Monday, November 26, 2007

HOW TO DESTROY A PROFITABLE INDUSTRY IN JUST A FEW EASY STEPS

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Ahhh... the good old days!

New York's "Vulture" section comes to the correct conclusion about the music biz-- but for the wrong reason. In commenting on the Wired profile of "Universal Music Group CEO/supervillain Doug Morris," the folks at "Vulture" have a yuck-fest over Morris' inability to come to grips with modern technology. I only had one real talk with Morris in my life. The Warners Music Group was in complete turmoil, beginning a really ugly death spiral that he insisted I buy into by going to work for a lackey of his. I refused and Morris was coincidentally fired soon after-- the lackey not long after that. Instead I wound up as president of Reprise Records.

When AOL bought TimeWarner I was one of the only happy campers at the company. Naively, I thought AOL was a visionary technology company which would help us grapple with the problems and opportunities inherent in file sharing. And Steve Case and his cronies were visionaries, but the vision wasn't grappling with anything except how to drain TimeWarner of as much of its value as they could get away with. He got away with a lot.

Meanwhile, some of us at Warner Bros decided to take matters into our own hands and look for our own solution. "Vulture" quotes Morris, who went from heading the Warner Music Group to heading Universal Music, lamely explaining why the music business failed to take advantage of the new technology that was leveling so many music business playing fields. At the time most record company bigwigs had contempt, fear and disdain for computers. Many of my colleagues told me they had never touched one-- the way Judge Judy and Larry King were bragging the other day how they still haven't done so-- and one major record group chairman said a computer is just a newfangled typewriter and that's what secretaries are for.

Years earlier one of my promotion men had helped me out at my little indie label by teaching me the DOS system and showing me how computers could make my life easier. By the mid-90s he was running Reprise's and then Warner Bros Records internet initiatives. He built the first label driven web development team and server farm promoting our artists, which later also led traffic stats for all of Warner's online properties. The Chairman of Warner Bros and I sat down with him and went over what we thought needed to happen to make the Internet a real part of our marketing and promotion strategy. He came up with a system which we brought to our corporate overseers. Here's where the Doug Morris quote comes in:
"There's no one in the record industry that's a technologist," Morris explains. "That's a misconception writers make all the time, that the record industry missed this. They didn't. They just didn't know what to do. It's like if you were suddenly asked to operate on your dog to remove his kidney. What would you do?"

Personally, I would hire a vet. But to Morris, even that wasn't an option. "We didn't know who to hire," he says, becoming more agitated. "I wouldn't be able to recognize a good technology person-- anyone with a good bullshit story would have gotten past me."

Morris may not have known what was going on, but at Warners we clearly understood the value and opportunity of the internet as a marketing vehicle to connect directly with music fans, circumventing the "gatekeepers," particularly MTV and increasingly expensive and corrupt corporate radio. As we were realizing and taking advantage of the huge efficiency and power of this medium, we also clearly observed the beginnings of illegal music file trading and distribution by fans-- and the ramping up of the demand for music delivered over the internet.

We viewed this "threat" as an opportunity. Not an opportunity to sue teenagers and/or their parents, but a new opportunity to let people purchase their music the same way they do at record stores. We didn't assume everyone wanted to be pirates, crooks or wanted to rip off their favorite bands-- we just assumed that fans of new music would be hip to new technologies-- it's kind of inevitable and luddites always lose in the end anyway; people crave convenience.

We proposed to our corporate masters that we sell "unprotected" MP3 singles at a reasonable price-- $1/$1.50. We wanted to experiment and see if this model would stick.

Why unprotected? Because we were already in a vastly successful business of selling unprotected digital files: CDs. If people wanted to get them on the internet-- they should be coming from us... that would be the future of the business: an evolution of the day's success.

The short term test was to give people a choice-- an alternative to piracy.

Our proposal, after lots of corporate headscratching, hummimg and hawing, was denied. The technology people Morris was complaining about said it was "elegant" but that they were "unprepared to set any precedents."

The corporate "expert's" recommendations:

- All digital content needed to be locked down with DRM so people couldn't pirate it. (This made no real sense because the mass-produced digital content on CDs were all out there-- and paying all our the salaries.)

- We needed to wait and try to develop a secure proprietary solution. One that didn't exist yet; one that didn't allow music fans to burn CDs they could listen to on audio equipment; one that talked only to DRM portable devices that didn't exist (or at least have the slightest consumer interest).

- If we did this we would resell the catalog and squash piracy moving forward.

So what happened?

They aggressively sued music fans.

They didn't give connected music consumers any alternative to piracy.

All internal and external development of a secure cross-platform solution failed miserably on many levels-- complexity, appeal to the customer, portable devices, connection to legacy music systems...

Music fans have had a chance to go all the way through high school and college thinking music is free. And now it is, thanks to Doug Morris and corporate managers who couldn't-- and still can't-- adapt to change.

An interesting footnote: in 2000 Steve Jobs snagged our VP of new media, referenced above, Jimmy Dickson... to help with Apple's music strategy... 6 months later: iTunes 1.0.



UPDATE: MORRIS RESPONDS

Well... not really. But this is a riot.

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14 Comments:

At 8:47 PM, Blogger Dr. Tex Nology said...

Great article. It is amazing how fast the music biz is changing. Not only do computers, the internet and mp3 downloads make it more convenient for the consumer ... the internet also makes it so much easier to discover new groups... and makes it easier for a "community" of like minded artists to exist ... support each other ... and grow.
It seems like it's so much easier for an artist to develop a fan base now, and so much harder to make money.

 
At 9:15 PM, Blogger salrock said...

Perhaps its time for Independent marketing companies to put the creativity and fun back in the music business. In the early 50's to late 70's Independent Labels and Distributors, drove the business. The Majors subsequently dominated mostly by controlling Independent promo and making it so expensive to get music exposed. Does that really matter as much anymore? At .99 a download how long can Universal afford it?
There has never been a musical trend started by a Major. Even Warner/Reprise was Independent when Tom Donahue told Mo and Joe to go to Monterey where they subsequently signed Hendrix and The Dead etc. With guys like Doug Morris running things it's got to be time again for a few modern entrepreneurs to create a "new" music business.

 
At 12:05 AM, Blogger Anacher Forester said...

Howie mentions a key aspect of this equation a key that deserves elaboration. By hemming and hawing (and suing rather than embracing mp3s, record companies alienated an entire generation of young music fans. This is important as teenage consumers traditionally spend a large part of their disposable income on music. At this time they also tend to establish specific buyer behavior that may last at lifetime.

One again the Luddite old school record company presidents foolishly believed that they could bend the marketplace to their will instead of pro-actively responding to the marketplace's demands. The result is a whole generation of music buyers with a deeply ingrained belief that they should always get their music for free. Furthermore, they believe that by not paying for this product, they are striking a blow against the evil, greedy music biz establishment. The same corporate forces that had been suing people just like them.

Once the record companies finally gave in it was too late. The music industry's belated demand to charge the consumer for mp3s was akin to locking the barn door after the cow was stolen. To make matters worse, they've been spectacularly unsuccessful in convincing these music fans as to why they should pay for music. Just telling people that it's stealing doesn't cut it.

The extent to which this fandango has negatively impacted recording artists has been largely and typically ignored. Without going into mind-numbing specifics, the wholesale distribution of "free" mp3s makes it exponentially harder for musicians to make a living. Any directly related reduction in sales further limits artists' leverage with their record co. as well as the music industry at large. This affects everything from recording budgets, tour plans and radio airplay. These factors may force musicians to compromise their artistic vision in ways hitherto unthought-of of. It could even cause an artist to cut their career short.

Wholesale sharing of free downloads can be murder to a developing artist. It can wreak havoc on a new release by an established artist too. A few years back I worked with an artist whose intricate marketing plan was sabotaged by a college kid who somehow got his hands on an advance copy. 125,000 downloads later we were forced to release the album's six weeks earlier than planned. We had to forgo some important set up in the process.

AF

 
At 5:32 AM, Anonymous Scott said...

There was more to the music biz going down the drain than just online piracy. The major vendors/distributors WEA, EMD, Sony, UNI, BMG and PGD starting in the 90's all were selling hit albums to Circuit City, Best Buy and Wal-Mart, to name a few, who were selling them as "loss leaders" barely or not even above what it would cost a regular indie record store chain like the one I worked for. This was before online downloading had even happened. That's why I half joked to the owner that we ought to start selling tv's at cost just to show them how it feels. I can tell you right now those 3 companies I have mentioned never broke a record in their history. But chains like the one I worked for sure did. I worked in record retail for over a decade as a buyer/manager and believe me it isn't just one thing that did it in and it sure wasn't just downloading. The cost of cd's was out of whack right from the start. There is absolutely no reason a new release cd should cost $15 in the late 80's/early 90's when records and cassettes were still out and selling for $9.98 or $10.98 for the same title and yet they cost the same amount to manufacture. The greed factor was there from the start.

 
At 11:32 AM, Blogger Anacher Forester said...

Scott,

You're damn right about the greed factor. I had an extremely frustrating and bizarre conversation with a now former major label president in the mid-90s regarding CD pricing. We were trying to break a completely unknown new artist. The list price was $16.98 with some stores charging up to $18.98. I asked this prez of our distributing label to agree to lower our list by at least $2 and preferably by $4. His verbatim reply: "If they (the consumers) really want it, they'll pay $16.98 for it."

The list price was eventually lowered. We did break this artist selling in excess of 1 million copies. But it was no thanks to the old school label cats.

Major labels and the smaller labels they distribute are loosing out on another revenue stream: long out-of-print and deep catalog tracks. The marketing and production costs for this music have been paid some time ago. It should be an easy process, right? Smaller labels, especially those distributed by majors, where this is more of a priority run a big problem: there is still a huge backlog of music waiting to get into the digital distribution system. Lesser songs from the bigger artists on the distributors. bigger labels will always take precedence.

AF

 
At 9:09 AM, Anonymous rechercher said...

>>the Luddite old school record company presidents foolishly believed that they could bend the marketplace to their will instead of pro-actively responding to the marketplace's demands.<<

Exactly! Big Media has taken a pass on the greatest tool for market research yet devised. Through the YouTubes, BitTorrents, etc. of the world, the public is telling Big Media exactly what it wants to see and hear. Instead of making legit versions of those products available and promoting them straight to the users who are interested (via ads on YouTube pages with, "buy-it-now" links, etc.), Big Media cackles, calls its lawyers, and spins the tumblers on its vaults.

 
At 9:35 AM, Anonymous Chris Bingham said...

A few years ago I was listening to a local radio station interview some gravely-voiced singer-songwriter. The DJ, talking about the singer's background said "He's put out five cds on his own but this is his first real one." In other words, you're not a valid artist unless you're on a major lable. (They had a point - no one could even hear you music because the majors had / have commercial radio locked up.)

The downfall really started when music got so big that toilet makers like Vivendi decided they could sell musical widgets like thet sell toilets. It's all "prduct" and "units" with everything measured in cash.

I can't wait for the demise of these behemoths. I've been putting out music since the mid eighties and I'm doing better than ever giving our tunes out on our website and selling a disc for every thousand downloads. At least I have a SHOT at getting heard.

When I'm hopeful about the future of the music business, I see a lot musicians making a decent living wage, while the accountants that managed the Britneys and the Milli Vannili's are back to selling toilets.

 
At 11:58 AM, Blogger Ed Ward said...

Great post. And great punchline.

 
At 8:28 PM, Anonymous Scott said...

To add to my comment of a few days ago I would just like to say that customers complained about CD prices right from the beginning when they first started dominating the market. As I pointed out earlier when all three formats were still on the market a new release title would cost 9.98 or 10.98 LP or Cassette and 14.98 - 15.98 on CD. Catalog cassettes and LP's generally were about 6.98-7.98 with CD's about 11.98-12.98 depending on the company and the title. I remember reading in Billboard magazine in the mid-90's about a Chicago neighborhood record store chain that had about 25 stores and within a year or two was down to just a handful. And this was before downloading had even started. So what happened to them? As I pointed out earlier it's hard to compete with someone selling something for 10.99, as essentially a lost leader, that cost you 10.60 to buy.

 
At 8:57 PM, Anonymous McBizz said...

What is amazing is not how quickly the market is changing, but how excruciatingly slow businesses are adapting. It is understandable that the large conglomerates and umbrella organizations that compose the majority or todays music industry are slower to react, but it is simply bad business to continue to deny that we live in a fluid free-market system. The market is still there, and it is up to the thinkers and idea people in the music industry to bring them back.

 
At 10:09 PM, Blogger McBizz said...

What is amazing is not how quickly the market is changing, but how excruciatingly slow businesses are adapting. It is understandable that the large conglomerates and umbrella organizations that compose the majority or todays music industry are slower to react, but it is simply bad business to continue to deny that we live in a fluid free-market system. The market is still there, and it is up to the thinkers and idea people in the music industry to bring them back.

 
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