To This Veteran’s Ear, the Music Industry’s Timing Has Been Off

The $40-billion music industry is in serious trouble, or so says music industry veteran/Internet novice Jimmy Iovine.

And the industry has no one to blame but itself.

It has been nearly three decades since Iovine broke into the music business engineering and producing hit records for John Lennon, Bruce Springsteen and Patti Smith. Now he’s back on the cutting edge of the industry running Seagram’s nascent Internet effort, Farmclub.com, as well as Seagram’s Interscope, the label that rules the pop chart this week with the No. 1 CD in the nation: Eminem’s “Marshall Mathers.”

The 46-year-old executive is sick of corporate bureaucrats compromising the industry’s future by obstructing online initiatives and tying the hands of entrepreneurs who are trying to figure out how to compete on the Web. If the industry doesn’t get moving and start making music transactions easy online, he says, it will soon relinquish control of a valuable distribution channel to innovative upstarts such as Napster.

Iovine dove into the Internet world six months ago when he launched Farmclub.com with Universal Music Group Chairman Doug Morris. Farmclub is an online label with a cable TV show and a Web site where musicians can download and upload songs. With the backing of Seagram Chief Executive Edgar Bronfman Jr. and an estimated $25 million in financing from Universal, Farmclub.com is on the verge of opening its own streaming subscription service.

In an exclusive interview at his Santa Monica office, Iovine spoke candidly about copyright protection, security systems and some of the problems he and Morris have encountered in trying to carve out a space on the Internet.

Question: What’s wrong with the direction that the industry is going?

Answer: We’re stuck in the past and afraid of the future. If we don’t figure out this Internet space soon, we’re heading for trouble.

This industry is in protection overdrive. The only reason MP3.com and Napster exist is because the record industry never did anything in this space. I’m as guilty as the next guy. We never had anybody out there working like the Napster guys, who just said, ‘Hey let’s put this thing up and start sharing files and let’s do it tomorrow.’

Sure, Napster is dangerous, but it’s made a noise--a noise we should not ignore. I’m all for protecting music. But we can’t wait until we invent the perfect digital padlock. We can’t wait until we figure out the perfect online license. That could take 20 years. We don’t have 20 years. We need to move right now.

Q: How difficult has your own experience been in trying to break into this space?

A: Very difficult. Edgar Bronfman has been fantastic to us. And that’s where the rubber hits the road. But there are factions in this company, as in every other company, that are in protection overdrive, and they are overheating big time. It’s got to loosen up and become a bit more progressive to compete.

I believe that in the end the copyright will win the day. I think the Internet is a gigantic opportunity. The music industry could double its profits with a subscription business if we get out there and start competing on the Internet.

Q: But if you can’t?

A: Then we will stand by and watch another industry develop that we don’t participate in or have any ownership in. If the record companies don’t participate as a member of the new technology that sells our music, we’ll become the movie business. We’ll end up with these tiny little margins.

I guarantee you that if the record industry doesn’t figure it out, somebody else will. Somebody else figured out MTV. Somebody else figured out SoundScan. We allowed third parties to come in and dominate those businesses when they should have been ours. If we don’t wake up, it’s going to happen again.

Q: How long does the record industry have?

A: I think it’s “put up or shut up” right now. We need to move right now. I don’t mean tomorrow. I mean this second. If we do, there is an upside that is enormous. If we don’t, we’re going to see that what happened to the movie business is going to happen to us. Thin margins. If we don’t win this one, we deserve it.

Q: How many years has the record business lost in the online world because of bureaucratic bungling?

A: Too many. But it’s not just the time. We’ve also lost a big psychological advantage. Our reaction to MP3 and Napster triggered front-page stories everywhere painting the record industry on one side and technology and freedom and kids on the other.

We’ve got all these industry grown-ups running around everywhere yelling at kids to stop using MP3 files. It’s so typical of what has happened to our industry, in terms of the “corporatization” of the music. We used to be the rebels, the ones parents always hated. Now all of sudden, it’s like we’re a bunch of boring adults.

Q: Are you worried that piracy will cripple the business?

A: No. What we need to do is embrace the technology and get moving. There are ways to steal cable, but most people choose not to. We have to give people music in a format that offers the same convenience as the one where they get it free. If it’s too difficult, they’ll go elsewhere.

We need to make music online simple and hassle-free. Right now, it’s nowhere near that. And it’s our fault.

Q: Do you think online delivery will kill bricks-and-mortar retail as we know it?

A: Some people fear that, but I don’t believe it. Just because people have kitchens at home, it doesn’t mean they don’t like to go out to eat in restaurants.

We’re in the service business. If we give our customers the service they want, they’ll be glad to pay us. I believe CDs are going to sell for a long time to come. Whatever people play in their car, that format is not going to go away tomorrow.

We had a huge campaign at Interscope where we downloaded two minutes of Eminem’s new album. We gave away 800,000 of them, but we still sold millions of the CD. It’s the biggest-selling album in the country this month.

Q: The business model of the industry has long been built on the album. But online users prefer downloading singles.

A: I think albums will still exist for a long time. But who knows? Maybe we’ll end up changing the way that albums are configured. Maybe we’ll end like television with an advertising-based model. We’ll probably go through 50 different experiments before we get it right, but so what? Why is everybody so locked into protecting one specific format? What is this, a religion? I swear the Catholic Church changes quicker than the record business.

Q: But the profit center of the business is based on albums. Selling singles will deliver far less profit.

A: We’re not going to get stuck just selling singles. We’re going to offer subscription services with a broad menu of options. But I think lots of fans will still buy CDs. Maybe we need to test different pricing points for stuff online, but the fact is we’ll never find out sitting still the way we have been.

Q: If you could change it now, what would you do to correct the damage?

A: I would give each label free reign to experiment in the Internet space. I would try to recruit people from Microsoft and AOL. I’d go get people who have worked in this space and excel at it. I’d bring them into the record business.

But in most cases, the opposite is happening. We’re losing people from the record business to all these Internet start-ups.

Q: You sound awfully optimistic about the future considering all the elements stacking up against you. You’re about to lose a generation of consumers who have grown up thinking music is free. On the other hand, you’ve got the a bunch of bureaucrats blocking access to prime Internet real estate. The collision of these two elements could be devastating.

A: What I’m saying is that the record industry needs to take advantage of future profit centers other than just selling the packaged goods.

Q: Do you feel the industry in general is doing that?

A: No.

Q: How far off are they?

A: consumer is trying to tell us something. They enjoy music online. They’re telling us they want a new kind of access. Let’s give them what they want: real simple, real convenient. If we make the experience too difficult, they are going to go somewhere else and get it, somewhere where it’s easy. If that challenge makes it riskier for us, well then, so be it.

* INDUSTRY AT RISK

Music companies are in danger of self-destruction if they don’t find a way to sell online. A1