Brad DeLong's Semi-Daily Journal: A Weblog

The weird thing, the really weird thing, is that people were screaming this basic ides at the top of their lungs five years ago. Literally years before the dawn of iTunes. If Sony, or BMG, or whoever had jumped onboard then, how much money would they have made?

There is cash being left on the table here. Why?

Perhaps I haven’t read carefully enough, but isn’t digital music on demand already available? I’ve been buying individual songs and whole albums from Itunes to play on my computer and on my Ipod. Eventually artists will simply bypass the established music industry and sell directly to the consumer. For that matter why do we need the book publishing industry anymore? One of my friends is finishing his book on signal processing, and he says the publisher wants him to do everything—hand them virtually camera-ready copy. No editing and minimal peer review. So what is their value added? Just the other day I downloaded a whole and very good book: “Information Theory, Inference and Learning Algorithms.” Interestingly Oxford sells the same thing for about $90.

Way back when I had a roommate that had satellite TV, when he was out of the house I put on a music channel. Left it on all day. Never got tired of it. No talking, just music.

I'd pay somewhat for that. Where can I sign up? Oh, wait...

D

You're kidding right? This is a joke or something to blow off a little steam?

I can fully understand the ignorance most have as to the capabilities, resources and cost effective determinations involved in running a record label/distribution, but the fact Mr. Cuban and you never considered illegal downloading in your equation, makes you look like whiny, spoiled rich brats!

I got laid off last year after 16+ years with the Warner Music Group, and yes, illegal downloading is the blame. Believe me, there is no love lost for the record industry here, I'm not trying to defend them, but I do wanna give some perspective.

People who say '...you're afraid it will cut into your CD sales, it won't cut into your CD sales...or should I say, it won't help your CD sales more or less...', are full of s**t and don't know what they are talking about.

You might be a music lover with tons of CDs', but the majority of consumers ain't like you. All the talk about making individual songs available on the web for sale will spark CD sales, is a bunch of mule fritters. Music is an item consumers want to spend the least amount of their disposable income on.

All of this might have already happened if the music downloading services already available had succeeded - they didn't.

The CD boom is over and the labels are no longer flush with cash to experiment with ways to make more cash. They know the cost/risk equation of web service start-ups, and so far, it likes investing in Sinclair Broadcasting stock.

The domestic labels have been downsized K-Mart style, and the 'good old (white) boys' are running the show. They have no vision, no guts, no ideas and no patience. You're gonna see fewer Becks' and more Ashley Simpsons'.

Besides, if Mr. Cuban knows what's best for the music industry, why don't he buy a record label and prove it?

http://ThatColoredFellasweblog.com

Can anyone tell me why recorded movies have gone down in price over the years but music albums/CDs haven't? The very first movies on VHS tape cost sixty bucks. Now you can get a new release for as low as $15, and some pretty decent movies on sale at Wal-Mart for $10. I got The Day The Earth Stood Still for the latter price. Record albums sold for about five bucks in the mid-70s and have steadily gone up in price ever since, even when the format switched from vinyl to CD. Why a price learning curve in one industry and not the other?

(Legal) music downloading reaches a market that was abandoned with the advent of CDs: those of us who want only a handful of hits from a particular album and not the whole thing. Most albums/CDs have more filler than hot dog franks. Why pay for ten songs when you only want to listen to three?

We once had 45 rpm "singles" (one song recorded on each side, for Gen Yers and the younger Gen Xers out there). Is a two-song CD more expensive to manufacture than a two-song 45 record? Downloading makes that a bit of a moot point, but I'm still curious.

>> It won’t cut into your CD sales, or should I say, it won’t help your CD sales any more or less than existing peer to peer networks

'Course it would. "Existing peer to peer networks" are a minority-of-a-minority product. Trying to chuck something similar onto AOL would migrate the mass market onto this kind of product.

I have no real intuition about whether this bloke's other points make sense, but my experience in the past has been that people who make definitive, unequivocal statements about complicated matters where they have no hard data at all, rarely have anything useful to add.

> I got laid off last year after 16+ years with
> the Warner Music Group, and yes, illegal
> downloading is the blame. Believe me, there is
> no love lost for the record industry here, I'm
> not trying to defend them, but I do wanna give
> some perspective.People who say '...you're
> afraid it will cut into your CD sales,
> it won't cut into your CD sales...
> or should I say, it
> won't help your CD sales more or less...', are
> full of s**t and don't know what they are
> talking about.

The problem is that no one outside the music industry believes anything that anyone inside the industry says about sales or profitability. Since Edison invented the phonograph, every single time a light has been shone into the corners of the recording industry heaps of cockroaches that would make Halliburton sick have been discovered. Take the country music industry for example: I don't see it as being much different from a slave market.

So the industry isn't going to get much sympathy from we "seats" (or whatever derogatory term is in use today).

Cranky

"Can anyone tell me why recorded movies have gone down in price over the years but music albums/CDs haven't?"

Great point. Can anyone tell me why the same album sells for ahalf in England?

Always left out of the equation are:

1. Most people have replaced their favorite LPs with CDs.
2. Groups today suck, as evidenced by the fact that the Rolling Stones/Genisis still sell out why Brittny Spears cancels concerts.
3. Copy protections schemens that can damage my computer also make people quit buying CDs.

The industry agreed that with advertising co-ops they were in fact controlling prices. Is a CD any cheaper today than before that settlement? No.

The trouble is at Music Industry school they still teach the Michael Jackson Thriller album case study not the Kevin "Bloody" Wilson or the Ani Di Franco case study.

Having said that, living as Brad does in one of the entreprenerial hot spots of the world, the question should be not how should the music industry exploit this, but how should Brad exploit this?

(Google Kevin "Bloody" Wilson and discover the wonders of the english language.)

Someone who had worked for 16 years in the recording industry wrote:

"You're gonna see fewer Becks' and more Ashley Simpsons'."

And how, exactly, is that going to improve sales? Archaeologists are going to dig up Ashlee Simpson landfill 5,000 years from now.

I think the idea of specialized music channels sounds good. MTV is still around, isn't it?

-A.R.Yngve
http://yngve.bravehost.com

Someone who had worked for 16 years in the recording industry wrote:

"You're gonna see fewer Becks' and more Ashley Simpsons'."

And how, exactly, is that going to improve sales? Archaeologists are going to dig up Ashlee Simpson landfill 5,000 years from now.

I think the idea of specialized music channels sounds good. MTV is still around, isn't it?

-A.R.Yngve
http://yngve.bravehost.com

Someone who had worked for 16 years in the recording industry wrote:

"You're gonna see fewer Becks' and more Ashley Simpsons'."

And how, exactly, is that going to improve sales? Archaeologists are going to dig up Ashlee Simpson landfill 5,000 years from now.

I think the idea of specialized music channels sounds good. MTV is still around, isn't it?

-A.R.Yngve
http://yngve.bravehost.com

Doesn't the music industry depend on jackpots? In book publishing the profits depend on the occasional best-seller, they put out a lot of books that break even or better but the money is in the jackpot.

If a music company puts out two hundred items a year and three of them are real popular for about 2 weeks each, those three will be a big fraction of their sales.

It seems to me they wouldn't want to include those 3 items in their dollar-a-month category. They wouldn't want to do anything that might threaten their jackpots.

The old songs that they'd be willing to make available online for a monthly fee are things that are very little value to them. Things that are molding away in people's record collections, on vinyl and cassettes and buried deep in the stack of CDs, things people have forgotten how much they used to like. It's no harm if they hear those on the radio and remember old times. And nothing anybody can do if they dig through their old CDs and listen. But if they had the whole collection of ex-bestsellers available, would they be so eager to buy the next bestseller?

Even if the revenue stream was larger, losing the jackpots would kill the industry. Everybody involved has their role defined by the gamble. Get rid of the risky business and what does the industry need *them* for?

Selling music-by-the-month to the music industry is like selling pilotless planes to the airforce. It may be something they'll have to do eventually, but they'll fight it. When every pilot is an officer and those are the officers who count, it's a tough sell.

iTunes is nice and all, and I've spent plenty of dough (averaging 20-25 songs a month for the last four months) there since I got my iPod. In fact, for Xmas, I'm asking for iTunes gift cards.

The problem is that the available selections are pretty limited. I'd easily be spending twice that if iTunes had a better inventory.

On the other hand, if I can't get a song from iTunes, I almost never will buy the corresponding CD. But if Warner, Capitol, whoever had a service like iTunes, I'd definitely be buying single songs from them. And a lot of them.

iTunes is nice and all, and I've spent plenty of dough (averaging 20-25 songs a month for the last four months) there since I got my iPod. In fact, for Xmas, I'm asking for iTunes gift cards.

The problem is that the available selections are pretty limited. I'd easily be spending twice that if iTunes had a better inventory.

On the other hand, if I can't get a song from iTunes, I almost never will buy the corresponding CD. But if Warner, Capitol, whoever had a service like iTunes, I'd definitely be buying single songs from them. And a lot of them.

The only real solution to this problem is to dissolve the current industry model that centers on the record label. They've slowly locked up the main distribution channel and own typically half of the rights to their catalogs. They've enjoyed economies of scale is physical distribution of music for decades now. If distribution goes digital, the labels lose that critical advantage and as a result have to scramble to fight a war on two fronts - one to build new barriers to entry and also defend their existing business.

A service like iTunes has suceeded in entering the market as a non-threatening enitity to the existing labels, but is quietly gaining a lock on a new distribution chain. P2P has not so quietly created another distribution chain, however this chain is a completely unregulated market with no move towards a greater value. At zero cost the competition to move to a higher quality, differentiated product is not evolving and will probably continue to be reborn again and again. This represents multiple reinvestments of time in finding new channels and getting efficient at moving the music around. Over time demand for a higher quality and thus higher cost product should evolve.

So what?
Music is just another form of IP. The cost of developing this IP in digital formats is less that for physical distribution and the variable costs of distribution is almost zero. At some point artists will begin to capture more value upfront and assume a more active role is deciding how to reach their audience at a cost they can bear. So just as much as a consumer has a choice, the artist will as well. Whatever digital distribution service allows artists to reach their fans in the way they want will succeed.

DRM is another question entirely. Will anyone feel comfortable with buying digital media and then having to get permission to use it. Can that ever become viable? Will anyone feel comfortable buying in a model that is more like a lifetime rental? And is that really worth the same amount as a song delivered via physical CD that can be resold, copied, and lent out?

My crytal ball prediction is a Music-on-Demand model once broadband wireless becomes cheap and widespread (WiMAX). And this service will be many tiered like cable. Low quality, basic selection at Cuban's $1 month through your broadband provider. Additional tiers for higher quality, broad selection in blocks of minutes listened. Heavy usage costs ~$20 month, well within the range of a teenager and useful for anyone in the family at home, at work, on the road.

And please, can we get away for grouping by genre. That's half the reason why music is so bad today.

The only real solution to this problem is to dissolve the current industry model that centers on the record label. They've slowly locked up the main distribution channel and own typically half of the rights to their catalogs. They've enjoyed economies of scale is physical distribution of music for decades now. If distribution goes digital, the labels lose that critical advantage and as a result have to scramble to fight a war on two fronts - one to build new barriers to entry and also defend their existing business.

A service like iTunes has suceeded in entering the market as a non-threatening enitity to the existing labels, but is quietly gaining a lock on a new distribution chain. P2P has not so quietly created another distribution chain, however this chain is a completely unregulated market with no move towards a greater value. At zero cost the competition to move to a higher quality, differentiated product is not evolving and will probably continue to be reborn again and again. This represents multiple reinvestments of time in finding new channels and getting efficient at moving the music around. Over time demand for a higher quality and thus higher cost product should evolve.

So what?
Music is just another form of IP. The cost of developing this IP in digital formats is less that for physical distribution and the variable costs of distribution is almost zero. At some point artists will begin to capture more value upfront and assume a more active role is deciding how to reach their audience at a cost they can bear. So just as much as a consumer has a choice, the artist will as well. Whatever digital distribution service allows artists to reach their fans in the way they want will succeed.

DRM is another question entirely. Will anyone feel comfortable with buying digital media and then having to get permission to use it. Can that ever become viable? Will anyone feel comfortable buying in a model that is more like a lifetime rental? And is that really worth the same amount as a song delivered via physical CD that can be resold, copied, and lent out?

My crytal ball prediction is a Music-on-Demand model once broadband wireless becomes cheap and widespread (WiMAX). And this service will be many tiered like cable. Low quality, basic selection at Cuban's $1 month through your broadband provider. Additional tiers for higher quality, broad selection in blocks of minutes listened. Heavy usage costs ~$20 month, well within the range of a teenager and useful for anyone in the family at home, at work, on the road.

And please, can we get away for grouping by genre. That's half the reason why music is so bad today.

It's interesting that it;s the music industry that's having problems. Who listens to that garbage? Why should any rational being on the planet care one way or another? It would be a good thing if there were no music industry. Very good, the best. I'm all for it.

Seconding David above, I think the problem for the music industry is more on the supply side. Any new solution they find, can be adopted by others, WITHOUT them. And why will new bands sign up, when they can finally cut out the middleman? A middleman of enormous greed and callousness, by the way, who makes bands sign non-disclosure agreements so they can't complain about the ruinous contracts. This new medium solves (1) studio production, (2) distribution and (3) advertising. If you're good, you're not going to need the "music industry." Do listeners care which corporation puts its imprimatur on a new album?

Much the same argument is becoming true of motion pictures and television. For fifteen years I have heard entertainment people down here in Los Angeles say there will ALWAYS have to be a "filter," for "quality" (hah!)--and in this same period the entertainment industry has been finally, completely taken over by twenty-or-thirtysomething beancounters, who are making creative decisions that are worse than ever. (Which, for movies and TV, is a lot.) And everybody says so. The real creative types are bailing-out as soon as they can. Yes, there are still a large hurdles to finance star movie vehicles, and finance the large production teams that are necessary to feed the network schedules. But the new technologies keep making storytelling cheaper. So we are going to start seeing local niche stars in local niche markets, owning their whole show...

A. Zarkov: Publishing through a publisher adds credibility and citeability, as it is certainly a more formal process than putting it up on the web. And who will print a 400-pager? If I want to check out a book before making a purchase, or want to put it only to minor use as an occasional reference, I can live with PDF, or whichever format. (I have a small collection of scientific texts in PDF that I use in this mode.) If I want to put it to real use, only the hardcopy will fit the bill. Imagine a class of 30 students hitting the laser printers after the prof has given them the textbook list. And hardcopy will also easily survive the ages, both physically and in the catalogs, and make you book accessible to libraries, through which much of the scientific community will presumably use it.

I have been under the impression that the recording industries (music & movies) are putting forward "proof" of piracy by comparing (supposedly) actual revenue and units-soid numbers to their double-digit-growth based business projections (AKA wish list) and explaining the gap with piracy.

I don't know how this could leave them with any claim to credibility.

The myth of the superstar is dying, and the music industry that feeds on it can't stomach the alternative.

The music industry is finished. People can, do, and will make music without them. See www.songfight.com to see the future.

What the subscription model overlooks is that people would rather own a song rather then rent it.
To claim that it would be better to pay an ongoing rate evry month forever rather then to pay a single up front fee and own the music ignores past experience of not only these models but other experiences in marketing as well.
How does the subscription model work for those that go overseas or work in locations where band width is shared and not readily available for music down loads?
I think comparing a rental of a theorical 10,000 songs, most of which any single listener will not want, or owning ones music is cleverly worded but not a winner in the marketplace.

>And why will new bands sign up, when they can finally cut out the middleman?

Because record companies aren't "middlemen". They pay advances, which cover the costs of writing and recording the album. They pay these up front and don't get them back if the album is a stiff. They are, therefore, much more like early stage VC investors in a band than middlemen.

I'd take a lot of these rants about the music industry more seriously if the authors ever took time out for a word about the true parasites of the music industry; the surprisingly high number of bands who sign a deal, take a big advance, then spend it all on drugs and never come up with the goods.

Daniel, if the record company can't arrange for suitably inspirational drugs for their talent, then what do they expect?

Sheesh.

The workman is only as good as his tools.

dsquared: Find me =one= VC that funded a bunch of drug-users who couldn't deliver the goods. If the industry isn't doing Due Diligence, I fail to see why that should be MY problem. (They are more likely to get in trouble, btw, with a fluke band that hits--think Iron Butterfly--than with the recording equivalent of the midlist.)

Let's be straight: Mark Cuban doesn't buy a record company for the same reason Warren Buffett doesn't buy an airline; there isn't a revenue model that makes any sense there. And when the founder of broadcast.com talks about the revenue potential of internet channels, I tend to give him some credence.

True, as you and thatcoloredfella point out, Prof. De Long is likely incorrect in saying that CD sales won't decline. But the OVERALL REVENUE from subscription online distribution and ad sales would be significantly greater. And distribution COSTS will go DOWN (no need to burn as many landfill CDs, thank you; we'll burn our own, and know that if the CD develops a skip--as so many of the record industry's products do, with little recourse--we can blow a quarter on burning another CD. (All right, the quarter is the retail cost of the CD; doesn't include the burning time, electricity, etc. But I'm willing to argue those as sunk costs.)

And it would be teaching a pig to sing to point out to thatcoloredfella that the decline in CD sales fairly well corresponds with the death of Napster, which was the Listening Booth of the late 1990s (unless you're arguing that 128Kbps is "high fidelity" of some sort). Besides, Cuban did that years ago--around the same time Ben Affleck proposed (casually, in the midst of an interview about other things) that the labels should sell downloads from their stock at a fixed annual rate ($200, I believe).

The question is only what the price point would be. As several people above noted, the problem with the record company business model is that it depends on owning rights, NOT selling recordings. (It wasn't until Sony bought Columbia and applied the business practices it had success with in Japan here that the rest of the American industry suddenly discovered the value of its back catalog.)

I'm happy that they own Jeri Southern or Kitty Kallen or all those bands sent up by Bowling for Soup's "1985." But I would be happier if those recordings were available to buy, and if you didn't have to spend $15 for "The Essential REO Speedwagon" just to get the one of two tracks that remain (barely) listenable.

Yes, it may mean the album in general goes the way of reel-to-reel, 8 tracks, LPs of whatever RPM, singles, and those abominations called cassette tapes (high fidelity recording on tape unfit to record a lecture). But pretending that the commercial CD should be the core of your revenue base and focus of your efforts in the face of declining sales and new markets isn't just foolish--it's a bad business practice, and one that leads to downsizing thatcoloredfella, instead of having him negotiating with Comcast to do tie-ins with their multidozen digital music cable channels or something else that will find ("create") value.

Copyright only makes sense when the channels of ditribution are a monopoly, or monopolized by a small group of large players. In this type of market the copyright guarantees a non-zero vig from the final sale to the consumer.

There are two essential music markets currently, one for the physical distribution (places that sell physical copies of music), and one for advertisers (places that play music for free to get you to buy the music, or pay in some way for performances of the music.) Both of these markets pre-assume a one way consumption model. The consumer buys, in either market one of the set of choices put on the table by the market makers. Buying in the "advertising market" is the equivalent of listening to songs on the radio, watching an MTV Video, etc.

What is really at stake here are the market makers positions, in deciding who gets to be produced, and who gets to be heard. Since no existing producer or radio station conglomerate can have a monopoly of the same kind, ever, in the Internet space without permanently damaging the Internet space it's a no brainer lose, lose for existing market makers of either market. Worse for artists the copyright guarantees some kind of slice of the vig under the current model. In the all digital world it is not clear that ANYONE, artist included, will get any vig what-so-ever, further the distrubution may never even involve a sale.

What's the reality? The well has already been poisoned for the two essential markets, and through the iteration of technology the poisoning will get progressively worse. Law enforcement and lobbying will remain expensive and be as effective as traffic tickets in preventing speeding. Traffic speed laws only slow things down in a close proximity to the time and location at which they are currently being enforced, otherwise the average speed on any road increases to what capacity, automobile technology, and road conditions will warrant.

Clearly now is the time for more venture capital in this area. We need to run many experiments to see how to move forward. Ironically the "venture experiments" only get less expensice and easier to run as technology improves and time rolls on. If the existing market makers feel they do not have money to invest why should that prevent other players from trying?

cm: I largely agree with you, but I think the times are changing. In the past a well-known publisher like McGraw Hill did add credibility through a rigorous peer review and editing process. Unfortunately, today, publishers do much less along these lines, and will reach the point where they only offer the author marketing services. We might have reached that point already if my friend’s recent experience is any guide. As for paper versus electronic, I agree, I like paper too, but paper has problems. My personal library is large and takes up a lot of space. Moreover I just found out that I have a fairly severe dust-mite allergy. My allergist told me that all those books in my bedroom (and the rest of the house) are a problem as they collect dust. One thing I can do is freeze the books a few at a time and that will inactivate the dust-mite allergen. Finally there is the matter of cost. Getting a $90 book for free is hard to resist. I can print the sections and bind them. Occasionally I have to do this for library copies of unavailable out-of-print editions. Not as nice as a bound volume, but better than nothing. There is some stuff you can’t get even on the used book market. So unless you have a sugar daddy cost is an issue. For all these reasons I see the electronic books as the future, especially for those expensive specialized technical books that have limited printings. Once the authors can get nearly the same ego gratification and publication credit from electronic distribution, paper will eventually wither away. They don’t make much money anyway. On the other hand, those mass-market books that return significant royalties to the authors will be around longer. But once we get true electronic paper, then everything will be different. I strongly agree about survivability. You can’t beat paper for true durability.

On digital music, it is clear that the unfortunate poster released from the big leagues would be out of a job in any case-selling music has been on a downward curve for a long time. Marketing a brand identity became the norm, and music performance not even a tertiary concern. Promotion, marketing, palm greasing, kickbacks, drugs and other inexpensible items cost. When is "Chinese Democracy" coming out by the way?
And while music is primarily a matter of taste and secondarily a matter of group identity reinforcement, why is there so little variety in music as a product? Why do independent music producers manage to survive and even thrive when the majors seem to do nothing but piss and moan about how hard it is to make a buck? I've read Frank Zappa, Henry Rollins, Jello Biafra, David Lee Roth, and the subpop clowns' stories and what I got out of it was that the music industry was so corrupt for the most part that there was no advantage to being on a major unless you were planning a Sex Pistols style ripoff and bidding war. Rollins did a song about the LA Money Train and I think he has a point about the homogenizing influence, the dumbing down, and the blandness that 'music product' has become.
As for academic texts, I hate that Springer-Verlag and CRC Press can charge such extreme prices for academic texts and journals. If it wasn't for NTIS/USGPO/Agency presses it would be cost prohibitive to attempt to be an academic. If Henry Rollins can publish 250 pages of tour diary for 24.95, why can't I purchase a 250 page book about cryoturbation of arctic soils, reporting on research paid for and edited by government agencies and public grants, for less than 250 dollars? The scientists aren't getting the profit, and modern publishing costs and outsourcing simply cannot explain the differential. That is a buck a page, with a majority of the text being repeated bibliographic references.

dsquared: The advances are always paid back out of future profits to the bands, as provided in their contracts. Meanwhile music can be digitally recorded in a garage, and lots of amazing stuff is. Record companies weren't simple middlemen before, but they pretty much are, now. For almost all of them, "coming up with the goods" means mass-consumer success. Maybe you can niche-market if you stay small and friendly, like Ani DiFranco's operation. Then you're like a portal. On the big music companies, you would have a better case that they can finance promotion and touring, but unless a band is an instantaneous success, that money dries up, while the band is still tied-down in a creatively-accounted contract with profits many years away (and unable to complain about this treatment in public.) This has destroyed many talented bands. Pro musicians are full of stories. And drugs are just as big a problem among record executives.