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Is the Internet, and the technology that led to the ability to download music files, the major source of the industry's current financial stress or is it a red herring? Here are the views of Danny Goldberg, chairman and CEO of Artemis Records; Touré, contributing editor for Rolling Stone; Jeff Leeds, reporter for the Los Angeles Times; and Harold Vogel, a media analyst for Vogel Capital Management.

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Danny goldberg
Chairman and CEO, Artemis Records

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The business during most of the '90s was great. It was still growing. … It was continuing its growth, so-called double-digit growth, for the corporate sector up until probably '99 or 2000 when the Internet phenomenon took hold and the alternative ways of getting music, including free music, put a big dent in the sales growth, especially in certain genres.

Let's talk about technological innovation and the record business' response kind of across the board. I'm sure its apocryphal but I've read things where people say, when sheet music came along, people in the business were saying, "It's going to kill vaudeville" or whatever it is.

I don't know about other business, but I think in the entertainment business in general, people who are successful tend to fear change and fear the unknown. …

In terms of dealing with the Internet, it's been a profound challenge for the music business. And unlike some of those other examples, the people that are concerned about it are not completely wrong. There is a problem if someone can get an album for free. And it's very hard to think of what you can do to get somebody to pay for something that they can easily get for free, especially if they can get it legally for free.

So it's a challenge, but there's a lot of harder challenges in the world and I still think that those of us in the music business are pretty lucky and you've got to figure it out. I think there are going to be a number of strategies that will turn the business around, and I think we're already seeing some of them. ...

Some people have said to us, you know the great thing about the CD was there was this infusion of cash because people replicated their vinyl. On the other hand, it digitized music for the first time ever. It led, inevitably, to whatever is happening with the Internet by the end of this century.

Yeah, so? I'm not a great expert on technology, but certainly you have ups and downs in the life of a business, and the music business, the same as movies or books has ups and downs, and technology over the long haul has so far been a big help. But short term, sometimes it's hurt. And, you know, the challenge right now for the music business, I think, is to add value to the product, give people a reason to buy it.

When I was in high school, the album cover and the liner notes were part of the reason we bought records. So just to have gotten the vinyl without the packaging would've been a big disappointment to me. I think that we're going to see more thought going into packaging, maybe boxes that include a t-shirt or access to concerts, kind of a Happy Meal concept. McDonald's sold hamburgers in part by giving away five-cent plastic toys.

I think you're going to have to add value to the product to make it unique. Even if a piece of it can easily be replicated digitally, the total statement of the artist will be harder to replicate, or in some instances impossible. That's what I think you need to do. I think people still love artists. But if you can get exactly the same thing for free, and there's virtually no enforcement of it, you know, people are going to take it for free. …

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Michael toure
Contributing Editor, Rolling Stone

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Downloading is talked about a lot at this point. [Is it] leading to the demise of the record industry?

[Laughs] Not at all, not at all. Any basic economist will tell you, if you go into the supermarket and there's a girl standing there with a platter of free cheese, everybody's going to take a piece of cheese. That does not mean that everybody who took a free piece of cheese would've bought one. It's not a one-to-one comparison. So the record business would love for you to believe that every download equals a sale lost. It simply doesn't bear out in [a] common sense level.

The downloading problem is much worse and much less worse than they would have you believe. It's worse because I do [go to] a lot of high schools, and I ask the kids, "Who downloads?" And nearly every kid in high school is downloading, except the dork who doesn't even know how to use a computer.

So there's more downloading than they're probably even willing to admit. And for the vast majority of kids, the lawsuits have not stopped them at all. There's no fear of the lawsuits. So all that the record business has done is victimize a couple of kids and make themselves look bad, but they haven't actually stopped it.

But now, what lots of kids who are downloaders say, is that they go online and check out these new songs, and then if they like it, they buy the record. So it becomes this sort of national listening station.

Not everybody who's discovering new music this way is actually buying it. But a lot of the kids are. And that is a boom.

So why does the record industry make the argument?

Well, it's very easy to believe. I mean it's very easy for the over-35s. Their record buying mentality is go to a store and buy a CD, and buy an album. There's a huge generational divide in the way that we buy music that the record business has not responded to.

People over 35 are buying albums or the CD. People under 25 are looking for MP3s and singles that they can download for free or to buy. This is a completely different way of consuming. The record business has been set up for 30 or 40 years to give albums to adults.

It's been since the '60s that they haven't marketed singles to teenagers. So they have to find a way to shift to giving the teenagers, the prime consumers, the product in the way that they want it, which is convenient, fun Web sites that make it easy.

So is the piracy issue an excuse?

For the record business a lot of times the piracy issue is an excuse. Absolutely. I mean, it's also sort of an excuse for the kids, because a lot of the kids say things like, "It's just easier to go [on] one of the pirate sites," than it is to go through all the rigmarole on one of the pay sites.

But there's this undercurrent also that most Americans think that most records, most albums, don't really have that many good songs. Even a superstar artist -- for the most part you're going to get, what, two, maybe three good songs? And the rest is going to be crap.

So when you go into the transaction thinking "I'm going to get screwed," there's no guilt in stealing it through downloading because they're putting out crappy product anyway. I mean, how many records have you bought, that you feel you got burned? "I paid $15 and only two songs I want to hear." And it happens over and over and over.

But is it an excuse for the record industry who's making these other mistakes and not capturing the audience? Is that why they keep coming back to this fact that this thing is hurting them so badly? [Is this] the reason for the downturn?

Many of the record business executives feel the downloading issue with a real passion, like a store owner who comes in in the morning, and the front pane is broken and somebody has come in and taken a bunch of their stuff. I mean, I talk to executives who are like, "We want to put, not just ghost files--" because now they're putting lots of ghost files, which are nothing. So you download 20 Madonna songs to get nothing, you get tired of it, you say forget it.

Now some executives want to put out viruses, where if you download this, it will wreck your whole computer. Put a couple of those in circulation, people will stop downloading fast, but that's against the law to spread viruses like that.

But they don't know what to do. They are so emotionally assaulted by the downloading thing. And they're so blindsided by it. That they're like, "Whatever we can do." So yeah, of course they're attacking. …

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Jeff leeds
Reporter, Los Angeles Times

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I think that when the Internet emerged as a force, that the record companies looked at it and thought, "Okay, here's another change in the way that we do our business, the way that we get music to people." They realized very early that this could be a very powerful thing and could ultimately become a way that they can sell music.

But they also feared it in a way and were very weary of it because looked at it as another potential gatekeeper. … Both radio and MTV ha[d] become like gatekeepers, where you had to somehow work them in order to get them to do what you needed them to do, whether it was to play a song on the radio, or video on MTV or what have you. And so that had become a costly machine for them to work in. They had to spend more and more money, they felt like, with less and less a return at both radio and MTV.

And so when the Internet came along, they thought, "Man, here's another thing, that if we're not careful, someone is going to control this and make us pay more money to use it, to get exposure for our music."

They didn't immediately want to embrace it. They were trying to figure out how to co-opt it. In different ways, they all wanted to get a piece of the action. They all started individually, the different companies cut deals with different technology companies, different software developers. All of the different kinds of things that they were developing were incompatible. And so there was a lot of in-fighting within the business about who was going to dominate. None of them wanted the other guy to become the most powerful music/technology company and then control the way Internet distribution was going to work.

And so while they were feuding with each other, this [technology], MP3 just became kind of a de facto format. The record companies were all trying to develop their own secure format, their own sort of way of packaging music on the Internet, but where it could be distributed safely and securely and at whatever price the record companies wanted to set. At the meantime, this technologically simple format called MP3 just became popular. Because the people that were able to encode their music digitally were using MP3 format.

So that just became the de facto thing. And then all of a sudden, when Napster emerged, there was a way for those MP3s to just be traded across the world. And the record companies had then wasted all this time trying to each develop their own kind of way to adapt to this thing. …

What have they tried to do, and how successful [have they been] to put the genie back in the bottle?

After a couple of years of trying to figure out what to do, and each try to develop their own systems, all the record companies ultimately agreed to back Apple iTunes music service. That started last spring and they all agreed, "Okay, we're going to make our catalogues available digitally, and Apple is going to sell them for 99 cents each." So, Apple, for the moment, has sort of become the gatekeeper. "We're all working with Apple now and trying to get catalogues and music on the service."

And they really enjoy the fact that Apple has committed tens of millions of dollars to advertising the service, and trying to make it a cool and popular thing to do. And then now they're licensing all kinds of other legal services around the world that they hope will gradually begin to draw consumers back in and take away from the piracy.

And the downside or the unknown?

Well, the unknown is how consumers are going to be using these services. How much they're going to buy. What they're ultimately going to be willing to pay, and those kinds of questions. The record industry is going to have a really serious problem if consumers come to a service like iTunes and buy only the one song that they heard on the radio.

There was a time when maybe we'd buy an entire album, based on hearing a single on a radio, or seeing the one video on MTV, one video for one song. And so then you'd go and you pay $12 or $15 or $18 for that album. That would be your transaction. But, if you're only buying one song, then there's a gap there. There's a gap between 99 cents and $18. And you got to either draw more people into the system, so you've got 18 people paying 99 cents for that single, who weren't going to buy it otherwise, or you've got to figure out some other economic model. …

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harold vogel
Media Analyst, Vogel Capital Management

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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," or "12-year-old girl owes $100 million" 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 now, 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 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. …

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.

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posted may 27, 2004

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