April 23, 2003

The Jackboot Paradox and the Fall of the Music Industry

Wynn Quon

What's the difference between a music industry executive and a death-row inmate? The inmate has better prospects. CD sales have plummeted over the past few years. The new chief of Sony Music recently predicted sales would drop 15% this year alone. The villain according to the music industry is rampant file-sharing over the Internet. While they scramble to figure out how to save their necks, there's no shortage of shouted advice for the hapless industry. Most of this boils down to: Go digital or die. What's needed say some pundits is a whole new paradigm of making and selling music centered around the Internet. Unfortunately this advice is dead wrong. What the music industry needs is a good old-fashioned dose of business sense. The industry's biggest problem isn't piracy. It's two things: First, consumers no longer believe they're getting fair value when they pay $20 or more for a CD. Compare a music CD to a DVD. Both sell for roughly the same price, but a DVD has a 2 hour movie plus background notes, commentaries and other bonus materials. You're lucky if you get more than 40 minutes of music on a CD. Secondly, the music industry is suffering from an enormous self-inflicted public relations disaster. And all because of its misguided attempts to stamp out file-sharing.

The public relations quagmire illustrates an axiom for digital goods which we can call the Jackboot Paradox. The fiasco started with Napster. When Napster invented file-sharing it was one of the most innovative technologies of the Internet. But instead of adopting it, the Recording Industry Association of America (RIAA) launched a lawsuit and killed the company. That didn't stop piracy. Instead an even more powerful file-sharing program came along: Morpheus. In less than 12 months, Morpheus had more users than Napster ever did. Morpheus was named after the cyber-hero in the movie The Matrix who battles an evil, inhuman empire. The name should have been a hint to music industry executives. They missed it. Record companies introduced a series of ill-advised countermeasures: new CDs that weren't playable on PCs, demands for more royalties on blank CDRs, demands for the power to hack into users' computers to root out music pirating, more lawsuits against file-sharing portals. In the meantime pirating has exploded. At its peak, Napster's file servers were busily servicing a million file-swappers at any given moment in the day. Today, only three years after Napster's demise, the leading file-swapping program is Kazaa. It attracts upwards of four million simultaneous users. Here is the Jackboot Paradox: Authoritarian acts against piracy results in more piracy. The more stomping the record industry does, the more users feel justified in downloading, ripping and burning. The solution isn't more countermeasures, the solution is to go to the root of problem: restore the value that consumers want in the music that they buy.

The industry hasn't been oblivious to its public relations quagmire. Recording industry associations have fallen over themselves launching ad campaigns telling us that piracy wrong. Is it any surprise these aren't working? One unfortunate campaign tried to equate piracy with drunken driving. (Puh-leeze!). And how do you square the industry's law-and-order message with the embarrassing fact that in 2000 the Federal Trade Commission in the U.S. charged the five major record companies with price-fixing? (The cost to consumers of this abuse of monopolistic power? US$480 million over three years). A fundamental business truth is that once a public relations problem gets so big that it threatens your bottom line, words are no longer enough. Only actions will do.

Here are some ideas that would help bring consumers back to the record stores:

1. Cut the price of CDs. Finding and downloading music from the Net still involves hassle. If the price of CDs were lower, more people would be willing to save their time by buying instead of pirating. Not convinced this is a viable strategy? Check out Naxos. It sells a line of well-regarded classical musical CDs for less than $10. And it's profitable.

2. Provide more content. If someone's going to sell me a $20 CD, I think I would like not only the songs but also the artist's verbal commentary on the music, the lyrics and the sheet music. (Another message to the music industry: there is huge pent-up demand for making music rather than just listening to it, make it easier for us and we'll pay you). Again, fill the CD with enough content so that it's a bargain compared to the time and effort you would need to scrounge it from the Net.

3. Make the CD something worth collecting. Back in the days of vinyl, having a good album was more than just having a bunch of songs on a disc. You had liner notes and lyrics (printed in a size that's easily legible) and cover art that was really art. (The Andy Warhol cover art for one of the Velvet Underground's albums became an icon of the 60s, can anyone point to a CD cover that's as famous?) Despite our love for digital everything, deep down we still want to buy attractive objects and that's one thing you can't download over the Internet. Some vinyl albums have become valuable collector items, you can't say the same thing about CDs. CDs are designed and packaged for the convenience of the music industry not the consumer. There's no better symbol of record company lethargy than the super-fragile CD jewel case, something which has been around for decades but is surely one of the worst consumer packaging designs ever conceived.

4. Stick to your knitting but do it better. In all the handwringing it's easy to forget that creating and selling great music is what it's all about. Unfortunately, the music industry as a whole is horribly inefficient. Less than 10% of CD titles released by the major record companies pay their own way. It's a sad commentary on the industry's complacency that this statistic has been used to justify high CD prices rather than as a problem that needs fixing -- and quickly.

None of these ideas have anything to do with "going digital". Forget going digital, go analog. Focussing on the analog - packaging, collectibility, efficiency and pricing takes the music industry out of the digital file-swapping minefield. It's too late in the game for the industry to compete head-to-head against the file-sharing services. The industry's latest answer to the file-sharers, pressplay and MusicNet will be colossal flops.

Why's that? First, file-sharing services like Kazaa, iMesh, and Grokster provide a wildly greater selection of music for free. Pressplay charges US$18/month for limited downloading on a narrower choice of music. Second, it's not just about music. Kazaa and its brethren also gives its users access to video, software and image files. Unless the music industry wants to get into the distribution of Pamela Anderson's home movies, it'll have a hard time dislodging Kazaa from the user desktop. Finally, the music industry's Net initiatives are doomed for the same reason why a new word-processing program would never beat Microsoft Word. There's a gigantic installed base. More than 175 million copies of Kazaa have been downloaded. Something like MusicNet may have had a chance in the early days of Napster but not now. Going back to business sense again: If you want to go head-to-head against a heavily entrenched incumbent, anything short of a resoundingly superior product means failure. The Net will play an important part in the future of selling music but pressplay and their ilk isn't it.

What are the chances that the music industry will pull itself out of its free fall? Imminent death focuses the attention admirably so there's reason for optimism. Whether change comes from within the industry or whether an imaginative outsider will light the way, changes are inevitable. Those who insist on the jackboot will fall by the wayside. Those who realize that it's all about bringing value back into an industry that's lost it, will prevail.

Wynn Quon is Chief Technology Analyst at Legado Associates. He can be reached at wynn_quon@hotmail.com--(website: www.legadoassociates.com)