Moses Supposes – July 2007
In this Issue:
-- Universal Gives iTunes A Bloody Nose
-- Rolling Stone Sells Its Soul
-- Making Life Choices in the Music Business (re-print)
-- Orchard First Internet Indie to Go Public
UNIVERSAL DECLARES WAR ON iTUNES
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Will a UNI Pull-Out Dawn The End Of the Download Innovator?
By Moses Avalon
So, imagine you’re a die-hard fan of Amy Grant, Blink 182, Def Leppard, Elton John or Ja Rule, and you go to iTunes to buy their new release but it’s not there. Nor is any music by artists on Universal Music. Why? Because, Apple may no longer carry the catalog of the world’s largest record company. What will you say to yourself?
Well, according to Steve Jobs, CEO of Apple, you’ll say, “Too bad for Apple, I’ll buy another artist that I can easily find here on iTunes. There are thousands.” But according to Universal Music, you’ll say, “Na… I’m loyal. Ill just click over to Rhapsody, Napster, Yahoo, or (God forbid go to a record store) and get what I want. Not what Apple wants to sell me.”
This is the Mexican standoff drawing near because of Universal’s bold statement last month: they are not renewing their bi-annual contract with Apple and instead putting them on sort of month-to-month lease for the rights to sell their artists. Anyone who has ever rented an apartment knows that when your landlord says he will not renew your two-year lease and puts you on a month-to-month, it’s not good times.
Publicly, Jobs seems very casual about this. This may be because he’s betting people are fans more of his buying experience, over the artists themselves.
Who is right? Well, that’s the $200,000,000 question. This is how much annual revenue the industry stands to gamble with if Universal’s move inspires the other majors to do the same. If push came to shove, could the majors really afford to boycott the world’s largest retailer of on-line music? Probably not. So what is this really all about?
If you’ve read some of the blogs on this ground-breaking issue, “insiders” are saying that Universal is posturing a sort of strike if Apple doesn’t allow them to dictate different pricing for different artists. However, Jobs has stated that he feels staggered pricing would alienate the consumer. But, those of you who read the DRM Manifesto in the July 2007 issue of EQ should be able to figure out that this has nothing to do with staggered pricing. There’s really a much broader agenda at work.
(To read the DRM Manifesto on www.MosesAvalon.com go here: http://www.mosesavalon.com/mosessupposes/may07.html )
THE METHOD BEHIND THE MADNESS
Y’see, it’s real simple: the majors hate iTunes. Yes, it brings in a lot of revenue, but the majors want everyone to get their downloaded music via subscription based services like Yahoo, wherein you pay a monthly fee of about $15 and go buy the CD when you’ve decided what you really like. This is the future they are trying to sell. Using this system labels, publishers and the artists make far more than if the consumer buys a 128 bit low-res file for a one-time fee of 99 cents that can only play on selected (networked) devices.
But Jobs will not make iPods compatible for use with subscription services. (And he claims he’s pro consumer). To do this, iPods would need to incorporate a program that generates royalties based off “play events” (a royalty generated from each play on an MP3 player or computer payable to the label/artist and writer.) Without this type of digital rights management software, the iPod remains one of the only music players in the US that proactively endorses people experiencing music “shared” from unlicensed sites.
And so the majors hate iTunes.
Jobs knows this. He could make them like it more. But instead has refused to make iPods compatible, stating instead that labels should remove the “lock” that disallows copies of music files to be “shared.” (Read: labels should let everyone steal their inventory so that Jobs cans sell more iPods and iPhones.)
IT’S ON!!
If they could get away with it, every major label would probably bail out of iTunes until Jobs decided to play ball. But aside from the lost revenue, if all the majors conspire to boycott iTunes, Apple would have a billion dollar claim against the RIAA.
The far smarter move is for a mega major like Universal to “break ranks” and pull out for personal reasons. No anti-trust issues and yet it would seriously handicap iTunes because Universal controls about one-third of the product in the marketplace.
Who would have thought Universal would be the rebel label? Will they win the coming stand-off? What’s at stake? Just the way we all make money with music in the 21st century.
Stay tuned.
Moses Avalon
For a complete list of just which artists will be affected go here: http://new.umusic.com/Artists.aspx?Index=1
More links on this: http://www.reuters.com/article/businessNews/idUSN0128300220070702?feedType=RSS&rpc=23&sp=true
http://www.azcentral.com/business/consumer/articles/0702biz-universalapple02-ON.html
ROLLING STONE MAGAZINE SELLS ITS SOUL
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Music Icon Decides to Help Tech Industry Destroy the Pop World
By Moses Avalon
Once Rolling Stone Magazine was the masthead of a generation. One that was inspired by and contributed to musical trends. Now they have reduced their standards of “fair & balanced” to the level of Fox News. In the process, they have sold out the very audience that built their brand.
In June of this year Rolling Stone published an article, “The Record Industry's Decline” (link to the original article is below). Filled with out of context quotes by “anonymous” sources and former head of the RIAA, the article predicts the end of the record business within a few years. The journalists (who seemingly took the path of least resistance for their research) focused on record company short-sightedness in dealing with Napster, but completely ignored the realities of the complex licensing dilemma that existed at that time.
One example is this quote taken from the article’s text (as opposed to a quote by a source), “Even worse, the record companies waited almost two years after Napster's July 2nd, 2001, shutdown before licensing a user-friendly legal alternative to unauthorized file-sharing services: Apple's iTunes Music Store.”
This implies that the labels had control over when Apple created “safe” DRM friendly software. It also has errors of fact regarding the label negotiations with Napster in regard to why they could not reach an agreement in 2002.
Naturally, the piece jumps on the media bandwagon of “declining CD sales” as its tent post, ignoring the fact that CD sales revenue has not only been off-set by other new revenue streams, but that current CD sales are only down to 1991 levels, which was one of the best times in the record business.
(For more on off-set revenue streams from new media see my re-print of “Making Life Choices in The Music Business” directly below.)
While one might expect this sort of one-sided journalism from one of the other main-stream press outlets, it’s very sad to see it from a periodical that made its bones on the backs of recording artists; now selling them out and helping the tech industry brain wash the public into thinking that resistance to the Tech-World’s DRM-free campaign is useless.
(If you don’t understand what I’m referring to read “The DRM Manifesto” at this link: http://www.mosesavalon.com/mosessupposes/may07.html )
I wonder if a perusal of Rolling Stone’s most recent advertising acquisitions and drop-outs would reveal anything about their motives?
The Moses Avalon Company mourns the death of a great American magazine and wishes them well in their voyage to the dark side.
Moses Avalon
http://www.rollingstone.com/news/story/15137581/the_record_industrys_decline/print
MAKING LIFE CHOICES IN THE MUSIC BUSINESS
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By Moses Avalon
(Re-Print from Moses Supposes - December 2006)
Okay, show of hands: who in the past year or so has had a friend or relative come to them with an article claiming the death of the music business? It’s usually followed by comments like, “I think you should really reconsider this music thing. Take that job with my uncle doing carpet installations. People always need carpet.”
Does this sound familiar? Hands high. I’m counting. Yes. I see there are many of you.
And I’m sure you’ve also felt somewhat handicapped for a snappy response. In your heart you love what you do and you know that you should pursue it, but where are the words and facts you need to tell them to step auff?!
I have grown ill listening to pessimists blabber on about the “dying industry.” What sales reports are they reading? The business has earned more new revenue between 2004-2006 than ever before. The RIAA has called the file-sharing of music, “a public raping.” They claim that piracy has cut sales by almost 30% over the last few years, and yes, any fool can see that file-sharing has affected the business. But has it been in a negative way? Has it really cost the labels “big money” and is the business really suffering because of it?
No. Quite the opposite. I’ll tell you a secret. Revenue is not really down at all.
In 2005, album sales were 618 million units. In 2006 they dropped to 588 million. A 5% drop. Not 30%. Not even 10%. And this was only in the US, which saw the worst drop off compared to the rest of the world. Extremely negligible numbers and better than other industries like computer and automobiles who in the US have experienced bigger reductions in gross revenue.
Okay. I hear you out there reading this. You’re saying, “But Moses, 5% a year adds up. Doesn’t that mean they’ve lost money and isn’t that a bad thing.” No because that 5% is more than made up for. The Warner Music Group, said in their annual report that recorded music sales for the fiscal year 2006 rose almost 3 percent, to $3 billion, and that digital revenue had more than offset the drop from CD’s.
Let me tell you a few more secrets: what the RIAA doesn’t include in “lost sales.”
-- They don’t include CD sales of independent artists, only a decline in sales of titles on major labels. Indie sales make up about as much market share as all of Warner Music Group, which is about 20%. So they are not including album sales equivalent to all of WMG in their calculations of “lost sales.”
-- They don’t include the approximately two billion legally paid for downloads from iTunes, Yahoo e-Music and many others. These are not CD’s, technically, so they don’t count them in “reduced album sales” even though record companies are getting hundreds of millions in new revenue from these sales each year. Also worth noting is that there has been a 71% increase for these types of sales. (2005: 353 million units, 2006: 582 million units.)
-- They don’t include the fact that the licensing fees for getting a hit song in a soundtrack has increased over 1000% since 1995 (climbing from about $80,000 to about $1,000,000) with no additional hard costs to the label.
-- They ignore the tens on millions of ringtones that have generated about .30 cents each in new revenue (about $90,000,000) for labels in the past three years and due to a new ruling in the copyright office, will increase to about .50 cents for each sale in coming years.
-- They are omitting the fact that downloaded music has virtually no manufacturing costs, nor are there any returned or damaged merchandise (with rare exception). So, in essence, record companies make substantially higher profit margins on newer sales.
So, when record executives give interviews that bemoan the pending death of the music business to me they just sound like old school farts, trying to crawl back into some decomposing chrysalis.
Look carefully at their credentials. Most of them were recently fired from their cushy, six-figure A&R jobs. Why? Because, labels are re-tooling for the new millennium; streamlining their staff. You no longer need a team of A&R executives making an average salary of $175,000 a year, with expense accounts for travel to hear a new act. Why bother when you can have three 20 year-olds for $30,000 a piece doing the same job by searching MySpace. Plus, while A&R departments are being trimmed, Human Resources is busy filling seats in the ever expanding Licensing Departments of major labels. Why don’t you read stories about that?
Mass firings on the A&R side does not equal a dying business. It equals a changing business.
We don’t have cobblers anymore either, but we still have a shoe industry.
Nuff said,
Moses Avalon
ORCHARD REAPS MASSIVE HARVEST
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Little Indie Becomes The First Of The “Internet Distributors” To Be Traded On The NASDAQ
By Moses Avalon
Forget TVT, Razor & Tie or Koch, a little Indie called The Orchard, who up until earlier this year was competing with other garage-band distributors like CD Baby, has pulled way ahead of their competitors with a merger to the publicly traded company, Digital Music Group. (symbol: DMGI)
The Orchard has had a rocky history. While they were of the first to offer “on-line CD distribution” to unsigned acts, the model was fraught with growing pains and speed bumps. For years, The Orchard wracked up many complaints by member artists and labels, developing a reputation for not paying their royalties and backpedaling on promises of obtaining distribution alliances.
When The Orchard was purchased and restructured in the past year, its new CEO, Greg Scholl, then stated to me in email, ”We have invested a lot of time and money in building the infrastructure and improving business disciplines and financial transparency… [And have] dramatically changed the nature of how we relate to the artist and label clients we serve.”
The Orchard hopes its new philosophy will resonate with its members as it has with Wall Street, where double talk and elusive claims of profits and losses are business as usual.
Despite revenues of about $15 Million and a gross profit of $4.2 million during 2006, Orchard states they have still lost money during that period and for the first quarter of 2007. The reason, according to Scholl are investments in, “building out operations, marketing services, and other initiatives that we believe will help our artists and labels sell more music and build bigger audiences.”
This merger signals a new “hopes up” era for the world of Internet based distribution which as been besieged with doom & gloomers in the blog-o-sphere who claim the business is in the doldrums. News that a company with confessed losses can still find partners, investors and even go public will be a bitter pill for them but relief for their knackered readers and Orchard’s clients.
The new entity will trade on Nasdaq as “DMGI,” but will still be The Orchard in name and brand.
The Moses Avalon Company wishes The Orchard much success in their new incarnation and hopes that it will stay true to its mission statements of good service to the thousands of artists and labels they distribute.
Because if not… now that The Orchard will be a public company, they trade watchdogs from The Moses Avalon Company, to The US Securities and Exchange Commission and their perpetual budget to investigate complaints.
Ever onward,
Moses Avalon
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