The Year in Music Business

Like the classic "unravelling sweater” cartoon gag, for the past few years the music business has been franticly trying to knit itself back together at the top, while the arse falls even faster out of ’er at the bottom. But if events of 2007 are an indication, the unravelling is slowing and we are finally seeing concrete evidence of the shape of a stable Music Business 2.0.

Apple kicked off the year by reporting ginormous holiday iPod sales, giving Apple an even more massive share of the digital music market through the continued dominance of the iPod-iTunes-MP3 triumvirate. Apple’s success is due to its format flexibility: MP3 is non-brand specific; the MP3s sold by the iTunes store, iTunes itself, and iPods will run on both Mac and PC. Microsoft’s portable digital music device Zune, and many other MS-driven devices will only run on your Windows system. (This is meant to prevent illegal file swapping, but it severely limits playability between devices. Consumers who legitimately purchased music files find this really, really annoying.)

Apple’s smash hit season was bad news for major labels, who preferred to support Microsoft’s Windows Media Digital Rights Management (DRM) system, which they saw as placing tighter controls on their property in the digital market. But Apple’s gleeful, strategic poaching of Microsoft system users, and its persuasive branding among early adopters of technology and music have made "the Apple way” the standard, which put the writing on the wall for DRM-loaded file formats and Microsoft’s Active-X platform. Indeed, in February, Apple put forth a frank, passionate and entirely self-serving plea for the worldwide abandonment of DRM on music files. In April, EMI announced it would offer its catalogue of DRM-free tunes in the premium AAC format through iTunes and Universal followed suit with a limited catalogue release, while Warner held out against iTunes and, in the person of CEO Edgar Bronfman, stomped around righteously for a time, but by mid-summer had announced a partnership with DRM-free music-swap site Lala.com. Meanwhile, up here in Canada, digital retailer Puretracks.com finally came up with a workaround to its Mac-rejecting Active-X server and offered a library of DRM-free MP3s that both Mac and Windows users could buy.

Thus, a hard lesson learned and a rule for Music Business 2.0 is just good business sense: make it easy, not hard, for consumers to buy your stuff. The migration of music sales to the digital world over the past few years also raised interesting concerns, questions, and opportunities for music publishers. Music publishers are in the business of exploiting mechanical rights (the right to mechanically reproduce copyrighted music) and performance rights (the right to perform copyrighted music in a public venue). Record labels have to pay mechanical royalties to publishers when they reproduce a number of CDs; and businesses that publicly perform music, like radio stations, ice rinks, cafes and so on, have to buy licenses which revenues later get divvied up as performance royalties. In March 2007, music publishers represented by CSI (CMRRA/SODRAC — two major mechanical royalty agencies) successfully lobbied the Copyright Board for mechanical royalties from online music services, including a reproduction royalty of 8.8 percent of consumer price per permanent download. And this fall, SOCAN, which deals in performance rights, also scored performance royalties from online music services.

The combined CSI and SOCAN royalty on a permanent download is 12.2 percent of what the consumer pays. Happily for consumers, it is not likely that the cost of downloads will go up commensurately. So the big struggle between artists, labels, distributors and music service providers is "Whose pocket is this going to come out of?” The impulse of the music business in similar past situations has been to pass new costs and charges on down the line to the last poor souls in the chain — the bands themselves. Thus, we may see the musician’s share of the download dollar getting smaller. On the other hand, music publishers will see new revenues, meaning that smart musicians should make sure their publishing rights are properly administered. RIAA (the Recording Industry Association of America) continued its merry march to hell. Since 2002, RIAA has attempted to sue dead grannies, underage kids, random computer owners and people who don’t own computers — pretty much anyone in the phone book — in its ongoing effort to make an example of its own customers. ("We’ll teach YOU to want music!!”) This fall, a bad case made worse law when RIAA’s suit against Jammie Thomas, a 30-year-old Ojibwa mother from Minnesota, resulted in her getting smoked with $222,000 in fines for violating the copyrights of 24 songs. That’s $9,250 per song, folks — songs that, if Thomas had been willing or able to buy legally — would have cost her about a buck apiece, with a profit to the copyright owner of maybe 50 cents each. How this outcome makes sense to anyone but a sleek passel of Porsche-driving litigators, we’ll never know.

Are you sensing that the business part of the music business has been generally acting like a jackass and that it’s only a matter of time before artists simply pack their toys and go? Well, that’s precisely what happened in several high-profile incidents. First, we had Prince giving away nearly three million copies of his new album Planet Earth in the UK free with a copy of The Mail on Sunday. The move infuriated music retailers and industry pundits worldwide, while creating a storm of publicity for Prince — leading to a sell-out for his "21 Nights in London” residency. As a distribution strategy, the move was likely not especially profitable — but then, record sales typically represent a narrow margin of earnings for an artist, compared to live performance, merchandise, and other streams.

Madonna sure noticed: she ditched her record label altogether, and in October announced a massive deal with promoter LiveNation, which would see them taking a share of the whole Madonna brand. At 49 years old, it’s questionable how much longer Madonna will continue to generate hundreds of millions in revenues, such as to justify the $120 million she stands to pocket from the deal, even if her last world tour was one of the year’s top grossers (although, through the miracle of modern chemistry and eight glasses a day of magical Kabala water, she could end up a pointier, crop-wielding Bob Hope, entertaining the troops into her 90s). The point is, those hundreds of millions don’t come from record sales alone, but from ticket sales, merchandise and so on. LiveNation’s $120M deposit is a strong signal to artists to get off the label train and join the new model army.

Of course, the most significant artist-versus-music business story of the year is Radiohead. The band eschewed signing with a record label and instead, on October 10, released their new album In Rainbows all by their lonesome, initially on their own website and for the low, low price of whatever you felt like paying. What better way to tell the music business to take a flying leap? While sales numbers have not been officially confirmed by the band, several sources suggest the band may have grossed something in the order of nine million dollars in the first few weeks. And because they are a smart bunch who have always gone out of their way to give their fans a little bit extra, there’s no reason to doubt that physical sales of the CD and an expensive but loaded Discbox option, to be released in Canada by indie label Maple Music, will do very well too.

The Radiohead experiment has made two compelling points about the music business: first, that bands who have successfully managed to consolidate a loyal worldwide audience, and who aren’t dummies, can do as good or better a job at running their affairs than a label would; and second, that if people love the music, most of them will pay something for it. Perhaps after a few more "pay what you want” experiments, we’ll see consumer-driven standard pricing emerge. No doubt there will always be jokers who want everything for free, but in Music Business 2.0, we won’t spend all of our time and resources wrestling with the few who don’t pay, and instead do everything we can to encourage spending by those who do.

So, explosion of digital distribution minus DRM plus download royalties minus retarded outcomes in illegal file-sharing suits plus artists taking control equals what? Music Business 2.0. We are irrevocably headed toward a new model, where the creators of music will collaborate with service providers to bring music to the people in any number of new and creative ventures. For the existing music industry, this means that the old model of "sign band, sell records, make profit” is pretty much dead. Record labels — in particular, indie labels — have shown their understanding of the new reality by "horizontally integrating” management, licensing and other revenue-generating services into their core activities.

In the densely competitive world of emerging music, marketing would be king if anyone really knew how to do it. So, to stand out from the crowd, you still need great songs, a killer live show, and the willingness to work your ass off. I guess that’s one thing that never changes, even in this topsy-turvy climate.