Industry information that you can actually use
In this issue:
--Music will stay free for a small price: CDs to be put in cereal boxes.
--FarmClub/Uni is hauled into court for, of all things, copyright
infringement.
--SoundScan makes liars out of the majors with annual report
--BMG approves of its own existence. The German Giant gives itself
permission to take over the world.
--Harry Fox and the labels give each other nasty wedgies in war for royalty cash.
--Predictions for the coming year
This is not news...
News is allegedly objective. This is anything but. This is about
interpreting the news into information that you can use. The key to
predicting the future is in interpreting the past. In real terms, this means
understanding how the big players interpret their mistakes and their recent acquisitions.
And they make some big ones of both. Let's take a look. But first:
NEW ON MOSESAVALON.COM
First let me wish everyone a fantastic New Year. I wish each of you more
profit and less hassle in this next centaury.
In case you haven't heard, the New York Music and Internet Expo has been set for April 21 and 22 at Madison Square Garden's Expo Centers. This should not be confused with the http://www.ieexpo2001.com/travel.htm
Internet Entertainment Expo (IEX) 2001 which will be held this March in Los Vegas, where the real Internet players will be. I'll be hosting a panel called "Making the Business of Music Work on the Internet."
This will be the first time certain industry professionals (which cannot be
named at this time) will square off face-to-face on the big issues, mainly:
How the hell will the industry recapture the value of their product in an
environment where people believe that they have the "right" to free music? I hope to see you there.
If you feel you can offer something substantial to this panel, I have two
seats open.
To those who took advantage of the holiday offer and bought the autographed first edition of Confessions, thank you. We sold out. However, the shameless ad on the home page of "http://64.225.86.211/index2.htm" www.MosesAvalon.com will remain for a month or so because I am digging into my personal stock to meet further demand. Oh, the burden.
Okay, here we go:
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MUSIC FREE? AT WHAT PRICE?
In the near future you may get to keep music free-most likely by digging for CDs in a box of Captin' Crunch.
The key question perched on the lips the entire industry is this: how, when the public's perception is that music should be free, do record companies create the perception that music should be paid for?
This is not a new problem. In fact, one can trace this exact phenomenon back to the controversy created by piano-rolls in the early 1900s. The Internet is just that-piano-rolls for the new millennium; just another manifestation of an industry dependent on control of distribution, fighting the public's conditioned incentive to get something for nothing.
Perhaps there is some young Stamford marketing-school graduate who can see a fresh angle here, but I see only two ways out for the majors:
1) Major labels will have to resort to the technique they've used many times in the past, whenever a new technology became overly accessible: they upgrade the standard to one that makes the old one sound absurd, cheap and worthy of being "free." The last time they used this strategy was the 1980s; most audio files would agree that CDs, when compared to LPs, didn't sound as full if heard on a high-quality stereo system. As part of marketing CDs, the parent companies of PollyGram and Sony, Philips Electronics and Sony Int. respectively (who held the CD patent) downgraded the quality of consumer listening systems: i.e. cheap boom boxes, integrated stereo systems for under $200, and other things that made listening to LPs "the right way" almost impossible. Left without a viable comparison, we now are now a generation unable to fairly compare the quality of LPs to CDs. As a result "CD quality" became the sublime standard.
What to Look for:
Special "audio file" releases in 24 bit/60khtz and players to support them.
DVDs will incorporate albums which will include video footage and behind the scenes info. Also, record clubs with value-added things like concert tickets and contests for members who pay the monthly subscriber fees to Napster and the like.
2) If the above fails then record companies will have no choice, as I see
it, but to go to the preverbal mattresses, tossing in CDs along with the sale of other items so that it seems "free." Much like the prize at the bottom of the cereal box. For example, buy a BMW and get the Beatles box set " free." A story published this month is the writing on the wall for this theory: ASCAP announced an alliance with Heineken to market a compilation CD. It will not be long before major labels and performing rights agencies begin exploiting this model and packaging new artists with products even before the record is released. Label's decision-making process for who to sign will begin to revolve around how they can package the artist with their affiliate/sponsors. (News flash: they already do, but now the volume will be turned way up.) Will artists go for this? They may have little choice if they want a major label deal. This gives the Indies a new angle to sell. Go get 'em.
What to look for:
The tell-tail signs of this will likely be product placement in MTV videos
before the end of 2002. Whereas before you might see Brittany Spears doing a Pepsi commercial, now you will see a subtler, reverse version of this: Pepsi incorporated into in the Brittany video. No big stretch there. But how will this fit into the more subversive marketing campaign of say, Limp Bizkit, or Marilyn Manson? (Perhaps Marilyn's label can convince distributors of RU486 to do a placement.) When record companies run out of condom and alcohol sponsors, what next? A&R: "Hey fellas, we see you doing the video where you have a dream that you're performing your hit for a room full of Metropolitan Life Insurance Company salesmen, and then out pops a chick, dressed like a Hershey's chocolate bar. Can you see it? Can you see it?"
Lawyers and managers, prepare for some new "merchandising language" in label contracts for the coming year. Make sure you are not obligating your client in ways that will have them sending a few "boyz" to your office on that high floor.
(If you have any suggestions as to alternatives to either of the scenarios
above, I'm very interested. Any really good ones will be published on
MosesAvalon.com and I'll send you a free book.)
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HOW YOU GONNA KEEP THEM DOWN ON THE FARM CLUB NOW THAT THEY'VE SEEN A FEDERAL
JUDGE?
Companies like Universal are finding out that just 'cause they have a hall
pass from the Man is not a guarantee that they don't get dragged into
detention. This month the Universal Internet companion, FarmClub, was sued by their own writers (that is to say, writers who have material in the UMG catalogue). These included some of the biggest writers in the Biz. Their claim: FarmClub is infringing on their rights with unauthorized distribution and downloads.
If you think you're having a Deja vu, you're not. This is exactly what Uni
sued MP3.COM for. Don't these guys learn? Everyone was so absorbed with copyright infringement of the master recording, many forgot about the underlying composition.
This case, however, will not end as neatly as the MP3.COM case. It's quite amazing to me that Uni's lawyers didn't see this one coming. I predict pain and a settlement that will likely force FarmClub to sell most of it's stock to a fund set up by the class of suing writers. If this case goes badly for them (and I predict it will), then this is a devastating blow to the promising Internet model that has positioned itself as the leader in "legal" Internet record sales.
It would be ironic if the writers then donated the money back to MP3.COM, just to spite UMG.
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FOR ALL THE WHINING, SALES ARE BETTER THAN EVER
Record companies complained like children this past year about loss of sales due to the Internet. But SoundScan, the leading sales tracking system that has been employed by the industry since 1991, reports that we had a 27* growth in sales since the Internet's proliferation in 1996, 4% of that just in the last year.
So what are the big five all upset over? CD sales are up in spite of the
Internet pirates. Doesn't that prove that Napster's defense wasn't just poop after all and that giving away music does stimulate sales?
This must be a confusing month at the PR departments of the majors. They can't how to spin these statistics, so as to vilify Napster. Should they claim that SoundScan does not reflect real sales and open the door to a more adroit speculation about how many records they really sell? Or should they say, yeah, well, sales are up but they should have been even higher, making them look like greedy pin-heads.
Watch to see how this piece of hype plays into their testimony at the Napster hearing this Spring.
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BMG SCRATCHES ITS OWN BACK WHILE WE SCRATCH OUR HEAD
In the "give me a break department," several papers reported in the past few weeks that Digital World Services (DWS) (the "leader" in digital rights
clearinghouse services) has approved of BMG's choice to accept the download and encryption standard for hand-held "Rio-type" players made by a company called InterTrust.
Because of BMG's "acceptance" and DWS' s "approval," the message being communicated is that InterTrust's devices are destined to become
Napster-friendly sooner than any other portable device, and will be able to
directly download MP3 files from BMG's Internet thoroughbred. Obviously this is BMG's way of trying to figure out how-in-the-hell they are going to make money with their recent acquisition.
But what most of these articles didn't do is point out that InterTrust and
DWS are both controlled by BMG. Surprised? DWS offers clearing the rights to digitally transmit music. InterTrust is the company's technology partner. Both are either funded or have a stock participation with BMG. DWS is also one of the founding members of the Secure Digital Music Initiative (SDMI) whose key sponsor is BMG.
This means that a fair translation of this "news" story is, "BMG gives itself approval for use of a standard on one of its own products." Well that's a relief. World domination seems just a download away for the German Giant as we take another step in this rampant anti-trust voodoo that Majors are trying to pass off as impartial regulation for the new world odor. Major labels buying into companies to regulate themselves. I'm laughing, but I'm not.
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HARRY FOX GETS NASTY WITH THE MAJORS, BITING THE HAND THAT FEEDS THEM
The New Year kicks off with the bitch-fight of the century: The RIAA verses The Harry Fox Agency (HFA). Two companies that have enjoyed unprotected sex with each other for about 25 years are now having a lover's spat. And it all comes down to what else...? Money. In dispute: Internet radio royalties and how to divvy up the new revenue stream. He wants the new stereo, she needs shoes like nobody's business.
The money comes from the revenue generated from streaming songs across the web. Soon a new royalty will be attached to this privilege, the rate for which is the current business before the Copyright Office of the United States. Both the RIAA and the NMPA (National Music Publishers Association, a division of Harry Fox) in the past few months have filed petitions to establish separate statutory royalty rates for the downloading and streaming of music on the Internet. It seems the two entities can't agree on what that rate should be or how the fee should be split between sound recordings (which the RIAA represents) and the underlying composition (which the NMPA/Harry Fox represents).
This is the start of a war. Look for lots of nasty skeleton-outing
sound-bytes in the media over the next few months. This one will definitely get nasty as the potential pool of cash is well into the nine figures. (That's a lot of shoes.)
Regardless of who wins this argument, the losers will be Internet radio
stations, most of who will likely be forced out of business rather than pay
this new royalty.
Interestingly, producers may find themselves in a new position of power, in that they are considered "Authors" of SRs, and these new royalty streams affect them significantly. Count on seeing more stringent language concerning the transfer of authorship rights in your recording contracts.
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OTHER PREDICTIONS:
It's fun to predict the future, even if you're wrong about a few things. It
keeps the brain tuned. Here are few messages from Moses' spirit world.
--Internet record sales will level off at about 1.6% of total sales, but,
since SoundScan will add many new vendors to their system, it will be
reported that on-line sales are way up. This report will likely come from
Jupiter Communications, a market research firm, who, in a desperate to dodge wrongly predicting that Internet sales would reach 5% by 2002, will try to spin this. Don't be fooled by the fake "rising" statistics that you will see showing up in the media; changing the way sales are counted is not the same as more sales.
-- BMG will disconnect from Napster, probably before the end of 2002 as
Napster gains independent faux respect from Big Five sycophants, but in the end will be dismantled for lack of profitability. All that will be of value
will be the brand name, which by that time will be an empty shell. By the
time any court reaches an affirmative decision about Napster, the decision will be mute. Just about every significant label will have some type of Napster-ready delivery-service in place by the middle of 2002.
--The AOL/Time Warner merger will happen before the end of the year. The stock will return to close to its former glory (about 90 a share) in
September. AOL will announce a subscriber based model that will be faster and cheaper than any of its competitors. However…
--As for Internet Record Clubs: The subscriber based model in general will
fail miserably. Record companies will be forced to adopt one of the two
scenarios (or both): improve the technology standard, or sell out to
advertisers in a big way.
--The Cell phone will become the most significant new contributor of revenue for writers as the technology for music-on-demand is implemented and people "order" hits to be streamed through their cellular devices.
--However, the music-on-demand service will be hurt significantly because it will not find its way into cars anytime this year as predicted by the various services who are marketing this technology. It's still just too damn
expensive. CDs are still not standard in most cars even after 21 years, yet on-demand marketers predict that car manufactures will bend over to kiss their bum and install these on-demand-receiver-thing-a-ma-bobs anyway. Sure.
--The Copyright Office of the United States will not set a standard for the
"Interactive Streaming Statutory Rate" (that's what I'm calling it) until
late this year, maybe even early 2002, buying time for several internet radio stations. But in the end, most Internet radio stations will go bye-bye and be absorbed by conglomerates.
--The FCC will redefine the meaning of a "radio station market," thus
expanding their power and jurisdiction over the Internet and allowing
conglomerates to own far more stations in a market than they are currently allowed to own. This will make any company's portfolios of stations ripe for massive buy-outs (apparently the intended effect). Soon, before the end of 2002, it will be possible for one corporate entity to completely control the radio airwaves in a
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