thousands of consumers by suing them for exposing song files via P2P services. You’re causing tears, heartbreak, stress; you’re taking away vacation savings and college funds. And you do it in such a way—a slow steady stream of lawsuits every month—that you derive virtually no worthwhile public relations value from it. You guys simply severely damage thousands of people’s lives every month because you can. (You might respond, “They’re infringers! They’re not ‘our customers’.” But I’ll bet that’s not true—I’ll bet they buy as many CDs as anyone else. Downloading tracks and buying CDs are not mutually exclusive activities.) You do have a point to get across: “File sharing is illegal. Don’t do it.” But there are better approaches that would be more effective in delivering the message and would hurt fewer people. Perhaps, for example, you could use the concept of “flighting”—if you’re going to do lawsuits, do them in infrequent batches, with concomitant publicity. (Gets your message across more clearly and hurts fewer lives at the same time.)

6) Embrace your friends: Most of my recommendations above are about phenomena associated with the webcasting era but not about webcasting specifically. Here, I’d like to address that point. Virtually all Internet radio properties today were launched by music fans—people who love their genre (or genres) of music and want to see the musicians and labels involved succeed. They’ve designed Internet radio products that are, in fact, getting people excited about music again. (Again, see here.) Regarding this whole royalty imbroglio, to quote Jack Bauer, “You’re making the wrong play.” Instead of asking for a royalty rate so high that it would bankrupt webcasters and shut them down, as you did in your successful case to the Copyright Royalty Board, you’d be better off offering webcasters a livable royalty rate and a plan to work together to sell more product to consumers. If you guys do, you’ll be surprised how effective working together can be!

Kurt Hanson is Publisher of RAIN: Radio And Internet Newsletter, the leading trade publication for the field of Internet radio, and CEO of AccuRadio.com, a popular multichannel Internet radio property that reaches almost half a million unique listeners per month. He previously worked at WLS/Chicago and WLUP/Chicago.

Who speaks for the artist?
By Jay Rosenthal

Since we are going down memory lane, I found Bruce Springsteen in 1974 when he played a show at Albright College in Reading, Pennsylvania—my hometown. I had never heard of him before, but I was in a band and the guitar player heard about him from some people who saw him at the Main Point in Philadelphia. I bought my ticket—I loved it, and went out and bought the album (Greetings from Asbury Park), and all his albums thereafter. Now you may say that my “word of mouth” experience is what Internet radio is all about. My response would be that I heard about it legally—no illegal copies, no below-market Internet radio rates, no payoffs, nothing. If only that were the case today.

Am I depressed about the music industry? Who isn’t? I can give you all the stats and details, but you know them. The labels are terrified and are taking unprecedented contractual measures to ensure their viability, like requiring artists to share some of their live performance income. Some labels think they are managing the artist anyway, so what the hell—they might as well act like managers.

I can’t stand the practice, but I understand why they are doing it—and I understand why the labels are trying to shore up their copyrights. Quite simply, they are trying to maintain the value of the copyrights. And most artists feel the same way. The difference is totally in the means.

You propose an “economy of scale” solution. Allow the masses to self-generate publicity for artists, and somehow there will be new economic benefits. I’m not quite sure where those benefits will come from, but the idea is that if there is enough churning of the “open source” music world, then all will benefit—and perhaps most of all the more independent and esoteric artists.

The future of the music business will not turn on how low we can push the value of music. The future is in the creation of compulsory license systems providing fair value and ease of administration, and creating new and ancillary markets and promotional outlets. But I am not sure Internet radio will be a major part of that solution.

Keep in mind, the Copyright Royalty Board rates enable you to do what you want to do—even if it hits you hard in the pocket. That is why the future of the music business is not primarily being determined online or even in the marketplace. To a large extent, the future of the music business is being determined in Washington, D.C. Or more specifically, in the development and supervision of the compulsory and blanket license systems of the future. That is why the process (the CRB process right now) is just as important as the substance.

But here is the key point—the music business will only flourish if the value of music is maintained and new streams of income are developed. It’s impossible to compete with “free.” And below-market-value Internet radio just doesn’t make up for all the “free” out there. The economic laws that guide our existence apply just as much to music as to other industries. The free music philosophies we hear so much about will not be the panacea of our business. I have heard argument after argument professing that free or almost free will be our salvation, whatever it is: the 3-cent download; the expansion of “fair use” to cover P2P file sharing; the expansion of the Sony doctrine to protect Grokster and the other criminal enterprises providing the drug of choice to the poor kids who are being sued ; the elimination of broadcast flags; the elimination of all DRM; and on and on. And they all start with the same refrain: “Artists should get paid, but..”

Now here is my prediction considering I don’t have much faith that the industry will find an all-purpose cure in the short term. Major labels will only survive by relying on television, movies, commercials, endorsements, and other ancillary businesses—as well as master tones, phone based services, merchandising, etc. Branding of artists is the key, and that does not come anymore simply from radio airplay—Internet or not—or word of mouth. Just ask the major managers. They don’t want artists—they want brands. I really don’t have much faith in the music industry surviving our “wonderful” Internet era in any other way. To break an artist today, they must use these ancillary resources. Broadcast radio will still be important, but the jury is still out on Internet radio’s importance.

The only indie labels that will survive are those licensing music to those same sources. All others will most likely fail. But for the actual music-related streams of income, moving toward compulsory systems that include copyright enforcement along with sensible compulsory license adjudications are vitally essential.

Now to your specific points:

Take advantage of the Long Tail:

I believe indie labels and music have a pretty good shot at surviving this depression because they are finding new ways to sell music. There are fans of all sorts of music out there, and they hopefully will generate some business, but it simply is not enough to turn the tide of the entire industry. It will keep the business going somewhat, but that’s all. And the only way even the very esoteric labels can survive is if they can take advantage of the various income streams of the future—like those coming from SoundExchange and from new technologies that actually pay them. They want Internet radio stations to play and pay for their music. Short-term promotion cannot turn into long-term income streams without viable compulsory license rates. And if they want to use Internet radio simply as promotion, then they can direct-license. It may be tougher for the Internet radio stations, but if the artists and labels have to try harder, then the Internet radio stations must put some effort into it—life isn’t easy.

But there is an amazing irony in your point—most of those genres you identify generally appeal to a much older demographic. The older—and more economically well off—fan will continue to buy this type of music. And the reason is that they just don’t know how to download. But I don’t believe the young jazz fan will respect the rights of artists any more than the young alt-band fan. Their economic reality will push them toward illegal downloads. So when all of my generation dies, we are all screwed—the major label artists, and the jazz acts.

Rethink CD pricing:

You and I can totally agree on this point. The examples you raise are right on, and I believe enlightened record labels will respond. The introduction of audio product with video is going to become very viable—although that does put some indie labels at a disadvantage. They have figured out how to make a low-ost record, but I don’t know if they have the resources for full video integration. I also like the idea of selling records in conjunction with concert tickets. That is a very interesting new mode.

Rethink download pricing:

I really like the idea of charging a premium for downloads without DRM. I have no big problem with the 99 cent track, but they should also offer a track without DRM for $1.20 or more. Buying interoperability is buying value, and its a good business modal.

Rethink your approach to peer-to-peer file sharing:

This is where we totally disagree. There is very little similarity between radio pushing sales and P2P pushing sales. It is the height of delusion to think that the vast majority or even a majority of those downloading buy more music because they download. Kids just don’t work it that way. I have kids, and they have friends—and I know they download music because it is free. While they buy music at times, they relish the thought of acquiring free music without any apparent ramification (more on this below). They have very slight resources, and if they have $40 a month to spend on entertainment, they have a choice of buying four CDs or stealing all the music and going to the movies four times. At 16 what would you do? We simply have to stop this crazy thinking that illegal piracy helps sales. It is the primary reason, if not the sole reason, for the depression we all face. If P2P pushes sales we would be in a golden age of music sales. So lets stop drinking the Kool-Aid and at least agree that unauthorized P2P is our greatest enemy; perhaps, if monetized properly, it is our best friend. I have read studies trying to prove the opposite. I not only find them totally unpersuasive, but think they are actually a form of satire.

Quit being a jerk to your customers:

Here is one I don’t get. If someone sneaks into a show, they are either thrown out or arrested. A kid who steals merchandise is in big trouble. If you walk out of a store with a CD, you are most certainly arrested. Yet, stealing music via the Internet seems to be not only an acceptable act. Some try calling it fair use—and some even praise the act. Some even try to differentiate between stealing a physical copy and a digital copy. In today’s world there is no basis for such a distinction. Stealing intellectual property value is like stealing physical property. We should be teaching our kids to respect the intellectual property of an artist. Many kids and even parents don’t understand because they think since the computer lets them do it, it must be legal. Simple education alone is a folly. Deterrence is an essential part of the solution. It is impossible for the IRS to arrest all of the tax payers in the United States if they all refuse to pay taxes—but the vast majority of Americans file anyway. Why do they do it? Because of the fear of being arrested, even though there is an extremely low probability that they will be arrested. And that is exactly what the lawsuits are doing. They are creating deterrence so the vast majority—though not all—may stop engaging in such a destructive and illegal practice. This is why the music industry started the lawsuits. Maybe the suits have reached a saturation point, but the initial reason was absolutely valid, legal, proper, and moral.

Now I have no problem with those arguing that it may be a bad business move at this time, but I sincerely hope they differentiate between the business rationale and the copyright rationale. We cannot and should not turn this into a form of fair use. And perhaps the deterrent has had the requisite effect. But if not, then the lawsuits should continue. And I know this is a position not shared by many in my profession at this point in time.

Embrace your friends:

Everyone wants to pretend that they are the friend of the artist. In my estimation, anyone not paying an artist a fair royalty or failing to get authority to use the music may love the art but they certainly don’t love the artist. There are many good hearted music lovers and business leaders in the Internet radio community who want to make the world of the artist better. But they must meet the artist at least halfway. In the long run, the Internet radio community must learn to work with the rates, enter into good faith negotiations, or direct license. Some stations and services may go under. It will not be easy, but it is the only antidote. But you must recognize that many artists have lost their careers as well. I know you think your movement is righteous, but where were the same people when the artists’ careers were and still are being killed—where is the SavetheArtist.net campaign? Certainly you don’t believe that Internet radio fits that bill. The small webcasters may be hurting because of this turn of events, but they are a small part of a much bigger picture. Major webcasters will figure out how to survive, just like any major industry faced with increased costs—and some of them may reduce their services or maybe stop—but in the long run most of them will figure it out. The basic reality is that the harm to all artists receiving a below-market rate or perhaps nothing is much greater and more important than the problems facing the webcasters, especially the small webcasters. It is the difference between someone who has a healthy appetite and someone who is starving.

And by the way, people have always been excited about music—they really don’t need the small webcasters to find music. Did you and I need a small webcaster to find Bruce Springsteen? All we needed were friends, and in your instance, a friend with a bootleg copy—but ten to one, you would have found Bruce anyway.

Jay Rosenthal is a partner with the Washington DC law firm Berliner, Corcoran & Rowe, LLP; co-legal counsel to the Recording Artists’ Coalition; and a SoundExchange board member. He also represents numerous recording artists, independent record companies, producers, songwriters and independent film companies and is an adjunct professor of entertainment law at the George Washington University School of Law and at the Washington College of Law of the American University.

Prices and rates nobody can work with

Jay, you wrote, “But they must meet the artist at least halfway. In the long run, the Internet radio community must learn to work with the rates, enter into good faith negotiations, or direct-license.”

First, it is impossible to “work with” the CRB rates to offer advertising-supported radio in the current advertising environment—the rates per listener-hour are higher than 100% of what advertisers are willing to pay per listener hour. (The CRB judges pulled their alleged “market rate” from the per-track pricing for an on-demand subscription service. Maybe we can go into this in more detail later this week.)

Second, we (the Small Commercial Webcasters group) have been trying for two years to enter into meetings with SoundExchange for good faith negotiations; only in the past few weeks have we actually been able to get a meeting.

Third, a direct license will probably not “meet the artist halfway” at all, as the legislated 50/50 split between copyright owners and artists would not apply to direct licenses—in other words, the label would be able to keep the cash while the artist, depending on his or her contract with the label, as I understand it, would get little or nothing!

You also wrote, “But you must recognize that many artists have lost their careers as well. I know you think your movement is righteous, but where were the same people when the artists’ careers were and still are being killed—where is the SavetheArtist.net campaign?”

I don’t understand your point here. Which artists have lost their careers? Why have they lost them? (If it’s due to lower CD sales for catalog product, don’t we agree that might simply be a pricing issue?) What would have been the goals of a SavetheArtist.net campaign—to encourage labels to issue accurate recoup reports to their artists?

Kurt

Develop a more rewarding ad base

Kurt,

1. Moving toward a more viable and economically beneficial advertising business model for you is the best goal. Right now, you and others may be losing a bit, but if you develop a more financially rewarding advertising base, then you win—i.e., there is incentive for you to move toward a better advertising model.

2. I don’t want to get into too much history. The key point is that right now negotiations are going on with all parties—serious negotiations. And I truly believe they are good-faith negotiations. I am optimistic that settlements will be reached—so long as they don’t have to answer congressional staffers’ emails and press requests every day regarding the proposed legislation. This was my point about legislation not being the right way to go—fighting for that back-up position may prevent a negotiated settlement—and as I said before, it is a lot easier to stop a bill in Congress than to pass one.

3. Almost all labels will use SoundExchange anyway because of the administrative ease, so this is not such a big deal. You direct license, and whatever the deal it will most likely go through SoundExchange. And if it is a gratis license, there is nothing to pay anyway. Plus, your concern has been with the indie labels, and many of their deals need artist approval and are already set up for a 50/50 net split, and in many instances the artist can get the money through even if they are unrecouped. And regarding the whole concept of being recouped—there is no one more aware of that problem than I am, but the reality is that even if an artist is unrecouped, third party licensing payments reduce the unrecouped account, helping the artist reach that golden moment sooner. But for major artists, most never recoup—and that is why SoundExchange is the better alternative. I also believe even some majors would send the direct-license money through SoundExchange, even if they have unrecouped advances, especially with the smaller webcasters—again, because of the smaller administrative costs.

Jay