So the distribution side of the business was a major effect on bringing the music to the public if you will. And I know it's hard to imagine for today's younger people. They say, "Gosh, you just download it. It's just there or whatever." But in reality, distribution, physical distribution, was a hard thing to do. It was expensive. And you had a lot of companies consolidating and saying, "Maybe we should leave the financial and the administrative and the physical handling to companies who can extract efficiencies. They can do this much easier and better than we can."
When you say, "one stopped," [what] do you mean?
Smaller record distributors who serviced a tiny region, or a couple of stores, or whatever. And that is also changed. This change took place over a period of say 20 to 30 years. We really, until we got to the late 1990s, didn't have a major shift in the way music was recorded, distributed, or even thought about until about 1998, '99. So it's pretty recent. Because you have to remember that music as well as film, go back to the modern era starting in say the 1920s.
The last major important change in the music business, you could say, happened in 1920, when the first broadcast stations came on the air. Before 1920 there was really no radio broadcasting to speak of. You couldn't listen to music or anything else, and there were major battles fought throughout the '30s and the '40s even, about music rights, who owns what, who gets paid what for what performances.
None of this was sorted easily or quickly. It took 20 years, from 1920 through about 1945, until all of this was settled out. 25 years. We're doing this at a very rapid pace today. By comparison, it's only taking five to 10 years maybe.
You had said that if the big bang moment was Woodstock, and you said just a little while ago that all continued and there was kind of consolidation and whatever else was happening, FM and stereos and all of that, and then you said something happened at the end of the '70s. What was it?
Well what happened at the end of the '70s was excess. The Woodstock mindset extended at such a pace. And there was a change in the economic situation. A lot of inflation, we were worried about inflation in the Carter era. There was a lot of worry about other things but especially the drugs, the overpayment of the artist, the wild parties. The record companies taking back, on consignment basically, taking back the records. All of that contributed to a steep downtrend in profitability.
They couldn't afford the excess, it had gotten out of hand. And the music perhaps, innovation, slowed down at that point. And when that music innovation stopped, it exposed a lot of financial and other flaws in the industry.
Now you had pressing plants in some cases not able to keep up with the quality or the quantity demanded at some times. So there were complaints about the vinyl wasn't good. You had record stores opening up based on credits essentially. And they said, "Gosh I'll open up a record store. And if it doesn't sell I'll just ship it back to the distributor." Well, what does the distributor do with this?
And then there were, in addition to that, and I don't want to get too deep into this, I'm not an expert in this area, but there were, let's say, fringe elements, criminal type activities, with record cutouts that also happened around that time. So the industry around 1980, hit a speed bump. It took the introduction of cassettes and CDs later on, to really remedy all of this. When the cassette came in, it was very important. …
One the things in our kind of story arc is this idea that Woodstock, big bang, trajectory, for the purpose of argument let's say the 2004 Grammys at the other end of the arc, okay? Near the top of the arc maybe are the '80s, maybe is--
Well, Napster and MTV were very important. We should cover that a little bit. Because, as I put it in the introduction to my music chapter in my book, I said, "Life's not fun when you're running out of gas." And essentially the industry ran out of gas around 1980. The excesses were so out of bounds, the financials were so weak because of all the records coming back, that the record companies then started to do something different.
They said, "Look, no more of this plastic credit where you open up and if it doesn't sell you ship it back to us. We can't afford that kind of a business. So we're not taking back as many records." They cut back on the parties, the crazy parties, the drug-crazed parties if you will. That was a lot to do with it too at that time.
They changed their way of business, becoming more fiscally responsible. And that combined around 1980, 1981, with the opening of MTV. MTV was the booster shot, the booster rocket to the '80s, what FM radio might've been around 1968. …
I have to say that Napster in 1998 was a major event, again a major turning point. And I'm not blaming Napster for all of this, because there are lots of other places to blame or point fingers, but Napster represented a turning point in terms of music sales, and in terms of enthusiasm for the product as it was priced.
I have maintained in my speeches and analyses of the situation, that the dirty little secret of the music business that sustained it for so many years, was that you liked two or three songs, you heard it on the radio, you heard your friends play it, and what happened is that you said, "Okay I'm going to buy the album. I want those two or three songs." But really you didn't care about the rest of the 13 songs that you got, you wanted only two of them! But you had to buy the whole package for $14 dollars, $16 dollars, whatever, the whole album.
Now, with downloading, the secret is exposed. Gosh you don't need 12 other songs, you just download or buy what you want, the one song that you happen to like and want. You don't need the other 12. And the technology again changed, because it became digitized in the last four or five years. You could become much more mobile. So the technology went, you could say, from FM radio, it was important in the late '60s. MTV, cable, in the early '80s. Napster at the end of the '90s.
From there on, you could say digitization and portability of music, so that you could carry your music wherever you went. You see people on buses and trains and airplanes, and waiting around for their planes or buses, or in cars, they all have music. And it's very important to them, but the technological revolution is that you can buy a CD player, if you go in New York City in the subway system, you'll see a car full of young people, mostly young people but some older people, sitting or standing with CD players or MP3 devices attached to their ears. They take the music with them. And that's allowable because the price of the hardware came down. Certainly the price of the software went to zero or near zero, with downloading.
So all of that really expanded the demand for music in a lot of ways, or allowed it to flourish in some respects, even though the record industry was stuck in its old business model and had to suffer. And was, in my opinion, for about five years, in a state of delusion and denial about the technology, about what consumers wanted. They didn't care about the consumer. What they cared about was their own jobs, "My gosh, I have a high-paying job at a distribution company, and I want to keep that job. So the only way to do that is to keep going, do whatever you've been doing in the past, close your eyes, bury your head in the sand, don't worry." …
What happened because of the [invention of the] CD? One of the first things I notice is, there's a kind of infusion of cash, a real shot in the arm as you say, because people are replicating their catalogues, they're out buying the White Album again. They're out doing all that other stuff. And they're driving, they're spiking the value, the apparent value. But is it a kind of false value, and is anybody hip to that while it's happening?
… There was a lot of resistance in the industry itself to accepting CDs. I remember the complaints of the retailers and the rack jobbers, "Oh we've got to replace all of our shelving. We can't handle these CDs, they keep getting stolen, we have to replace our shelving and it's a big capital investment in 400 stores to replace the shelving, to take CDs. And how do you counter the shoplifting element? Because a CD's a lot smaller, easier to put in [your pocket.] And your customer base is probably interested in doing that if they can get away with it."
So all of those elements came in, but it was recognized by the music industry that replacement with a higher-quality product, higher-quality sound, more portability, was going to be inevitable and it was going to raise, not only pricing for that time, but also interest in music. So this was a selling point for the stocks.
And it made it much more attractive as companies?
Yeah there were plays on this in the stock market, as you would expect. People said, "Oh gosh they're going to replace all their catalogue and buy new stuff. And if they're going to buy new stuff, this is going to be very profitable. They'll develop new artists, they'll have--" Michael Jackson and other artists at that time sold millions and millions of records. It was incredible. The Bodyguard [soundtrack], Whitney Houston, Michael Jackson's Thriller, all of these were top, top albums, selling tens of millions of copies.
So by your light, did the infusion of capital or cash, as a result of the CD, make a lot of guys in the business kind of lazy?
I don't know about lazy. Certainly it made them very protective of very good positions. And gave them the impression that it would go on forever, that it was not something temporary, just one year or one quarter. In fact, you could argue that they were probably right in the long run because, getting back to my original thesis, music is the most fundamental and widespread, around the world, it's a basic human need and emotion-inducing type of product.
So it cut across cultures, age groups, and countries. And it's worldwide, and for that reason you could say that, "Okay, when the middle classes in large impoverished countries start to grow, India, China, and so on, or Latin America, you would say, gosh, these are great markets. They're going to all turn first to music. They may not be able to afford a fancy DVD player or whatever for $400 dollars, but they can all afford a couple of cents for music."
So the assumptions on which these thoughts were based weren't crazy.
Let me go backwards just a little bit. I take your point about music as this kind of driving force everywhere and people are always going to need it. In a way that kind of gets the guys who run the companies off the hook, I guess.
The enthusiasm and the bright outlook that they all held was not a silly type of thought. Because we know that music cuts across cultures, and national boundaries. It's emotion-inducing, it is a fundamental entertainment, perhaps the most fundamental entertainment medium that there is. And so you could sell a lot of music to countries, to people that are in the developing countries where they are just emerging from poverty into a growing middle class.
One of the first things that they would do for example, I've given the example in the past that's not that relevant right now, but in Berlin when East Berlin became part of the west, one of the first things that people would do is run to buy music. So you could say that once the economies start to improve, and politics is, let's say, liberalized, or taken to a higher level of participation, democratized, then at that point you get, you get the stage where people buy a lot of music, or are interested in buying music.
At least that was the old time. The new time they just go on a computer and download [laughs]. But you can see why they do it. The impulse is driven by a fundamental need. That's why they do it.
It makes me wonder how in the world, if that's true, and I agree with you that it is true, how in the world we could be in a position where this quote-unquote "perfect storm" is taking over the music industry. What happened? How could you possibly blow it as an industry, if in fact you're willing to posit that they have blown it?
I will. I think they've blown it because they were suffering from all of these delusions. And they denied the impact of the new technology. The thought was that new technology would sort of go away, or they would adapt to it or whatever, and it would stop. But it didn't stop. And they should've been quicker to realize what was happening. Because it was no secret, Napster was out there developing. If it hadn't happened in '98, called Napster, something else would've happened similar to that.
And the technology is moving very quickly, and it's a danger for other industries. Obviously the film business ought to learn from what happened in the music business and not follow the same road. But I disagree that it's just a perfect storm that came out of nowhere.
The industry tried to keep prices high because that, presumably, was the value proposition that was being given to the consumer. Not realizing that most consumers didn't want the whole album, they just wanted two songs or cuts out of the album. So now if you could get two cuts on your own, why buy the album?
Then the industry kind of slowed down and became I think a little complacent. There was not a lot of great new sound coming out of the industry. It was a bit repetitive and dependent on sequels, such as the "Best Of…so and so." There was a lot of that kind of music released in the last couple of years. So there was no great impulse to buy new stuff.
Also, the population age wave if you will, changed a bit. And obviously with older consumers, when you get into your 30s, 40s, and 50s, you probably don't have at the top of your mind to stand outside in the rain and snow to be the first one to buy such and such's album when it comes out. You probably have other priorities, and if you have other priorities it changes the dynamic again. Sales dynamic. So the population shift, in the U.S. especially, made a difference.
And essentially it was pricing, it was technology, it was head in the sand-type thinking by the industry. They were very protective of what they were doing, not realizing that there was a major seismic shift into the new era.
A lot of the people we talk to say-- and one of the things that's not on your list-- and you confirm or not whether it belongs on the list, is this notion that the artists themselves were not being given a chance to grow, survive, become great. Partly because corporations took over these record companies, quarterlies had to be hit, executives said, you know, "You don't hit it on the album right away, you're gone. Next, next, next." And there was this imperative to find the newest thing and meet your quarterlies.
Well, there's an element of that. But I don't think it's realistic to put too much weight on it. And the reason I say that is that many artists -- and this is another characteristic feature if you will of creative industries -- is that you can say, "Okay we have a contract for five albums, and you've delivered one, and you're supposed to do the next four in four years, five years, whatever it is." This causes great controversy with the artists. …
But what has really happened is that, in all creative industries, but especially music, you probably worked -- whether you're a garage band or a polished opera singer -- you probably worked on your first album or collection of songs for a long time before you put them together. And that first album, maybe a second album but usually a first album if you're successful, it sounds great, you have it in you, it's terrific. And then you're supposed to have on a timetable album number two, number three and number four.
Well, [it's] hard to put that together, to create it on a schedule. Hard to meet the contractual requirements. So this creates a friction between the artist community and the record company. The record company gets a lot of pressure because shareholders say, "I need to have the quarter such and such and such and such."
But that is I think a lame excuse. It gets down to the creative end. It's unrealistic. When the business was growing rapidly, you had a lot of new artists, a lot of revenue, new revenue coming in, every year. The business tide pulled it all up. It didn't matter. "Oh we had one slower quarter because we had a few albums delayed by a quarter or two." It didn't matter because there was so much of it. The river was overflowing with stuff.
And now, when that river's dried up a bit, all of a sudden, as it dried up, you found that artists couldn't deliver on schedule. Why are you surprised? It's part of the creative tempo, if you will. You can't force creativity, you can't force people to have a great second, third, and fourth album on a schedule. A railroad schedule.
Especially when they took maybe five or 10 years to do their first album and perfect it. And we know that artists are very careful, they like the perfecting, they're perfectionists. So they spend a lot of time in the studio, they spend a lot of time writing, testing, tweaking the material, and that becomes very expensive if you're running a record company.
So you can't tolerate wild spending, there has to be some discipline, business discipline. Because if it costs you $2 million dollars to produce it and it only makes $50,000 at the end of the day, your record company is going out of business. You can't tolerate too much of this. So they indulge as much as they can, but at a certain point the record company has to say "Enough." …
When I look at the business, and we're following a young singer who maybe has a chance, maybe doesn't, maybe is one of 20. Comes from a good family, she's certainly got in her foxhole everybody that matters. A lot of important songwriters around her, a lot of important management. Everybody who matters. Good label, they're going to push her, she's going out soon. But if she doesn't make it -- she drops her single in May -- she's going to be gone. They've spent a million dollars on her as a company, but she's going to be gone. Doesn't have a multi-record deal. Is there any other business that follows that business model?
Well, movies, sports, have similar characteristics. All of these creative industries, and there's an excellent reference in academia, by Richard Caves, but they all follow option principles. And you go to a certain point in the development and then you say, "Okay, has this worked or not worked?" It's a decision tree. And you reach a decision point and you say, "Yes we go further," or "No that's the end of the road, go to another record company, go out of the business, whatever it is."
But they have to do that because that's the nature of these businesses. You can't let it run wild and it does have a tendency, in plush times, to get out of control. There are shareholders, there are people who demand a return on investment. So basically there has to be a disciplinarian. And I'm not saying that the record companies are always right about this. They make their share of mistakes. They cut off people who shouldn't be cut. They indulge people who shouldn't be indulged.
But by and large it's a measured risk and you have to say, at this point, are we going to throw more good money after what we've already spent, or not? So they make a commitment, up to a point, and then they decide what to do after that.
And the people who say, "In that environment, in this world where Bertelsmann and accountants and bean counters in Berlin make decisions -- in that world Bob Dylan never would've grown up. Bon Jovi, which took three albums wouldn't exist, and how many countless Bon Jovis don't exist because of it? And what are we really losing when the music dies like this?" You say?
I say: These things happen in an evolutionary sense. In nature, in all kinds of businesses, what if such and such a gizmo was developed and it was stifled in the laboratory? A drug at a drug company, let's say, pharmaceutical, some of them survive tests, some don't. What happens if a movie is green lighted or not green lighted? Same kind of decision. And you will lose some. That's inevitable.
But I would maintain that music is so powerful to artists, the creative people, that they would probably make the music for free because they enjoy it. They would compose it for their own enjoyment. And then if it's really good, chances are -- it's not guaranteed that this would happen every time -- but chances are that if it's really good, it would probably be heard, and signed, and be distributed.
Doesn't guarantee anything, no one has a way to predict this, but it happens in nature that some things just go by the wayside even though they were worthwhile. And you lose that, but that's the way things work in this world. So it's unfortunate, but I would say that all of the top creative people get a pleasure out of doing what they're doing. Creating the music, listening to it, going to concerts, hearing other artists, or writing it, whatever. And they would probably do a lot of this even if there weren't a giant record deal standing next door to them. It might not be heard by a lot of people, but they get their own satisfaction out of it.
Now what happened with the Web? How did these guys blow it?
Well, I assume you mean the record companies. How did they blow it?
Did they blow it?
Yes, they did. And the reason is that they got it into their heads that the customer is the criminal. "We have to stop all of this horrible theft." …
And the artists too were learning. We're all learning at the same time. The artists had to come around to seeing what was happening. And understanding how they could promote their music. How they could record and distribute.
So the first thought by the record distributors when they saw the business shrinking was, "We're going to stop these criminals out there from downloading and stealing our music for free. And we're going to put all of this effort into protective devices and lawsuits." They will claim at the RIAA that they did the right thing with these headlines about "87-year-old grandmother sued for $50 million dollars," or "12-year-old girl owes $100 million dollars because she downloaded a thousand songs or whatever on her computer." I would say that is a horrendous public relations situation.
They may have kept some people from downloading or made people think about it, but that's only in the U.S. Outside of the U.S., people didn't hear about that, they didn't care, and I would say they just drove it further underground.
But the main problem that these record companies encountered was that they tried to criminalize their best customer, their most avid, enthusiastic listeners. And on top of that, they tried to prevent, fight the technology towards portability, mobility of music, by putting up these barriers. "Oh you can download and rent the music, it's okay to rent the music for a month, for a day, for an hour, for whatever it is. But you can't own it, it will wipe itself out like Mission Impossible after 24 hours or a month or whatever it is, and you have to sign up again to rent the music for another $10 a month or whatever it is." And customers could not carry their music with them as they wanted to do nowadays. They could record two copies, make two copies, or one copy, whatever it is.
So they fought the technology, which was evident. They fought their customers, which is not a good idea in any business. And they saw the business shrivel. They actually drove more people away, to downloading for free.
Were they just not paying attention, not hip to it, just not suited for the task?
Yeah, I think they lost sight of the customer comes first. And the way to do that, it was clear at least to me, and I'm just an outsider to this industry, an observer, it was clear to me that the way to do this is make it easy for the customer to pay for the song. And don't make it a high price, make it a low price. If you make it convenient, instead of downloading and going through all the problems that you have, downloading you need a fancy rig, computer, to get the download fast, a broadband pipe, you need all these kinds of things. Make it a convenient package, make it easy to be portable because that's consistent with the new technology and the consumer demand. Give your customer more than what they can do alone. Means better packaging and so on.
So what happens is the package essentially goes away, but you can add the equivalent of liner notes, digital liner notes. You could make it easy for the customer to obtain the material. Not rent it, so it disappears after a certain time, but actually own the music the way they did before.
And this is where Steve Jobs comes in with iTunes. He changed the paradigm of the music industry. He made it possible for people to legally download, to pay for the music, and have a high quality product. And that's all the consumer really wanted, but the record industry was steeped in its old traditions, its old way of thinking, "We got to get those guys! All the customers are criminals, they're stealing us blind!"
That's not a way to do it. "And let's make it hard!" They had all these industry conventions, technologists coming together and trying to figure out, "How do we make it impossible to break the code so that they can't copy?" What a waste of time and talent and legal minds. "We're going to sue all of our customers! Our best customers, we're taking them to court." It just doesn't make any sense from a business standpoint.
Now they haven't discovered the ending business model, the standardized business model. But this is how things evolve. It takes 10 or 20 years to find out where the grass roots are. Where does the business model settle? What price? What is the convenience level? What is the type of packaging? How do you make a profit on this?
And all of those things, as I've said, by the bit, by the byte, by the song, by the minute, how do you package this, how do you sell it, how do you get paid for it? Those things are still in flux, we haven't settled that out yet, but I would say the iTunes model goes a long way in that direction.
And it took an outsider, like Steve Jobs, who had the clout, had the intelligence to understand what was happening, to approach the traditional record companies who were sort of chasing their own tails and going out of their own minds trying to figure this out -- it took an outsider to do that. I think we are now on the right path in terms of where we're going. I don't think the prices or the models yet have settled out in terms of artist contracts, artist relations, who gets what, does the record company get a piece of the touring revenues. We don't know that yet, how all of this happens. But record contracts will be changed, modified for the first time, in a major way, in maybe 30 or 40 years. And you're going to see new pricing structures evolve.
Some of it will be for free. The free comes when you have Pepsi, for example, sponsoring a 100 million downloads. And you can get it legally, as their commercial says, for free. And free happens to be a very good price.
… Would you buy into the music business? Is this a good time?
I would not particularly buy it yet, except for one segment of it, which is the music publishing business. Music publishing, music as I said earlier is so powerful, the music publishing business has the potential to throw off steady cash flow. You're not taking a lot of risk about new music, because it just accumulates and the best stuff always is used the most. So it throws off steady revenues, even though you have to replenish it from time to time, it's a pretty steady business. And that business I like as a business model.
That doesn't change, or doesn't change much. What happens is that the record business, through pressing, distribution, and artist development, that part is still in flux and hasn't settled out. What is the pricing model? We don't know, we just don't know. Is it free and other companies pay for the advertising and for the promotion? Is it 99 cents or is it 49 cents a song? We don't know yet [in] the long run.
So what happens? The business withers? The big five become the big three? Everybody is owned by Bertelsmann?
Further consolidation doesn't get us anywhere, it just cuts administrative and financial costs behind the scenes. It doesn't get us anywhere. What we have to do is develop and nurture the new artists, the creativity. We have to develop a pricing model that works for everybody. And the business will eventually get there. Because it gets back to the fundamental of music being such a basic entertainment aspect of everybody's lives.
So once we get back to that it'll be fine. But we're in this transitional stage where there's a lot of uncertainty, a lot of change going on, and I don't think we're there yet. So I'm not inclined to be too optimistic about the next couple of, say one or two years. But I think we've reached a point of perhaps stabilization, and we're no longer in delusion and denial. We have gone beyond that, thankfully. And we can now move on to developing a different model, business model, business strategy.