Until recently I was the Chief Executive Officer of Urban Box Office. Inc., [“UBO”], a record label that vigorously stirred the melting-pot and ruffled George W. Bush’s feathers, when, in April of 2006 it released “Nuestro Himno”, an all-star recording of the Star Spangled Banner, in Spanish, and in solidarity with undocumented immigrants. Prior to founding UBO, I produced records, managed artists, supervised movie scores, executive-produced movie soundtracks, and worked as a bouncer at punk concerts, having started out making tea for pop-stars at a recording studio in central London.
Obscured by the hysteria accompanying Nuestro Himno’s release was that UBO had become a successful independent record label, with a unique business model, which was described by Ethan Smith in the Wall Street Journal as follows:
"UBO, as the label is known, relies on low prices, direct contact with potential customers and an ad-hoc distribution network reaching thousands of neighborhood stores -- including bodegas, gas stations and hair salons -- that many music companies either ignore or cede to middlemen"
Music retailers’ response to our effort to reduce the price of CDs was to gouge. We often found our CDs (which wholesaled at $6.00 in the expectation they would be sold for under $10) on their shelves priced at $12.99, $15.99, even $20 or more. The gouging jeopardized our business model and our relationships with artists who complained that we were subsidizing retailers, by reducing value of their share of net revenues.
Worse, we discovered that some retailers were bootlegging our products – a practice prevalent in Latin music retail that rips off record companies, consumers and artists for the sole benefit of the retailers, for whom each sale becomes an untaxed pure profit event.
Ripping-off artists has always been absurdly easy in the record business, as artists are reluctant to offend the grand egos they hope will market them to superstardom, and are invariably represented by managers, agents and attorney’s that are too indebted to the great egos to put up much more than the semblance of a fight, and whose concept of a Chinese wall is an entree at Mr. Chows.
Without oversight, successive generations of executives have over-marketed albums to gain market share, chart success, and personal glory (as did I), and then so under-priced those assets in their dealings with other media that they have not been left with sufficient capital leverage their content themselves.
Among the more delirious examples of record business largesse are; three decades of giving music videos away to broadcasters like MTV and BET, without sharing in the revenues from advertising inserted into the videos, channel subscriber fees, or taking an equity stake in the channels themselves; and enabling Apple to monopolize the digital distribution of music so completely that it determines pricing, availability, and the extent of its own competition.
A back-of-a-cracked-jewel-pack calculation of the transference of wealth from the major labels to Steve Jobs, Sumner Redstone and all that sail with them, looks like this:
On April 25th, 2007 Apple reported record quarterly profits of $770 Million, driven by sales of 10.5 million iPods. 15.6% of Apple’s $85 Billion market cap is derived from iTunes, 22.8% from the iPod, worth a combined $35 Billion; Viacom’s music channels contribute half of MTV Networks free cash flow and are worth another $10 Billion or so. Given Warner Music Group’s 13% global market share and $2.55 Billion market cap, the current value of the global record business is less than $20 Billion – less than half that of the Apple and Viacom music interests, built leveraging its content.
Compounding the industry’s problems is that music is not as essential it was. In London, in the late 70’s, it was the primary expression of our tribal and life-style affiliations. ‘Soul boys’ listened to R&B, ‘skinheads’ to ska, ‘punks’ to near-music, ‘metal-heads’ to hard rock, and every weekend I would hang out at import shops listening to the latest reggae pre-release, before taking the best home and spinning them in solitude, in Hi-Fi, on my stereo system!
I don’t know anybody who listens to music like that anymore, certainly not my daughters or their friends, who graze it while eating, reading and banging out blogs. Music, once a recreational activity, has become the soundtrack to our lives, and the consequence of its new role is that we are never going to pay premium for it again.
So what to do?
The first step is to stop selling pre-recorded music CDs; they are absurdly expensive and taxing on the environment to manufacture and distribute, may be returned without penalty, contain ‘filler’ to justify their unjustifiable (in a digital world) price, and are for retailers, mobsters, street-entrepreneurs and consumers alike, the perfect bootlegging device.
The second step is to push all music online without copy protection having forced Apple (as a proxy for all of the manufacturers of digital players and keepers of proprietary online digital music stores) to:
- License iTunes (on a similar royalty basis to that paid the inventors of the CD) to anyone wanting to open a digital music store, encouraging real world competition on price, service, selection, and user experience, and interfacing with a vast range of newly compatible devices.
- Pay a royalty on every iPod sold. Currently, only 20 or so of the 400 songs on an average iPod are purchased, the rest are ripped (mostly from CDs). If each iPod were sold with the expectation that 600 songs would be ripped onto it in its lifetime, and a 10 cent royalty paid on each, the 40 ++ million MP3 players projected to ship in 2007 would generate $2 Billion plus, attributable almost directly to the bottom line - more than the 2006 profits of all the record companies combined. A $20 per unit payment in respect of the 100 million plus iPods already sold should generate an additional $2 Billion. (An iPod royalty is already paid by Apple in France and by Microsoft in respect to the Zune)
It will be argued that my proposal is too extreme, that CD sales, though declining, are still 90% of revenues and that as these revenues cannot possibly be replaced day one, the industry will be worse rather than better off without them. I counter by pointing out that CD sales (already barely profitable due to the high cost of manufacture and physical distribution) are declining precipitously, and no longer support specialist music retail, leaving the industry at the mercy of Wal-Mart loss leading and a spiraling downward trend; and that Apple will agree these terms, because without access to premium content, iTunes is Mp3.com with a few bells and whistles.