So What Can The Music Industry Do Now?

Music Industry

from the quite-a-lot,-actually dept

The Techdirt Book Club book for September has been The Knockoff Economy: How Imitation Sparks Innovation. Earlier this month, we ran an excerpt about the importance of “tweakers.” This second excerpt is actually the final section of the book, published after the “final” chapter, taking all of the concepts in the book, and seeing how they might apply to the music industry. We’ll be arranging a time to chat with the authors soon, so stay tuned.

In the final chapter of The Knockoff Economy, we tell the story of the music industry’s decline. In a decade-long crisis driven by Napster and the rise of peer-to-peer technologies — a development which the music industry met with an ineffective strategy based around copyright enforcement — the revenues of the record labels have fallen by more than 60% since Napster’s debut. And yet there was nothing inevitable about this tale of decline. Hollywood, for example, has fared better. To be sure, Hollywood worries a lot about piracy. But while there is plenty of it, especially overseas, piracy has yet to threaten the existence of the major film studios.

Why has the movie industry’s fate been different? For one, technology gave them a few years’ reprieve. Video files are much larger than music files. As a result they were, until recently, relatively difficult to download and upload. More important, Hollywood learned some lessons from the music industry’s straits. Hollywood fought copying, but as a part of a broader overall strategy aimed at capitalizing on the opportunities the Internet offered, while blunting the effect of piracy. We will examine some of the details of Hollywood’s thus-far more successful strategy as we consider music’s future.

That future is bound to be different from music’s past. Copying music is easy and the risk of getting caught minimal, and this is unlikely to change. But easy piracy does not mean the death of creativity in music. Nor does it mean the end of profits from music. Here are some ways that the music industry could adapt–and in some cases already is adapting–that mimic strategies we’ve seen deployed by other copy-prone creative industries.

Music as an Experience

The most obvious adaptation is changing what the music industry sells from product to performance. As we argued earlier in The Knockoff Economy, products often are easy to copy, but performances are not. One of the reasons chefs remain so creative is that competitors can copy a restaurant’s signature recipe but they cannot so easily copy the quality of the preparation or the restaurant’s ambience or service.

We won’t repeat the discussion here, but we do want to underscore the centrality of performance. Millions of people every year already attend concerts. A greater shift to performance will never replace all the revenues that currently flow from recording. But shifting the business model away from the easily copied product (the song or album) and toward the hard-to-replicate performance (the concert) can help to stabilize the fortunes of musicians.

In many ways, this is simply a return to the reality of the last two centuries of popular music. That point was made with terrific clarity by Mick Jagger in a recent New York Times interview:

“There was a window in the 120 years of the record business where performers made loads and loads of money out of records,” Jagger says. “But it was a very small window–say, 15 years between 1975 and 1990.”

The past was, and the future is going to be, much more about performance. In this new world, recordings often function as more as ads for concerts than as money-makers themselves. (And sometimes are bundled with concert tickets, as Madonna’s latest album was.) As a result, copying looks a lot less fearsome. A copied ad is just as effective–and maybe much more so–than the original.

Music as a Social Network

As the cost of producing and distributing a product falls, basic economics predicts that more of it will be produced and consumed. This axiom certainly applies to music: as digital technologies have slashed the cost of producing and distributing music, we see an unprecedented amount and variety of music on offer. But there’s another change. Digital technologies also change how the rewards of the music industry are distributed. In the heyday of the labels, a lot of revenues unsurprisingly went to them. This system produced some very successful stars, but a lot of musicians–even very talented ones–made little or nothing.

This picture is changing. While mega-stars still exist, a larger and more stable musical middle class is emerging–artists who are able, by making recordings, touring, and selling merchandise, to sustain a decent living. Because it costs these artists less to produce music, a viable career is possible at a smaller scale. And this can be done with less reliance on intermediaries like record labels. The same technologies that have made pirating music so easy also facilitate direct communication between musicians and their fans.

Just ask pop singer Colbie Caillat. Caillet’s music career began in 2005 when a friend posted several of her home-recorded songs to MySpace. One song, Bubbly, began to get word of mouth among MySpace users, and within a couple of months went viral. Soon Colbie Caillat was the No. 1 unsigned artist on MySpace. Two years after posting Bubbly, Caillet had more than 200,000 MySpace friends, and her songs had been played more than 22 million times. Caillet had built a global fan base while never leaving her Malibu home. In 2007, Universal Records released her debut album, Coco, which peaked at No. 5 on the Billboard charts and reached platinum status.

Or ask rap artists Mac Miller, Wale, and J. Cole. Each of these artists built up a fan base by releasing free material on the Internet and interacting with fans on social media and blogs. And in a space of two months in 2011, each released a debut album that rose high in the charts (Mac Miller’s debut charted at No. 1 and sold 144,000 copies in its first week; Wale debuted at No. 2 the week prior and sold about 164,000 copies in its first week; a month earlier J. Cole’s album debuted at No. 1 and sold 217,000 copies in its first week). Fans could have pirated these albums–and doubtless some of them did. But thousands ponied up the money to buy them, perhaps partly out of appreciation for the free mixtapes that they’d downloaded previously.

Social media and the fan base it enabled made the music careers of Colbie Caillat, Mac Miller, Wale, and J. Cole, and they aren’t the only ones. Social media also broke UK stars Lily Allen, Kate Nash, and Arctic Monkeys, among others. This illustrates an important facet of the relationship between music and copying. Music fans love music, and they often want to support those who make the music they love. The Internet turns some fans into pirates. But it also turns fans into promoters. And the same technologies that enable piracy are also restructuring the industry in ways that create an entirely new relationship between creator and listener.

So how is the industry likely to change? There are two trends that are, in our view, the most salient, both of which flow from digital technologies. First is the fragmentation of the audience into smaller and smaller groups, as more music becomes more available and hence the universe of choices far more diverse. Second is the ability of these smaller groups effectively to communicate both with one another and with the artists they like.

What is likely to flow from these changes? These are the conditions — relatively small groups, able easily to communicate — under which norms can help to regulate behavior. As we describe in Chapter 3 of The Knockoff Economy, this is precisely what we see in the world of stand-up comedy–there are a few thousand touring comedians, and because they often appear together in the same comedy clubs, they communicate readily. These conditions allow comedians to control copying not by relying on copyright law, but through social norms.

The problem of piracy in music is, of course, very different from the problem in comedy. Stand-up comics worry most about a rival, not a fan, copying their jokes. Still, the reduction of consumer copying of music via norms may be possible, and will become more imaginable if the music industry experiences ever-greater fragmentation and communication. There is already an interesting example of norms playing a substantial role in controlling copying in music. In the culture of jambands, we see the fans themselves taking action to deter pirates. What are jambands? In a fascinating 2006 paper, legal scholar Mark Schultz studied the unique culture of a group of bands that belong to a musical genre, pioneered by the Grateful Dead, characterized by long-form improvisation, extensive touring, recreational drug use, and dedicated fans. Although acts like Phish, Blues Traveler, and the Dave Mathews Band vary in their styles, they are all recognizably inspired by the progenitors of jam music, the Dead. But the Dead’s influence is not only musical. Most jambands adhere to a particular relationship with their fans that also was forged by the Dead.

Touring is central to the jamband culture, and most allow fans to record their live performances. Many even encourage fans to share the live recordings they make. Some bands even set up special “tapers” sections at live shows, and occasionally even allow fans to make recordings directly from the soundboard. And many jambands also set rules whereby some recordings–the band’s studio albums, and some special live recordings intended for commercial distribution–cannot be freely shared. The Grateful Dead’s statement on taping is a typical example of these rules:

The Grateful Dead and our managing organizations have long encouraged the purely non-commercial exchange of music taped at our concerts and those of our individual members. That a new medium of distribution has arisen–digital audio files being traded over the Internet–does not change our policy in this regard. Our stipulations regarding digital distribution are merely extensions of those long-standing principles and they are as follows:

No commercial gain may be sought by websites offering digital files of our music, whether through advertising, exploiting databases compiled from their traffic, or any other means.

All participants in such digital exchange acknowledge and respect the copyrights of the performers, writers and publishers of the music. This notice should be clearly posted on all sites engaged in this activity.

We reserve the ability to withdraw our sanction of noncommercial digital music should circumstances arise that compromise our ability to protect and steward the integrity of our work.

Schultz documents how jambands and their fans interact on the basis of a strong and long-standing norms system. The fans are often very invested in the bands that they follow, and they believe that because the bands give them freedom to record live shows and to share those recordings, they are valued as community members and treated fairly. And in return, fans largely adhere to the rules and discourage others from violating them.

While the jamband ethos is unlikely to take over all forms of music, it may spread beyond its original home. And the changes in the industry we noted earlier may make this more likely. Digital technologies allow for smaller, more closely knit fan groups, and easier communication between bands and their fans. Facebook provides a virtual way for fans to interact, and of course live concerts allow a real-world version to develop. The jamband experience suggests that bands cannot simply set rules and demand compliance; Schultz argues that the fans must feel that they are getting something in return. For jambands, it is wide access to recordings of live shows. Given the likely importance of live performance in the future, this may be a workable strategy for a range of musical genres.

Norms are not a panacea for pervasive copying. The casual fan who treats music as a disposable pleasure is unlikely to respect the norms of any particular musical community. So for some types of music, norms are unlikely to have much effect. The pop music of the moment, for example, is unlikely to create the kind of enduring community that can form and sustain a norms system. And the very improvisation that is at the heart of jambands–the jam–makes copying generally less harmful, since no single performance is quite like another. Still, there is no reason to believe that a successful norms system is limited solely to jambands.

All Roads Should Lead to Your Content

For years, the record labels had a business model that was consistent and single-minded: (1) bundle together a dozen songs on a CD, (2) ship the discs out to retailers, and (3) collect money. The labels’ business became even simpler following the shift from LPs to CDs–it was at that time that the labels killed off the singles market. Why ship CD singles when, for virtually the same cost, you could ship an album and charge at least three times the price?

But it turns out that by killing the single, the record labels made the Internet piracy problem, when it arrived, even worse. One of the major attractions of filesharing was that it brought back singles. Consumers wanted the one or two songs on the album that they liked, and not the ten they didn’t.

What we learn from this is unsurprising. Consumers like choice, and new technologies frequently offer more choice than the old. In this case, Hollywood’s very different, more profitable, and more piracy-resistant approach is instructive. The movie industry has long managed releases according to a series of “windows.” Films are first released at the box office–and at a premium price. Then, after a few months, films are released to the DVD sales and rental market. Shortly after that, they are available via video-on-demand, pay-per-view, and on airlines. And later still, the films are released to pay-TV cable channels like HBO and Starz. And then, finally, they go to basic cable and broadcast channels.

This system gives consumers a wide variety of ways to watch movies. And different ways of watching movies appeal to different types of consumers. For those with willingness to pay, there is the new release in the theater. And for those willing to wait, there is video rental, pay-TV, and commercial television.

Hollywood’s release windows system was conceived long before the Internet arrived. For our purposes, however, the system matters because it functions as a powerful anti-piracy tool. Hollywood did not attempt to enforce a one-size-fits-all business model. Instead, it realized that different consumers would have different willingness to pay, and so it developed a distribution model that gave consumers more choice.

In sum, like the recording industry, Hollywood views copying–especially in its growing markets abroad, such as China–as a grave threat. But unlike the recording industry, Hollywood has responded, at least so far, in ways that effectively blunt piracy’s impact. It focuses on the experience–watching a movie in a theater is different and, for many people, better than watching a pirated copy on a computer monitor. It focuses on quality, both in the theater (new digital projection and 3-D technologies) and for the home viewer (high-resolution Blu-Ray). It offers multiple ways for viewers to access content. What Hollywood does is not precisely the same as any of the other industries that we’ve studied. But Hollywood has taken a page out of several of their playbooks.

Summing Up

Today, copying is a fact of life in the music world. Yet music is not dying. Even without any changes, music is vibrantly creative today. From a consumer point of view, life has never been better: more musical choices, more easily obtained, than ever before.

Still, the music industry can change further to better survive a world of easy copying. Rely more on the live show, an experience that cannot be copied. Attempt to woo customers away from piracy by emphasizing the quality of the legitimate product. Create (or bolster) social norms about copying. And diversify the ways in which consumers can access music. The result will be a very different music industry. But it will be a world with a lot of great music.

Filed Under: business models, copying, music industry, strategies