....LMB: "Shockwaves"....

January 23, 2003

I posted an article earlier today about a recent court victory by the Recording Industry Association of America (RIAA), a lobby group for major record labels. In quick succession, I found an additional three articles also about the RIAA which make that victory look insignificant in comparison.

The first of these three was about the RIAA capitalizing on their latest legal victory by demanding that ISPs pay damages to the record industry for the music illegally downloaded by the ISP's customers. As the article points out, this is sheer fantasy. The completely accurate analogy is quoted in the article, that "Blaming ISPs for giving these hardened criminals the bandwidth for perpetrating their heinous file-sharing acts is akin to blaming the highway department for creating roads that are used by dope smugglers."

I don't think the RIAA has a legal leg to stand on here. At best, they could hope to use this demand as leverage to coerce frightened ISPs into taking steps of their own to prevent file-sharing (or at least scare them into a cash settlement). But still, seems like a long shot.

Actually, let's break away here for a minute to discuss the record industry itself. You can read these next four or five paragraphs, or you can listen to this interview I did with Rage Against the Machine (and now Audioslave) guitarist Tom Morello. He's a savvy fellow who's been in the business for about 15 years. That twenty minutes of audio might better explain what's going on than I'm about to.

In succint terms, record labels--the entities which "release" a band's album-- are loan sharks. When you sign a contract with a record label, they will give you an "advance" which is actually a loan. You might get a $100,000 advance to pay for the studios and producers to record your album, and you have to pay back every penny to your label.

Record contracts usually guarantee the artist 10-15% of the profits from their album sales (meaning that the record label, who has not written a single lyric or sung a single note of the music, receives 85-90% of the profit). The record label helps itself to 100% of your cut until you have paid them pack, while simultaneously taking their 90%. So if your 10% amounts to a dollar an album, then your band must sell 100,000 albums before you make a single penny.

I remember being shocked years ago hearing about world famous musicians going bankrupt. Everyone knew that rock stars were rich, how could they have spent all that money? Because of this loan system. Bands go into debt to record an album, and receive additional advances/loans to pay for concert tours, to film videos, etc. If your record doesn't sell well, you can not only make no money, but end up in the hole.

And what's worse, is that labels hold the artists' futures in their hands. Artists sign contracts for multiple albums, and the record label can choose to release/not release, promote/not promote your album as they see fit.

So let's say you have a four record deal. You go into debt for album #1, and it does poorly. You remain in debt. You borrow some more money to record album #2, but the label is no longer confident in your sales power. They release your record, but don't put much effort into promoting it. Like a self-fulfilling prophecy, your album sells poorly. Your debt has increased. You borrow even more and record album #3. The label decides to not even bother releasing it. So what the hell do you do now? Any songs you record now will be the property of your label. You can no longer make your career as a recording artist.

There are other factors, like copyright and merchandising and such, but I'm not going there today (for more info about the inner workings and ecnomics of the record industry, I highly recommend the Rap Coalition website. RC is basically a quasi-labor union and business education center for rap artists. Good stuff there).

I point all this out mainly to: 1) inform, and 2) show how despicable it is when the RIAA self-righteously condemns file-traders for depriving their artists of money (maybe they just don't like competition on that front). They are about sucking consumers and artists dry, and to pretend otherwise is just vile.

Anyhow.

Now we get to article #2, The Year the Music Dies. This article points out the dire straits that the record industry is in. Record labels serve three main functions, and other players can now perform those functions.

1) Capital. The advances/loans given to artists is often necessary to pay for things like recording and going on tour. This is the primary leverage that the industry still has. But the more artists come to realize the economic situation involved (getting a loan in exchange for 85-90% of all profits made on future sales of their album), we might see artists turning to alternate financial sources and releasing their albums themselves. Also, the costs of recording keep decreasing as recording technology and software drops in price.

2) Promotion. With their vast capital, marketing know-how, and connections with the media, record labels (especially the majors) can pack a real punch in raising an artist's profile and convincing consumers to purchase the artists' albums. But we sink into a catch-22 here: massive promotions are needed to generate massive sales to pay for the massive costs of a massive record release. But what if the costs were much lower...? See below.

3) Distribution. Here is the number one fear of the record industry. Labels have to pay for the manufacture and physical transportation of millions of compact discs to recoup their advances. So what happens when music can be distributed for practically nothing, say, over the internet? This cornerstone of the label empire is completely stripped away. In the past, artists could never distribute their records on a national or international level because they could never afford it. Now they could pretty easily sell their songs for download online...

I think what we see here is a need for a supreme restructuring of music finance, in the downward direction. The previous reality was that due to the expense of massive distribution/promotion/production costs, you needed the backing of rich and powerful corporations. One RC article claims that it is not worth most record labels' time to have artists who's records sell less than 200,000 copies. So imagine a different world, where an artist makes not 12% but 100% of the profits of their sales, where they record their album with moderately-priced technology, and distribute it via the internet for pennies. And because the costs are so much lower, you need to sell far fewer albums to earn a living.

(Actually, I envision a potential future where you can buy records at a kiosk at the mall, where the proprietor simply downloads the music from a label's server via high-speed internet, and then fast burns it to a blank CD that he has on-hand. More economically and ecologically efficient that producing millions of copies and trucking them from coast to coast)

The article points out that the industry faces this huge challenge, and that in its arrogance and short-sightedness, has alienated all of its potential allies: politicians, webcasters, customers, musicians, songwriters, radio, television, etc. Even, interestingly, the mega-corporations that own the labels. The author points out that a conglomerate like Sony might find that they make more money selling mp3 players which play illegally-downloaded music, than they do from records sold on the Sony record label. What happens then?

And our final RIAA-related article of the day:

Music Industry's Chief Lobbyist Leaving

For several years now, the RIAA's loudest, shrillest voice has been its head, Hillary Rosen. She screamed about Napster, about webcasters, CD-copying, always complaining how the industry was losing money because of the efforts of people who simply love music. Anyone who's taken more than a casual interest in these issues probably has little love for Rosen. And today, she has announced that she will resign from the position at the end of the year [insert thunderous applause here].

Why?

"Rosen's departure comes as the organization sought to soften its image among Internet consumers, many of whom viewed the RIAA and Rosen personally with antipathy over incessant pressure for crackdowns on sharing digital music over the Internet."

This theory backs up the previous article's dire forecast. If the music industry wants to survive, it needs to win back some allies. And Rosen's departure could get music fans back on their side.

Interesting stuff. We'll have to wait and see what happens next.