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Hip to the Groove #5: Milking the Cow
by Tom Körp
Hip to the Groove #5: Milking the Cow
We’ve all heard that saying: the cautionary, finger-wagging line about not giving the milk away for free, because then no one will want to buy the proverbial cow. It’s an old favourite, and mom, dad, and the grandparents have doubtless dropped that one on each of us at some point in our lives.

Considering how ubiquitous that mercantile adage has become, it’s surprising to see how many businesses are doing the exact opposite of what the grands and the ‘rents have been advising all these years. I’m not talking about small scale freebies and promos to entice the consumer—the supermarket finger foods, complimentary beverages, CD samplers, shareware, demos, and trial memberships—since those intentionally limited experiences are designed to inspire desire for something that was previously unneeded or unknown. They are simply smart self-promotion and marketing techniques, examples of the time-tested “try it, you’ll like it” approach to salesmanship.

Rather, I’m talking about businesses that, for whatever reason, have decided they should give their core product away, free of charge.

Newspapers, for one, have pioneered the questionable practice of undermining their print runs by providing the entirety of their bread-and-butter business—that is, reporting the news—online at no up-front cost to the reader. To use The New York Times as a concrete example: as of this posting, a resident of western New Jersey has the option of paying for a yearly print subscription at $10.60/week (less promos and sign-up specials), $1.50/day for single copy ($5.00 on Sunday), or browsing the paper and its magazines online for free, with or without a registration (which is also free).

The wisdom, if you can call it that, behind the shift from an analog, printed-and-purchased format to one that is digital, online, and (mostly) free-to-use is based primarily on advertising revenues. Without boring you with the details, most newspapers and magazines do not make much in the way of profit from subscription fees and single copy sales; if anything, said income is used to defer the cost of printing, shelving, and delivery. The true “secret” to making a buck in the news industry is advertising, plain and simple. As such, the more subscribers, site hits, and registered users you have on your audit sheets, the more attractive you are to potential advertisers—meaning that you can also charge said advertisers more money per column inch, pixel, and kilobyte. It’s like supply and demand, except you need to supply more readers before you can demand a higher advertising rate.

It looks great on paper, until you realize that the paper itself—the original news medium—is a losing proposition. For one thing, the profit margins are grossly skewed towards the online component of the business, which is insanely profitable only in the sense that it costs so much less to maintain a website than to lay out, print, package, and distribute a newspaper. Generally speaking, revenue per ad tends to be less for a website (note: it’s hard to convince someone to pay as much for an intangible product as a tangible one), but there’s little-to-no space limitations (more space = more ads = more potential revenue), and operating expenses are minimal, since the profit margins of online distribution methods, being ancillary to the main newspaper, often do not factor in the cost of maintaining a stable of journalists, editors, photographers, features writers, graphic artists, and paginators, let alone the printers, bundlers, and delivery persons responsible for creating and shipping the physical product. Hardly; with few exceptions, embracing the promise of the Internet Age means sending the old horses out to pasture (via layoffs, buyouts, etc.) and expecting a skeleton crew of roaming freelancers, telecommuting bloggers, uninsured part-timers, non-contract workers, and harried IT personnel to pick up the slack. Working smarter often means working thinner, and common practice these days is to cut fat and muscle in service of the bottom line. So it goes.

As evidenced by the February shuttering of Colorado’s Rocky Mountain News , solvency issues plaguing the likes of Tribune Co. (layoffs for everyone!), The Philadelphia Inquirer, and The Boston Globe, plus the foreboding digital migration of the Seattle Post-Intelligencer this past March, the newspaper industry is in the midst of a sea change the likes of which it has never experienced before. Sure, radio and television had co-opted their fair shares of the readership in the past, but broadcast news and entertainment were—‘til the advent of TiVo-like DVR services, Podcasts, YouTube, and Hulu—dogged by a sense of fleeting timeliness, an in-the-moment urgency that, barring syndication, cassette tapes, and VCR-finagling, precluded repeat listening and viewing. Printed media like newspapers and magazines had the distinct advantage of remaining in the home for a few days or even weeks at a time, permitting readers to browse repeatedly and at their leisure, absorbing information at their own pace and passing it along thereafter. Where radio and television had immediacy, newspapers and magazines had breadth, depth, and durability. Now, the scions of the Digital Revolution meet all of those needs: browse for news updates 24/7 with an RSS feed, watch television shows on-demand, tailor you own streaming radio station to suit your taste, and share all of those things through the social networking service of your choice. The vastness of the Internet has birthed the virtual Übermedia: an easily- and ever-accessible triune of literature, film, and sound, all-consuming, all-producing, all-involving, and all-sharing. It has changed—and continues to change—our daily lives in ways we cannot even begin to fathom, let alone anticipate. And, as in the case of newspapers, some in-real-life businesses find themselves undercutting their income with the very thing they had hoped would supplement it, effectively making their original business model obsolete in the process.

But, for the sake of this article, newspapers are merely an example of what has already happened: the laying low of a once-proud industry, followed by its well-documented struggle to stay afloat in a wide and turbulent sea where one would be better off growing a set of gills and learning to swim. Really, it’s a case of Social Darwinism meets the (ostensibly) Free Market. Resist and drown. Adapt and survive. Convert or die.

Such forced evolution is one of the more painful side-affects of the Digital Revolution, and the music industry is yet another example of a large-scale business model in the midst of a decidedly uncomfortable transformation. Not that this is the first time that the music industry—collectively: those individuals and businesses responsible for the recording, production, manufacture, and distribution of a physical record—has had to reevaluate its modes and methods, nor will it likely be the last. Think back to the transition from the stand-alone single to the long player album as the primary saleable good, as well as the numerous storage format shifts (successful and otherwise) of the past twenty years, from LPs and 8-tracks to cassette tapes and CDs, MiniDiscs and downloadable MP3s. Truly, the music industry is no stranger to change, though it is far more familiar with expansion than contraction.

There is no doubt that the advent of the Internet has impacted the music industry in a profound and multifaceted way, exposing its artists, performers, labels, and retailers to an infinitely wider (and increasingly international) market, as well as providing a vast array of easy-to-use promotional and info-marketing tools like MySpace, YouTube, Pandora, Last.fm, MOG, and imeem. Not to mention direct-to-consumer sales via artist- and label-specific websites, increased/alternative distribution through online merchants like Amazon and Insound, digital download stores like Apple’s iTunes and Microsoft’s Zune Marketplace, and hybrid subscription services like eMusic and the Roxio-revised Napster.

But this expanded toolset is the silver lining to the music industry’s sordid love affair with the World Wide Web. Hindsight being 20/20, the development of the MP3 compressed audio file format in the mid nineties was the first stone sent a-rolling down the digital hill, a seemingly innocuous prelude to the late nineties’ avalanche of legally questionable peer-to-peer file-sharing made possible by IRC chat rooms and a host of decentralized P2P networks and their attendant websites. Even so, music downloads were tied down to an Internet-enabled computer, or relegated to a mix CD; the MP3 was new, yes, but it wasn’t yet its own. Despite earlier attempts at creating mass-marketed portable digital audio players—most famously by South Korea’s SaeHan Information Systems’ MPMan and Diamond Multimedia’s Rio PMP300, both introduced in 1998—it was not until the introduction of Apple’s iPod portable digital music player in 2001 and the launch of its associated iTunes online music store in 2003 that the digital audio revolution finally cut its tether and hit its stride. And, thanks to no shortage of very prominent public advertising, the iPod-fueled MP3 craze has kept a steady pace ever since. It was sleek, it was mobile, and it was not looking back.

Really, the music industry is still reacting (and sometimes overreacting) to the ongoing format shift from its flagship CD format to the relative newcomer MP3 (an admittedly catchall term for the multifarious audio codecs in current use), and it seems as though the industry is constantly developing new ways to promote, purchase, and copyright-protect digital downloads. We have computer audio player applications with self-contained download shops; store-bought gift cards for downloaded music sold side-by-side with physical albums; MP3 kiosks in shopping malls and supermarkets; song recognition software and instant access to the MP3 storefront of your choice via your smartphone. As if it were not a complicated enough process to begin with, this marketing shift from the material to the ethereal (often using the former to promote the latter) has been regularly confounded by the rampant spread of Gnutella- and BitTorrent-enabled digital “piracy”—the for-free online distribution of copyrighted files without the expressed consent of, let alone monetary compensation to, the creators and copyright owners.

But I’m getting ahead of myself. Even with the specter of piracy lurking in the background, from the perspective of record stores specializing in CDs, the ongoing shift to e-sales and MP3s has been a nightmare in terms of slumping sales and retracting revenues. In addition to the cultural cachet, storage capacity, and portability of the iPod and its competitors—with the latest versions of Apple’s miracle devices (the iPhone included) giving the user 24/7 WiFi connectivity to the digital music marketplace—there’s also the glaring price difference between a CD and a legitimately purchased MP3. Presuming that audiophile quality and collectibility are not a consideration, when an individual can purchase an album like the Yeah Yeah Yeah’s It’s Blitz for the standard price of $9.99 via iTunes, why in the world would he or she shell out $17.95 for that same album at FYE, $13.98 at Target, or $9.99 (plus ~$2.98 S&H) on Amazon? Moreover, what reason does the individual have to purchase the entire album, physical or digital, if he or she only wants its hit single(s)? Returning to our introductory adage from another angle: how do you convince your customers to buy the cow if they only want a glass of milk?

This specific variety of personal choice meets cost/benefit analysis is the key to understanding the current plight of the music industry. According to the U.S. Manufacturers’ Unit Shipments and Value Chart, a year-end report provided by the Recording Industry Association of America (RIAA), total CD sales for its constituent members (most notably the “Big Four”: Universal, Sony BMG, Warner, and EMI) have dropped steadily over the past eight years, plummeting from 942.5 million units in 2000 to 384.7 million units in 2008. In contrast, legitimate digital downloads have risen drastically, growing from 4.6 million albums in 2004 to nearly 57 million in 2008, though this is still far from what would be needed to meet the difference in physical CD sales. Even more impressive (and telling) is the resurgence of single purchases in terms of digital downloads, which exploded from 139.4 million in 2004 to over 1 billion in 2008. Compared with the sales figures for CD singles—which nosedived from 56 million in 1998 to 3.1 million in 2004 and dropped even further to less than 700,000 in 2008—the difference is astounding, and indicative of the MP3’s growing importance in music marketing.

In spite of the meteoric rise of digital albums and downloadable singles, whether by habit or by choice, people are still buying the physical product—and will likely continue to do so until such time as Steve Jobs and Bill Gates can put an iPod or a Zune in the hand of every person on the planet. ‘Til then, the CD remains a viable option to the MP3 juggernaut; stranger still, the rampant growth of digital audio seems to have caused an unexpected (albeit small-scale) jump in the analog and nostalgia markets. In an intriguingly retro-minded market move, LP sales were up 124% from 2007 to 2008 (from 1.3 to 2.9 million records), and trend-watching national retailers like Best Buy and FYE are now devoting entire sections of their stores to new and re-released vinyl records from contemporary artists like Radiohead, M.I.A., Coldplay, MGMT, Santigold, and Green Day. Moreover, RIAA sales figures—which, notably, neither include nor account for independent artists and record labels in the United States, an 18% market share according to Nielsen SoundScan—show that the total unit shipments (over 1.8 billion) for 2008 were split 68% physical (CDs, cassettes, LPs/EPs, vinyl singles and DVDs) and 32% digital, with a combined net value of nearly $8.5 billion. While that many billions of dollars is nothing to sneeze at, it’s nevertheless a nearly 42% decrease in revenue since 1999—the cusp of the Napster-spurred P2P file-sharing craze—when combined sales netted over $14.5 billion for only 1.1 billion units shipped, the entirety of which were physical.

Think about it: as of 2008, digital audio content owned a nearly one third share of the (legally purchased) music market in the United States. One third! All after less than ten years of popular, post-Napster existence—merely five with iTunes present—during which time net sales for the music industry have declined by over 40%. This is a huge drop in revenue, period. And, despite the still-growing popularity of online audio retailers and monthly subscription services, the music industry, like the newspaper industry, is being forced to confront the harsh reality of the Digital Revolution: selling more of a digital product does not necessarily generate more revenue, especially when that implicitly cheaper digital product is effectively undercutting sales of the physical product—a process which is likely to worsen if the trend from the physical to the digital continues with the rapidity it has shown thus far.

And, to once again revisit our bovine metaphor, no one is going to buy the cow if is both cheaper and easier to just buy a glass of milk. It doesn’t take an economist to figure that one out, does it?

Unfortunately, the music industry’s reaction to the inherent shortcomings of its digital dairy discounting ways has been, well, reactionary. Whereas newspapers have inflicted the vast majority of their problems upon themselves through attrition and poor planning (and seem latently resigned to that fact, however resolute they may appear), the music industry has found a rather convenient scapegoat for its own implosion. Namely: digital piracy. Slumping revenues? It’s that damned digital piracy, which, according to an August 2007 report by the public policy wonks of the Lewisville, Texas-based Institute for Policy Innovation (IPI), costs the US economy $12.5 billion and 71,060 jobs annually. Yikes. Alright then, let’s sue a single mother of two to send a message to those thieving bastards. Case closed. What? Piracy is trending upward? Hrm… sue a ‘tweenager this time, that’ll teach ‘em. No? You’re kidding! Sales are still down!? Avast, ye scurvy bilge rats, it be time to indict some Swedes.

What the RIAA and its international affiliates have yet to realize is that the prosecution of digital pirates and websites (deserving or not) and the attempted coercion of Internet Service Providers to disclose users’ identities (and potentially deny them service) are not optimal, let alone realistic, solutions to the problems plaguing the industry. Obviously, it’s not just a matter of closing down the aggregating sites and nixing the BitTorrent links. Those are mere facilitators, the virtual “guy who knows a guy”, pointing other offenders in the direction of what they’re after. As the RIAA has slowly but surely learned, music piracy is the Lernaean Hydra of the digital world—cut off the head of one Pirate Bay (if you can), and two more will rise up to take its place. Prosecute one copyright offender, and you’re still leaving millions of others untouched, with more joining their ranks every day.

In truth, the larger, more confounding problem is the consumers themselves. According to the 2009 Digital Music Report from the London-based International Federation of the Phonograph Industry (IFPI)—an umbrella organization for defending and enforcing musical copyright law on the world stage—approximately 40 billion audio files were illegally shared in 2008. Jupiter Research also cited an estimated annual loss of £180 million in the UK music industry alone, with a projected loss of £1.1 billion by 2012. Additionally, the IFPI’s study claims that 16% of Internet users in Europe were found to have engaged in digital copyright infringement that same year. Given an approximate total population of 830.4 million and assuming that 50% of said population has Internet access, this would mean that roughly 66 million Europeans committed acts of digital copyright infringement in 2008 alone. Even if the IFPI’s findings are exaggerated, I somehow doubt that prosecuting each and every one of those individual users is tenable. There’s simply not enough time and money (or copyright attorneys, though I could be wrong) to handle all of the legal proceedings.

Which leads us to the other problem plaguing the music industry—or, at least, plaguing the RIAA, the Big Four, and their subsidiaries and associates: they’re the bad guys.

Rather, that’s how they’re coming across. Non-profit agencies like the Electronic Frontier Foundation (EFF) have made it their mission (well, part of their mission) to document and educate Internet users about the RIAA’s copyright-infringement lawsuits, which, since 2003, have been launched against the likes of single mothers, laid-off secretaries, college professors, and high school students, resulting in settlements and judgments ranging from $2,000 to $222,000. Then there is the 2007-onward “deterrence and education initiative” campaign. Focused primarily on college students in the United States, the D&E initiative makes use of IP address-identification methods and “pre-litigation” letters sent to college administrators. Per the RIAA’s request, said letters are then quietly forwarded to the IP-identified “John Does”, complete with instructions on how the offender can agree to a quasi-anonymous, non-negotiable, out-of-court settlement of roughly $3,000, payable by credit or debit card through P2Plawsuits.com.

Oddly enough, targeting student offenders this way makes a good amount of sense, especially when you consider that the widespread computer access and large peer groups inherent to modern college campuses helped spawn the Ur-P2P Napster, and that many college campuses continue to be hotbeds of casual copyright infringement for those same reasons. The RIAA is trying to go straight to the source with its compensatory claims, and without all of the time-consuming court proceedings and damning media kerfuffle. At face value, it’s an incredibly shrewd move.

But, even while the RIAA is well within its rights to file civil suits against copyright infringers, the severity and limited scope of the fines imposed seems a haphazard means of defending the intellectual property rights of its member artists and publishers. Putting select individuals into thousands of dollars’ worth of legal debt over a mere handful of pirated songs hardly seems fair, does it? In this sense, the RIAA’s litigation efforts amount to little more than “tough love” bullying and blatant scare-tactics: spankings, public hangings, and shots fired across the bow of the largely ignorant and apathetic pirate ships that comprise the global collection of P2P file-sharing networks and their users. According to the EFF’s September 2008 whitepaper, “RIAA v. The People: Five Years Later”, studies performed by Beverly Hills-based media measurement group BigChampagne show that the number of simultaneous P2P users in the United States reached as high as 9.35 million in 2007—up from an estimated 8.9 million in 2005, which was reportedly double the amount of simultaneous US P2P users in 2003. Yet another EFF-mentioned study, this one by Santa Monica’s Digital Music News Research Group, asserts that, as of February 2007, over 18% of desktop computers worldwide have the Gnutella-based P2P application LimeWire installed.

Okay, math time again—total world population being roughly 6.7 billion, and assuming that maybe 25% of the population has Internet access, this 18% works out to be about 301.5 million people with access to P2P networks and illegal file-sharing. If, in the RIAA’s wettest of dreams, it had the jurisdiction, financial resources, and manpower to file the above-mentioned pre-litigation letters against that many people, at $3,000 a head, it would generate close to $904.5 billion in settlements. Compare this with the IPI’s and IFPI’s estimated annual losses of $12.5 billion in the US and £180 million (approx. $288 million) in the UK, and you begin to see how disproportionate the RIAA’s response has been. Download one album’s worth of songs, if that, and you run the risk of being fined $3,000 for illegally acquiring the contents of a $15-$20 piece of plastic. Nothing like justice under the Digital Millennium Copyright Act, eh?

Litigious lunacy aside, what, if anything, is the optimal solution to digital piracy? How can you keep people from stealing the milk, let alone convince them to buy the whole cow instead of just the occasional pint of cream?

How, indeed. The threat of lawsuits has obviously been less than effective, particularly if the continuing P2P network growth documented by BigChampagne and others is on target. Though punishment seems far from the answer (the number of potential offenders alone makes it impractical), prevention has proven itself to be even less effective. Legal threats aside, the music industry’s main deterrence method—a variety of data encoding and encryption methods collectively known as Digital Rights Management (DRM)—has been an abject failure, often managing to do little more than delay the inevitable. Given the large and frequently tech-savvy population invested both casually and professionally in digital piracy, workarounds utilizing decryption keys, software patches, and analog loopholes are easily created, promulgated, and employed by others to bypass the usage and reproduction restrictions of most DRM-encoded file formats, effectively reducing a brick wall to little more than a bump in the road. Worse yet, very public snafus like Sony’s implementation and subsequent recall of CDs using the malware-like Extended Copy Protection (XCP) have further diminished the credibility and perceived effectiveness of DRM technologies. Striking yet another blow (and a potentially fatal one at that) to proponents of Digital Rights Management, a recent announcement from Apple stated that, as of April 2009, its industry-standard iTunes store would begin the process of converting its entire store to high-quality, DRM-free “iTunes Plus” AAC files. I don’t know about you, but that sounded like DRM’s death knell to me.

So, if punishment and prevention are failing miserably to curb the Internet-enabled public’s seemingly insatiable appetite for “free” digital music, what alternatives are there? Maybe run some adverts showing the human face of the music industry? Appeal to some vague idea of a shared morality? Perhaps send a sternly-worded e-mail to all 301.5 million suspected pirates, asking them, politely, to stop—pretty-please with sugar on top?

Yeah, good luck with that.

Still, even with the music industry evolving (alternatively: self-destructing) the way it has, the question remains: how, oh how, do you sell that goddamned cow?

Bear with me now, but here’s a thought: maybe, instead of trying to sell it, you should just give it away. Read the writing on the wall, cut your losses, and stop fighting a virtual war you could never hope to win. Reinvent your business so that recorded music serves less as a product in and of itself, and more as a means of promoting the real deal—concerts and live performances—plus or minus ancillary merchandizing near the lines for the bar and the bathroom. Forget about the Billboard Charts. Forget about going gold. Make CDs, like LPs, into collector’s items, with limited runs at limited expense. Defer physical production costs and limit your overruns by harnessing the power of the pre-order. Strip it down. Keep it simple. Get smaller, work smarter. It might not make you a multi-millionaire (it might not even make you a thousandaire), but it’s a more readily-sustainable business model that should keep you from going bankrupt playing search-and-destroy with the infinite flotilla of pirates, P2P networks, and Torrent sites who make their roving homes on the digital sea. Hell, the public might even lose interest in downloading through less-than-legal channels if you’re giving it away for free to begin with.

Better yet, you could even come up with your own, faster, more reliable P2P networks. Beat the bastards at their own game, yeah? Maybe charge a small monthly service fee, sell some ad space, throw up some links to artists’ online merch shops and ticket booths, monetize the user data, and cobble together a few smartphone and social-network apps to give it that extra, viral touch. Make it a one-two promo punch, y’dig? The people get their music cheap-as-free, the artists get their royalties, the industry gets its marketing statistics, et voilà—everyone’s fat and happy. Sure, it might sound like a crazy idea… but, then again, it just might be crazy enough to work.

And, if that’s not punk enough for ya, there’s always the option to just plain give it away for nothin’. Consider the strange tale of Quote Unquote Records (QUR), a microcosmic “Bizarro World” take on the recording industry headed by former arrogant son of a bitch and current Bomb the Music Industry! frontman Jeff Rosenstock. Less a record label than a group of musician friends with a shared distribution method, QUR bills itself as “the first ever donation based record label”, and its mission statement is just that. “We are just trying to do something different because different = fun,” reads the label’s website, “We have simple goals which is [sic] to put out good music, put out fun music and help our artists get heard.”

With or without making an entirely optional donation (ideally $5 per full-length album), listeners can stop by the QUR website, peruse its wares—including endearingly scrappy punk and earnestly roughshod rock from the likes of Chotto Ghetto, Bomb the Music Industry!, Cheeky, Shinobu, and O Pioneers!!!—and download what they like for free. Maybe people donate a buck or two, maybe they throw down $50. Maybe they find out who’s playing where and when, go to a show, hang out, and buy a t-shirt or an LP (most QUR bands have their music available in a physical format, be it CD or LP). Maybe they don’t. For Rosenstock and his friends at Quote Unquote Records, making the sale isn’t the point; the point is that people are listening.

On the whole, that’s a lesson in customer appreciation that the music industry could stand to learn. Sales revenue may be down, but demand is higher than ever; legally or not, the ranks of listeners at home and abroad are swelling at a phenomenal rate, with more artists and performers being able to reach more and more potential fans every day. To say that the Internet is destroying the music industry—or the newspaper industry, for that matter—is narrow-mindedness of the highest order. This is not the hour of the industries’ extinctions, but the once-in-a-lifetime opportunity for each to reinvent itself, to shed the weight of their old ways and embrace the potential of near-infinite readerships and listenerships, and to be able to cater to the needs and wants of each with a level of precision and flexibility never before imagined. Though the process may be painful, for either industry to forego their digital evolutions is to renege on the very promise of openness and accessibility that is the Digital Revolution. Resist, and they will drown. Adapt, and they will survive. Convert, and they shall thrive.

Either way, the end of an era is nigh—so stop worrying about avoiding the inevitable, and start planning for what comes after.
Posted by: Tom Körp

Features (May 31st, 2009)

Tags: beatbots, features, hip to the groove, digital piracy, music industry


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