Charvolant

Or: If you play nice, I’ll play nice

Coolfer.com has a post about an article that talks about ethics. A group did a study and found that people will pay more for ethically produced goods. Nothing too surprising there. Then, since Coolfer is a music blog, it’s author Glenn asked how this might relate to music. Here’s my two cents, as I posted in a comment there:

Being ethical when it comes to music has nothing to do with using green packaging and sustainable energy during recording. It’s all about where the money goes. By default, most people would probably consider an indie label to be “more ethical” than a major, and a band with no label who does everything themselves to be even more ethical.

In order for music to truly become ethical in this sense, you need to change the band to label relationship. The labels need to work for the bands, not the other way around as it is now. Once you change that, the ethicalness (is that a word?) will go through the roof.

In response, a few people seemed concerned that you would never be able to turn some people around towards ethical behavior when it comes to music. Skipping over the fact that good ethics are relative and vary greatly from person to person, they have a good point which may be true in a lot of cases. But if the band to label relationship improved (and it showed), a lot of people would become more ethical than they seem to be now.

It’s like a game. The way the internet is structured has determined the rules and the labels are like a bully who demands that the rules be changed whenever he starts losing the game. Nobody wants to play with the bully. If the labels start playing fairly, treating fans (and bands) with respect and then give them enough time to build some trust, a lot of fans would get back in the game and play fairly too.

This is a copy of my original Germaniac.com blog post from April 26, 2008

At a music industry conference he recently spoke at, Derek Sivers, founder of CD Baby, was recently asked how to stop music piracy. Here is what he said:

“More people are killed by pigs than sharks each year, but because shark attacks are more newsworthy, they seem more prevalent. Piracy gets all the attention, but … obscurity is your real enemy. Fight obscurity until you’re a household name, then piracy will be more of a problem than obscurity. Until then, worry about pigs, not sharks.”

The audience, full of record label execs, really didn’t like this answer. That’s too bad, because they are forgetting one very important detail: They are the ones with the problem! While on the other hand, CD Baby is doing better than ever. In fact, their physical CD sales are up 30% over last year, while CD sales in the industry as a whole are going down significantly. So, if you were one of these troubled execs in the audience, would you be paying attention to Derek’s lesson or would you be shouting “I hate your point of view, buddy!” like one woman did? Wow.

Derek concludes, “Putting so much attention and energy into fighting piracy (as if, when solved, you’ll suddenly start selling 10 times more) - is misguided effort, distracting you from what you really need to be improving.” That sounds just like what I told Stefan Herwig, but he didn’t get it either.

I remember agreeing with Stefan Herwig in an email a few weeks ago that record labels provide an important and valuable service to musicians. And they do, but I want to point out that this still doesn’t mean bands need record labels. Bands just need the services the labels provide for them. It’s important to make this distinction because these services can be done by anyone, it doesn’t have to be a record label. And there are more businesses and people who can provide these services now than ever before. So the challenge for record labels is really that they are going to have to change their practices enough so that they become more attractive to musicians than anyone else who can provide the same services with greater satisfaction for the band. Sure, I’ll agree that the record label as a concept isn’t dead, but it does have stiff competition for the first time in its life and needs to adapt to the changes.

The music industry’s problems are bad relationships. Well, at least the ones involving the structure of the industry. This is a re-post of something I wrote a few weeks ago on my Germaniac.com blog, but I thought it would be valuable here as well. Here is a link to the original post and lots of comments.

Currently, just about every record label in the world, including those that have emerged in recent years with alternative revenue models, still operates in essentially the same way. First, they form a contract with a musician in which the label becomes the legal owner of the rights to the music their signed musician produces. This establishes an asset for the record labels. And then later on, they use this asset to generate income either by selling the music to fans, or in some very recent examples, by creating corporate sponsorships for the music. Essentially, record labels use their rights to the music to directly drive revenues.

These are the two key aspects which are causing the record industry as we know it to crumble. When you zoom out to take a look at the bigger picture, you notice that the music industry is made up of three entities. They are the record labels, the musicians, and the music fans. Each one is linked with the other two, forming a hypothetical triangle of relationships. The strength of these relationships is critical for the health of the music industry. However, two of these three relationships are falling apart before our eyes.

There is hardly a day that passes that you don’t read about a musician or band that is protesting their relationship with a record label. At many record labels, musicians have almost no choice in deciding how they want their music to be distributed and sold. Oftentimes, labels go so far as to tell musicians how their own music should sound for optimal sales. And let’s not forget that they don’t even own the rights to the music they spend months and sometimes years producing. This unrest among musicians seems to be growing as more of them speak out, too. Under contract, thousands of musicians are held at the mercy of a giant, lumbering record label with an outdated ideology, unable to change as fast as their musicians know they need to. And for those lucky enough to find a loophole or who happen to be at the end of a major label contract, they often vow never to return to such an out-of-touch organization. Clearly, the relationship between record labels and musicians is weak, at best.

Music fans are also at odds with most record labels, due to the changing environment that music is surrounded by. The biggest argument by far is that of digital file sharing. Millions, probably billions, of MP3 files have been traded online for nearly a decade now, creating the impression among the majority of consumers that music has little monetary value. Naturally, this is bad news for record labels because it means that their assets, the copyrights to all that music, are being stolen on a large scale and are being perceived as being less valuable than they ever were before. In response, the Recording Industry Association of America (RIAA) with the support of the “big four” major labels, has filed countless lawsuits against file sharers. They have glorified their victories in court and threatened similar treatment to anyone who attempts to share digital music files illegally, acts that have essentially been interpreted as a declaration of war against music listeners. The relationship between record labels and music fans is definitely broken.

The only relationship that is still strong is the one between musicians and their fans.

Now that we have a better understanding of the bigger picture and what is really causing the problems the music industry is experiencing, it becomes painfully obvious that simply introducing a new revenue model like sponsoring musicians or expanding existing contracts to include new features like concerts is not going to solve anything. The solutions that have been proposed so far equate to taking a pain killer to treat a flesh-eating virus. These critical relationships need to be nurtured back to life, but that is clearly not going to happen with current thinking. What really needs to be done is a complete overhaul of how the three entities that make up the music industry interact with each other. Roles need to be changed. New terms need to be established. Relationships need to be redefined.

Nobody seems to have been able to put these relationships back together in a meaningful way because nobody has looked at the issue from this angle based on relationships. And now that we have found the real problem through this process, it is natural to use the same manner to resolve it.

Relationships of any kind are fundamentally built on trust and respect, and there are specific elements missing from each side of the relationship. The first problem is that most record labels don’t respect musicians. They craft contracts in such a way as to maximize their own profits while passing the risk on to the musicians, not to mention that they keep the legal rights to the musician’s own work. Record labels do, however, usually trust musicians because they know that they are eager to get their music out to fans in a big way. This results in the second problem. Musicians don’t trust record labels because of all the focus on units sold and profits rather than the music itself, but respect isn’t as much the issue here. Most musicians do respect record labels, or at least acknowledge that they are helpful in providing services and performing tasks that they otherwise would have lots of trouble doing themselves. Understanding this, we can restore the record label’s respect for the musician and bring back the musician’s trust for the label. All we have to do is ask what each other wants, because the other key ingredient in building relationships is value. Value never really went away, and it is probably the only reason the industry hasn’t collapsed entirely.

Musicians just want to make music. They want to be treated fairly, and they want their fans to be treated fairly, by record labels. A little help spreading their music and making it a worthwhile endeavor is all they generally ask for. On the other hand, a record label’s desire from the musician is to have enough talent and gain enough fans to sustain a solid revenue stream. After all, a label is a company and exists to make money. And that is fine, except they forgot that they make money by providing valuable services to musicians, not by ruling their career. Both record labels and musicians do want to work together to some degree because they know they can both benefit from it. But for many musicians, the benefit is beginning to outweigh the costs. When you start to think about it, much of what a record label does is actually not helping to improve sales. Owning the rights to a band’s music does not help sell it. Neither does “owning” a band in an extensive multi-year contract. So let’s get rid of all those outdated ideas. The real assets that a record label has, and the ones they should be focusing on, are their skills they possess in getting things done. They are the people in the business, they have the connections, and this is what they should be charging for. Yes, charging for.

Now that we have determined that musicians should be keeping the rights to their own music, they control their own legal assets and can use them to profit however they wish. In order to do this, the musician can then freely go to a record label and pay them for some services like selling merchandise or distribution or artist development. This gives the musician much more freedom to do whatever they want. They essentially become musical entrepreneurs and the record labels become their providers and support. Perhaps, since the lack of money is often a big issue for musicians before releasing an album, record labels will also be able to provide specialized loans to musicians so they can get themselves up and running.

This is a complete shift from what we currently know of as the music industry, but it is a hell of a lot better than what exists today. Do you agree? Could it work? Let me know.

I will be posting my ideas about resolving the label-fan relationship sometime in the future.

Anyone who has taken a basic economics class knows that the value, or the price, of anything is directly derived from how scarce it is. Things that are abundant are cheap, while anything that is hard to find or make is going to be much more expensive. Now when you relate this knowledge to the music industry, things start to make sense. Digital music formats cost next to nothing to make, store, reproduce, or distribute, so there are many more copies of any particular song or album than there ever were of CDs. And because there are so many digital music files like MP3s floating around peoples’ computers and on the web, the economic value per file is very close to zero.

You could make the argument that, while there are so many copies of music available online (in other words, the supply has increased), the demand has increased as well. Because it’s now so easy to find music online, it makes sense that demand has risen. But the rise in demand is actually quite small compared to the increase in supply, because it costs nothing to make another copy of a digital file. The supply is essentially infinite, but there are only so many people who would ever be interested in certain music, no matter how popular it may be. You also have to consider that the demand per artist within a person’s own music collection has decreased. Most people today play much more music than they did decades ago, but there is still only a given period of time when someone can listen to music. Each artist gets less total play time per person, in general, so again the value has decreased. Any way you look at it, increasing supply far outpaces the increase of demand, resulting in music files with no real economic value.

Consider the monetary value of someone’s music collection. A decade or two ago, a music fan might have a 320-disc CD wallet filled with their favorite albums. At an average of 12 songs per album, they would have access to 3,840 songs in their collection. And for $16 per CD, it would have cost them $5,120 to purchase them all. We can also calculate that each song had a value of about $1.33. Now, if you assume that the total value someone is willing to pay for their music collection has remained the same since then, and you divided that into the 20,000 songs you can store on an 80 GB iPod, the value of each song drops to about 25 cents. Keeping our average of 12 songs per album, each album is now worth $3. But in reality, the average person is no longer willing to pay $5,120 for their music collection because the economic value of music has gone down because digital formats eliminate scarcity and create ubiquity. So if that same person now goes and buys an iPod classic for $249 knowing that they can fill it to the brim for free, the cost of the iPod has become the new value of their collection. That means that in today’s economy, a song is worth little more than a penny, and an entire album is worth about 15 cents.

We have established that the economic or monetary value of something goes to zero when the (potential) quantity goes to infinity. Therefore, with digital music, the fixed, base value is zero. However, there is another kind of value that we need to consider (some smart people already are) which can be added to the base value. It is the personal, emotional value, like what something means to someone or how much they love something. And while this value can’t be measured in economic terms of dollars and cents, it can be “converted” into a monetary value.

People are certainly willing to pay for economically-worthless material, we see it happening all the time (like whenever someone pays a thousand dollars on Ebay for some piece of garbage just because John Lennon wiped his ass with it or something). The problem we face is that, like different countries’ currencies, the exchange rates of these values from personal to economic differ from person to person. They have no fixed value, and can even change dramatically over time. And because it is impossible to measure such an exchange rate before every purchase, the very best way that we have of tapping into the converted value is to allow people to pay whatever they want for a music download.

Now musicians and labels know what they need to do with digital music downloads, all that remains is to trust people enough to let them hold up their end of the deal. It’s not going to be easy, especially at first, to let some people pay just a few cents or a dollar for an entire album, but you will have to accept that the reason they chose to pay so little is because that’s all it was worth to them. If someone’s emotional values towards a song are “converted” into just a few cents, who are you to argue? It’s just not possible to know exactly what music is worth to any particular person.

Along similar lines, we must also realize that there is essentially no emotional value in a song before it is purchased, or at least heard, with the exception of a few hardcore fans of a band who have at least a few dollars of expected value for the musician to begin with. You need to allow enough time for the emotional value to grow. What bands and labels need to do is to collect permission from their free digital music downloads and then send out an newsletter or an individual email to people a few days or a few weeks later. By this time, people will have listened to the music enough times to let it absorb a bit and form an opinion of it. Ask them if they liked the music and then suggest a donation ala pay-what-you-want style if they haven’t made one already. That would be the opportune time to let them make a donation, not right at the beginning when they are presented with an MP3 file that has no value to them yet.

I remember back in the early summer when I was interviewed for a job at the now defunct digital music company BurnLounge, they laughed at me when I responded to a question that donation-based MP3s are the future of music online. Then I learned that they were under investigation by the FTC and I laughed back. Since then, bands like Radiohead and musicians like Trent Reznor and Saul Williams have been brave enough to take the first steps in opening up this idea to the mainstream, and I applaud their efforts. Digital music must be free (well, you could charge 15 cents per album if you really wanted to), and individuals must be trusted to convert their emotional values into a monetary value and donate what they feel is appropriate for them. If you treat them right, they will treat you right.

What do you think? Come on and voice your opinion now!