There’s a growing feeling in the American music business that the future will be in the cloud. No one will need physical CDs anymore, but will listen to music on streaming services such as Pandora and Spotify, which will eventually merge into a grand digital jukebox. But industry veteran Tom Silverman, who founded dance music label Tommy Boy Records in the ’80s and co-founded the New Music Seminar, says “rumors of the death of physical music and digital downloads are greatly exaggerated.”

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Beyond Oblivion markets itself as music liberator

That exaggeration was in full flower at the recent MIDEM conference that Silverman attended, where the talk of the show was Beyond Oblivion, a startup that is trying to license all music worldwide and have people pay one fee to listen to them when they buy each device. While Silverman believes such a scheme might finally help get around the major hurdle streaming services have in licensing music, he’s still bullish on good old physical album sales.

“People still want to buy physical,” he told me in a phone interview. “Album sales were only 26% digital in 2010, meaning that 74% of all albums sold were still physical. That’s with the loss of Tower and Virgin and with Best Buy cutting way back on the amount of music they carry. So even though it’s harder to buy music physically it’s still an enormous amount of sales. If you read the music trades you’d think there were no more physical sales.”

Of course, Silverman admits that this is only looking at album sales, while digital downloads tend to be singles — at a ratio of 15 to 1 (single sales to album sales), according to stats he cited from SoundScan. But Silverman also noted that album sales hadn’t dropped off as much in many parts of Europe as they had in the U.S.

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Silverman is a figure from the days of vinyl and “new school” hip-hop (who remembers the three-sided De La Soul single? [at left]). I vividly remember meeting him and a very young Queen Latifah when I was “beat box” editor for CMJ, a trade magazine covering alternative and college radio, circa 1989. In our wide-ranging recent phone talk, Silverman referred to “record stores” and “record sales” and the “record business,” showing his roots.

But he’s also trying to find a way to steer the business to a brighter future where artists and their labels or managers create 50/50 joint ventures, giving artists more power, control and royalties than ever. He is the ultimate insider/outsider, serving as an observer on the board of the Recording Industry Association of America (RIAA), while attacking them for not looking toward the future and spending too much energy holding onto the past.

The following is an edited version of our chat, in which Silverman talked about streaming services, the staying power of physical music and why he decided to revive the old New Music Seminar.

Q&A

What are biggest mistakes by the music business in recent years?

Tom Silverman: The fact that the industry showed no foresight after the conversion to CDs. The entire industry and all the hardware makers changed the value proposition of music from a $9 value perception [for an album] to a $16 value perception over a few years, and convinced everyone to recreate their entire music collection all over again. That led to the biggest boom in the history of the music business and it didn’t peak until around 1997. That, to me, was a great move.

The recession in the music business in ’79 was blamed on disco, but the real cause was that everybody had filled their catalogs with vinyl and cassettes and sales dropped off, so the record business went into a slump and needed a new configuration. We saw the same thing happen with CDs around ’98 and ’99, a little fall in the business, which meant everyone had re-bought their collection with CDs.

You’d think we had learned from this that you have to replace a product with a new product – this is something that Steve Jobs understands. He gets us to buy one iPod after another, and one iPhone after another, and the iPad. We haven’t learned that. I’m on the RIAA board as an observership position, and I always raise my hand and say, ‘Why do we spend 95% of our time trying to protect a business that’s declining, and 5% trying to expand the business?’ It should be balanced.

We botched high definition, we botched surround sound. When digital came in, it was our opportunity to get everyone to buy their collections again, and find a way to manage the consumer’s value proposition. But instead, we only thought about how to stop it. We should have said, ‘How can we take this flow of energy and make it work for us?’ No one ever asked that, they just looked at it as something evil that should be stopped. It’s no more stoppable than stopping the tides.

How has the music business model changed now?

Silverman: The new businesses are based on collaboration and connection, not based on control and coercion, which was the model of the labels. ‘Let’s roll them up so we can have more control. Let’s control radio and maximize control.’ But digital caused them to lose control. They don’t have control over release dates anymore. Forget about WikiLeaks, we have had WikiLeaks in the music business for years! Every important record is leaked before it comes out. Anybody can have every record two weeks before it comes out and no one has been able to stop that from happening.

The important thing is: how do you monetize that? There are some people asking that question but not the labels.

Silverman talks about how record label execs still don’t understand the new business model where the artist-fan relationship reigns:

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What’s the best way to look at physical music sales? Some people say to just forget about that now.

Silverman: Physical music sales? Retailers are part of the problem too. They’ve never understood how to sell music as a lifestyle. There are places where it’s actually sold and not just carried. There are people who come in for the hits at Wal-Mart and Target but if you go to Amoeba Music there’s a different environment and there’s always a line. And people probably buy three times as much per capita at Amoeba than they do at music sections at mass merchants because there’s an environment that makes you want to buy music and people are there to help you. There’s nobody home at these big box retailers, there’s just music in a bin.

Although physical sales took a 16% or 18% drop this year [in the U.S.], it’s surprising that it wasn’t greater considering the loss of shelf space.

I look at stats like this: Online physical music sellers online like Amazon — their physical album sales were only down 4%. Chain stores were down about 20%. Where it’s easy to find with full stock it’s not a double-digit loss. In every other country the drop isn’t as bad at all. In the UK, it’s flat. In Sweden, it’s flat. In most countries it’s down a few percentage points, but not down 10% or more. America is creating a self-fulfilling prophecy. It’s a combination of the media and the people who control the retailers that are left. They believe that because it’s going down it’s over.

Tracks are outselling albums 15 to 1 in digital. People like to buy tracks online with Apple and Amazon. Digital albums are growing at a greater rate, but I doubt it will ever get down below 10 to 1.

What about the alternative revenue streams out there? Do you see promise in those?

Silverman: Sure. Not that they will make up for the loss of physical sales but it’s promising. We’ll continue to see revenues from Spotify [a free streaming service not launched in the U.S. yet]. In the markets where Spotify has launched, we’ve seen more revenues than we anticipated. It’s at the forefront of cloud-based music. It’s also the biggest referrer to iTunes and other download services. There’s a ‘Buy’ button next to everything that you listen to, and it’s driving a lot of sales in the countries that it’s in. And there’s not a lot of evidence that cannibalization [of sales] is going on, which was the fear of [music business execs] and others. People like it.

Now you have Google working on a cloud service and supposedly iTunes is working on a cloud-based service. So you have on-demand streaming happening and generating new revenues and more discovery that will lead to more download sales. I just came back from the MIDEM conference, and the hype there was that the record business is over, that digital downloads is over and that everything will move to access away from acquisition. I think it’s bullshit, honestly. If that’s true than Pandora wouldn’t be the #1 driver of sales to iTunes and Amazon. People are finding out about great new music there that they wouldn’t have heard of before.

Silverman says physical album sales still have life, and that they will co-exist with digital downloads and the cloud:

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Any other surprises from the MIDEM conference?

Silverman: There’s a concept called “feels like free.” People don’t want to feel like they’re paying for stuff. They might be paying for it, but they don’t want to feel like they’re doing that. [laughs] There’s a difficulty licensing music for any new service, because you have to go to every publisher in the world, every performing rights entity in the world, all the record companies in the world and get them to license to you. It’s a nightmare and that’s why Spotify is only in seven territories, that’s why Amazon isn’t in every territory. I don’t know how Apple iTunes was able to do it. They’re not in every territory, but they’re in a helluva lot of places. That’s why Pandora is only in America.

Clearing rights is so difficult, so impossible, so extortionist that it’s stunting the business similar to the way the business stunted itself in the Napster era. So a startup Beyond Oblivion is trying to license all the music and trying to deliver it in a clear package to any hardware maker that’s connected, including a digital picture frame, an automobile – anything that’s connected. If you want to bundle all the music in the world, you pay a fixed fee, between $15 and $150 depending on the lifetime of that thing and how much music you typically listen to on it. They’ve created actuarial tables on how people listen to music and the lifespan of various devices to work out pricing.

They pay that one time and the person who buys the device has access to all the music in the world for the life of the device. Tethered music you can listen to on that device only. You can buy multiple devices that are Beyond Oblivion compliant. They pay one time for all the music.

What happened to the New Music Seminar? I remember it being a massive conference in New York in the late ’80s. What went wrong?

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Silverman: The New Music Seminar acted as a catalyst for change when we started it in 1980, and became the biggest music conference in the world by 1990. It started to peak then as the business had grown and the things we were fighting for became mainstream. Then we became all things to all people instead of a cause. We were pushing new music, hip-hop, new wave, house music — new music that was just starting to break. We’d have young Turks talking about new ideas. It was effective and then got bigger and more expensive, and I started to have problems with my partner at the time.

In 1992, I dropped out and 1994 was the last year they had it. And I picked it up again 15 years later because I felt like there was a cause again. In 1980 there were great people with great ideas who weren’t being heard. It was great timing, the year before MTV was launched. It spawned SXSW, CMJ, all the other music conferences came out of it, took the model of the Seminar. It started out as revolutionary and became generic.

How will the new version of the New Music Seminar be different than other conferences that are out there now?

Silverman: This conference is built around a mission: to build a sustainable profitable music business, which we don’t have now. Every other conference talks about why things suck and how we can fix them. We don’t talk about fixing them, we talk about building a new one. I lost my belief that the old record business could be saved and thought we needed a whole new paradigm to create a new business model. We wanted the New Music Seminar to be a forum to discuss what that might be.

There are less artists breaking through and less investment in the music business because the return is so bad. We have to figure out how to change the economic model, the contractural model. It’s a great chance to right some of the wrongs from the ’50s when the original music contracts began. And the music contract hasn’t changed much, it’s just got longer, like 80 pages now. We’re suggesting a new business model that’s more of a holistic 50/50 joint venture between artists and labels…And the business won’t be dependent on record sales or music sales but you’re selling the relationship to artists. How do we manage the artist-fan relationship?

Silverman explains how anyone can make music with GarageBand and there’s an explosion of music releases, making it harder for artists to break through:

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Are there new skills that record labels and managers need to have now with the rise of digital music?

Silverman: Yes. Once a manager or label is in a joint venture with an artist, their main job is to grow that fan base and move it to greater levels of passion. How do we get a fan to move from passivity to activity to super fan where they live and breathe for the artist? That’s a new skill that labels and managers have to cultivate. They’re great at getting exposure — press or radio — but they could never drill down to the fan level because before the web there was no way to reach the fan. Now the label has to find a way to find out who their fans are…And they’ll have to be skillled at monetizing those fans beyond selling music.

Did the labels make a mistake by letting Apple and Amazon know more about music customers than they do with digital downloads?

Silverman: We don’t know who the customers are, but they do. Apple and Amazon own that. People know at the major labels that they could have created a delivery warehouse, and Apple could have done the selling and we could have done the delivery. Having those IP addresses [for customers] is having the keys to the kingdom. Any major label that has direct contact with even 25% of their customers is in great shape and can monetize the relationship instead of just selling records, which was the old model. If you look at Facebook, MySpace, YouTube, Twitter, it’s all built around relationships.

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What do you think about the future of the music business? Will physical CD sales still be popular? Would you prefer streaming services? Share your thoughts in the comments below.

Mark Glaser is executive editor of MediaShift and Idea Lab. He also writes the bi-weekly OPA Intelligence Report email newsletter for the Online Publishers Association. He lives in San Francisco with his son Julian. You can follow him on Twitter @mediatwit.