The major labels are very outspoken about the evils of piracy, and aggressively pursue those who chose to download music and not pay for it. That being the case, there is great ironyin the fact that up to 47% of Sony-BMG’s software is pirated.

Recently, a tech support call for a program called Ideal Migration (a Windows server management tool) was made by a Sony BMG employee, and the product code given was pirated.

The ensuing drama included a seizure of some of Sony-BMG’s assets.? Paul Henry, The CEO of the maker of the software, was quoted as saying “I think piracy is linked to the policy of a company. If the employee has the necessary funding to buy the software? he needs,? he will. If this is not the case, he will find alternative ways, as the work must be done in one way or another.”

Bottom Line: A company that is using pirated software should not be surprised when their products are pirated.

“Music publishers, the record labels and digital music distribution outlets began a three-way legal wrestling match Monday over just how much songwriters and the publishing houses should get paid for digitally delivered music.”

At stake in this debate is mechanical royalties for internet streams. Major labels, Apple, and Yahoo want the royalty rate for artists to be lowered. The big publishing houses are currently promised nine cents a song, a figure that often gets negotiated lower, and the consortium against them wants that rate moved to 8%. Apparently, publishing revenues are up, while major label revenues are down. The Digital Media Association is upping the ante, pushing for the royalty rate to be dropped to 4%.

On the other side of the fence, the National Music Publishers Association wants the rates raised to 12.5%.

The driving concern here is the financial ‘burden’ that paying these royalties puts on the large companies that offer music. The claim is that streaming media should be treated like terrestrial radio.

Bottom Line: Without content, there is nothing to stream.

Despite strong digital gains, recent quarterly losses at Warner Music Group are part of a continuing profit slide. But just how serious is the financial picture?

This isn’t a rosy period of double-digit gains, that’s for sure. And flagship CDs are in a free-fall. But the financial picture at Warner is showing more resilience than you might imagine under the circumstances.

Warner Music Group first went public in 2005, a period that featured far more investor optimism. But the profit picture has been slipping since, and Wall Street has been mostly unsympathetic.

What was once slightly-in-the-black has now gone red. During Warner’s calendar fourth quarter of 2004, profits landed at $36 million, only to improve to $69 million the following year. But by 2006, the holiday story started losing steam. The company earned a smaller $18 million during the period, though profits turned to losses – of $16 million – during the most recent Christmas buying quarter.

But not everything is so bleak. Major label executives often temper the picture by pointing to more stable revenues, less severe profit declines, and bullish digital gains. Of course, some of that is spin, but in the case of Warner Music, balance sheets actually support those claims.

In fact, the revenue story has not been disastrous. Revenues topped $1.088 billion during the fourth quarter of 2004, roughly 9.1 percent greater than revenues reported during the recent period. Of that total, digital assets now account for 14 percent of total revenues – up from nearly zero several years ago.

On an annual scale, a similar revenue picture emerges. Dialing back to the fiscal year ending November 30th, 2003, revenues neared $3.23 billion. Fast-forward to the fiscal year ending September 30th, 2007, and revenues of $3.39 billion appear – hardly an implosion. Not the envy of companies worldwide – after all, a flattening revenue picture is rarely good news. But not exactly a sinkhole, either.

Why the revenue resilience? Is creative accounting at work? Almost every company dances the numbers a bit, but artistic accounting has its limits – especially in the current regulatory climate.

And ugly profit losses year-after-year prove the point. Warner Music dropped $21 million during the most recent fiscal year, and actually gained $60 million during the previous year.

But the worst financial losses happened during the earlier part of the decade. In 2005, the company lost $169 million, an improvement over 2004 declines of $1.42 billion. And losses hit an immense $1.35 billion in 2003, and a disastrous $6.03 billion in 2002, in part because of accounting methodology changes.

Those are major drops, though at least the earnings picture is showing improvement. The question is whether Warner – and other majors – can survive the current turmoil, one that now includes a massive, 15 percent US-based album sales decline in 2007.

The current terrain is characterized by serious overhead cuts and slippery traditional retail declines. That is a worsening picture, though major labels like Warner carry enviable recording and publishing assets.

Perhaps the best prognostication involves a breed of smaller major labels ahead, though survival depends on a leaner, greatly diversified model. And in the case of Warner, and other labels, the financial picture is less severe than generally reported – and that spells a little more wiggle room for radical reinvention.

Although still unconfirmed, rumor has it that EMI is seriously considering pulling their funding from the RIAA.? According to a recent Variety article, EMI has taken early steps to exit from the IFPI, the international version of the RIAA.? Part of the move is a demand by EMI that the RIAA and IFPA produce a proposal on restructuring by March 31.

Citing the massive cost of participation in these trade organizations, it seems EMI is very unhappy with the results being produced by the RIAA and IFPI.? The public relations nightmares these organizations have created has been a major contributor the devaluation of music.? If file sharing wasn’t labelled an almost terrorist act, it could have a huge impact on the perceived value of music.

More as this develops….

The RIAA is funded by the big four record labels, to the tune of around $130 million per year for each label. EMI was recently bought by a private group, and are now considering drastically cutting their investment to the lobbying and enforcement arm of the music industry.

Given that the RIAA’s legal moves over the last few years have been disastrous at best, it’s a great sign for artists that the RIAA’s financial base may diminish significantly. The amount of money that the RIAA has spent suing mothers and college students as been astronomical, and has led to a severe loss of credibility toward the record business in the public eye. Let’s take a moment to look at what a world without the RIAA might look like.

Without constant legal pressure to buy, audiences would begin to feel confident that albums they buy are supporting artists’ careers (this is part of consumer confidence). File sharing would continue, but people would be more willing to buy music they love knowing that they aren’t labeled as criminals anymore. The business model of turning artists into products, overcharging for albums, and using hype instead of quality would fail.

The music industry would become a free market, where any artist with great music and dedication could create a viable career. Rather than a few mega platinum artists, we would begin to see a massive amount of artists selling between 50,000 – 200,000 units on releases. This level of sales can cause an artist to be dropped from a major, but on an indie label, this is a great living for an artist, and a massive success for the label. Royalty rates for artists would also become much higher. Some artists already see similar profits selling 200,000 units with an indie label that they would see selling a million on a major.

New contracts would become the industry standard, similar to Polyvibe’s practice of leasing artist’s copyrights rather than owning them. Artists would have freedom to call the shots in their careers. The industry would shift to artists owning their masters, with labels existing to empower artists rather than to exploit them. Album advances would shrink; the amount of money owed to labels would shrink, too. In the major label world, an artist owes almost every penny the label spends on them. Label investment in artists would become the cost of doing business, rather than a loan.

The practice of shelving albums would become non-existent, as artists would have the ability to have promises for release dates in their contracts. Polyvibe currently includes release dates in our contracts, with a provision that if deadlines are not met, we will set a new release date. We even promise in our contracts that if we do not release an album within a set span of time after receiving masters, the artists is free to go elsewhere with their album. This type of provision would be standard fare, as well as other artist protection clauses.

Marketing, promotion, and booking companies would become the major players in breaking artists. The media will flock to what people want instead of what the Big Four tell them to promote. New and far reaching models and methods of grass roots promotion will become the norm. Music quality will again become the primary factor in an artist’s success; promotion and hype will be a second tier service. Radio will begin to offer a wider variety.

Without the ability to force legislation in their favor, major labels would become the victim of a music economy they no longer control. Consider that what allows major labels to force low quality music down our throats at high prices is their ability to grab politicians ears, to threaten us with lawsuits, and their near domination of media exposure and radio. We are now at the tail end of a 60 year monopoly on the music business. Rats swarm off of sinking ships, a perfect analogy for the exodus of mega-artists from major labels (getting off the ship, not the rats). In this new music environment, there will be dozens (maybe hundreds) of popular labels, and everyone will have the opportunity to create success.

Bottom Line: Without the RIAA, the major label business model will be obsolete, and a new paradigm and renaissance for music will appear within five years.

The XM-Sirius Satellite merger is imminent. Insiders are saying the Department of Justice will approve (and probably this week), followed by the FCC. It doesn’t take a rocket scientist to figure out the competitive advantage here: Consolidate the satellite radio waves completely.

Clear Channel is railing against the “peril” of this merger: “[T]he filing concludes by suggesting that if the FCC approves an XM/Sirius merger, it should also allow Clear Channel to expand beyond its current ownership…of radio stations”.

I want to share a quote with you: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony [. . . ]“ That’s the Sherman Anti Trust Act.

I wan unable to find any information that this act has been repealed. Will an XM-Sirius merger monopolize any part of trade or commerce? If so, it’s illegal.

A perfect storm is brewing. XM and Sirius merge, Clear Channel sucks up even more radio stations to be competitive. With only be two companies left serving radio, will this have an affect on advertising and play lists? Will it lead to further erosion of net radio?

You can see a timeline of the FCC filing history here.
Here’s the DOJ’s Antitrust page. No mention of this merger (yet).
My favorite article: Merger Enforcement Is Alive and Well at the Department of Justice

The Bottom Line: An XM-Sirius merger is a monopoly. If Clear Channel is allowed to expand, then there will be only two companies controlling almost all of the airwaves. Whatever happened to diversity?

We have been with RightCart since they launched last fall. Over the last few months, our online eCommerce solution has gone from wonky to broken.

First, they were acquired over the summer by online mega giant Buy.com, a fact that was only known to us when the SSL certificate went bad, delivering an error message that the certificate doesn’t match the site. We sent several inquiries about this through the summer, all met with either no reply or an apology, and all with no action.

Then, some time in October, the service stopped processing payments completely. I found this out when someone went to buy an album as was unable to complete the checkout. I then tested the service myself last week, and the payment was processed. I have received no confirmation from the RightCart service that someone bought an album, and I have not received notification as a buyer that my purchase was authorized. Sometime last week I was told that the purchase was on hold on both sides, and that was the last I heard of it.

Upon calling Buy.com last week, I was unable to get in touch with anyone involved with RightCart, although the RightCart contact page points to Buy.com. The person I spoke with on the phone was unable to find any record of RightCart being affiliated with Buy.com.

Finally, after sending a concerned email to several parties, I got a call from one of the original developers of this platform, who was only able to give me a minimum of information. It turns out that Buy.com has been altering the platform for a different use, reducing the original developers to outside consultants, and leaving us (and all the other clients) in the dark, and without a working checkout. Buy.com has refused to allow the RightCart development team to repair the platform, and has informed the developers that they will be retiring RightCart as an eCommerce platform.

The RightCart service is non-functioning, and Buy.com has been unwilling to allow the developers to patch the platform (they have the say-so since they now own it). All without any notification to the clients about the buyout of RightCart or any information on the status of the platform.

Although I have no solid data to back it up, I’m willing to assert there is some kind of non-disclosure clause for the developers, and that Buy.com is satisfied to tell none of the RightCart clients about the demise of the service until we are left with no checkout (which is already the case).

While an official announcement hasn’t been made yet, the RightCart service is completely inoperable, and will soon be extinct. Those of us who use the platform have been left with a non-functional platform, and no direct information.

Bottom Line: Buy.com bought the RightCart platform, then decided to disable the service. None of the clients of RightCart were informed of the acquisition, or told that the service stopped working, and we still have not been formally notified by anyone that the service will soon be shut down completely. The service continues to process payments, and no longer notifies the vendors that transactions have been processed.

We send our condolences to the RightCart development team, who have had their vision distorted and twisted by an online e-tail giant. We love the platform, and look forward to a new and improved checkout similar to RightCart.

We’ll be moving everything over to Paypal this week, until we can secure a stable platform that won’t be co-opted in the metaphorical dead of night.

NOTE: If you have purchased anything from Polyvibe since July and not received your album, please let us know immediately. We will see to it that your order is processed and give you additional swag, too.

Chris Anderson deserves a parade in his honor.

This brilliant post completely uncompresses the major label view of the music business with the actual music business.

“…it appears that every single part of the music industry except the sale of compact discs is up.

• Concerts and merchandise: UP (+4%)
• Digital tracks: UP (+46%)
• Ringtones: UP (+86% last year, but probably just single-digit percent this year)
• Licensing for commercials, TV shows, movies and videogames: UP (Warner Music saw licensing grow by about $20 million over the past year)
• Even vinyl singles (think DJs): UP (more than doubled in the UK)
• And, if you include the iPod in the music industry, as I’d argue a fair-minded analysis would: UP, UP, UP! (+31% this year)”

With statistical data to back up the claim, it’s clear that all the hoopla around the death of the music industry is a death cry form major labels. They could revamp their business models, and in fact they could have ten years ago when they knew this was coming. It’s as if these major companies have absolutely no relationship to reality.

The end of Chris’s article seems almost directed to this blog: “…for those who say that this avenue [giving away all music free] is only available to artists at the head of the curve…I’d point out that the other group poorly served by the labels are those at the bottom of the curve…”

As the major labels fail and become some new form of entertainment companies (most likely a clearinghouse for content or booking agencies), music will lose almost all of its value. Once we (the audience) are no longer pressured to buy, or told we are criminals for our actions, music will begin to regain its value.

While touring and swag are viable outlets for artists to generate revenue, the question becomes: where can smaller artists play, and is gigging still viable?

What is your take on the state of music sales, given this exciting and inspirational update on sales figures?

CD sales are dropping, set to be a small fraction of overall sales – and sooner, rather than later. A recent survey of high school students showed that there is a downward trend in music downloading in that age group. This is the next generation of music buyers. Perhaps their actions are pointing to something.

The Freakonomics blog posted an editorial recently with analysis of the record industry by five people who ought to know. Koleman Strumpf, an economics professor at the University of Kansas, had this to say:

“If file sharing hurts record sales, then albums that are more heavily downloaded should experience lower sales than comparable albums that are less downloaded. But, after controlling for the role of popularity, we found that downloads had little effect on album sales.” He wrote a whole paper on the subject, if you want to find out more.

In other words, file sharing is not the source of the drop in album sales. A powerful insight like this is the last word on file sharing for me (although not for the RIAA).

Audioholics.com posted a great editorial on whether CDs are approaching the event horizon of obsolescence. They include a buffet of statistics showing that while physical sales are slumping, digital sales are growing with velocity.

As the digital music market overtakes physical sales, CDs will become less available (relegated to major chain stores like Wal-Mart). We can see this shift with the demise of? Tower Records. When people can get all the music they want without going to overpriced record stores, they will. This trend has yet to infect mom and pop record stores, like Orlando’s own Park Avenue CDs, and since most of these stores are seen as boutiques rather than purveyors of the lastest industry tripe, most of them will likely survive (don’t forget that most small record shops deal with smaller and indie labels, and used CDs and vinyl).

People are still buying tons of music, and if digital music sales are any indication, music will continue to be a commodity. Although most commentary is still focused on what major labels can do to revive sales, the real issue is becoming what can artists do to empower themselves in this new realm.

People are exposed to a larger variety of sounds than ever before. Demand for music has skyrocketed, while profits are shrinking. The idea that music has lost much of its monetary value in the current market is a two fold effect: the novelty of file sharing and mega hard drives, and the price difference between a digital single or download and a CD.

We live in an era of convenience, and audiences consistently choose the format which is most user friendly (think audio tapes in the 80′s). The shift toward digital libraries has been predicted for years, and even with DRM, digital is already the industry standard. I’m still surprised that such a well-known and predicted phenomenon can cause such panic among executives. It’s almost as if upper management in the record industry has been ignoring the experts.

The quality of the music is a major factor in sales when people have access to massive catalogs, too. Hip Hop is a great example of this trend. Collapsing under the weight of violence and misogyny, some hip hop artist still enjoy huge mainstream and underground success. And the cause of this slump seems to be the choices made my industry executives over the last ten years.

The reality is this: The fate of major record labels has nothing to do with whether or not musicians will be able to create fulfilling careers, absolutely nothing. With unlimited access, people aren’t compelled to buy any album unless they absolutely want it.

And in case you wanted to know the secret to success in the music business in any climate:
Make Great Music!

Have you ever heard of Pretexting? It’s a manipulation technique often used to fool organizations into disclosing private information. In December of 2006, a California Law was proposed: “…any person…obtaining or attempting to obtain…personal information about a customer or employee contained in the records of a business …by making false, fictitious, or fraudulent statements or representations…”. Although the bill was unanimously endorsed by members of the CA Senate, the MPAA stepped in and had the bill killed (see Wired Magazine, “MPAA Kills Anti-Pretexting Bill”, 12/1/06). To put it simply, the MPAA and RIAA demand the right to lie to us in the name of Copyright Protection.

It seems the RIAA and MPAA are willing to allow privacy laws to deteriorate for all of us to protect their profit margins. The question on my mind is: Why should the MPAA and RIAA get special freedoms to prosecute people for file sharing?

Back in 2003, the MPAA and RIAA filed for a permanent Antitrust exemption. The bill was sponsored by Sen. Orrin Hatch. It contains a revision to The Copyright Laws of the US in Title 17 of the US Code. Here’s the revised copyright law of the US according this (thankfully non-passed) bill by Sen. Hatch (the revision is underlined):

For purposes of this chapter … any reference to copyright shall be deemed to include the rights conferred by section 106A(a) except that the court in its discretion may determine that such parts are separate works if the court concludes that they are distinct works having independent economic value.

These are the tactics of the MPAA and RIAA are using to transform entertainment. Creating exceptions to copyright laws and the having legal permissions to lie, cheat, and sue us into buying media for the prices they set, and in the forms they dictate.

21st century entertainment is not based on mafia style coercion by transnational media conglomerates. An outdated business model cannot survive by excusing themselves form laws the rest of us have to follow. Corporations are legally recognized as people. People cannot have laws rewritten for their personal benefit.

Polyvibe Records‘ response is our forward thinking business model. We do not take our artists’ copyrights. Our prices are set by the perceived value of our audience. Our digital albums are 100% MP3. And best of all, we make sure our artists’ are taken care of financially and personally. Taking copyrights from artists, then prosecuting others for sharing them is in the past. The future is ours.