I read on the Mail & Guardian that there is an intriguing trial under way in Minnesota. Jammie Thomas is one of 26 000 people being sued by a viper’s nest of record companies for making available songs on her PC for download via Kazaa, a popular peer-to-peer MP3 download mechanism that replaced the trailblazing Napster. Napster, you will remember, caused a huge stir when it made it possible for millions of songs to be illegally traded online in the 1990s. In 2002, the site was bought by BMG for $8-million and the guts were ripped from the business model. The record industry breathed a sigh of relief.
What it didn’t then do was go through a period of introspection. Any company, when faced with a changing consumer environment and increased threats to its fundamental business model, needs to respond with innovation. And if it’s a big multinational, it should blend that innovation with some canny marketing that takes its value proposition to a whole new level — one that is hard for the disruptors to replicate.
So in the world of music, record companies should have asked: “What can CDs do that MP3s can’t?” The answer might have been embedded unique content such as videos and interviews. Maybe the CD sleeve could double up as a concert ticket or voucher for a free T-shirt. Or maybe they should sit the artists down and get them to grab a pen and sign 2 000 copies of the CD, sent randomly through the distribution network. What U2 fan would choose an MP3 download over a chance to own a Bono-signed copy of the band’s latest album?
And if they couldn’t think of anything innovative enough to rescue the CD, then they should have gone one up on the illegal downloaders and distributors by offering secret concerts to those who bought the CDs off their website or from a store like iTunes, or entry into a competition, or a signed poster … in other words, stuff that the MP3 pirate cannot replicate, but for which there is a huge demand.
But they did none of that. They introduced copyright protection to stop people converting CDs into MP3s. They sued single mothers. They inflicted Pop Idols on the world. They wrung their hands in a sympathy-seeking gesture and said to the public “You’re hurting the musicians — you’d better stop.”
In the M&G article, Jennifer Pariser, head of litigation and anti-piracy for Sony BMG Music Entertainment, the second-largest record company in the world (and owner of now squeaky-clean Napster), is quoted as saying: “Piracy is a tremendous problem affecting the music industry. It has caused billions of dollars in harm in the past four or five years.”
This is the point at which the record companies would like you to feel sorry for them. Should you? Not at all — shed not a single tear. Who is feeling the effects of the “billions of dollars in harm”?
To answer that question, let’s take a quick look at the numbers. In South Africa, you buy a CD from a CD shop for about R120. Of that, R82,50 goes to the owner of the record shop, who needs to pay rent, VAT, marketing, staff and so on. I think that the profit margin is disproportionately high, but this blog is not about the retailers (that’ll come later); it’s about the piranhas who supply them.
So the retailer pays the record company R37,50. How is that then split? Eighty percent of it, or R30, goes to the record company. From that the record company needs to pay for the manufacture of the CD, the design and printing of the CD sleeve, the distribution, the recording, marketing such as the production of music videos and point-of-sale material, and so on. R7,50 is left — and that is handed to those actually behind the creative process. About half that will go to the artist (yes, R3,75 per CD sold, unless they’re an established star in which case they might get more) and the other half to whoever owns the various copyrights — the composer of the song will get about R2,50 and the publisher of the song R1,75. Of course very often the record company itself is the publisher too because that’s how it ensures a revenue stream for the creative work of its artists that extends to 50 years beyond the death of the artist, so its margin becomes a little higher.
In case you got lost in all those numbers, let me repeat the important ones: the record company gets R30 for every CD sold. The artist gets R3,75.
Then, when the record company has a hit on its hands, there begins the radio airplay — and if the company muscled in as a publisher, it will get an ongoing stream from that too. And recently there was talk of a “needle tax” whereby radio stations would pay record companies for the privilege of playing their music. To my mind, actually, radio stations should respond by sending the record companies a copy of their advertising rate card and charging them every time their artist is played on air, or whenever the song name or album title is mentioned on air. Because that’s what drives sales.
So, Ms Pariser, who exactly is being harmed here? Based on the rather crude calculation above, the people feeling the most harm are record-company shareholders and the music retailers. Which is why they will embark on multimillion-dollar lawsuits against housewives.
Record companies would reply (and I hope they do) that actually there’s more to it than that. And they are taking a huge risk, putting huge amounts of capital to record and market a CD that might bomb. They are partly right — but then they appoint experts to make sure that the risk is mitigated to a large extent. That’s why only the “safest” artists get recorded, and only artists with some sort of track record get huge amounts of marketing cash put behind them.
They would also argue that, by making profits, they are able to generate money to put into developing new talent. (Which is how we arrive full circle back at the travesty that is Pop Idol.) It’s an argument that doesn’t wash. Just look at some of the new talent that has emerged of late — Arctic Monkeys owe their career not to some record company exec, but to savvy marketing on the internet. The recording industry, with its massive profits, did nothing to “develop” them. They did it themselves, and bankrolled it themselves. They are one of the more high-profile examples, but there are others. And this is why I so enjoyed reading Jaxon Rice’s blog Radiohead’s brave new world. It shows how, in the absence of any innovation that responds to the needs and demands of the 2007 consumer, bands are starting to take charge of their craft by cutting the record-company fat cats out of the mix. And, hopefully, they will end up earning a lot more than they would have with a traditional record deal.
All strength to them. The rest of us can just sit on the sidelines and wait for some innovation from the record industry instead of lawsuits. But don’t hold your breath.
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