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In part one of a two part article published June 19th, subtitled, “Record sales are tanking and there’s no hope in sight: How it all went wrong ” Rolling Stone magazine indirectly decreed the end of the music labels (the Big 4 at least) and the end of the music business as the world has known it.

Quoted in the article, industry attorney Peter Paterno said unequivocally “the record business is over.  The labels have wonderful assets – they just can’t make money off them.”    The numbers presented support his, and the article’s, claim. In 2000, for example, the top ten albums in the US sold 60 million copies combined.  In 2006, the top ten sold only 25m.  Digital sales (of both songs and ringtones) meanwhile, while booming, are largely in single song increments where revenues and the margins are much lower.

It’s for certain, the industry, as it once was, is on life-support.  The Big 4 (Universal, Sony BMG, Warner, and EMI) control nearly 70% of music distribution but they’ve been caught between a mess of conflicting needs and ideologies: the competing demands of traditional retailers (who themselves fear the loss of their business), the interests of the artists, and, of course the entrenched thinking of the labels themselves.    It’s been a struggle to balance those interests and adapt to the changing dynamics of the music marketplace – particularly online sales. 

The question is, is Peter Paterno correct, and is the inference in the Rolling Stone article right?  There’s no question the labels are fighting; and they’re fighting with desperation.  From efforts to find revenue in music videos, to gambles on streaming services, to more efforts with videos.   But really, is it too late for the labels to save themselves?

It may be, but there may also be hope locked in the efforts of number three label, EMI. 

THE EMI SCENARIO:
EMI is the only major label currently offering its music in an unencrypted format. First it was through iTunes, then promised to Amazon’s future store, then Passalong Networks, and Snocap and now, HMV too.  (On Friday, it was announced that U.K. music retailer HMV will launch an online music store in September and its available titles will, like all the others, include the catalog of EMI in a DRM-Free format). 

In offering unencrypted files through a range of vendors, EMI gains two significant things.

1. Increased Price/Margin Potential
The increasing prevalence of the single means both lower price per sold unit and lower margins for the labels.   That, according to the Rolling Stone article, and industry analysts, is part of the cause of their financial troubles. 

By offering a variation on product, specifically, a higher resolution DRM-Free song,  EMI gets a legitimate basis able to increase their fees (e.g. one that doesn’t alienate customers and push them away from a purchase).   And with the higher fee’s come higher margins.

2.  Decreased Dependence on Single Vendors
The labels are increasingly dependent on a few sellers.  In traditional retail, for example, around 2,700 stores closed in the U.S. since 2003 and sixty five percent of sales take place in big-box stores.  Big-box stores, like Wal-Mart, or Target, carry a smaller group of titles and make less effort to promote new groups (which makes it more difficult for new acts to fill the sales slots vacated by older titles over time ).  (These statistics were taken from the Rolling Stone article)

Among that small list of leading sellers is Apple.  Online, and overall, Apple’s iTunes has become the number three retailer of music in the U.S. With that increased status, Apple has more power to fight efforts the record labels might make to try and dictate sales terms – from tiered pricing to pushing more bundles sales.    That’s not good for the labels.

Thing is, it was the record companies digital rights management demands that helped give Apple that power:  The iPod is the leading player in the market and is the only player capable of decrypting Apple’s Fairplay DRM encryption.  The labels forced Apple to use encryption, and in the terms of those contracts, gave Apple an incentive to keep that encryption system closed and proprietary. That in turn, took away iPod owner’s purchasing options. They could either buy from Apple or not buy music online if they wanted it to play on the iPod.  (See the Metue article on the Paradox of DRM or Steve Jobs open call for DRM-Free music for more information on this)

Now, in selling music without DRM, which is portable across players including the iPod, EMI is trying to give other vendors equal access to iPod customers.  That significantly expands the marketplace for online sales  and creates competition; competition that could theoretically diminish Apple’s power.

THE REST OF THE LABELS
So far, EMI is alone. The other three (of the Big 4) labels have not even hinted at a willingness to embrace a DRM-Free platform of their own.   They generally cite piracy concerns as a key part of their reasoning.  It is that thinking, however, which may be just what proves Rolling Stone’s authors correct: 

Throughout history, those in power (or with it) who have maintained their position often learned to incorporate their opposition rather than trying to bury them.    It’s a throwback to the book that became the bible of business in the 80s, the ancient text, The Art of War which says “subjugating the enemy’s army without fighting is the true pinnacle of excellence.”  The best way to do that is to give a reason to join you.

Copyright advocate and Stanford Law professor, Lawrence Lessig points out (In a 2004 Article for Wired magazine (which excerpted from his book)) that alongside Peer to Peer (P2P) technology (which helped spawn the business of digital downloads), there are a few other not so insignificant media industries that drew their roots from pirated technology too: Hollywood, radio, cable TV and even the music industry.

With Hollywood, for example, filmmakers headed west to escape the reach of those enforcing Thomas Edison’s patents.  Out of Edison’s line of sight, they set up shop in the west, and in the 17 years before Edison’s patents expired, they established the foundation of an industry that eventually put Hollywood on the map.  Had Edison’s people been less focused on controlling their invention, and instead, more focused on finding a way to share profit with those who wanted to build from it, they’d have likely seen far greater rewards.  (Lessig’s article, and the book it is excerpted from, delves more deeply into these and other stories.  It’s an interesting read.)

In the early days of online file sharing, the music labels had history books to guide them, and law on their side.  They favored the latter over the former, and in so doing they missed an opportunity.   They could have proactively guided online music distribution, giving customers an incentive to buy and the tools to do so. Instead, they fought to protect what they had.  In their defense, the past seven years have shown a sea-change in technology development that would have been hard to envision but one fact was clear: tens of millions of people were using P2P technologies to trade music – Napster, Kazaa etc.  Customers were implicitly asking for online music sharing and distribution – and the music labels didn’t hear their call.

EMI’s present approach seems to be an effort to listen. It doesn’t erase, or even directly address, the concerns of piracy. To that, it does what the labels arguably should have tried to do years ago: it tries to give music listeners a convenient and reasonable basis for buying online (just as iTunes did when it launched).

EMI’s apparent DRM-Free strategy seems like an effort to rewind the clocks, rewind the music, and put them back in a position to give the customers what they want and profit from doing so.    It’s a strategy to increase the scope of their distribution channels, decrease their dependence on single vendors, and increase their ability to serve the market.   It could find some measure of success. But to prove the Rolling Stone article wrong,  the other labels will have to join the battle. If they don’t – it may well be time for them to develop new business models and the Rolling Stone authors to formally write the eulogy for the ones that went before.

(In an interesting bit of irony: one of the companies EMI is relying on now to help give them back some power, Snocap, is founded by the same person who (by  failing to find a way to work with his company seven years ago) may have cost them their future to begin with.  (Snocap was founded by Sean Fanning who previously was behind Peer to Peer file sharing company Napster prior to its reinvention as a subscription music service))