Rochelle News Triangle of odd news (Coolfer overview, Chuck Klosterman article and Scotlands Sunday Harald).

Looking For That $4.2 Billion

Music writer Chuck Klosterman has an article in Esquire titled“Anyone Seen My $4.2 Billion?” that ponders the record industry’s sales drop since 1999. It’s worth a read.

Klosterman has put together a good think piece. In short, he does away with overthinking the underlaying issues and boils it down to one thing: money. If consumers can save money by not buying music, or by spending less for the music they want (cherry picking tracks from an album), they’re going to do it.

Klosterman ignores common but errant theories typically tossed around by music writers — music today sucks, CDs are overpriced — and instead puts on an economist’s hat. He considers the incentives behind purchases. Consumers see P2P as a way to save money. They see iTunes as a way to escape purchasing an entire CD, thereby saving money.

Whenever writers try to explain the collapse of the music industry, they inevitably blame the labels themselves; they point out how wasteful and inefficient the corporate structure was at places like Elektra and Chrysalis, and how unfair it is to charge kids so many dollars for a disc that costs pennies to make, and that modern consumers have come to the realization that ‘music longs to be free.’ This may all be true, but I’m not sure it’s a viable explanation for things like huge layoffs at Def Jam. Lots of industries succeed despite being poorly modeled. What happened is this: Young people needed more money to pay for their rising levels of self-imposed debt, so they unconsciously gravitated toward the first technology that provided a cost-saving alternative. Because four-minute digital-song files are relatively small (and thus easily compressed), ripping tracks for free became the easiest way to eliminate an extraneous cost. It wasn’t political or countercultural, and it had almost nothing to do with music itself. It was fiscally practical. It was the first, best solution.People didn’t stop buying albums because they were philosophically opposed to how the rock business operated, and they didn’t stop buying albums because the Internet is changing the relationship between capitalism and art. People stopped buying albums because they wanted the fucking money. It’s complicated, but it’s not.

 

If I were to amend the article, I would point to this article in the Sunday Herald in which the writer argues the downturn was inevitable. The industry’s reaction to changing technologies could not have been avoided in all but the most perfect of scenarios. Industries always struggle with change.

 

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Anyone Seen My $4.2 Billion?

There’s a lot of money out there in the economy that people used to spend on CDs. The question is, where, exactly, did it go?

By Chuck Klosterman

[more from this author]

David Hughes

 

Even if you know nothing about the music industry, you probably know this: People don’t buy albums anymore. Everyone is aware of this, mostly because this phenomenon is reported on constantly. The soundtrack to High School Musical was considered a commercial success by selling 2.9 million units in all of 2007; seven years before, Britney Spears was able to sell 1.3 million copies of Oops! . . . I Did It Again in a single week. That disparity should be shocking, but it isn’t — by now, anyone who (even casually) follows the music industry is inundated with similarly grim statistics all the time. Interestingly, these stories tend to make music fans happy. People hate corporate record labels and love reading about how the industry is failing. As such, the media coverage of plummeting music sales almost always focuses on how labels are losing money. But this coverage usually ignores an economic element that is less tangible but more interesting: What is happening to all the money not being spent on music?

In 1999, the total revenue from all music sales (albums and singles) was $14.2 billion. By 2006, it was barely more than $10 billion, including downloads. While considering that staggering difference, assume the following suppositions are true:

• The music-buying population in 1999 wasn’t that different from the music-buying population in 2006. Some people stopped buying music and some younger people started, but the overall demographic base is mostly identical in size and scope.
• The quality of the music produced in those respective years was not significantly different. In other words, no one is going to argue that sales only went down because the music got worse; the public’s interest in sound is static.
• The price of music in stores stayed roughly the same.

This being the case, it would seem there are two elementary reasons why the decline in revenue happened: a) illegal file-sharing and b) heightened consumer selectivity. File-sharing has been written about extensively, so there is no need to readdress it here. The term “heightened consumer selectivity” is really just a manifestation of iTunes — if someone is obsessed with the song “1 2 3 4″ but has no interest in the Feist catalog, he can acquire the single for ninety-nine cents instead of blowing sixteen dollars on a full album he’d never play twice. But here’s where the math gets less clear and more meaningful: These trends don’t involve everyone. Your grandma is not using LimeWire. The 2.6 million people who love the Eagles are still going to Wal-Mart to buy the physical CD. In practice, it’s only a select class of computer-savvy consumers who are making this dramatic revenue shift happen — almost exclusively music fans under the age of forty who a) used to buy a few albums every other Tuesday but b) now buy virtually none over the course of an entire year. This specific underclass was the collective beneficiary of the aforementioned $4.2 billion difference from 2006; that number represents money they would have spent on music in 1999, but were able to save. So I wonder: Where did all that money go?

When the Associated Press did its (now annual) story about How the Music Industry Is Failing this past January, it tried to answer my question with one sentence: “The recording industry has experienced declines in CD album sales for years, in part because of the rise of online file-sharing, but also because consumers have spent more of their leisure dollars on other entertainment, like DVDs and video games.” This is a rational explanation supported by the precipitous commercial rise in both idioms. (Video-game revenue has more than doubled since 2000, and DVD sales grew from $2.5 billion in 2000 to $23.4 billion last year.) The only problem is while CDs, DVDs, and video games are physically similar, and they’re sold in the same outlet, the experiences they offer aren’t logically connected. I don’t see why not having to pay for a Band of Horses album would make a person any more likely to buy a copy ofKnocked Up, as opposed to buying four gallons of gas or a pair of sunglasses or a turtle. I don’t think young people swap out items in their “leisure” budget that explicitly. What seems more likely is that this extra $4.2 billion — unequally distributed among all the music fans who didn’t pay for music in 2006 — entered the overall economy in lots of disparate ways. And while we’ll never know exactly where all those bones disappeared, my specific theory is this: A lot of the money not spent on music in the twenty-first century is being used to pay off credit-card debt that was incurred during the nineties. In other words, not paying for In Rainbows today is helping people eliminate the balance they still owe for buying Mellon Collie and the Infinite Sadness when they were broke in 1995.

During the early eighties, it was difficult for college kids to get credit cards; at the time, parents still needed to be cosigners. But when that policy changed in the early nineties, it instantly became effortless for any slack-jawed student to get a credit card. Subsequently, the percentage of young adults (ages eighteen to thirty-four) with credit-card debt increased 5.6 percent from 1989 through 1998. But after 1998, it started to decrease; by 2004, it was lower than it was in 1989. Now, there are myriad reasons why this happened, but here is one potential factor: Napster — and the entire file-sharing era — launched in 1998. It seems entirely plausible that the money college students saved by stealing MP3’s played a critical role in paying down whatever they owed on Visa cards they never should have applied for in the first place. I suspect that if Shawn Fanning had pioneered a safe, socially acceptable way to electronically shoplift from Target in 1997, people would have jumped on that bandwagon instead.

Whenever writers try to explain the collapse of the music industry, they inevitably blame the labels themselves; they point out how wasteful and inefficient the corporate structure was at places like Elektra and Chrysalis, and how unfair it is to charge kids so many dollars for a disc that costs pennies to make, and that modern consumers have come to the realization that “music longs to be free.” This may all be true, but I’m not sure it’s a viable explanation for things like huge layoffs at Def Jam. Lots of industries succeed despite being poorly modeled. What happened is this: Young people needed more money to pay for their rising levels of self-imposed debt, so they unconsciously gravitated toward the first technology that provided a cost-saving alternative. Because four-minute digital-song files are relatively small (and thus easily compressed), ripping tracks for free became the easiest way to eliminate an extraneous cost. It wasn’t political or countercultural, and it had almost nothing to do with music itself. It was fiscally practical. It was the first, best solution.

People didn’t stop buying albums because they were philosophically opposed to how the rock business operated, and they didn’t stop buying albums because the Internet is changing the relationship between capitalism and art. People stopped buying albums because they wanted the fucking money. It’s complicated, but it’s not.

 

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NO BUSINESS IN SHOWBUSINESS?

CAN THE MUSIC AND FILM INDUSTRIES FIGHT OFF THE FILESHARERS? 
BY LEON McDERMOTT

IF THE entertainment industry wanted an early warning of how filesharing over the internet was going to affect business, it might have been wise to check what middle-aged craft hobbyists and sock-knitting grannies were up to. By the time record labels had begun fretting about the impact of Napster, back in 2000, the business of needlework and knitting patterns had been left for dead: on peer to peer (P2P) sites, craft enthusiasts were sharing needlework designs and knitting patterns freely, and within a couple of years the industry’s major players were brought to their knees, their businesses in ruins.

The same has yet to happen to the music industry, despite the fact that, according to estimates from European trade body the International Federation of the Phonographic Industry (IFPI), as many as 20 billion tracks were illegally shared in 2007 alone. It has left the industry in grave difficulties, however, after it first ignored and then struggled to adapt to a world in which the CD was no longer king, and in which live music now accounts for the majority of bands’ – if not their labels’ – profits.

The most stark example of the industry’s woes so far is last year’s £3.2 billion private equity buyout, headed by Guy Hands, chief of private equity firm Terra Firm, of EMI, once the self-proclaimed “greatest recording organisation in the world”. Having failed to persuade one of its former biggest acts, Radiohead, to release their new album through the label, things got even bleaker last month when Hands announced that the company’s recorded music division was going to have to shed some 2000 of its approximately 6000 staff and undergo a radical restructuring.

Elsewhere, there have been successes, such as Apple’s iTunes, which now accounts for some 80% of legal music downloads in the UK (they sell, on average, 1.3 million tracks every week). But while digital sales are on the rise – in 2004 they accounted for 2% of the market, now they account for approximately 15% – they are not enough to make up for the shortfall in physical sales, which continue to decline at over 10% per year.

The film industry is keeping a close eye on things too. Broadband take-up keeps rising and bandwidth is becoming ever cheaper and faster. Virgin Media this week announced that it would increase the speed on its maximum package to 50 megabits per second later this year. This means that Hollywood is beginning to face the same challenges that have left major record labels floundering: P2P services now mean that, given a half-decent home broadband connection, you can have this weekend’s box office smash on your computer in a couple of hours.

“You could say that technological advances have ruined the music industry,” says Simon Dyson, an industry analyst for business intelligence specialist Informa. “It’s easy to blame the labels for letting that happen, but in a way, there’s not a great deal they could have done about it.”

Dyson agrees with the suggestion that labels reacted too slowly, citing Sony – a company that, in addition to owning record labels, also manufactures everything from computers and stereos to CD and DVD burners, and thus should have seen the changes on the horizon.

Slowly, though, the industry is starting to adapt. Mis-steps along the way such as overly strict digital rights management (DRM) on legal downloads, which restricted what consumers could do with the music they bought, often tying it to one specific computer, are gradually being abandoned. ITunes launched with DRM, but is now in the process of dropping it. Amazon’s new download service, currently only available in the United States, serves up DRM-free MP3s. And the industry is currently attempting to tackle piracy head on by going after such organisations as The Pirate Bay – which relies on P2P BitTorrent technology to make available thousands of albums, films, games and TV shows – rather than suing individual consumers, an approach which led to little more than acres of bad publicity.

Though film and television companies are facing many of the same problems, the picture is, according to Dan Cryan, an analyst with Screen Digest, a little less grim than the one facing the music industry. “People are becoming less wedded to physical product,” he says. “Broadly, what drives online content sales is hardware platforms; for the domestic computer, people in general don’t want to pay for content.” However, if they have an iPod – and the newer iPods are geared as much towards dealing with film as they are with music – “they do start paying for content”. The big question for Cryan is: “When will we start getting the widespread adoption of something that will get movies to where people want to consume them, which is traditionally through their television, and still have them pay for it?”

So, where do entertainment companies go from here? Some have suggested advertising-supported streamed music free at point of use for the consumer. Last week saw the launch of something similar when Qtrax debuted at entertainment industry conference MIDEM in Cannes. It, too, is proposing advertiser-supported free music, but downloadable through shared files rather than streamed online. Things quickly became acrimonious, however, with labels almost instantly denying that any contracts with Qtrax had been signed, and although the future of the service is now in doubt, the idea might still point the way forward.

Eamonn Forde, editor of industry publication Five Eight, isn’t convinced. “Music for free is a tricky proposition,” says Forde. “I don’t think the industry is seeing it as the end solution to the P2P problem, but it is a means of coaxing people away from illegal services and getting through to them the message that there is a moral decision for consumers. People can go to sites like that with a clear conscience, knowing that the artist and the label are getting paid, but whether there’s any advertising money there remains to be seen: that’s the big equation.”

Whatever the future of the industry, they need to take into account the major change that has come with digital distribution: people don’t buy albums anymore. They buy single tracks. “The music industry was built on album sales,” says Dyson, and if you wanted that killer track, you had to accept that it might come on an album packed with filler. “There’s gong to be a 10-year realignment, with people cherry-picking singles or buying tracks they heard in a film or on an advert.”

According to Bob Lefsetz, an LA-based lawyer who formerly headed the American division of Sanctuary Records, this is a problem. “An album is a viable thing; someone makes a decision to buy it and they lay down their $10. But if a person is buying tracks, they have to make 10 decisions to spend that same $10.”

While dealing with this contraction of attention span on the part of consumers, the industry must do the opposite and expand its vision. The past 20 years have seen an ever-greater insitence on short-term rewards, as exemplified by the now-annual X-Factor race for the number one spot. Speaking at MIDEM last week, Laurence Bell, founder of independent powerhouse Domino Records (home to Franz Ferdinand and Arctic Monkeys), said that labels should be more willing to “make a sustained investment in their artists, helping them develop past albums one and two, rather than always spending their cash trying to sign the next big thing”. Alongside this, labels are facing pressure to cut down the number of artists on their books. EMI, before Guy Hands took charge, had 14,000 artists, 85% of whom made a loss. The logic used to be that such artists were subsidised by EMI big-hitters like Coldplay, Radiohead and Robbie Williams. But by last year that business model was fundamentally broken; EMI reported losses of £260 million for 2006-07.

So-called 360 deals, like the one Madonna signed last year with concert promoter LiveNation, are a way for labels to claw back some of that disappearing revenue by giving them a cut of artists’ live revenues, merchandising and sponsorship. But they’re far from uncontroversial. “Certain quarters of the management and legal communities would see these deals as land grabs,” says Eamonn Forde, “but there are arguments on both sides, and labels realise that they can’t just take a standard contract and add a clause saying oh, and by the way, we get a cut of everything else as well’.”

For Lefsetz, there are two factors to consider about 360 deals: “One, the big-time managers will not do it unless the cheque is incredible. Two, the newbies might do it, but are they even going to sign to a major label when they don’t know if the label will deliver what they need?”

There are two things almost everyone agrees on: piracy isn’t going away any time soon – Simon Dyson suspects that “we’ll still be talking about it in 2015″ – and labels will likely collaborate with internet service providers to clamp down on filesharers. Recent French legislation has already cut off the internet connections of copyright infringers, and the UK government has warned ISPs in this country that it too will legislate unless it does a deal with the music industry.

U2 manager Paul McGuinness put further pressure on the broadband providers when he waded into the argument this week, saying that they should delete subscribers who were caught uploading files three times. On the other hand, a decision by the European Court of Justice last week that ISPs could not be forced to give up the details of those under suspicion of illegal filesharing has cast doubt on the UK government’s room for manoeuvre. In sum, however, Dyson still believes: “A clampdown has to happen in the long term, because otherwise the industry isn’t going to survive.”

Cryan is a little more optimistic about the prospects for film and television. “It’s a great service, the quality will only get better, and it gives you an easy and seamless experience,” he says, adding that American networks are finding the same model is working for them. “The moment you need an application to view content, it’s a barrier to entry, so broadcasters have all gone with open web propositions, and for television at least, they’re generally free.”

If the television and film industry is coping better it is perhaps because unlike with music, they’re still dealing in the same discrete bits of entertainment rather than having to deal with the decline of the album and the rise of the individual track.

Forde predicts that there is consolidation on the horizon, as music companies diversify their business models. “Some of the majors stopped calling themselves record companies a while back, and started saying that they were entertainment corporations, which is, I think, a sign of things to come.

“They haven’t moved quickly enough for the times, but they’re exploring what’s out there. They’ve finally realised that putting out albums is not the be all and end all,” he says.

~ by iprcast on April 8, 2008.