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.

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.

“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?

Although the details are sketchy, the US Justice Department is looking into whether a subscription for the Big Four labels is an antitrust violation. Back in 2001, there was an antitrust investigation against the major labels for…. a subscription service. According to The Register, the Big Four have already been served notice this time around. Although the details are sketchy, it is apparent that the Dept. of Justice has an eye turned toward the industry (again).

Investigations around “Big Music” have been ongoing for the last few years. In 2000, the Federal Trade Commission settled with the major labels on price fixing and unlawful advertising practices relating to “Minimum Advertised Price” policies.

Super producer Rick Rubin has said “The subscription model is the only way to save the music business. If music is easily available at a price of five or six dollars a month, then nobody will steal it.” He also said, “Until a new model is agreed upon and rolling, we can be the best at the existing paradigm, but until the paradigm shifts, it’s going to be a declining business. This model is done.”

While a subscription service may stem the tide of file sharing, will it provide any kind of sustainability for artists? CD sales are falling end over end, but digital sales are brisk, and touring and merchandising are still viable revenue streams.

Everyone agrees it’s time for a new model, and noone seems to know what the new model will be. The sky may be falling, but music is still a multi-billion dollar business. The future lies in creating a model that generates positive public perception, convenience, and collectibility. The platform may be shifting wholly to digital music, but that doesn’t necessarily mean people won’t buy music anymore. The advent of the “360 deal” shows that the industry is embracing a new kind of marketing, where the band is the brand, not the content. At the end of the day, it’s all about the music, and people will pay for convenience and for music that they love.

Bottom Line: The paradigm shift at the heart of the music industry is upon us.

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.

Here’s a great article about the new marketing methods we’ll be seeing in 2008.? We will begin to see large scale experiments in subscription based music distribution and other models which eliminate a pay by the track model (such as Imeem).? The death of DRM may come this year, as three of the Big Four labels are already in the process of abandoning it.? There are rumors of deals in the works between major labels and ISPs (internet service providers) to offer unlimited downloads or more bandwidth, and we can expect to see multiple collectible versions of albums released.

As the shift in music sales hits overdrive into the digital realm, 2008 is shaping up to be the year the major labels begin to adapt to environment.? The big question left is: how will artists break into the big time?

Bottom Line:? The Big Four are finally entering the digital revolution.

The RIAA wants to expand copyright law, with the apparent intention of having more technicalities to prosecute.? The new law on the table is for album compilations.? Specifically, having each track count as separate count of infringement.

Goggle’s top copyright lawyer was quoted saying the parties pushing this bill have an “unslakable lust for more and more rights, longer terms of protection, draconian criminal provisions, and civil damages that bear no resemblance to the damages suffered”.

Bottom Line: Fining someone upward of $9,000 for a track with a value of a dollar may not be fair, but lawmakers still seem to align themselves with this kind of enforcement.