Saturday, May 26, 2007

Prologue: "The Maserati Imperative"

The problems the record industry is having aren't caused by peer-to-peer file sharing...or home CD burning...or Internet radio (quite the opposite!)...or inadequacies in copyright law.

In my opinion, the root cause of the record industry's problems is a belief on the part of senior management that they have the RIGHT to have their glory years -- that shining period of roughly 2000-01, when all the factors were lining up in their favor, and sales volume, profitability, and executive perks were all at their peak -- extended INFINTELY into the future, regardless of changes in technology, consumer tastes, or competition for the entertainment dollar.

In other words, the record executive who was driving a Maserati in 2000 believes he has a right to continue to do so forever.

(By the way, I realize that a more accurate car model would probably be something like a high-end Mercedes, but I don't know my Mercedes model numbers and, what's more, "The Maserati Imperative" makes a great book title, doesn't it? (See illustration.))

Ch. 3: The Heart of the Matter: DVD pricing

"Hey, kids, collect the whole set!"

I believe the bloggers and anlaysts who believe that the era of the CD is over are wrong. Why? Because we live in a culture where people like owning things that they like.

Example: I've watched every episode of "30 Rock" this season at least twice, but when that boxed set of Season 1 gets released in September, I'll be at the front of the line to buy it so I can give it an honored place on my bookshelf full of box sets of my favorite TV shows' best seasons.

DVDs are an increasingly better value relative to CDs

Here's the primary problem causing the decline in CD sales (in my opinion):

Other segments of the entertainment industry are aggressively competing on price in an attempt to grow their overall revenues. And if a consumer has got a somewhat limited budget for entertainment purchases, and other things are becoming better values than music, he or she is going to start spending less on music and more on other things. (D'oh!)

You may recall, quite a few years ago, when the movie studios realized that they would make a lot more money selling millions of DVDs at $20 than tens of thousands at $60.

That pricing strategy really, really worked! As a result, during the past few years, the street price-per-hour of VIDEO -- with high production values, and attractively packaged -- has come down to about $7 per hour of content in the case of movies (and as low as $3 per hour if you take into account bonus features) and, even more appealing as low as $1.50 per hour in the case of TV shows (see illustration).

Meanwhile, the record industry is obstinantly trying to hold to their traditional price-per-hour of about $20 per hour of content for mere AUDIO.

And why do they think that consumers will let them get away with this? The Maserati Imperative!

Ch. 4: Deceptive Bends: Bullsh*t doesn't help

Obvious lies to journalists and Congress aren't going to help

"CD sales have slumped 25 % since 2000, while webcasting audiences have grown dramatically." -- SoundExchange FAQ

As Penn & Teller (well, actually, Penn) would say, "Bullshi*t!" That's being presented as a causal relationship when they know full well that's not true!

It would be equally true to say "CD sales have slumped 25 % since 2000, while consumption of Starbucks Orange Mocha Frappuccinos has grown dramatically."

Logically, therefore, Congress should impose a tax on Orange Mocha Frappuccinos and give the money to the big four record labels!

CD sales are slumping because DVDs and video games and other competitive products are offering increasingly better relative values... and because people are less interested in music nowadays (partially for that reason)... and because there are no hot new musical trends (like boy bands in 1999 and rock-rap in 2002).

Internet radio, on the other hand, is helping PROP UP those declining CD sales! (See for the comments of over 60,000 people who explain why.)

So conflating those two data points in the SX FAQ is just wrong on every possible level.

Ch. 8: Technology creates opportunties

Technology creates opportunties,
but opportunities get ignored

The technology industy has handed the record business a potentially amazingly wonderful lifeline: They're selling kids (and, not to mention, adults) MP3 music players that hold 20,000 songs!

Yet what is the record industry doing to take advantage of this opportunity? Nothing.

Let's do the math: The net price per track of music when purchased in the CD format -- with nice packaging, near-perfect fidelity, and no copy restrictions, and despite expensive physical distribution costs -- is about 90 cents. But for download sales -- with no packaging, reduced fidelity, and signficant copy restrictions, and NO physical distribution costs, they're trying to get 99 cents! (And apparently, given what we read about how Steve Jobs had to cajole them into that, they're not happy with that!)

And then they have the sheer, unmitigated gall to complain to Congress that they need legislative relief because download sales aren't growing fast enough to perfectly supplant CD sales declines!

Realize that their pricing scheme means it would cost a teenager $19,800 to fill up their MP3 player legally. But the execs who run labels intend to hold that price, no matter what is happening in the worlds of technology, society, or their competition (e.g., declining DVD prices)! Why? Because they feel they have the right to maintain the same pricing, sales volume, and profit margins as they had in their glory years. It's the Maserati Imperative!

Yes, I'll admite there is a legal way for kids to fill their MP3 devices (as long as they're not iPods) -- the subscription plans offered as Napster-to-Go, Rhapsody-to-Go, etc. Two problems, though: (1) They are not consistent with the American desire for ownership of things (which is especially true for kids ("Kids, collect 'em!")). (2) To maintain your collection of tracks, you're looking at a commitment of $15/month for the rest of your life, so it's still a prospective $10,000 commitment if you want to go that route. In contrast, if you spend that same $15 on a CD this month instead, at least it's yours for the rest of your life.

Ch.20: Home taping

I'll expand on this point later, but let me insert a note here that CD burning has always been with us. Only back in my day, it was called "home taping." (Ah, the TDK SA-C90 cassette!)

This practice was (and probably still is) an excellent music-discovery medium, second perhaps only to radio. Taping friends' LPs is how I discovered Bruce Springsteen, Led Zeppelin, and many other acts that I later went on to spend lots of money on. For acts that you like, eventually you prefer to own an "official" copy, not something that lacks cover art and where you made the label using a Sharpie.

As it was, so it shall always be.

Ch. 30: Hey 19: Today's young people today

We adults in charge of the radio and music industries are so out of touch with the younger generation that Phil Leigh can get away with a 45-minute podcast of interviewing one college student... and can charge $50 for the transcript!

In this chapter, we'll talk to a bunch of today's young people (like Josh, pictured) and learn how they're using CD burning and P2P file sharing, whether they're opening to purchasing music at all (and, if so, in which file formats and configurations), whether radio has (or could have) any role in their lives, and more.

Appendix: Miscellaneous material

"They are greedy SOB's who are tripping over quaters to make a dime."

I love Mark Cuban, but I think he's wrong on this one (that the record industry can be saved by selling downloads via ATMs):

WSJ today (5/30) has an article about the total lack of audience at (comScore says "Too low to be measureable"). Reminds me about how Mercury Milan's radio channels had an AQH of 3 people... and about how Tide's elaborate message boards have a total of about 20 posts, most of which are critcizing the product and recommending competitors. (I used to tell people, "I'm a Tide user, but I'm not going to join a Tide user community..." Apparently I am not alone!)

Good article on Seventies rock LPs: