In the early 1950s the American movie industry found itself in a state of crisis. After decades of prosperity-people had kept going to the movies even during the Great Depression-Hollywood's economic well-being and its cultural dominance were shaken by an antitrust lawsuit and the rise of television. In 1948 the federal government had forced the major studios to sell off their chains of movie theaters, depriving the studios of a ready-made market for their films and a reliable source of revenue. More important, television allowed viewers to get for free what Hollywood was asking them to pay for. Instead of going out to the theater, people were increasingly content to sit on the couch and watch Uncle Miltie. Between 1946 and 1956, box office sales were cut in half and the movie industry's profits and revenues plummeted.
Yet Hollywood survived. Americans never again went to the movies the way they did in the '30s and '40s. And the studios no longer resemble the vertically integrated motion-picture factories they were in the days when they churned out hundreds of pictures a year. But they adapted to the new world. They introduced innovations that television had a hard time duplicating, such as CinemaScope, a method of showing widescreen films in their truest form. They expanded overseas, where television had a much smaller foothold and where American films still had tremendous cultural cachet. And they played the "if you can't beat 'em, join 'em" game, investing in television production and selling thousands of their movies to the networks. Business was never again as easy as it had been before World War II, but the new system beat extinction.
Fifty years later, the music industry finds itself in a similar state of crisis. After nearly two decades during which the industry luxuriated in the riches created by the invention of the compact disc-which impelled music lovers to buy recordings they already owned and which had profit margins that dwarfed those of the LP and the cassette-the economics of the business look increasingly awful. Music sales fell five percent in 2001, and another 11 percent last year, even as spending on movie tickets and other forms of entertainment rose. Sony Music lost more than $100 million in 2002, while Vivendi's attempt to sell the Universal Music Group has failed because no one wants to buy a major record label in such uncertain times. The most obvious culprit, of course, is the Internet, which allows millions of listeners to download for free music that once upon a time they would have had to pay for. But the industry is also suffering from the inevitable waning demand for its back catalog (everyone who once owned Rolling Stones LPs already has those records on CD), from an economic model that's broken, and from its apparent inability to adjust to a more diverse, fragmented music market. The old ways of doing business, it seems, are no longer good enough.
The music industry, of course, spent most of the last few years denying this, trying to fight a rearguard action against Napster and its ilk while relying on the teen-pop boom to save the day. But in the past year, there's been a general recognition that the industry really is in a state of emergency. That's good, because changes that seem too radical when things are going well suddenly look more reasonable when things are going badly. And radical change is precisely what needs to happen. Here, then, are a few suggestions. Call it a five-point plan to save the music business.
1. ALIGN COSTS WITH REVENUES. This sounds painfully obvious, but in terms of overhead, contracts, and the size of its artist stable, the industry is still acting the way it did in the good old days. As Hollywood's box office take fell, one of the first things the studios did was slash the number of films they made (by 28 percent between 1946 and 1956). The major labels need to do the same with the number of records they release. In 2001 they put out 6,455 albums. That's too many at a time when album sales are falling. Of course, the labels have made gestures in this direction from time to time, and bands get dropped whenever there's consolidation in the industry. But the majors need to be more systematic about winnowing their product.
This will be good for both the labels and the bands themselves. Too many bands sign to major labels with visions of glory, only to end up ignored and isolated when they fail to produce a big hit. But there are now plenty of independent labels that have excellent distribution and low overhead and can make money on an album that isn't a megahit. Ninety-four percent of the albums the majors released in 2001 sold fewer than 100,000 copies. Most of those albums therefore had to be considered failures. But at an independent label, many of these albums would have been healthy successes.
Just as important, the labels need to continue doing what they've already started to do, and that is to put a stop to the megacontracts lavished on stars like Mariah Carey (who reportedly got an $80 million, four-album deal from EMI's Virgin Records in 2001, only to be bought out for $28 million after her first record for the label bombed). The logic behind those contracts was that the only way to make up for all the mediocre-selling albums you put out was to have a few blockbusters, so when you found a guaranteed hit maker you held on to that person tightly. But in the new world, hit makers are selling fewer records and staying at the top for shorter periods of time. In 2000, at the height of the teen-pop boom, the top 10 records in the United States sold 60 million copies. In 2001 they sold just 40 million copies, and in 2002 just 39 million. The blockbuster model made sense only if a star offered a guaranteed return on investment. But in a world where Sony can spend an estimated $25 million promoting a Michael Jackson record (as it did with Invincible in 2001) and then watch it sell just under 2 million copies, megacontracts have to go. Finally, the labels need to be ruthless about their internal spending. Sony's decision to let Tommy Mottola go may be a move in this direction. Like the movie business, the music industry has always been run on the mogul model-put the right guy at the very top and his taste will guarantee success. But if there was ever a time when that made business sense-and that is a big if-it has long since passed. A more diverse, fragmented record-buying audience demands a more decentralized management structure, since no one guy can really keep his finger on the entire industry's pulse.
2. EXPERIMENT WITH PRICE AND FORMAT. The music industry's assumption about people downloading music from file-sharing services like Kazaa and Morpheus has roughly been, "If they can get it for free, they'll never buy music at any price." But it seems more likely that while lots of people who use file-sharing aren't willing to pay $17.99 for a CD, they might be willing to pay eight or nine bucks, or-perhaps more tellingly-they would pay a dollar for a hot single (as opposed to having to buy the whole album). The problem is that the industry has been locked into a single model: the overpriced CD.
There's concrete evidence that lower prices can boost record sales. Last year, a number of labels slashed prices on CDs in the first weeks of their release, with good results. The Vines' debut album, for instance, was available for $7.99 in some places, part of the reason it debuted at No. 11 on the Billboard charts, and Ashanti's debut-which was marked down to $8.99 in a lot of stores-sold more than 500,000 copies in its first week. This isn't too surprising: As any economic textbook will tell you, if you cut the price of something, demand for it will rise. But the music industry has typically acted as if consumers are price insensitive-if they want a record, they'll buy it at any price. This has never been true, and in a file-sharing world, it's preposterous. Lower prices mean more customers.
Just as important, the industry needs to break outside the CD mind-set. The problem with the success of the compact disc is that it made labels think they were in the packaged-goods business instead of the content business. Glamorous as the music industry may seem, its revenue model looks a lot like that of Wrigley's gum-which explains why, as file-sharing boomed, labels stayed focused on getting shelf space at Tower Records for their compact discs. One of the biggest impacts of file-sharing is that it's made consumers realize how much money they were wasting on entire albums when they really wanted only one or two songs. One of the simplest but best innovations some of the labels have experimented with in the past year is allowing people to download a single track from a record for 99 cents. The profit margins aren't as high as they are on CDs, but it beats nothing.
3. OFFER WHAT THE INTERNET CAN'T. If one of your biggest problems is people stealing your content, then one solution is to offer them content they can't steal. Instead of simply putting music on CDs, the industry might also invest more heavily in DVDs that feature videos, live performances, and bonus tracks in addition to the album itself. With so many people now buying home theaters (which provide sound that's better than most home stereos) and with DVD players becoming as common as VCRs, there's a ready-made market for what you might call value-added discs. Of course, the industry has been experimenting with this idea, but, in typical fashion, it has done so in the most alienating way possible, releasing, for instance, a CD-DVD package of Pink's Missundaztood long after most Pink fans had already bought the album, meaning they would need to shell out another $20 or so. A more customer-friendly solution would be to simultaneously release albums in multiple formats. DVDs or Super Audio CDs (which provide much better sound) are never going to be the cash cow the CD was. But they could be nice new revenue streams at a time when the industry needs all of those it can get.
4. STOP BAD-MOUTHING YOUR CUSTOMERS. The music industry undoubtedly has reason to feel sorry for itself. It's hard to face competitors who are giving away product for nothing, especially when the product they're giving away is yours. And it's difficult to do business one way for decades and then to be told that everything is suddenly different. But the industry has only compounded its problems with heavy-handed rhetoric, like when composer Mike Stoller, testifying for the music business' main lobbying group, dismissed Napster's file-sharing service as "thievery". Recording Industry Association of America CEO Hilary Rosen has been described in a Business Week article as "a musical Conan the Barbarian," and the industry's war against Napster and other file-sharing services has mainly been viewed by the public as a corporate attempt to squash an upstart. Similarly, the major labels' hesitant and slow-footed move into the digital world has made the labels appear backward and unwilling, as if they were more interested in protecting their sinecures than serving customer needs (which, of course, they may be).
What the industry needs to do is stop slamming its customers and do a better job of explaining how digital piracy imperils its business. After all, on some level everyone understands that if no one is willing to pay for music, there will be no music (at least not the kind of music we've grown accustomed to listening to). And at least one survey suggests that a significant portion of people who use file-sharing services would be willing to pay for something like Napster. So instead of treating the Internet as the vehicle of doom, the music business needs to embrace it not just practically but also rhetorically. In the future, most music will not be on CDs, but will be downloaded or streamed. The major labels need to define themselves as the drivers of that future rather than the victims of it.
5. CREATE THE SERVICE EVERYONE'S BEEN WAITING FOR. The final step, then, is the most important, and that is the creation of a truly universal, easy-to-use, and reliable online music service. To be fair, the industry has made progress on this front. Where initially music services like Pressplay seemed designed to annoy customers with their unintuitive interfaces, strict restrictions, and feeble selection, the newer versions are noticeably improved, even if the number of subscribers remains small (in the hundreds of thousands, versus the millions who use Kazaa and Morpheus).
The labels, however, are still playing catch-up, and they've also been hurt by their own competition. Pressplay is run by Sony and Universal, while AOL Time Warner, Bertelsmann AG, and EMI are backing a service called MusicNet. Together, they divided the musical landscape. The problem is that no one wants to subscribe to a service that only offers songs from a couple of labels, just as no one would want to shop in a record store that offered only Sony and Universal CDs. Nobody knows, or cares, what label Linkin Park is on-people just want to be able to hear that Linkin Park song when they feel like it. Belatedly, the labels have woken up to the problem, and by the end of last year songs from all five majors were available on both Pressplay and MusicNet. Still, some big names remain conspicuously absent from both services (The Beatles, Madonna, Pearl Jam), which means there are still a lot of tracks you can't pay for on MusicNet that you can get for free on Kazaa. This is strange, because it means that the labels' greatest strength-the ability to aggregate enormous amounts of valuable content-is effectively going to waste. What the industry needs, then, is a site backed by all the labels-though not necessarily run by them-that offers unlimited access to back catalogs with every song in pristine and reliable condition (unlike on Kazaa) for a monthly subscription fee. If the airlines could get together to start Orbitz, their ticketing Web site, the record labels-to whom the Internet is a much bigger threat-can do the same. In the short run, the labels will probably charge extra if you want to download songs to your hard drive or burn them to a CD. But that's a short-term consideration. What the labels should really be working toward is the day when high-speed wireless access is ubiquitous and customers can listen to any song anywhere-car, cafe, beach. In that world, ease of use and reliability will be the most valuable commodities. The music industry can provide that; file-sharing services can't. In other words, with the right strategy the Net could be the industry's salvation instead of its demise.
Of course, this is a dramatically different future from the one the record industry was expecting 10 years ago. But that's what disruptive technologies do. They force you to rethink your business model from the ground up. The transition to this new world won't be easy, and there are players in the business (like record stores) who may eventually find themselves completely out of luck. But the major labels have already spent too much time dreaming of ways to recapture the past. It's time to start living in the present.
