“Increased Demand” & the New Music Business

CommuniK Commentary by K. Matthew Dames
Beware any music executive who opines on the record that “the demand for music is as strong as it has ever been.”

There is incontrovertible evidence that compact disc sales cannot fall much further before they fall into the toilet. There also is what music executives would have you believe is incontrovertible evidence that so-called “file sharing” is killing sales. (A masterful, peer-reviewed article (.pdf) in the Journal of Political Economy empirically debunks that myth.)

And if you know anything about the music business, music executives, or the ability to read between the lines of a quarterly earnings statement from the CEO of a major corporation, then you can be confident that when Warner CEO Edward Bronfman talks about “demand,” he really is using that word as an alternative meaning for “sales revenue.”

Finally, one can surmise reasonably that the money the recording labels receive from digital music outlets like iTunes Music Store (iTMS) is not nearly enough to support the corporate and executive infrastructure those labels have grown and maintained for the past three decades. The labels’ desire to maintain this level of corporate infrastructure is one reason several have balked at the uniform pricing scheme Apple has demanded as a condition of selling music through iTMS.

So how does one reconcile trickling unit sales and the scourge of “file sharing” with healthy “demand” (i.e. sales revenue)? I count at least three possible ways that revenue could rise without unit sales of compact discs increasing.

First, look at the increase in the manufacturer’s suggested retail price (MSRP) of new compact discs, which now routinely approaches (and even exceeds) a Jackson. Even if the public can buy a new CD for less than MSRP, a higher MSRP still leads to a higher actual retail price, since any discount that retailers impose is deducted from MSRP. All things being equal, a higher MSRP leads to higher revenue, hence higher “demand.”

Second, look at alternative methods of getting revenue. In the past two weeks’ Clippings, we ran stories about a clash between Bob Marley’s estate and Verizon over the cellular provider’s agreement with Universal to sell Marley ringtones. (Universal owns the copyrights to much of the Marley song catalog.) Traditionally, recording industry contracts have been silent about revenue that occurs outside of unit sales of records and compact discs, or explicitly has reserved such revenue to the recording artist. Not so in today’s music environment: increasingly, recording labels are demanding through contract that artists surrender some of non-music revenue, such as ringtones.

Although a relatively recent innovation, ringtones have become popular, and thus potentially lucrative. Further, since the ringtones are derivative works of an intellectual property asset the record company already owns, it can cut lucrative deals with the highest bidder. The label has to share some of the ringtone earnings with the songwriter and publisher, but since this is a new revenue stream that the labels and songwriter may not have been envisioned, the label has more flexibility in crafting a deal with those parties than it would have under more established revenue streams.

You can be sure the label is going to cut that deal as far to its advantage as possible, even if the artist objects to the very idea of a ringtone deal (which is the case in the Marley-Verizon clash). While there are several variables in this situation, the net effect of ringtones is more revenue to the label, hence higher “demand.”

Third, labels increasingly are demanding that artists surrender or share a portion of concert and tour revenue. This demand is more egregious than the ringtone sharing deals. Ringtones are a new revenue stream that recent technological advances made possible. There was no tradition or business precedent for it, and in a new, free market, parties are free to cut their deals as they please.

In contrast, live performance revenue always — always — has been the artist’s exclusive economic domain. No longer: now labels want a share of ticket revenue, merchandising, and licensed products. (Some even ask for a share of licensed product revenue that has nothing to do with live performances.)

I consider this to be salt in the proverbial wound. It’s not enough that the typical artist will get no revenue from radio play: radio consolidation increasingly demands that only top-selling artists get airplay because radio executives are convinced such a playlist drives advertising revenue. It’s not enough that the typical recording artist will get no revenue from unit sales. It is true that illegal music copying and downloading cheats recording artists out of potential revenue. But one could argue reasonably that restrictive and egregious contract terms cheat recording artists out an equal amount of potential revenue even before that artist records the album.

Now, the artist has to go on tour and pay off the label, too? That artist is better off working the line at UPS; at least Brown pays health insurance and tuition reimbursement. While there are several variables in this situation as well, the net effect of this new, previously unheard of economic stream is more revenue to the label, hence higher “demand.”

None of this rationale considers a current trend in which states are making it difficult to sell used music. A recent trend, however, has state legislatures creating or extending so-called “pawn shop” laws to apply to the sale of used compact discs. These measures effectively create an economic disincentive for retailers to sell used discs.

Billboard magazine reported in May that a new law in Florida requires all stores that buy used goods to apply for a permit; thumb-print compact disc sellers; retrieve and retain the sellers’ government-issued identification; and hold the discs for 30 days before resale is allowed. Consumers no longer can receive cash for their discs; only store credit is allowed. ArsTechnica reported, also in May, that the legislatures in Rhode Island and Wisconsin are considering similar legislation.

Remember that pursuant to the “first sale” doctrine, neither labels nor recording artists receive any revenue from the sale of used compact discs. But of these two groups, recording artists have much more to gain from secondary market resales of their work because at minimum, a sale of a used disc creates or maintains attention for the artist. This attention could lead to future sales of new music, or attendance at a concert. I’ve discovered several artists’ work in this manner; it’s a safe way to test an artists repertoire before committing to full price on a new compact disc (which you cannot return to a retail store once you’ve broken the insanely tight shrinkwrap).

The recording industry’s attempt to restrict or eliminate sales of used music does not help its bottom line; all it does is harm consumers and artists. (For one artist’s opinion on how the music industry treats consumers, see Trent Reznor’s rant on YouTube.)

But let me return to the central premise: above, I’ve articulated three reasons why Bronfman can claim that “demand” (i.e. revenue) for music in 2007 is “as strong as it has ever been.” But what Bronfman is not saying is critically important: he is not saying that consumers are buying more units because the labels are providing better (or at least more popular) products and services. Quite the contrary: “demand” (i.e. revenue) likely has increased because the labels are charging consumers more, taking more from artists’ pockets, restricting consumer choice, and (equally as likely) engaging in creative accounting.

And even with all Bronfman’s rosiness, Warner Music Group’s third-quarter revenue (the three months ending June 30) still dropped 2 percent.

See also: (via Reuters). Warner Boss Sees Rebound Despite CD Sales Decline. Sept. 18, 2007.

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Written by sesomedia

09/20/2007 at 08:00

Posted in Uncategorized

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