Editor’s note: Russ McGuire is the online director of Business Reform Magazine. Each issue of Business Reform features practical advice on operating successfully in business while glorifying God.
For the past five years, the music industry has fought tooth-and-nail against digital downloading of music. Although still fighting legal battles against illegal downloading, record labels are finally warming up to legitimate services that contribute to their top line instead of stealing from their bottom line. However, the industry’s total distrust of the Internet has blinded it to the huge upside represented by the digital medium.
When the Web burst onto the world in the early 1990s, many claimed that all rules of business were thrown out the window. Obviously, most of those claims have since been proven false. However, there are at least three critical lessons that the music industry should learn from the Internet revolution.
- Digital delivery obliterates the compromises introduced by the realities of physical delivery.
- Communities thrive online.
- Selling direct really works.
So far, these online realities have merely been risks that have burned the music industry, to the tune of millions of dollars in lost revenues. If the industry were to embrace these realities as opportunities, record companies may actually find a way to return to profitability.
Think about it. The entire music industry has been structured around getting physical products into the hands of paying customers. This has tremendous implications for the research (finding new artists) and development (producing new albums) of new products, the marketing of those products (radio and concerts), and the distribution of those products (primarily through record stores).
All of this translates into compromises that must be made at every step.
The cost of fully developing the very first song from a new artist and introducing it through the sales channel is quite high for a major record label. The economics of physical delivery require that a full album (roughly ten songs) of material must be created for any hope of breaking even. That means that a full album of material must be produced in the studio, requiring hundreds of hours of expensive studio time with an expensive producer and an expensive band of talented studio musicians. The album that is produced from these sessions must be packaged with attractive photos, artwork, and words so that it will catch the attention of record store owners and consumers and convince buyers to plunk down $15 of their hard earned cash on a totally unknown artist. Investing in radio promotion and the opening slot on a major concert tour can help, but doesn’t come cheaply.
What if a new artist recorded one song instead of ten? What if a single photo promoted that song? What if a simple paragraph describing the artist and her music were used to promote the song? What if that song were recommended by a hugely popular artist to his fans in an online discussion forum?
The entire packaging concept of the music industry can and should be thrown out the window. The ten song “record album” should become a vinyl memory of the past. It forces artists to compromise, filling their albums with weak songs to complete the package. It forces fans to wait for the complete package to be delivered, months after the artist has completed a brilliant song. And it forces the record labels to spend more money to produce a weak product that consumers don’t want and of which musicians aren’t proud.
Sure, there are exceptions. Opera and classical music have traditionally been produced with themes stretching across album length timeframes, and popular artists have mimicked those forms in creating “rock operas” and “thematic albums”, but in the music industry world, those are the exception rather than the rule. Unfortunately, the industry is ruled by the exception.
Digital delivery can break all of these compromises to the benefit of the consumer, the artists, and yes, even the record companies.
Artists may still produce ten new songs each year, but by focusing on a smaller set of songs at a time, the product of each session could be much more satisfying. In fact, artists may record a rough demo of a song (an “alpha test” version?), produce increasingly refined versions (“beta versions”), eventually releasing the “general availability” product. True fans may be willing to pay a premium price for each version.
Which leads us to the second point. Communities naturally thrive on the Internet. Fans of popular musicians love nothing more than to compare notes with other like minded listeners. As a simple example, the Dixie Chicks fan site features six discussion forums with a total of nearly 70,000 messages from fans. Yahoo is charging $30 a year to join the “official artists club” and apparently, there have been more than a few takers – enough to generate 70,000 messages! Imagine the opportunities lost by Columbia Records by failing to tap directly into this audience.
Band fan clubs have always been a great way to sell high priced/high margin products to the narrow group of people likely to actually pay for it. The problem has traditionally been finding those people and serving them in a cost-effective manner. The Internet has clearly solved both of those problems as fans have been the ones searching for the online communities of fellow fans. For the most part, labels have missed the opportunity to host these communities and to reap the financial benefits of doing so. Label-authorized downloading of music by paying fan-club members is a natural addition to the news, photos, t-shirts, and other commodities that have been exchanged within fan clubs for decades. And who is better positioned to centralize all of this activity than the labels?
Finally, from the earliest days of the music industry, it has been unrealistic for the labels to sell directly to the public. Buyers are too distributed for labels to establish direct sales stores in every community around the world. Independent record stores make perfect sense, aggregating products from all the labels into a single source for the consumer. These distribution channels have become the lifeblood for the labels. Therefore, these retail channels hold incredible power over the industry. The labels would never consider attempting to bypass these retailers by selling direct.
Well guess what? The traditional record stores are doing virtually nothing in the music download space. Instead, the labels are enabling a new group of channels – Apple, Musicmatch, Roxio/Napster – to gain the same kind of power the retailers have traditionally held. And by doing so, the industry is destroying its traditional sales partners – and gaining virtually nothing for themselves in the process!
On the Internet, aggregation is almost meaningless. It’s easy for online shoppers to search for the website that is selling the product they need and it’s certainly much easier to hop from one website to another than it is to drive from one store to another. The labels are unnecessarily creating a layer of middlemen who raise prices for consumers and take profit from the labels.
Consider this. Recent analysis by “Business 2.0 magazine” broke down the roughly one dollar per song charged for a downloaded song. The song publisher typically takes eight cents. The artist gets somewhere in the twelve cent range. The label gets thirty cents. The remaining half buck goes to the music download service and other middlemen. Talk about lost opportunity!
Bottom line, the music industry as it exists today needs to stop viewing music downloads as a threat to be minimized and instead manage the Internet as an opportunity to be realized.
If they fail to do so, they’ll have no one but themselves to blame for their continued financial decline!
Russ McGuire is Online Director for Business Reform. Prior to joining Business
Reform, Mr. McGuire spent over twenty years in technology industries, performing various roles from writing mission critical software for the nuclear power and defense industries to developing core business strategies in the telecom industry. Mr. McGuire is currently focused on helping businesspeople apply God’s eternal truths to their real-world business challenges through Business Reform’s online services. He can be reached at [email protected].
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