The Widening Gulf between Art and Commerce

I am honored to be in front of you today. The topic I will discuss, the music trade in the new millennium, might seem like a digression from the usual concerns of the Business & Economics Society International, especially in these tumultuous times and here in Athens!

Yet Pythagoras first explored the mathematics of sound here in Greece, so perhaps it is also fitting that we should talk about music. If you pluck a string that is two-thirds the length of another, you hear a tone that is a fifth higher. At a length of three-fourths, you hear a tone that is a fourth higher, and if you halve or double the string, you hear octaves. The simple counting numbers one, two, three, and four explain consonant and beautiful sounds in nature.

Moreover, moving up and down in fourths and fifths from a starting tone produces the major pentatonic scale—arguably the bastion of pop music today and the building block of the diatonic scale. With Pythagoras and the Athenians around him, we began to understand music better.

Music and Me

Many of you in this room, I am sure, love music. But I don’t suppose that you love it as much as I do. My passion for music drove me to change career, change country, and take a lot of risk. I’ll explain.

Since I was a boy, I have loved classical music. And as a teenager, I attended concert series regularly at the Teatro Colón in Buenos Aires, Argentina, and its Mozarteum Society. I also attended pre-concert briefings with the preeminent musicologist Jorge D’Urbano. I will never forget his presentation on Beethoven’s last quartets, starting with Op. 127.

My musical heroes were Bach, Beethoven, Wagner, and Stravinsky, but also the Beatles, tango composer Ástor Piazzolla, guitarist Pat Metheny, and jazz composer Duke Ellington. I sought to learn the language of these masters, all of whom touched my deepest emotions. For instance, in my twenties, after playing classical guitar for more than five years, I discovered improvisation and the blues. My budding interest in rock guitar with the Beatles expanded to include Pat Metheny’s well-thought-out jazz compositions and guitar solos.

My choice of musical heroes might be surprising to some of you, as it straddles the world of educated practitioners and that of artists like the Beatles, who were not. But I am talking about the love I have for the craft of music making, and in this regard I share my affection for the Beatles with the best musicians on the planet.

In fact, for me good music is not just the prerogative of the privileged to make or to consume. And yet I think of myself as someone immersed in the “high culture” end of music, at least as practiced by its top and most-recognized exponents.

Economics

Before I went into music, I was an economist with a Ph.D. from Oxford in Latin American studies and a specialization in Argentina. I was published early and worked as a research fellow at the University of London. I then spent some years in Buenos Aires as a professor on the payroll of the Inter-American Development Bank at the Di Tella Institute, a think tank in Argentina.

When I was 35 and after I did much soul-searching, I decided to embark on a music career. By then, I had given up on the Argentine economy. I could have had a future in government through my mentor Guido di Tella, who became the country’s foreign minister, but I reasoned I was still young and could change my life to finally pursue my musical dreams.

I already had a daughter, and luckily my German wife, Beate, who was a student with me at Oxford, did not check out of my life! She is here today, and I cannot tell you how fortunate I feel.

My plan was to make a livelihood in music. I would give it a try in the United States, because [the States] had the most developed and vibrant music market. I had heard of Berklee College of Music in Boston: a microcosm of the industry and a place where one could explore different career options. At the time, the college offered about 10 music majors, including film scoring and music production & engineering. Berklee looked interesting.

I cast a wide net, and recognized the importance of instrumental proficiency but was not wedded to the idea of playing only the guitar. This turned out to be a good thing. In 1989, when I set out for Los Angeles with my family, I found out that the local branch of the American Federation of Musicians listed more than 200 pages of guitar players.

I thought as an economist and used my experience in research to plan my moves. For instance, in Buenos Aires, before I left for the United States, I read Keyboard and Guitar Player magazines regularly and discovered a rich trade in musical instruments and accessories. I also found out that the business of music education—in music, music business, and music therapy—could perhaps become my safe employment harbor.

Money and Music

To further clarify my options, I tried to identify the flow of revenue in the U.S. music industry as best as I could. Now, remember: my connection with music was aesthetic. Following the money trail for purposes of employment inevitably brought me closer to the mass-consumption market. Let me tell you a bit about it.

In 1989, record labels were the cash cow of the music trade. On an average day, nearly $30 million was spent in the United States on CDs, cassettes, LPs, and music videos. At the time, this was double the amount spent on musical instruments and accessories, five times the amount that music publishers collected on composers’ and songwriters’ rights, and 10 times the amount of tickets sold at live-concert venues.

Making music was good business in the United States, and it might be surprising for you to know that the combined annual value of the activities I’ve listed exceeded the GDP of many African and Central American countries.

But there was more. In Los Angeles, I enrolled at the Guitar Institute of Technology to improve my guitar playing and then, in 1990, went on to Berklee in Boston. In the end, this ancillary market in education was the one that landed me my first job in music in 1992, because Berklee started its own music business program. I was recruited to teach economics and statistics. That year I was lucky as well to win the green-card lottery.

Nineteen ninety-two was my annus mirabilis. The pendulum had swung my way. In October, I was appointed the Spanish editor for Recording magazine in Los Angeles, and produced in Boston the first edition of Recording en Español for the burgeoning Latin market in pro-audio gear.

Between my new teaching functions and my editorial work for Recording, I was fully occupied. I played much less music, but I was happy.

The Market for Music

As a new professional, I knew from the data that music for entertainment trumped “high culture” music by far. For example, sales of jazz and classical records represented much less than 10 percent of the U.S. market. I found out that the same was true in the largest music economies of Japan, Britain, and France.

To this day, rock, pop, r&b, hip-hop, as well as the many local varieties of country and folk music still dominate market sales of recorded music across the world. This continues to be so even in Germany, Austria, and Switzerland where sales of classical music are proportionally higher than anywhere else.

In addition, the record business does not regard jazz and classical labels as self-sufficient operations. Their funding is subject to commercial success trickling down from popular music sales. This was not a problem during the 1990s, but financing prestigious genres has become much harder since. To make matters worse, Bertelsmann (BMG), the most classically inclined major label, became defunct in 2006, leaving only Universal, Warner, Sony, and EMI.

Media Conglomerates

I also realized that the media conglomerates ruled in music and had crowded out the labels, so the market was being pushed harder toward entertainment.

A good example of this is the growing importance of the Walt Disney Company. Commercial success in music now seems correlated with Disney’s top ranking as a media company. Disney was the top global seller of records in 2006, and 2007 with its ABC series Hannah Montana, as certified by the International Federation of the Phonographic Industry (IFPI).

Disney owns the ABC and ESPN networks, a number of film studios, parks, and resorts, the gaming company XD, and it sells its own merchandise. Its market power is unrivalled by any record company. This is also well understood by the Universal Music Group and EMI, the two major labels that act as distributors of Disney’s music in the United States and Europe, respectively.

But Disney is not the only media company vying to sign up musicians and conquer territory from the record labels. Susan Boyle’s “Dreaming a Dream” was the top global seller of 2009 after the singer’s appearance on Britain’s Got Talent, a property of the independent media company ITV. Rupert Murdoch’s News Corporation, the owner of Fox TV, has made American Idol a delirious success and has had a significant impact on recorded music sales. Fox TV has launched another show, Glee, and seems very interested in cherry-picking young teens and repertoire to compete with the major labels. Viacom Inc. has long shared similar ambitions, and Sumner Redstone’s MTV motto, “think globally and act locally” could itself have been taken from the major [labels’] overseas manual.

Video, Branding, and Sponsorships

Since the mid-1980s, popular music itself has become more market oriented. The birth of MTV was funded by advertising money and coincided with an explosion of cable TV channels. Every song had to have its own video. This changed the character of the business.

Then, during the early 1990s, Wall Street investors pushed the multimedia frontier on the PC. The value of well-known artist contracts sky-rocketed; now, exposure was possible through TV, computer, CD-ROMs, and DVDs. Brand-related opportunities and sponsorships were perceived as helping artists, especially after the incredible signings of Michael Jackson and Barbra Streisand in 1992 and 1993. Talent has since pursued such options with vigor.

During the new millennium, as the fortunes of the labels declined, artists began to regard branding and sponsorships as a matter of survival.

The Collapse of Album Sales

Recorded music, as you probably know, is collapsing as we speak. Between 2000 and 2009, global revenue fell from $37 billion to $17 billion, an annual and catastrophic drop of 7 percent (see IFPI figures). This includes every recorded medium (i.e., track downloads to a computer, mobile music, and within it, ringtones and subscriptions, as well as sales of physical CDs).

In the United States, for example, recorded music sales today are worth just over half the value they had in 1989, and this does not account for inflation. Recorded-music sales are now nearly on par with the sale of musical instruments and accessories. The revenue-crossover point—where music gear will supersede recorded media—may well happen next year. This is unheard-of.

It should be obvious that, through the Internet, more points of access for consumers have not translated into a higher returned value for the labels. Music piracy is still rampant, and the business has not made up the losses with growing sales of catalog product (an idea that Wired magazine editor Chris Anderson promoted in his familiar “long tail” theory).

Moreover, the production of music for entertainment has been boosted by the consumer mindset for single-track purchases over albums. The iPod and music piracy accelerated the move to a single-song economy, while free music further devalued recorded product—even for Apple. Apparently 48 percent of the songs on iPods are illegal copies.

The consumption shift toward single tracks has also led to a significant loss in the monies expended on artist development and production, which tends to diminish the overall quality of a label’s output.

Under the circumstances, it is regrettable but understandable that the recording industry has become more commercially minded.

The end of the album era has had other consequences. It should be remembered that an album did not just make more money than singles for the label. For the creator, it was generally the format of choice, because its longer time frame allowed more exposition and a better range of expression. Sadly, this old standard may now have passed.

Partial Conclusions and Berklee’s Example

I have argued that (1) production in the music market is more dependent on video and recognizable brand names such as Disney, (2) standalone recorded music sales have slumped disastrously, and (3) we have moved decisively away from the album format.

The implication is that the primacy and independence of music is under threat and that it should no longer be taken for granted in the current marketplace.

I’ve taught at Berklee for nearly 20 years, and given what I’ve just said, you might imagine that the college would have experienced a significant drop in enrollment. But that has not happened during the current economic crisis. We have been operating at full capacity, maintaining a steady student base of about 4,000 students and 600 faculty members. (And Boston still boasts the largest number of per-capita guitarists anywhere.)

Berklee, of course, is well regarded in the industry and among aspiring musicians. Yet the economics of the present juncture are so unusual that the paradox of high student enrollment at a time of crisis begs for a more in-depth explanation.

First, music is a career choice over which young people agonize. Once they realize that this is what they want to do, they’ll pursue music almost regardless of circumstance. I am living proof. The neat thing is that there will always be an interest in making music regardless of the particular economics of the business at a given moment in time.

Second, musicians have a natural curiosity about their craft, and they have a strong drive for learning. At Berklee we have many varieties of learning styles, and some of you might not consider our students real scholars. Still, they come to us because they want to learn at the largest institution in the world that teaches contemporary music.

Third, passion and music go together, as you know. A frame of mind common to our students is that you go forward, as Walter Yetnikoff says, “by defeating the probabilities against your going forward.”

Fourth, the current juncture is rich with entrepreneurial opportunities. As the record-label citadel appears to crumble, there is an all-around do-it-yourself (DIY) attitude. Recording, releasing a constant stream of music, and connecting with fans directly is within everyone’s reach. Coordinating all these tools may be beyond an individual artist’s capabilities, but more limited goals can be achieved (however, there is little evidence that such DIY activities matter much in the total revenue pie).

Fifth, making a livelihood in music is not seen as narrowly as it was previously, nor is it as dependent on the record industry. The other legs of the business are much steadier. Live music and publishing seem to have prospered overall, and the business of musical gear and accessories still offers the greatest number of employment opportunities, by far. Consider the possibilities for instrument manufacturers, for the production of recording and processing software, for authoring pedagogical manuals, or for writing for consumer trade magazines.

Sixth, if you come up with the right song, you may be set for life. Music is not a hamburger. It is a complex commodity bundled with a number of intellectual-property rights, including the rights of public performance and digital or physical reproduction. You or your estate can keep collecting over the course of a lifetime.

Seventh, our students hope that the economy will recover, and more funding will afford more employment. Even Bach needed patrons before he could synthesize music into a new paradigm in an essentially feudal economy.

I would contend that there is a larger truth about music that is illustrated in Berklee’s high enrollment numbers. At a time when recorded-music revenue seems to have scattered artists’ efforts and detracted from their bargaining power, musicians are not coming to market just because there is a clear expectation of financial gain. Pleasure, or utility, can be a powerful incentive for sellers as well as for buyers—and this is something hardly considered in economic theory.

Final Thoughts

Recorded music, the pedestal of the music trade, is being toppled as we speak. Media companies are rushing in where the old business (i.e., the TV networks) feared to tread. Online distribution surrendered long ago to Apple, which now controls the largest retail market in the business. Finally, the typical market exchange is not an album but a single track. This represents a tenfold loss in returned value.

There has been a drastic change in the terms of the trade of the music business, and the consumer has been the beneficiary. We can no longer assume a self-propelled future for recorded music, as it hardly has an intrinsic marketplace value of its own.

Finally, I ask that you consider this. Could it be that the last stage of music development is the production of music for entertainment? That is where the richer countries appear to be heading. Where music is less commoditized, its cultural import is clearer, and the irony is that this is happening in less-developed countries.