Michael Geist

We're not anti-business at all. I go out of my way to explain that making money isn't a bad thing, we're all for it. But doing it at the expense of your consumers is myopic and stupid.

Show me the spreadsheet that says infecting your consumers with rootkits is good for the bottom line. Show me the numbers that bear out the fact that handcuffing consumers from listening to your music the way they want to is good for business.

In my opinion, it's the RIAA that comes off as anti-business in the sense that they are battling their audience.

Artists do not need labels for the creation of music. It is arguable that they don't even need labels for the distribution (Read MySpace, Last.fm etc.) Bu tthere's a good argument that a label situation is good for the artist. That doesn't mean the label should spend the artist's money suing its fans. Distributors and labels like Magnatune and Audio Lunchbox (and even to some extent AllofMP3) are showing the ways you can build a business without DRM and without punishing your own consumers. We'll see if they work.

This idea that there needs to be a spreadsheet to prove that customers won't ruin your business is akin to the way vaudeville reacted to radio. What was the business model? Radio allowed everyone to enjoy entertainment without paying a ticket price. How was this going to work? Radio figured out how to monetize performance. Someone, wheteher it's a Magnatune or Audio LunchBox or someone else, will figure out how to do that with the Internet.

Vaudeville dug in tooth and nail to resist and fight radio. How many vaudeville nterprises survived into the age of radio? How many radio enterprises made a huge amount of money by adapting to a new reality?

Tom, I don't disagree with your comments about root kits, etc. I think those are reactions to a very complex problem that's facing the industry.

Look at it from the point of view of the corporations.

A corporation, like Sony, has shareholder who they are accountable to. So just can't change business models without proving to the shareholders it won't result in a loss in profits (shareholder really want to see how profits will grow). The CEO of Sony just can't "Hey we're changing business models because we think it's the right thing to do." Because if the CEO can't show the new model will lead to an increase in profits the shareholders are gonna say "Hey we're changing CEOs because we don't think you know how to run a business." You suggest that by providing non-DRM digital downloads for a reasonable price will result in increased profits. Do you have any evidence to support that statement? The data shows that since the advent of digital music and file sharing has resulted in a decrease in sales.

And to the issue of artists, I again ask you to show me a single artist that's as big as U2 or Brittany Spears, who has made it without the backing of a major record label. Name one. If I was an artist I wouldn't risk my career on your hypothetical business model that all the evidence suggests won't work.

I'm not trying to pick on you, I just want realistic dialogue about a very complex issue that faces corporations, artists, and consumers. The Internet is filled with simplistic answers to this complex problem. I expect more from the CNET and the Buzz.

I want to start off by saying this is a simple argument and not all-inclusive. I don't have any facts, figures, or anything of the sort in front of me.

That said, let's look at the basis of selling stuff to people: Supply and Demand.
The trends:
Higher prices- More of a product can be supplied, but there is less demand.
Lower prices- Less of a product is supplied, but demand increases.
I made a simple graph and uploaded it to my flickr account. You can find it here: http://tinyurl.com/oa648
Using my made-up numbers (they just illustrate a point), you find that profit can be maximized by meeting the demand of consumers.
15 * 200 = 3000
10 * 500 = 5000
Too high, and you have a surplus that you wasted money on. Too low, and you have a shortage and not everyone that wants the product can have it.

Hopefully, this illustrates to you how reasonable prices will help to maximize profits. I'm not taking into account DRM. Although, if you think about it, if you're making as much money as possible off of something, why would you need to waste resources on DRM?

-Ryan

Hi Ryan,

I understand what your saying (and the recording industry does too!). They're always adjusting the price points of products based upon what the consumer is willing to spend. In fact they spend millions of dollars researching how to maximize profits without killing demand.

What your analysis doesn't take into account (and you do acknowledge) is this...

Given the choice of taking a product for free or paying for it, will the consumer pay for it? In general that answer for the 15-25 year-old demographic is no, they won't pay. Which is a signficant reason behind the drop in CD sales...

But this is also the fundamental question behind this issue. How do you get consumers to pay for something that they can get for free?

Are we certain that given the choice between a legal but DRM-free MP3 for a cheap price and a risky free download from P32P that the demo you state will always choose free?

Tom,

Great point, and think that's the core question. The answer I believe depends a lot on the demographic. People like you and me who are old(er) will pay. I certainly would and from what I've heard you say, you would too. Great. But we're not the key demographic. The demographic that makes the most money for the music industry is 15-25 year-olds. And while I haven't read a study about their willingness pay, I do have a great deal of anecdotal experience. I work at a major university and I talk to students in this demographic all the time about this issue. Overwhelming they say that they will not pay. It is truly amazing when you talk to these kids.

As an aside, it would be a great podcast to interview college kids and ask them about file downloading. Why they do it, what will make them stop, etc?

how do you get people to pay for stuff that they can get for free, you ask?

Make it cheap enough. It shouldn't be worth the trouble to fileshare.

Immediate, accurate delivery (ie.itunes) is the answer for me. Of course I'm old enough to know better, but the ease of itunes keeps me from ever considering a non-legal option.

I still think that the entire album price could be cheaper. For the kids, maybe even an EDU priced music store.

I totally agree. People will use file sharing when it's more trouble to download for free than it is to pay.

Q: How do you do that?

A: Lawsuits and DRM. Now we've come full circle. There's method to the madness of the RIAA.

I don't think lawsuits and DRM good public relations, but it works. That's the one thing students tell me has caused them to reduce (not stop, just reduce) their downloading. The reason that price reduction won?t work is because the alternative is always free. And the only way to compete with free is with free. That?s something they just can?t do (at least under the current business model).

IMHO, I think the best the RIAA and MPAA can hope for under the current model is equilibrium. Downloading files is going to be like speeding. Just about everyone will do it every now and then, but occasionally someone you know is going to get caught and will have to pay. The RIAA won't make many friends that way, but the police don't either.

The only alternative business model that I can think of is for the recording industry to give up selling music and go into the concert business (which is an experience that can't be downloaded or shared via p2p). But that will end up punishing the artists and I think will dramatically impact the type of music that we see.

I don't know what the MPAA can do...

But the point of all this discourse is that it?s simplistic to just demonize the RIAA. Ultimately in the end you?ve essentially agreed with their tactics (make it painful to participate in illegal downloading and filesharing). Interesting, huh?

I didn't mean to imply that makign P2P more difficult is the solution. That is a pointless battle for them.

The price point needs to change, and the one place it could change would be in student pricing. $5 for a full album download by 1/4 of the people stealing music would be far more profitable than $0.

I think the $9.99 full album price is perfect for everyone else.

While from an industry stand point, $5 is better than $0.

From a consumer stand point $0 is better than $5.

And that's the problem. You can't complete with free. The history of the internet is filled with stories of companies that went under when a competitor released a similar product for free.

I didn't mean to imply that makign P2P more difficult is the solution. That is a pointless battle for them.

The price point needs to change, and the one place it could change would be in sthttp://reviews.cnet.com/5224-6142-0.html?forumID=97&threadID=167145&messageID=1852711#udent pricing. $5 for a full album download by 1/4 of the people stealing music would be far more profitable than $0.

I think the $9.99 full album price is perfect for everyone else.

Thanks for the civil discourse and disagreement.

The shareholder argument is a straw man and avoids the point. What will lead to profits. The CEO will also be out on his/her ear when someone else finally takes the risk and starts turning over bank. It's the classic problem of the CEO. Play it safe and risk falling behind, or play it risky and risk losing it all. Thta's why they get to be CEOs. I don't feel sorry for them. That's still no excuse to sue your consumers and break their computers. No excuse at all.

I don't dispute that artist need promotion. I agree with you on that point. It's why I called out Magnatune and Audio Lunchbox. magnatune is a label. No argument there. I think maybe your trying to argue that Magnatune isn't major so not comparable. OK. Somebody liek them may become major. Sun wasn't very big. Geffen wasn't major at the beginning. Neither was Virgin. List goes on and with big big names. I'd also argue that major labels got to play by house rules since the 1950s when radio was forced to become friendly to the system and that's when the labels really became major. In fact those are the last examples of artists that became big on small labels. Like Ray Charles.

And as for downloading music causing a decrease in music, I also say prove it. There is a correlation, not causation.

See, here's the real rub. The record industry says since they don't feel comfortable with a new model, and since they fear that downloading is killing music that they need to attack their own audience. But just because they're afraid doesn't mean they're right. And I'd have a hell of a lot more sympathy for them if they weren't outright hostile to their own consumers. I also believe there are folks out there that can prove that downloading is not killing music (It has been proved to help smaller artists and hurt major artists). And I believe that there are people smarter than me who can prove that a model like Magnatune's can work. (Cory Doctrow is making money, in fact quit his day job, by giving away his books for free).

It is a complex problem which doesn't deserve a simple answer like DRM and sue everyone. The labels are the ones who can't embrace the complexity here.

First, Tom, that was a great post. And now we're getting to the real interesting question! What is the future economic model for mass media content? I don't know the answer (If I did I would be rich). In a world of Tivo, mp3 players, IPTV, etc how do you maximize consumer rights and ensure corporate profits?

How do we encourage artists to take the bold step and forgo a major labels backing? How do you get a company to risk sales of a major artists new album without DRM? Downloading and stealing their music is NOT the way to do it. It simply reinforces their belief that people won't pay for music/movies/etc.

And as to proving that downloading cause a drop in CD sales, that's a challenge because the only way to demonstrate that correlation is causation would be to prevent all ripping/duplicating/downloading/sharing of music and then see if sales go back up. And we all know that this test is impossible to do.

But here's a thought, Tom. Take it on faith that it's true. What would you suggest that the recording industry do to gain lost profits?

You mention that the 18 -25 year olds wont pay for music. So is this now the old market place ?

Should the music industry now be making music for a different market?

Staying away from the Britney Spears and the manufactured pop which is more the haven of the 18 -25 year old market and trying to produce music that targets a different demographic that is more willing to pay for content.

Also I think that no one has mentioned the fact that since 98, the sales of video games and later in the piece DVDs have increased in sales massively. This money has to come from somewhere as the market only has X amount of dollars to spend, not an ever increasing amount.

I believe in that time cds perceived value has also dropped as I can regularly buy new release dvds for the same price or less then many cds new or old.

The fact that music is so freely avaiable on the net makes the perceived value of music seem less and in turn a reflection of what people are prepared to pay.

In short cds face more competition in the entertainment market place and have not changed to meet this new reality.

It would be interesting to note how many of those illegal downloaders would have bought a cd if it had not been avaiable on the net, I don't think it would be as high as the Record industry would have you to believe.

Well, for one, the Arctic Monkeys.

http://en.wikipedia.org/wiki/Artic_monkeys

Tom,

Here's a couple of quotes from that wikipedia reference...

"...the band ended up signing to Domino Records in June 2005."

"...was followed in October 2005 by a

did you also read the part where they were selling out shows before they were signed, and people were signing along to songs that had never been published outside of the Internet? They developed an HUGE following based on the strength of their music alone *COMPLETELY* on the Internet and one self-published EP. They were signed to Domino after that point.

The Internet has the power to spread word of mouth faster than any other medium. Much faster than a record label can generate the buzz for them.

Yes, they sold out shows, but they were small. And it was in a small country (U.K.) were rabid fans (like dead heads) could travel from show to show.

But no question the internet facilitates discovery of new artists. That was not my point. My point is that artist need the major labels to gain mass popularity. (especially in the U.S.) The relationship is symbiotic.

Sorry to butt in, but... well, I enjoy butting in.

You did pose the question: "Will Internet will help you build awareness? Maybe, but I doubt it. Is there a major artist that was discovered via the Internet?"

But, like you said, it's kind of beside the point. The point is that the recording industry doesn't have a symbiotic relationship with artists, it's a parasitic one. Yes, they offer the funding to record an album in a studio and produce and market the CD - and then they take ALL the profits from it, unless you're a megastar and can demand a cut. The record companies make out like bandits, while the artists starve.

The fact of the matter is, you wouldn't need a record company to gain popularity if they didn't do everything in their power to freeze everyone else out of shelf space, radio play time, and concert venues. They're practically a racket. Yes, their business model is proven - but that doesn't mean it isn't outdated or that there isn't a reason to explore new ones. The internet is becoming a more viable means of promoting your independently produced music every day, with sites like Pandora and Last.fm growing more popular and exposing people to new artists who run along their tastes without relying on recording industry money.

I'm not saying there's no place for record companies or that we should form an angry mob and burn them all down (unless they keep up the anticompetitive practices and price-fixing schemes) but to deny that the way people hear about and buy new music is changing is just bad business sense - and the record companies' declining sales numbers are proof of that.

The point is *mass* awareness. And again I state no artist has achieved mass awareness without the recording industry.

Mass awareness leads to greater record sales, which benefit the record company. But mass awareness leads to more and larger concerts that benefit artists. That is a symbiotic relationship.

While I'm not privy to the discussion of the Artic Monkey's business dealings, I'll wager that it had much to do with building mass awareness.

The Internet is all about the long tail. It's easy to build niche audiences; it's hard to build mass audiences.

I only have heard of them from Best Week Ever as the band that's so cool you have never heard of them.

Piracy is not the sole reason for the downturn in the music industry. There is plenty of crap being heavily promoted and their is a backlash against it. I do not know how rampant piracy is for individuals, but a few years ago, almost everyone I knew with a broadband connection used Napster and Kazaa. When I worked for Earthlink, almost everyone used Napster.