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Back to Business..

Looks like the uprising of consumers against the Music Industry has taken a fairly heavy blow. The Music Industry equivalents to Che Guevara and Fidel Castro have both been snapped up by legitimate companies with similarly legitimate (and legal) intentions.

As Bertelsmann (AKA BMG) moves into the MP3 realm with a subscription-based model, what is the significance of this for the industry? I think it’s too easy to cry foul and to discount these actions as the “end” of something which could have been better. Nobody’s selling out to the man, here.

BMG is in a much more solid position to deal with the RIAA (they are, after all, a member) and fend off the types of reactionary responses that have been coming from the industry so far. The subscription-based model being discussed is actually good for artists who, via ASCAP & BMI, would get compensated based upon their popularity and the number of transfers from within Napster.

What’s more, such a model points out more than ever before how the Record Label’s role as promoters and distributors of music is becoming quickly outmoded. Record labels do, however, have a role to fulfill.

I had dinner with a friend of mine, Adam Hurstfield, in Vancouver a couple of weeks ago who has achieved some success in the music industry as a producer. It occurred to me, during our conversation, how much his language is like my language — talk of investment, upside, and dealmaking. I realized then and there that record labels are the Venture Capitalists of the music industry. They sink the money to get the music produced, paying for studio time, pizza, and limos; and they help to push the artist to the next level — bigger financiers and bigger promoters, and bigger labels. Their investment should not go unrewarded.

But just as the VC business (who had heard of these guys before the 80s?) evolved out of the banking and finance industry, so boutique record producers (ie. indie labels) are spinning out of the music industry and driving margins and insane profits down. The result: a more equitable distribution of the profits among artists and producers on the up side; and fewer and less risky investments being made by the majors on the down side.

So the old problem remains: MTV and Radio are still the big dogs of the distribution and promotion model — and they suck. While MTV becomes more costly and more successful, and Radio becomes less and less profitable and undergoes consolidation, the window for programming creativity begins to close. Music is now “Researched” and “Tested” before making the playlist and Indie labels can’t break into this cycle because it’s too costly.

Now, along comes the internet not only as an alternative to Radio, but also to the CD store. Napster’s pretty cool these days, but it’s no MTV… and it doesn’t help out indie labels at all because there’s no effective device to return upstream revenue to the producer and the artist.. (in fact there’s no mechanism to return revenue to Napster, either). If anything, this exacerbates the problem: it’s the industry cannibalizing itself. And because it’s IP it’s NOT mainstream.

Napster may have made things even worse now, as it is today, because labels get more and more conservative as they fear that lower-threshold artists could get “Napsterized” and have pirated copies of a CD outstrip the sales in the store. In this light, Christina Aguilera becomes even more favourable because you can be dead certain that she’ll sell enough product to hit critical mass and pull way out ahead of the pirated and bootlegged material. So in an ironic way, Napster has made the music industry suck even more… and Napster is (even more ironically) ultimately dependent upon that industry to generate and promote content.

Now, for a recipe. Take 1 cup Napster, 1 cup, 2 cups ASCAP/BMI, and stir:

Build into the Peer-2-Peer model AND the centralized distribution model a subscription-based pricing model with upstream revenue to artists and producers through ASCAP and BMI, just like what has been in place for decades with Radio, and you’ve solved the problem. More powerfully, you have created an alternative medium to MTV and Radio that is self-sustaining, and which is more open and more free to inexpensive promotion by a more diverse range of musicians. And you’ve cut out all the fluff and margin that has made the music industry so polarized.

And now for my Buck Rogers vision of the future: If IP can spread far and wide enough that the internet distribution model, with its lower cost and greater diversity, Internet-based music srevices can begin to appeal to audiences more effectively and more widely than MTV and Radio. With that, you have ghettoized those two institutions and created a medium which is no longer alternative, but hopelessly mainstream — without all of the hangups of alternative media. Britney Spears has to get a day job as a hairdresser.

The difference between this vision and the original Napster vision? Nobody gets screwed. Audiences pay less for the music they want, artists get what they deserve every time, and labels don’t get to be greedy bastards anymore because there are no barriers to entry for new “Music VCs” to enter the game — money and creativity is the only ticket to ride. Record labels are forced to get big and stay big through diversity and breadth, not pushing cookie-cutter imitations and force-feeding Backstreet Boys onto every radio and TV station until we relent and head over to to buy the CD.

One thing’s for certain: the Record Industry’s high times are numbered. But there’s a fundamental role that labels serve and should continue to serve. BMG should be commended for recognizing this and being brave enough to face it with vigor and creativity.

Napster was never meant to be. That should be obvious to anyone who knows what their revenues are. It’d be interesting to know what the Return On Investment was for the VCs that pumped cash into Napster, as a result of the deal.

Stay tuned for my post which theorizes that Napster was built-to-flip and that this “surprising” move of selling out to a major label was part of the plan, all along. Was Napster’s Luciferic logo intended to scare the industry into submission?