“When the history of our digital times comes to be written, one of the questions that will puzzle historians is why the record companies missed the significance of the internet.”

What a great thought (and a very catchy headline). Here is a summary of the article, with some commentary.

Since World War II, the record industry had a total monopoly on the recording, packaging, and distribution of music. They controlled the careers or artists, the way the music was disseminated, and dictated terms to music retailers. When the CD came around in the early 1980′s, and as the article says “recording studios converted the sounds made by musicians into bitstreams – long sequences of ones and zeroes – while, at the consumer end, CD players converted those bits back into high-fidelity sound.”

The sales model for this era was to create the plastic disks and packaging, ship them distribution houses, and then off to retailers. While this model proved to be profitable, the overhead costs were astronomical, with up to 50% of the retail price of a CD eaten up by production costs.

The internet was poised to change all of this for major labels. It presented the opportunity to drop production costs to the floor, while expanding profits. But the internet was ignored at first, and then it was treated as a realm for legal prosecution. Even bands chimed in, complaining about the evils of the internet. This practice got so widespread that the RIAA began prosecuting teenagers and single moms. And as the industry resisted the internet, CD sales bottomed out.

To put it simply, the major labels did not want to let go of CDs in the face of an evolving marketplace. Rather than adapt to the climate, they attempted to maintain the status quo. The writer of the article states “The obvious hypothesis – that the senior executives of all the record companies were idiots – has always seemed implausible to me. Or it did until I read the recent interview in Wired magazine with Doug Morris, chairman and CEO of Universal Music Group.”

Because CDs were so profitable, the music industry turned a blind eye to what was next, and settled into a short sighted approoch rather than looking at the big picture.

Bottom Line: The record industry can turn itself around virtually overnight by embracing and adapting to technology. Welcome to the Future.

The folks at Forrester Research recently published an 18 page paper on the decade long decline in music sales. The article points to the idea that the shift in music sales is permanent, thanks to the Internet. I haven’t read the paper, but thanks to the blogosphere, information abounds.

The Forrester paper predicts half of all music sales will be digital by 2011, but that the boost will not make up for lost revenue in CD sales.

The paper predicts that subscription services will only grow “modestly”, and (no surprise here) that DRM will die.

In other words, technology is the future of the music business.

A synopsis on Cnet points to some of the concrete data in the report:
“A Q3 2007 survey of more than 5,000 U.S. adults with online access showed that 94% of them still listen to the radio, and on average spend 43% of their overall audio-listening time with radio–far ahead of #2, CDs, which occupy only 20% of listeners’ time.” – Radio and streaming audio are still powerful tools for listeners, and in the era of choice, people are exercising their freedom to choose.

“…the survey showed that 62% of the subjects listen to music files on a PC, while only 43% of them listen to music on an MP3 player. Even 48% of them listen to Internet radio.” – True convenience isn’t defined by product availability or features, it’s defined by the individual.

The paper also suggests that corporate sponsorship and advertising will become a major factor in platinum music success.

While this is a comprehensive analysis of the music industry, it’s not really new information. Technology has become the key to the future of music, and I believe that the future of music will be more artists selling less albums. Labels will have less investing in broader catalogs, and artists’ will become more business minded, using the resources of labels instead of being exploited by them.

Bottom Line: The music industry isn’t collapsing, it’s evolving. Welcome to the future.

An interview with the Flashbulb about his recent calamity with iTunes, and putting his album up on BitTorrent. It turns out iTunes is selling his albums without permission, and not paying royalties.

The Flashbulb (Benn Jordan) has been releasing albums for 14 years, the last 5 have included various commercial endeavors. The label deal he has is a 50/50 split, but he hasn’t been seeing the money. Benn says he has no agreement with iTunes to sell his music, and many of his fans have told him they bought his music there. When he investigated the issue further, his label asked him to drop it, and his calls went unreturned.

Here’s a great quote from Benn: “Who’s the pirate I should go after? A kid who downloads my album because it isn’t available in non-DRM format and costs $30 on Amazon? Or a huge multi-billion dollar corporation that has been selling thousands of dollars worth of my music and not even acknowledging it?”

Benn is being labeled in the press as pro-piracy, but his true stand is that people buy what they like. “What I’m promoting is the artist’s freedom to choose what can and can’t be done with his/her music, and more importantly, the listener’s freedom to do what he/she wants with their own computer, MP3 player, or internet connection.”

Benn makes a poignant case that the RIAA has spent so long dictating people’s taste and choices that they are now threatened by the opportunity for people to choose the music they want. He suggests that “music will be judged by it’s content again and will be subjected to it’s own Darwinism.”

Bottom Line: Where are all those billions in album sales really going?

Ghosts is a variation on a theme created by Radiohead. The latest NIN album is part free, part paid, part digital, and part traditional. And a broad range of consumer preferences and budgets are accommodated by the initiative.

Reznor and Radiohead are important market-movers and fearless risk-takers. But are these experiments really relevant to the broader music industry?

The problem is that only part of the consumer population is going to play along. Radiohead found that a disproportionate number of fans downloaded In Rainbows for free, an offered option. But an even larger number of fans downloaded the album for free outside of the Radiohead page, on BitTorrent, P2P, and other sharing protocols.

These fans wanted the album on their turf, not Radiohead’s. And that has been the bigger story for the recording industry for the past ten years. Sure, the iTunes Store has sold 4 billion downloads, but that is just a tiny fraction of the free downloads obtained from other channels.

Outlets like Limewire offer instant, on-demand bulk downloads and comprehensive recording catalogs for free. The iTunes Store offers a cleaner copy, but for a price that makes collection volume difficult to achieve.

Now, Trent Reznor is about to learn a similar lesson. Most likely, fans will grab the first, free volume of the album in heavy numbers, and a smaller percentage will pay for the expanded collection.

But that is only part of the story. Outside of that sandbox, volumes II-IV will quickly creep onto Gnutella, BitTorrent, and IM. Sure, Reznor seeded the first volume onto BitTorrent. But who are we kidding? Fans are in charge of this channel, not Reznor.

That means far lower volumes for NIN, or any other established artist, compared to the 90s. Other factors are also sapping energy, including an increasingly-fragmented media market, and the lowered attention spans that come with it.

Then again, who needs 90s volumes when the major label is suddenly optional? After all, Reznor can now keep the revenues (almost) all to himself, and achieve robust revenues on far smaller volumes.

The math is alluring, and a major disincentive for signing with a label. Marketing specialist Seth Godin urges artists to cultivate targeted, niche audiences, and any business school graduate will lecture you on the value of consumer targeting. Why not translate those principles and percentages into a healthy, more controllable career?

The question is becoming less and less academic, and artists like Trent Reznor are putting the possibilities into motion. But it remains unclear if artists can healthily sustain themselves using this philosophy, at least in scalable numbers.

And smaller artists will have difficulty applying the Radiohead model, at least until their recognition grows. Why? The reason is that most lesser-known artists have trouble getting people to download their content for free, much less pay for it. Why pay for something blind? That is a game for pre-2000 consumers.

In contrast, Reznor and Radiohead have established names, thanks to a massive, major label publicity machine. That tailwind is a critical component of the current models – and a major reason why media outlets are focusing heavily on their initiatives.

In the middle are artists like Saul Williams, a poet and rapper that exists outside of the mainstream. Reznor actually helped Williams create a Radiohead-like model with the help of Musicane, and the results were mixed. Less than 20 percent opted to pay $5 for the album – a total of nearly 28,000. Then again, that translates into roughly $142,000, a revenue total that easily pays the bills.

And any starving artist knows that six-figures is a goldmine for a life in the arts. A major would drop Williams in a heartbeat after a performance like that. But sailing solo, Williams could command a decent and consistent payout.

So is the Radiohead model relevant? For more established, post-label artists, the concept probably maximizes recording profits, and creates momentum for other revenue generators. And the results are boosted if the recordings are dispersed across a broad number of sales outlets, including the artist page, iTunes, Amazon MP3, and even traditional brick-n-mortar.

Sure, the result is smaller than 90s recording sales potentials, but it is something nonetheless. And if the consumer elects to pay, they have the opportunity to do so.
What about everyone else? For mid-size artists, the concept can translate into meaningful revenues, and for smaller artists, the idea is probably premature ahead of broader audience awareness. But more than ever, artists have the potential to reach super-targeted audiences, and that greatly increases the chances of a paid transaction.

Here’s a paper titled “Does Chatter Matter? The Impact of User-Generated Content on Music”. It’s a study in how blogs and and social networking sites are impacting music sales. The study did not include any analysis on radio or internet broadcasting as a variable. Since this a very long and convoluted paper, I’ll give you the highlights.

(a) the volume of blog posts about an album is positively correlated with future sales
(b) greater increases in an artist’s Myspace friends week over week have a weaker correlation to higher future sales
(c) traditional factors are still relevant – …a number of reviews from mainstream sources … tended to have higher future sales.

People naturally look to others for opinions. Music recommendation is part of this phenomenon. When people put time and effort into good blogs, readers find value in the content and message. With MySpace, the promotion of music in top friends can be a powerful recommendation tool. And album reviews and ratings are factors in people’s buying habits.

The study was conducted for four weeks before and after an album’s release, and the sales data was based on Amazon’s top sellers of physical units.

The study discovered that mainstream album ratings did not relate to online or consumer ratings. Blog postings had the strongest relationship to sales. Higher blog post volumes and higher percentage changes in Myspace friends corresponded to increased weekly sales in the future.

They also concluded that blog posts had a larger impact on sales than MySpace, and they hypothesized that was due to a credibility gap. MySpace allows for passive involvement, while reading blogs is a more active pursuit. Also, critical acclaim in reviews did not have the impact on sales that they expected.

Ultimately, the study was unable to determine whether or not blog chatter actually causes sales, as there were too many undetermined variables. Blog chatter does on some level represent the buzz around an album, making it an expected phenomenon that it had an impact.

Here’s a quote form the conclusion of the article:

“We analyzed the usefulness of blogs and social networks, as well as reviews in
consumer, online media, and mainstream media, in predicting album sales in the four weeks before and after the album’s release date. We found that the most significant variable is blog chatter or the volume of blog posts on an album, with higher numbers of posts corresponding to higher sales.

Higher percentage changes in Myspace friends may also be significant, although the results here were not consistent … We find that the average consumer rating is significant, while the number of consumer reviews is not … Average consumer ratings better predict[ed] sales than average mainstream media ratings.

Although we found that user-generated content is a good predictor of music album sales, our analysis showed that traditional factors cannot be ignored. While independent label releases with extremely high blog chatter can sell even more units than major label releases, our findings estimated that the average major label release sold approximately twelve times more than the average independent label release. We also found that the higher the number of mainstream media reviews, the greater the sales.”

Bottom Line: The results of this study suggest that user-generated content should be considered seriously by record labels.

This article looks at the impact that huge MP3 collections has on our perception and enjoyment of music, and really got me thinking.

Music has value because it moves us. That special album that takes us back to some magic moment, or the songs we love to dance to. What has people by albums us the love of the music.

MP3 collecting is similar to collecting baseball cards. Grab an artist’s entire discography, and trade among your peers. Our music collections expand almost as fast as the national debt, and often music sits on our hard drives unlistened, unappreciated, and unacknowledged. We become overwhelmed with the amount of music we have to listen to, and start to lose our love for the music that touches us.

When music is downloaded and listened to only once or twice, it becomes a single serving item, like a hamburger. The joy of music is in the artistic expression, and the way we are moved when we hear something we love.

Could the current frenzy of MP3 downloading (both legal and illegal) be eliminating our love for music? There’s a phenomenon known as information overload. One way to look at the current consumption of MP3s is that music is in an information overload stage.

With so much music to choose from, both free and bought, and huge MP3 collections, the line between having music we love and having music because its there is getting blurred.

Most of the time, we relate to this in terms of album sales, and the music industry. What if we looked it as a shift in the perception of music? While music is always special, it’s apparent that we are now starting to view it as a thing to have. What effect this will have on our appreciation of music is anybody’s guess. Based on the habits of the general public, music is losing it’s intrinsic value as art, and becoming more like a piece of furniture.

Bottom line: We used to buy CDs because we loved the music. It is starting to appear that we now collect MP3s because they’re accessible.

Here are some of tasty quotes :

“it’s always very difficult going from something that’s free to an industry to something that has a cost to the industry.”

“I think what we have to do is far more flexible about price. The industry has been very bizarre over the years – it’s essentially a one price industry.”

“I don’t want to destroy physical sales … We find physical and digital are both viable markets that people enjoy using. But clearly, there’s an opportunity for music on tap, and as a service, and it’s something we should explore.”

“I would like to see copyright modernized in 2008, with people enabled to do what they want to do, and those who profit from it allowing the practice [third parties] to be monetized. I’d like to see barriers taken away from the enjoyment of music.”

“I think P2P does have a discovery element to it, and it you may discover something on P2P that makes you buy a product. CD burning is much more domestic piracy, and is much more somebody avoiding paying for something.”

“I think the whole “DRM as a policeman” policy was doomed to failure – the independent companies never supported it to any extent whatsoever. We have never believed in putting obstacles into what the consumer wants to do.”

“We inhabit a mature industry that’s grown on a multi-territorial basis. And, frankly ,if you were reinventing it today you’d reinvent it way differently. It would be global, not territorial.”

“…[T]he market is in the control of one or two parties, and we don’t think that’s healthy.”

“The patrons are going to be largely commercial so brands that see an advantage to a certain kind of artist, and that is putting art far to close to commerce. That would mean marginal music wouldn’t exist, you’d only have music that had a commercial upside for sponsors. That’s a world none of us really want to see.”

“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.

The RIAA’s head, Cary Sherman, wants to put encryption on our computer that will force us to decrypt music before listening to it. In other words, the filter will scan all your incoming data and then either allow or deny your ability to listen to it. since this idea likely won’t be popular (who’s going to willingly put a filter on their computer that blocks the files they are downloading?), the next suggestion is to put the filters in our modems.

Despite the predictable public backlash against these tactics (in an environment where the RIAA already has public approval that rivals the US Congress), some ISPs are moving ahead with these filters. The technical specifics are a bit thick, suffice it to say that various file encryptions can bypass these filters unless entire protocols are blocked.

Here’s a video of Mr. Sherman lauding the glories of filtering:

Bottom Line: Being out of touch with your consumers’ needs does not improve your financial picture, or your credibility.

Here’s something novel:

Dependent Records recently uploaded their entire catalog on Pirate Bay (Dependent specializes in aggrotech, electro-industrial and futurepop). Well, sort of. Apparently a group pretending to be Dependent posted the albums on the p2p site.

The quote from label head Stefan Herwig – well, an impersonator – is “I closed down my record label Dependent Records for good. But since I want my music to be heard by the people out there, everything I have ever published is now available on The Pirate Bay.”

While artists are turning to file sharing networks for promotion, it;s unusual to see a label do this (although there are some net labels giving away music, such as Kikapu and Lacedmilk).

Herwig (or his imposter) feels that p2p technologies are killing labels, not boosting sales. However, this article claims file sharing is a boon for new music. Perhaps availability adds to desirability.

Do you think file sharing is boosting or dropping album sales?