WHOS STEALING FROM WHOM?

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WHO’S STEALING FROM WHOM?

The recording industry blames the drastic plunge in CD sales on people swapping songs over file sharing networks. However, even that basic assumption isn’t a fact but rather one of many hypotheses for why CD sales have dropped in recent years. The fact is that book sales have dropped dramatically too, as have sales of many other items, and not all of these losses can be directly linked to file sharing networks.

THE PRICE OF CDS

Curiously, while the cost of manufacturing a CD (once the recording has been mastered) is much less than the cost of manufacturing a vinyl record from $13.01 to $14.64, between the years 1991 and 2001. The attorney generals of 43 states and territories even accused the major music companies (Sony Music Entertainment, EMI Music Distribution, Warner-Elektra-Atlantic Corp., Universal Music Group, and Bertelsmann Music Group, as well as retailers Tower Records, Musicland Stores, and Trans World Entertainment) of conspiring to fix CD prices. or even a tape cassette, the price of CDs has increased an average of 12.53 percent,

The music industry eventually agreed to a $143 million settlement, without admitting any wrongdoing. Anyone who signed on to the music lawsuit wound up collecting $12.60 for their share in buying overpriced CDs all those years.

An additional part of the settlement stipulated that schools and libraries receive $75.7 million worth of CDs, although many schools and libraries are complaining that the music industry is only giving them CDs that they couldn’t sell anyway. One library wound up with 57 copies of Three Mo’ Tenors, 48 copies of Mark Willis’s Loving Every Minute, and 47 copies of Corridos de Primera Plana by Los Tucanes di Tijuana.

“This is a landmark settlement to address years of illegal price-fixing,” New York Attorney General Eliot Spitzer said. Former FTC chairman Robert Pitofsky added that consumers had been overcharged by $480 million for CDs since 1997.

Although the music industry’s alleged price gouging has convinced many that pirating music can be justified as a way to get back their money, it’s no more justified than stealing a book to get back at a bookstore. While music piracy isn’t the answer to price gouging, it’s definitely part of the backlash the music industry is facing these days.

COMPETITION FROM OTHER FORMS OF ENTERTAINMENT

High CD prices aren’t necessarily to blame for causing people to forego buying CDs. The problem is that given 20 bucks to spend, there’s a whole range of new alternatives for people to spend their money on, from video games and DVDs to interactive role-playing games on the Internet and cell phone services. So the reason why people are buying fewer CDs may not be because they’re stealing music. They could just be buying fewer CDs because they’d rather spend the money on another source of entertainment.

Even if people want music, they don’t necessarily want it on a CD. Lugging around a portable CD player is nice, but if you want to listen to 50 of your favorite songs, you may be forced to carry dozens of CDs and swap them in and out of your portable CD player just to hear the songs you want. Portable digital music players, such as Apple’s iPod, have proven popular because they allow you to store and listen to more songs (10,000 songs on a 40GB iPod) without lugging around a briefcase full of CDs. This desire for portability could explain the wild popularity of Apple’s iTunes online music store, which has sold over 100 million songs. People are still willing to pay for music just as long as they can take it with them anywhere they go.

So even if people want to buy more music, few of them want to buy music trapped on the archaic CD format, especially if the music companies include cumbersome copy-protection mechanisms that not only prevent people from copying a CD, but also prevent them from playing that same CD in a computer or car stereo. (Chapter 17 discusses various copy-protection mechanisms that the recording industry has used to copy protect both CDs and individual audio files.)

FILE SHARING AFFECTS MUSIC SALES

The basic assumption is that file sharing causes people to buy fewer CDs, but the reverse may actually be true. Given the high cost of CDs, many people aren’t willing to buy a new CD just to see if they might like a particular album. Instead, people prefer to buy CDs that contain songs they already want to hear.

Strangely enough, file sharing networks may increase an artist’s exposure and generate more interest in that recording artist. Daniel Bedingfield recently had the top-three song “Gotta Get Thru This.” However, most of his music wasn’t available through any of the file sharing networks. His album lasted on the Billboard Top 200 for less than a month, even though the single had been on radio playlists all over the country for several months.

In contrast, one of the most downloaded albums of all time was The Eminem Show, by Eminem. Toward the end of 2002, The Eminem Show became the best-selling album of the year, which lends support to the theory that file sharing exposes more people to music that they wouldn’t normally buy otherwise. Once they enjoy a particular recording artist, they’re more likely to buy albums by that same artist, although they may not buy a CD, preferring to buy their music electronically for their iPod through Apple’s iTunes online music store.

WHO’S REALLY LOSING MONEY

The music industry often claims that stealing music deprives artists of royalties from their albums. Yet many recording artists claim that the recording industry is actually responsible for depriving artists of their royalties.

For example, when the Dixie Chicks’ two albums Wide Open Spaces and Fly sold over 19 million copies, the trio complained that Sony had engaged in “systematic thievery” by underpaying them $4 million they were due in royalties. The Dixie Chicks claimed that Sony’s contract virtually enslaved its talent by “obligating its artists to continue to record for Sony no matter how repeatedly and blatantly Sony breaches its payment obligations.”

Prince had a similar legal dispute with Warner Bros. and resorted to changing his name to a symbol to escape the legal clauses of his contract and to appearing in public with the word “slave” printed across his cheek.

Prince and the Dixie Chicks aren’t alone in their complaints about the recording industry’s unfairly structured contracts. Don Henley, Billy Joel, Sheryl Crow, and Beck have even raised money for the fledgling musician lobbying group called the Recording Artists Coalition (http://www. recordingartistscoalition.com).

These are some of the issues that recording artists face:

• Recording contracts that require seven albums, with no end date. The music companies claim this keeps popular artists with a recording label that initially invested in that artist, but musicians claim it turns the recording artist into an indentured servant of the music company.

• The record label’s right to reject an entire album and then extend the contract by one more album. Record labels don’t want to promote something they don’t believe will sell, but artists feel they have no control over what a record label may declare as “commercially or artistically unacceptable.”

• Recording contracts include an initial advance, but the cost of recording the album along with producing videos and other promotional material gets charged against the artist’s royalties. While record companies risk the initial investment in supporting artists who may never earn enough to recoup the recording costs, successful artists wind up paying for much of their own recording and promotional costs while trusting that the recording company is fairly charging expenses. (The publisher of this book would love to adopt a model like this; he thinks he’d be very rich and driving a real car rather than an antique.)

• Contracts that give the bulk of royalties to the recording companies. Given that the five major companies release over 90 percent of commercial music, artists must sign standard agreements or give up their recording careers altogether. If artists wish to audit their royalties, their contracts stipulate that they must go to court in order to get the full amount due and pay the cost of the audit just to get what they were rightfully due anyway. As a result, they often settle for some amount less than the total amount due.

• “Packaging” or “container” deductions in a contract can reduce an artist’s royalties by 15 to 25 percent. This cost once paid for brown paper sleeves to hold a vinyl record, along with an actual cover with artwork, to package the record. Now with compact discs costing less than $1 to manufacture, and assuming a $15 suggested retail price with a 15 percent deduction, the artist is charged $2.25 to manufacture a CD that costs $1 to make, providing the record company with an additional source of income taken from the artist’s royalties.

• Royalty contracts that reward songwriters, not performers. When Madonna announced her 2004 tour, many people speculated that she needed the money since she received very little from her previously recorded albums, because she didn’t write most of her older songs.

• Contracts that essentially “own” a recording artist’s songs. If a record company stops selling an album, the recording artist can’t rerecord the songs on another album for a different record company.

The real threat of file sharing isn’t stealing royalties from recording artists; it’s about stealing royalties from the recording industry. While some of the record labels will undoubtedly refuse to adapt and wind up dying, the smarter ones will take advantage of the new opportunities that file sharing networks provide.

Warner Bros., Disney, and Atlantic Records hire the services of BigChampagne (http://www.bigchampagne.com), which keeps track of the most popular songs traded over file sharing networks, along with the IP addresses of the people sharing them. Instead of using this information to file more lawsuits, these companies are using the statistics compiled by BigChampagne to determine which songs are most popular in different geographical areas, so they can target their advertising campaigns to promote certain recording artists in different parts of the world.

If the recording industry refuses to adapt, newer companies will likely step into the void and pursue opportunities that file sharing offers. Apple turned itself around from a strictly computer and software company to an online music store with iTunes, and a leader of portable digital music players with its iPod. Sales of the iPod actually help subsidize the cost of iTunes, so while Apple makes little money selling music online, it makes the bulk of its profits by selling iPods.

Another company, Mercora (http://www.mercora.com), offers a unique twist on the file sharing market. Instead of letting people swap music files, Mercora lets people connect to each other’s computers and stream music to each other. That way people can listen to music files stored on other computers, but they can’t copy and store that same music on their own computer. Thus, you get to share music without infringing copyright, which file trading entails.

Will the music industry be smart enough to adapt to change? Or will it follow-the path of the slide rule, buggy whip, and turntable manufacturers into the dustbins of history? The way things are going, you can pretty much bet that the next leaders of the music industry won’t be any of the names that people had heard about a few years ago.

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