After 10 Years Can We Finally Get Some Perspective?

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The media induced conception is that labels sat on their laurels during the advent of the Internet in the late 1990s, thus creating their own hell with illegal downloading. This is an easy pitch to buy into, especially if you have tech-related interests. It makes labels seem dial-up dumb and combined with their reputation for not paying their artists, it’s one that has been welcomed by just about everybody.

But is it true? And should we care about the truth or does it take a back seat to “justice?”

“Not true,” says Michael Ostroff, executive vice president of Business and Legal Affairs for the Universal Music Group. Mr. Ostroff serves as UMG’s chief legal officer, worldwide. I interviewed him in 2006 for my third book Million Dollar Mistakes from which much of this article (with updates) is excerpted.

Michael Ostroff: “It is very much a myth that record companies were saying no, no, no to the Internet. [Universal] started looking into the Internet as an opportunity in the late 1990s. One of the opportunities that we thought we would have was like the models they have in the film business. Physical product at one point, then streaming to different sources, and then buying the permanent download. Like video, pay cable, pay per view, and network broadcasts.”

So, what went wrong? If labels really were reaching for this technology and the internet companies reaching for them, why did both sides miss the boat? Now that we’re in year 10 since the start of the internet/label war a look back might reveal, for some– an inconvenient truth.

FIRST BLOOD

Many tech companies approached majors during the late 1990s for catalog licensing, but the one that seems to create the standard for examination is Napster; the David that bagged Goliath. It was the “success” of Napster that paved the way for other P2P based companies like Kazaa and LimeWire, both of which, unlike Napster, are still operating in illegal formats.

The principals of Napster claim they approached majors to get the rights to legally “distribute” catalog on their P2P service as early as January of 1999. Napster’s perception was that labels didn’t pay royalties to artists and, being very pro-artist, Napster wanted to make sure that artists were paid from their downloads (ironically). (See All the Rave: The Rise and Fall of Shawn Fanning’s Napster, by Joseph Menn.)

But record companies faced these three obstacles in regard to licensing to online services in 1999:

– They lacked the rights to grant.

– Their desire to maintain the album-based-economy business model.

– Fear of anti-trust suits for imposing standardization.

While other internet service-based companies seemed willing to engage in what must have been very frustrating negotiations with the majors, the three important factors above were obviously lost on the aggressive and naive Team Napster, whose average executive was barely 25 years old. Some execs had not even finished college. To them it seemed doubtful that these powerful labels, who could make or break careers, were claiming that they couldn’t go boldly and quickly into something that seemed so very obvious. At least to them.

Here’s how the three obstacles broke down:

FIRST: GETTING THE RIGHTS STUFF

A fact glossed over by the media when criticizing record companies was that in 1999, with the exception of certain “digital rights” for Jazz audiophile records, there was barely a single major label recording contract that granted the artists’ specific rights for Internet distribution (as opposed to copies being made via a download.) The now famous broad language that we see in today’s contracts that would cover any new development (“now known or hereafter invented”) was not a given for Heritage artists signed in the 1960 and 1970s.  And even if it were, there was still a loophole labels had to close on this issue just to protect themselves from liability.  This was something labels probably did not tell the tech companies courting them for fear they would be usurped, which in fact, some tried to do. (Napster, to name but one.)

The crux of this problem was that some key artists were not willing to give up Internet rights so easily. They were still feeling the sting from years back when labels asked for the rights to re-release their masters on the Compact Disc (CD) format. This was a right not automatically granted in pre 1980 contracts.

Throughout the 1980s, virtually every artist signed over their CD rights without receiving any up-front money. They were told instead that they would get higher royalties because the CD would sell for about $12, instead of the usual $7.99 in 1979-80. (Artists’ royalties are based on an integer of the unit price.)

But after getting these rights virtually for free, labels applied a “new technology deduction,” to the royalty formula, lowering payments by 25% and thus equaling the same royalty artists already received for LPs, which was already low and for which transparent accounting seemed impossible.

Many artists felt duped.

Now, in the mid 1990s, less than 15 yeas later, the labels wanted “Internet rights”— another right not automatically granted, even in pre1990 contracts. Even though newer artists had no choice, once burned heritage artists with leverage balked. Many wanted an advance. Some were not interested in giving their label more rights under any circumstances now that their contracts were in the twilight stage (you know who you are). And then there were the really “progressive” ones who felt that they might be able to make deals directly with Napster; laughable in retrospect but plausible at the time.

Bottom line, licensing a piecemeal catalog was considered flaccid and worthless to Napster’s business model (indeed to just about every ISP based model), yet for labels to give net-based entities complete catalog download rights in 1999, they would have to renegotiate with their 1000s of artists. That would take years. Napster, gave them about six months.

Tired of all this spit-balling about rights n’ stuff, Napster forged ahead with their launch in June of 1999. Artists with whom they were in direct negotiations soon backed off as they saw their own new releases posted on Napster’s P2P network– sans authorization.

It was war.

SECOND: TRANSITION FROM ALBUMS TO SINGLES

Napster was a singles-driven format, something the industry had evolved away from over the past 20 years.

But, misinformation has led consumers to believe that labels loved the Album format because it allowed them to package filler with the hits and charge more. This was never the case.

Labels want and have always wanted 14 hits songs on every album. Artists can rarely deliver and even if they can the radio/PR format doesn’t allow for too much attention to be placed on one album (with exceptions naturally.)The decision to move from singles to albums was driven by the law of averages, the economics of production, but also at the requests of artists.

Most all industry advances were based on projected album sales. This was something artists’ reps had worked for decades to achieve a standard for. Eight album commitments were perceived as sort of job-security for many artists; with an advance based on the standard financial projections of a 14 song album and a first run of at least between 100,000 and 750,000 units.

Switching over to a singles-driven model that has little to no pressings and just a posting on a website may sound good from a consumer point of view, but this sudden change would have seriously affected the economics of just about every deal in the industry.

Articles and blogs targeting only labels in their accusations of thick-headedness, seem to want to skip over the immutable fact that songwriters and artists didn’t want a “singles driven market” either, because, if album sales are no longer the means by which you quantify success, how are you going to determine the size of an advance? What are you going to figure it against? On-demand singles?

So, why doesn’t Wired and their ilk criticize artists? Because to imply that a songwriter deserves to have his songs “shared” because he’s clinging to a “dying business model,” doesn’t generate the same public sympathy for the tech industry. Instead, it makes them look like thugs. Better target: heartless record companies; a beard to hide the fact that stealing from majors was the same as stealing from the little songwriter too and a great aid in helping to make illegal P2P seem victimless.

Napster didn’t care to learn the economics of the music business, or how artists and songwriters pay their bills and feed their families. They just wanted the product and they wanted it yesterday. In their mind, artists didn’t get paid anyway, so why not forge ahead.

THIRD: DIGITAL TRANSMISSION STANDARDIZATION

Due to antitrust concerns there were limits to the conversations that major labels could have with each other or a tech company regarding a standard for digital transmissions. In other words, if you as a major record company controlling a vast majority of the product, make a deal with one tech company you could be required to make a “most favored nations” deal with all of them. With several companies competing for a “standard,” few media companies in 1999 were ready to do that. But you didn’t read about that in most news stories. The main-stream spin was that labels couldn’t adapt fast enough to keep up with the times,

If the antitrust climate that exists today were applied even less than 100 years ago, when Union Pacific for example, decided that they were going to create a transcontinental railroad with one type of track, every other train company would sue, claiming that they were bullying them into conforming to an inferior standard and not allowing them to compete. We’d have railroads where you would have to change trains every 100 miles or so because train company A’s trains won’t run on train company B’s tracks.

Or, applying the same analogy to telecommunications, a telephone system where you could only call people within a certain territory because the New Jersey telephone company used a different dialing technology or a different type of cable than ones adopted by other phone systems.

iTunes was years away and labels, wanting to create a uniform buying experience and not get pigeon holed with an obsolete standard, asked tech companies for some rational assumptions regarding which algorithm de jour was going to prevail. No one could give assurances in 1999, other than the MP3 format, which at the time was thought sonically inferior by majors and did not include coppy protection, like DRM.

DRM forced too many technical problems for 1999 software developers. So instead of saying, “We can’t figure it out,” they said, “Labels are being unreasonable in their licensing demands.” But another take on this is that Tech companies, by not being able to unify with a protected copy standard, forced labels to sit on their hands.

THE FREE TOY

In 1999 the music business had an already existing industry infrastructure, well established with standards, feeding thousands of employees and artists. The internet “industry” was just starting out, and other than HTML, had few standardizations. In order for copacetic progress to happen, tech companies would need to work within the labels’ existing standards. They claim they tried, but did they really?

Michael Ostroff: “I am not sure the tech companies were ever really reaching toward us. They were interested in building a business on the back of ours without compensating us. [Universal was] trying to develop [Internet] business in a more controlled manner. I think that we didn’t appreciate that all of that would come tumbling down.”

The rest is well documented elsewhere. Massive litigation and rewriting of copyright laws eventually closed down the free version of Napster. But by then labels had drawn blood with tech companies who simply did not understand the music industry’s concerns or didn’t care to. By December of 1999, one month before the new Millennium, a decision was made by the cabal of Silicon Valley companies: music would be the free toy at the bottom of their cereal box. Napster had proven the model.

Their PR machine in full swing, tech companies set about to make record companies the bad guy in an elaborate hearts & minds campaign. They helped finance “advocacy groups” like the EFF, and “solutions” like Creative Commons, to “educate” the public about “fair use” and their “right to share.” They seduced journalists and offered up intellectual puppets like Lawrence Lessig. And while P2P companies were losing the battle legislatively, from the public’s viewpoint they gained significant ground. Just about everyone thinks only bad things about record labels. All record labels. (The average person does not distinguish between majors and indies.)

The music industry missed a chance (if they ever really had one) to partner up with tech-companies. Will this ever change? I think so.

THE CHANGING TIDE

Of late, ISPs have started to see themselves as content delivery service providers, instead of just “dumb pipes.” Instead of “net neutrality” they now want to charge different rates for different types of content. And why not? The 21^st Century commodity is not Soy Beans, it’s Bandwidth. But, this requires them to make friends with their former enemies– movie and music providers. The “free toy” has become the new potential client. Time to kiss some ass.

Last year I was a Keynote speaker at the Eurosonic/Nooderslag conference (the SXSW of Europe.) A comment in my speech was met with astonishment when I said to a room of 300 international delegates that because of the changing tide I predicted that within five years you’ll see a high-profile arrest for file-sharing. This seemed absurd to Europeans at the time. The Dutch government had just passed a law that made P2P practically legal. I was wrong. It would not be five years. That arrest was only a few months away in the even-more-progressive country of Sweden.

Since then, the Supreme Court of the US has upheld stiff fines from RIAA lawsuits. Britain is now penalizing file sharers,. ISPs have agreed to work with the RIAA and other special interest groups in assisting them with finding and punishing P2P users. The tide is changing. The storm is clearing. When will the music biz naysayers wake up?!

Even beleaguered Warner Records reported that their Q4 2009 numbers showed only a 2% drop in revenue from last year (adjusted for exchange rates or what is called a “constant currency basis.”) Could this be a sign?

Bottom line for the future of the music biz, to paraphrase Fast Eddie Felson…

“We’re back!”

This is not the end.  It’s merely a new beginning.

Moses Avalon

PS: if you like this article you may also enjoy my third book, Million Dollar Mistakes.

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