Berklee Today

The Future of Music

Despite dire predictions by record-industry folk, the authors of The Future of Music see bright prospects for music and musicians in the digital age.

  David Kusek
  David Kusek
   
  Gerd Leonhard
  Gerd Leonhard
   
  David Kusek is vice president of Berklee Media and oversees the college's online extension school at www.berkleemusic.com. Kusek also founded Passport Designs, a music software company, and was a codeveloper of the MIDI standard.

Gerd Leonhard is a music-business entrepreneur and adviser for various entertainment and technology ventures in Europe and the United States.

The foregoing article was excerpted from the book Future of Music: Manifesto for the Digital Music Revolution written by Kusek and Leonhard and recently published by Berklee Press. The authors teach an online course on the future of music and the music business for Berkleemusic.com.

Contrary to what we've heard over the past few years, the music business is in very good shape today. The problem is with the record industry and CD sales. The Big Four major-label groups - Sony BMG, Universal Music Group, EMI, and Warner, are all suffering. But if one looks beyond CD sales, it is clear that overall, the music market is vibrant and alive. More music has been enjoyed over the past two or three years than ever before by a factor of two or more. What has spawned enthusiasm among fans and confusion among the major labels derives from new technologies - in particular, file-sharing services such as the original Napster and Kazaa.

However, other contributors include consumer electronics companies, creators of computer games, DVDs, cell-phone ring tones, and CD technologies that allow users to rip and burn their own CDs on personal computers. Music fans are completely awash in music, and digital music has become the new radio for the Internet generation. Digital technologies have been totally and unobtrusively integrated into the lifestyle of new generations of teens and young adults. Seeing the new technology as a double-edged sword, record industry executives point to file sharing as a key factor in their shrinking profits. This article will look at these issues from a few different angles.

Music Became a Product

Part of the reason that the record industry is in such sorry shape these days is that the people who control what is rapidly becoming the "old" industry have convinced themselves that they are the music business and that success in music means distributing products that they must control - and that only they can deliver, properly market, and turn a profit on.

Have you ever wondered why we have rivers of undistinguishable, shrink-wrapped music oozing at us from radio and television? It is because record companies think they sell products, MTV shows products, retailers display products, and we consumers have been willingly buying these products. For record companies, that's nice and simple, easy to control, and easy to manipulate. Sell singles, sell albums, sell CDs, sell downloads.

Let's define a product simply as something made or created and offered for sale. Is that what music is all about? Is it a product? Music is a combination of entertainment, communication, and passion - an ephemeral occurrence, something intangible, and something that is experienced in everyday life. Music today is proliferating and expanding at an unprecedented rate. Music making is a global phenomenon, and there is more of it being made than ever before.

There are more bands, more writers, more songs, more CDs, more shows, and more awareness of all of it. This makes it very difficult today to duplicate the success of mega-artists like Madonna, Michael Jackson, and the Who. There are too many choices, too many different ways to get music, and, of course, too many other interesting ways to spend money. In other words, consumers are starting to leave the narrow confines of the turf that the purveyors of media wanted them to stay in, and diversity is ruining the plan that worked so well for so many years.

When the first records hit the market in 1915, the music business as we know it today barely existed. Music was dancing, cabaret, sing-alongs, band concerts, eventually radio, and instrumental performance. People didn't "own" music; they listened to it, experienced it, and enjoyed it.

During the past 100 years or so, we turned musicians, performers, and even ideas into "products," and from that have narrowed everything down to a simple formula: you write a song that sounds unique to you, register it as yours, exploit it exclusively, and make a ton of money. Of course, this goes along nicely with the idea that the prime method of exploitation is the sale or use of physical copy or product.

The contemporary distorted view of music as a product is a manifestation of the late industrial age, when companies were able to fix music in time on sound carriers, then control and exploit it to their benefit. We consumers were brainwashed into believing that we have to "own" the music in order to enjoy it. Purchasing records or CDs is a way of "tagging" music that we like in order to be able to listen to it later. Digital networks are beginning to change this equation. Access to music will replace ownership of it. We have passed through the industrial age to the information age, and music will never be the same again.

This is where the idea of "music as a service" can come in. In the future, music will be, economically speaking, bigger than ever before, once it is freed from having to be a product. In other words, if we free music from having to contain at least 12 tracks of a certain length in a certain style throughout an album and appear in the stores in a particular country by a certain date, the true potential of music will explode, digitally and physically, in atoms, bytes, and dollars.

A new music industry that fashions itself as a service industry is likely to be many times larger than the product-based system that we have today. We will still have some physical products (likely in new formats), but we will have a vast number of additional digital music products and services available to us. However, the rules of the game will change, and the companies that are currently in control of the ship will need to let go in order for everyone to prosper.

This is where things get ugly. The end of "music as a product" may mean the end of the record label as we know it. They can only survive if drastic changes in music don't take place: that is if music remains a product. They are fighting tooth and nail for survival.

Performance versus Plastic

Let's zoom back to 1887, when Emil Berliner invented the gramophone. Back then, the big deal was that the gramophone allowed people to listen to music without having to actually be at the performance. It forever changed the concept of music from a dynamic and interactive entertainment experience to a fixed product. Music became nearly synonymous with the medium that delivered it, beginning with wax cylinder, then vinyl disk, followed by cassette tape, and eventually, compact disc. In essence, music moved from being a performance and a service to being a product.

Because of this shift, we have become accustomed to the perfection and repeatable quality of today's music. Prior to the nineteenth century, music wasn't played exactly the same way more than once, since it was impossible to reproduce the exact circumstances of a performance. The instruments and orchestration would change, as would the performers and their moods, audiences, and performance environments. Songs were performed as well as they could be in that moment, and composers worked hard to create a continuous flow of fresh music for fairs, operas, concerts, trade shows, theaters, and so forth. The composers of the time also liberally borrowed material from one another, often adapting, updating, and improving the songs for the players and performances at hand.

  About 60 million people are trading music online in the U.S. alone and the practice has been labeled piracy. When it first began, cable television was piracy. The first cable TV programs were simply captured terrestrial broadcasts that were rebroadcast at different times. The Supreme Court decided that it was not illegal or a violation of copyright to capture and rebroadcast terrestrial television, but that a compulsory license fee had to be paid. Today, 85 percent of all Americans pay for something that used to be pirated. Cable television is booming, offers more choices, and most everybody pays a fee for it.

Before musicians were placed in front of enormous gramophone recording funnels and asked to cut down their performance to an acceptable and packageable length, music was essentially an ephemeral art; if you weren't there you didn't hear it. These very same musicians were performing in hotels, bars, concert halls, churches, private homes, and on the street. Some were held in very high esteem, and a rare few were wealthy-if they were really good and if their message came across. The economics for musicians were not all that different from what they are today. Then as now, those who had something special and attracted an audience became successful.

After more than a century of music being pitched and sold primarily as static products, with musicians getting paid to perform on such products, in a way we are returning to those early days, and music can once again become more about the experience than the product. Of course some styles of music have never ceased to be a service, such as in niche markets, including classical music, world music, and jazz. Yet most financially successful musicians have become purveyors of products and hope to make a significant part of their living by "selling plastic."

Is File Sharing Really Killing the Music Industry?

There is no direct proof that file sharing itself is hurting the music industry. Record companies are touting this single-bullet theory to explain away all the ingrained problems of an antiquated business reaching the end of its life cycle. Indeed, one can argue that file sharing is the cheapest form of music marketing there ever was.

Danny Goldberg, Chairman and CEO of Artemis Records, said, "I don't think there was any more downloaded song than 50 Cent's [in 2003], and yet it sold nine million albums. So there were nine million households that felt, despite the fact that they had seen the video, despite the fact that they could get it online, that they wanted to hear the full statement that 50 Cent was making."

File sharing should not be equated with the type of piracy that is affecting the music industry on a global scale. Traditionally, in the music business, piracy refers to the activities of organized criminals who manufacture illegal copies of CDs, DVDs, tapes, and records, then photocopy the covers and sell the illicit product on the street for a steep profit. Pirates in many countries run pressing plants that churn out CDs by the millions without paying the mechanical reproduction licenses and mechanical license fees to the owner of the master recordings. The International Federation of the Phonographic Industry estimates that the number of illegally copied and/or manufactured CDs increased 14 percent in 2002 and an additional 4.3 percent in 2003, to 1.1 billion units; and worldwide, 35 percent of all CDs sold are illegal copies. It is estimated that the value of the pirated music sold amounts to $4.6 billion, and these figures don't even include online file sharing or recording of audio streams. In 2002 the global recorded music market declined 7 percent to $32 billion, and another 7.6 percent in 2003. Leaving file sharing out of the equation, CD piracy as defined above, could account for the majority of the decline in CD sales all by itself.

The millions of people who share music over the Internet want to acquire music cheaply, get connected to other people, share with them, learn about new music, and have instant access to what they want and where they want it. Radio no longer delivers enough new music to satisfy consumers. Technology has given them a turbo-charged version of tape swapping, an activity that has been extremely popular in the past and has fueled the advance and promotion of many successful bands, including the Grateful Dead, Metallica, Phish, and others.

The music industry has subjected us to a constant barrage of assertions that the free, uncontrolled downloading of music is the main cause of the industry's troubles. Whether the rampant downloading of music hurts the music industry or could indeed help it to grow is ultimately an irrelevant question. You might as well ask if cell phones hurt the landline phone companies, if Xerox machines hurt book sales, if the fax machine hurts the postal service, if Wi-Fi hurts Internet service providers, or if run-flat car tires hurt AAA's towing services. The answer doesn't matter; the point is that technology moves forward anyway-if and when it is meaningful to people, easy to use, respectful of human nature, readily available, and easily and widely affordable.

Can File Sharing Be a Winner for Everyone?

Nearly 75 years ago, radio threatened to destroy the existing music business. Sheet music was the "product" of the time, and people had to go to concerts to hear and see their favorite artists.

Radio changed all that. According to The Music Trades magazine, a representative of the Association of Sheet Music Dealers, Williams Arms Fisher, said at the time: "Radio at one blow undermines the concert tours of artists who perform to potential buyers of sheet music and diverts music into the ear of those who follow the line of least resistance - by that I mean those who might desire to sing or play or perform - but with radio, content themselves by bathing in music as a pleasant sensation, and with half-hearted attention."

It's amazing how shortsighted people can be when their basic interest is to preserve the status quo rather than to embrace change. The smart move today would be for the major record labels - while they are still viable players in the business - to find a way to either appropriate or somehow license the person-to-person (P2P) file-sharing services in order to extract revenue from their astounding popularity. Having said that, it seems likely they will encounter significant legal and structural hurdles that will prevent them from pulling this off without committing economic or political hara-kiri. When Cary Sherman, president of the RIAA, says, "We simply cannot allow online piracy to continue destroying the livelihoods of artists, musicians, songwriters, retailers, and everyone in the music industry," you just want to say to him: "Hey, Cary, if you can't beat 'em, join 'em - or buy 'em!"

Just as ASCAP or BMI collect blanket licensing fees from radio stations, so similar organizations could collect blanket licensing fees from the P2P companies or Internet service providers (ISPs), who could in turn charge the customers for access via their systems. That super-distribution model has been around since the invention of the Internet. If 50 percent of the world's active Internet users paid only $2 per month, the industry would collect $500 million per month - $6 billion per year - a whopping 20 percent of current revenues from CD sales.

Other calculations based on a sliding scale might work equally well, where people in developed nations pay $3 to$4 per month, and other emerging economies paying $1 or $0.50 or $0.25 per month to create a pool of money. And that would be just the beginning.

If 50 percent of the world's active Internet users paid only $2 per month, the industry would collect $500 million per month-$6 billion per year - a whopping 20 percent of current revenues from CD sales.  

The record companies need to adapt to the realities of the marketplace and cast off their antiquated business models just like they have cast off the thousands of artists whose records did not sell enough copies of their first album. Legitimate music distribution businesses can outdo the existing "rogue" P2P networks by developing their own delivery and customer interaction systems that employ superior technologies, recommendation engines, and customer service-watch for this to happen eventually.

In fact, Napster's founder, Shawn Fanning, is quietly working with the record companies on a project called Snocap to create a way of filtering and tracking P2P file sharing. By identifying files via a "fingerprint" and comparing the file with its database, Snocap software could in theory provide a payment mechanism for files traded via peer-to-peer networks. Such a concept should be appealing to current content "owners" who wish to maintain control over their property, but not likely very appealing to the P2P companies who may wish to develop more enlightened business models. It remains to be seen whether the record labels will agree to do business with their former nemeses. For now, many of these companies (and people) are simply blacklisted, and anyone who wants to do business with the labels has to stay away from them.

One solution may be the introduction of some kind of a license that all record labels either would or must grant by default to any legitimate online music retailers. Another option is to institute a small fee in the form of a "utility license" or-dare we say it-tax that would allow people to download any and all music online. This fee could be included in the price of blank media, MP3 players, ISPs, DSL, wireless, and cable.

Here is a framework for a new music business model for a next generation music company-one that is fully aligned and synchronized with the interests of the artist and fan. We see some of this already emerging, most notably with Sanctuary Group Netwerk, management companies like The Firm, and organizations such as the IMMF already heading down this path. We believe that the music company of the future will be active in a number of things, including artist management, publishing, touring, merchandising, and recording.

A New Music-Business Model

The artists' brands will drive the business, and the win-win-win economics between artist, company, and fan will make the risk more tolerable and the return on investment more predictable. Instead of betting on a traditional 10-to-1 recording model that relies on huge CD sales from just a few artists, the now-evolving business model can test-market artists more efficiently and work on much lower volumes by spreading the risk across multiple revenue streams and different forms of "product."

For example, building artists as brands requires a constant release of energy into the marketplace. Using digital networks to distribute the music, bundles of two to three songs can be released to test the waters, not unlike the old singles business or, more recently, the EP business. Rather than investing in the production of a complete album at first, a company can continuously release music into the marketplace, and the songs can be used to support touring and keep the music fresh and the company nimble. A more rational, slower-growth approach can be used to support multiple artists with less financial risk-versus the bet-the-farm mentality of the old record business.

This new musician-business model combines the functions of a record label, management company, publisher, and merchandiser into a single entity or related set of entities, such as that of the Sanctuary Group. The company signs artists to deals in which the artists retain ownership of the masters, and only license (that is lease) them to the company for a limited time. Artists create their own recordings, and the company takes this music to market in digital and hard formats, creates merchandise to sell, and provides management and touring logistics for live performances. The company also acts as the publisher for all songs written while under contract. This increases the potential return on investment for each artist signed by aligning the interests of the artist, manager, label, and publisher into a single entity that splits all of the revenue streams. This model is based on lowering the cost of production, distribution, and promotion for all parties to minimize the risk of financing a new act - and maximizing potential return.

The skills that are essential to recognizing talent, helping to develop that talent, and matching artists with potentially receptive audiences are at the heart of the game - both in the record business of the past and in the musician business of the future. But by marrying this effort with all the revenue streams available to an artist, a broadly defined musician business can reduce its risks and lower the break-even point of the overall investment. The potential conflicts of interest that can arise from having artist management inside the revenue generating engine can be minimized to a degree by keeping the term of the artist's contract reasonably short and the financial accounting transparent.

This model is not unlike what EMI has done with Robbie Williams or the model that bands like Phish and the String Cheese Incident are already using within their own companies, and similar to the model of an independent record label with a publishing arm. The major change is the integration of management and touring into the business mix. This way, the company can take an integrated and synchronized marketing approach across all the revenue possibilities to try to maximize income and opportunity. Maximizing the revenue potential by including touring, publishing, and merchandising in the mix, the company can experiment with new creative marketing approaches that leverage freely (and cheaply) distributed music to drive other income streams.

On to the Future

Futurist Alan Kay once said, "The best way to predict the future is to invent it." There are a tremendous number of bright individuals hard at work developing new ways to create, deliver, market, and enjoy music. They are inventing the future of music. The music business of today is vastly different than it was just a mere 10 years ago, and the next 10 years will be equally, if not more, transformative.