How the Record Industry Destroyed Digital Music and Chilled Innovation (in Their Own Words)

Since Napster was sued out of existence in 2001, the record industry has ruined digital music time and time again. The result has been to stifle innovation and creativity as the industry dug its own grave with respect to consumer support. We will never really know just how much music and culture suffered from their corruption, ineptitude and negligence. But now we can get a rough idea.

Anyone in the digital music world knows that record labels continue to sue competitors out of existence rather than negotiating a settlement and moving forward progressively (Grooveshark being the most recent example). Until now, this knowledge has been intuitive. But a new groundbreaking study by Rutgers law professor Michael A. Carrier offers stunning admissions by the world’s top music executives that they have been destroying digital music for a decade. Carrier is blowing the whistle loud to expose the culture-crushing tactics of a record industry hell-bent on saving its dying revenue streams. What’s incredible is how many of these smoking-gun admissions of the record industry’s practice of destroying music through litigation and intimidation continue to this day.

For the study, Carrier interviewed and anonymously quoted CEOs and VPs of major music and technology companies. All the major labels and nearly every digital music service worth mentioning from the days of Napster are represented here, with 31 top-ranking officers included as sources for the report. Even the infamous Hilary Rosen of the Napster-era RIAA makes an appearance. The 63 pages of the report are full of juicy, candid admissions that will make your jaw drop and the whole report is worth a read, but here are a few highlights:

• The labels shut Napster down just as filtering technology was being developed to weed out copyright infringing files and/or pay rights holders for use of their content — the same kind of software being developed and used now at YouTube. Had the labels continued to develop this filtering technology, it would be much more efficient and effective today at preventing copyright infringement. Worse, by banning p2p technology, labels just pushed the technology underground and it developed in a way to make it harder to apply such filters.

• The labels were very aware that tying a great single to a lackluster album of songs was akin to “selling 1 pound of shit in a 10 pound bag” and that one of Napster’s biggest lasting effects was to destroy the idea of bundling music in albums. However, they chose to ignore this sea change in music consumption because it ran directly counter to their business model. That the album was not sunsetted for the single continues to be pure willful ignorance.

• In the face of digital music, the labels used litigation as their primary business model. Their attitude was that they were not going to license their content to anyone. This strategy, akin to “not negotiating with terrorists”, (indeed file sharers were labeled as “pirates”) meant that no “legitimate” digital music service would emerge until the iTunes store. Steve Jobs made it happen through personal connections, and the labels basically handed the digital download industry over to Apple’s “walled garden” media ecosystem. Prior to that, the iPod drove the demand for music file sharing through the roof. By not negotiating with digital music services, the industry encouraged the “underground” to flourish an eventually empowered Apple to unseat the music retailers. By the time “legitimate” means of acquiring music emerged, the consumer base was already well used to free, unfettered access to music.

• The CD retail shops basically committed suicide. They were complicit in the labels’ litigious fight against digital music innovators. The labels saw the retailers as their customers, not the listeners themselves. After all, the retailers bought 90% of record industry products. Because the labels would allow no viable digital music alternative, an entire generation learned to consume digital music without industry consent. As a result, retailers essentially evaporated when the industry finally began throwing its weight behind the sanctioned digital music retailers as mentioned above.

• Much of the industry’s irrational behavior can be explained by the “Innovator’s Dilemma”, a somewhat obvious idea that large corporations are dis-incentivized to pursue new innovations that threaten existing business models. Just to demonstrate how out-of-whack executives were with reality, here’s an excerpt from the study:

…before iTunes offered 99-cent singles, one label was “adamant” that “the single should be priced at $3.25.” The reason was that if customers bought “two or three,” then they would “make up lost sales on the album by the sale of singles.” The respondents reaction was: “You’re out of your mind” since “people aren’t going to pay $3.25 for a single.”

• The business structure of the record labels was set up for short-term success in deference of any long-term thinking. Political power struggles were common. In short, the bureaucracy of these labels, themselves consolidated into larger corporate bureaucracies, lacked the ability to innovate in the first place. The result was that litigation was the only way to sustain the business model. Technology startups simply could not go on functioning with the massive legal costs associated with defending a record label lawsuit, especially when all the labels ganged up on one company as they often did (and still do).

• We all know that the RIAA terrorized consumers with lawsuits alleging personal infringement of copyright (remember, retailers were the labels’ customers, not the public, so why should they care about offending the public?). What many don’t realize is how CEOs of tech companies were terrorized with the same allegations of personal infringement in addition to having their companies sued out of existence. Additionally, because of the obscene statutory fines associated with willful copyright infringement, this created ridiculous situations, such as Limewire being sued for statutory damages of $75 trillion, which is more that the GDP of the entire world.

• The litigious affront by labels had a real negative impact on the economy. As it sued digital music services out of existence, venture capital for any new project was hard to come by. This created a chilling effect around digital music services that persists to this day. It’s hard to convince investors to support a project when in the past they have been personally sued for willful copyright infringement simply for investing in a digital music product. Today we have very few compelling digital music services as a direct result of the industry’s approach to using litigation as a business model.

• The report does more than dispel myths about “piracy”, it clearly shows the record industry is to blame for not only its own downfall, but the downfall of music itself. The loss of innovation and venture capital was certainly a blow to society at large, but the effect of this corrupt crusade on the music itself was equally tragic. Though hard to quantify, some of the “magic of music” as it were has been lost, or at the very least transformed irrevocably by the willful negligence of the music industry. Not mentioned directly in the report is the mountains of money denied to musicians themselves, the ultimate enablers of the industry who so often get screwed by it. Fortunately, all this chaos has spurred the public to adopt radical new business models — patronage and crowd funding chief among them — and we are finally starting to “bounce back” from the damage record labels have inflicted on the culture and economy of music.

It has never been more clear that despite bringing music to millions of people across the globe, the record industry has had a net negative effect on music, particularly in the last decade. This being one of the central theses of my upcoming book, I have overjoyed to have this report as a smoking gun source for what anyone in the digital music world knows intuitively to be true. Read the report to see what I mean.

Rethink Music Conference Recap: Top 5 Lessons

Several weeks ago I attended the Rethink Music conference in Boston. I can honestly say it felt like I downloaded the entire music industry in 48 hours. A non-stop parade of executives and managers concisely detailed the challenges they faced in the digital music age. In panel after panel, their guarded optimism shone like a dull reflection off a classic automobile that won’t start. Between furious note-taking and tweeting, I got all the the insight, confidence and enthusiasm I needed to begin writing the book I’ve been planning for ten years.

I want to extend thanks to the organizers and everyone who made this conference possible. Attending it changed the way I look at music and the music industry forever. Writing a book about musicians, fans, technology and the music industry has been a dream of mine since Napster hit the scene. After spending the beginning of the year cataloging my key thoughts and ideas from the past decade, I am now tackling this monster project every day.

I approached the conference deeply entrenched in my disdain for the overall apparatus that controls access to and thus commodifies music. I believed that technology got us into this mess and could get us out of it. I felt that music should be free like water (and bottled for profit when it serves the artist’s best interests). Most importantly, I felt that our culture had become a wasteland for the benefit of a corporate media oligarchy.

After attending the Rethink Music conference, that smoldering resentment of the exploitative music industry has never been more fully stoked. The trampling of artists’ and fans’ rights in a quest for revenue continues unabated, but you can’t blame the industry. It’s their job. But I’m not writing the book to change the attitudes of the music industry. I’m trying to change the attitudes of fans and artists — it’s the only way to force the industry to change.

Here are my five big “lessons learned” from the conference:

#5 – Lawyer Jokes

I learned what many Americans already know — that lawyers are generally evil, and entertainment lawyers are worse. I always knew IP law was horribly broken, but I never realized how this was the absolute bedrock of the talent exploitation business. he lawmen justify their dubious ethical position by telling musicians, “I’m doing this to protect your rights and revenue”, which rings about as true as a cigarette company telling a smoker they are protecting their freedom of personal choice. What’s worse — with rock and pop publishing deals involving multiple parties, I learned that some big deals just don’t get made. The result? The rights holders can’t afford legal representation to make a deal after the fact, caught in a Catch-22 because the deal isn’t done. Millions of dollars are floating around unpaid because deals don’t get made, period.

#4 – Unintellectual Property

I learned the industry is really as dumb as you think they are when it comes to technology. Incredibly, Napster hasn’t really taught them anything, now 10 years down the road. There were a few exceptions — Open EMI’s pre-cleared license hacker sandbox was the most notable. The Echo Nest is clearly and deservedly well-positioned to become industry tech darlings, enabling the big boys to play with the same tools the small, agile tech startups hold inherent to their hacker talent and creativity. But by and large, the entertainment is a lot like the government — it still doesn’t understand IP in the 21st century, and thinks it can use the old tactics to prevent the freeing of music for the good of fans and artists (to benefit the industry). But without technology in their blood, it’s going to be a multibillion dollar quixotic struggle of epic proportions to try to steer the future of music into conglomerate control. Since they can’t dam Niagara Falls, all they can do is pass laws to make it illegal to visit. But what happens when all the rivers flood? Consider that in the U.S. Apple generates over 100x the annual revenue of all domestic record labels combined, and then you see how badly the music industry needs help in the technology space. This is all so ironic because the entire record industry is based around leveraging technology to make people pay for music.

#3 – Complexity

I learned that one of if not the biggest impediments to the industry generating revenue in the digital space comes from their technological stupidity. One of the main themes of the conference was how screwed everyone will be for years to come because of the industry’s inability to manage the information that is responsible for profitability. There are an infinity of micro payments flying around for songs with different metadata and all manner of licensing, publishing and other exploitation rights and rates to be tracked. Though there are myriad solutions being put on the table, the industry seems to have collectively shrugged its shoulders, hoping the geeks will figure out eventually if they throw enough money at the problem. I heard a lot of guarded optimism as a facade for folks who were clearly flummoxed by the complexity of digital music analytics.

#2 – Gamification of Social Music Advocacy

I learned that what I believe to be most exciting and promising thing happening in music today — the gamification of social music advocacy — is something the industry is largely oblivious to. While the conference’s Genesis award winner Have You Heard was honored for proposing such a system, it’s insanity that the big players like Spotify had nothing specific to show in that regard. Perhaps they thought they were protecting “trade secrets” but I’ve got news for them: this is exactly why the music industry is choking. someone smarter than you is going to beat you to it. You need a to come along and flout licensing until the Big 4 say, “why, look at how you’ve grown! Accept our terms or we’ll kill you.” That’s the industry’s current model for innovation — let the geeks figure it out, then buy it or sue it out of existence. For the young entrepreneurs fresh out of Harvard who proposed the “FourSquare for fans” idea at the conference — I’m afraid this too could be your fate.

#1 – Artist Responsibility

Perhaps the most important lesson of all: I learned that when artists blame the fucked up music industry for their failure to succeed — or worse, their failure to get paid from their success — they’re ultimately blaming the industry for their own failure to understand the music or the business. There are a million “How to Succeed in the Music Industry” books, none of which have ever helped anyone write a good song. Conversely, there are thousands of great songs written by musicians that no one will ever hear, because the artist has no faith, interest or aptitude in the music business. Why should they? The industry is actually OK with its role as artist scapegoat, because if the artists really understood their responsibilities, they wouldn’t have to put up with such exploitation. Being a musician is really about being an entrepreneur, starting a small music business. What we need is millions of small music businesses, not a handful of monopolies trying to squeeze the last dime out of a dying industry, willing only to co-opt and rarely to innovate. Music, like life, is free and alive — and as they said in Jurassic Park, “life finds a way.”