Editorial: How The Music Industry Created Its Own Worst Nightmares

Music IndustryThe music industry has always had issues with making changes. Because of this the music industry is always left behind in the new trends and technology and thus causing them to lose out on money.  Much like the change that came with napster, instead of embracing the technology the music industry fought it and now is finally catching up and understanding that change comes. Check out this great new article on why the music industry is it’s own worst nightmare by Forbes contributor Bobby Owsinski. 

Once a sector committed to the bleeding edge, the recorded music business has gone from an industry adept at incorporating the latest technology into its products to one that’s become its own worst enemy by its refusal to adopt and adapt until its too late. Over the last 30 years, not only has the industry made a series of grim mistakes that has emboldened its competition, in some cases it has even created it.

For the better part of a hundred years the recorded music business had an impressive track record of staying on top of the freshest technology. From adopting the vinyl record to replace the fragile shellac discs that were its original core business, to welcoming the cassette and its new-found portability, to the random access and digital sound of the CD, the industry managed to rise to greater and greater sales heights with each successive tech breakthrough that it incorporated.

But a series of short-sighted mistakes starting in 1981 have turned the industry from the master of its own domain to one that’s now primarily reactionary, with each latest response putting it deeper and deeper in a hole as it loses control of its own destiny. Where once the industry controlled every aspect of its business, now it has ceded control of virtually all of it, but especially the distribution of its products.

This has occurred due to many factors, but historians will look back at three major turning points that altered the industry’s fate.

The Rise Of MTV
Up until 1980, recorded music was an ecosystem totally run by the major record labels. They were responsible for creating the product by finding and recording the artists, to manufacturing the product in its own manufacturing plants, to distributing the product to a series of retail stores, to promoting the product via print media and especially radio. The record label was at the center of each of these activities, none of which could progress without its approval. The money flowed and life was good.

But by 1980 the industry was in a major doldrum thanks to a backlash against the disco era and a general spending malaise. Luckily it was soon bailed out by new musical trends (punk and new wave), and an upstart cable television network called MTV.

Suddenly there was a new way to promote music and every label jumped in feet first as viewers and record buyers couldn’t get enough of watching videos by the artists they loved. Soon, a new stable of MTV-ready stars was created, the CD was introduced, and music consumers were buying more product than ever before, with MTV at the center of it all.

After a few years of escalating video production costs and desperate fights for the network’s airtime, it began to dawn on the music powers-that-be that MTV was pulling in large profits on the backs of the free videos that the labels were providing. MTV had gone from a channel almost no one wanted to one worth at least as much as the major record labels, much to the industry’s chagrin. The recorded music business had created a monster that it was no longer able to control or profit from, and a last ditch effort to charge MTV for the use of videos did little to change the outcome.

Along Comes The MP3 and Napster
With shouts of “never again” the industry felt it learned a hard lesson at the hands of MTV and vowed never to repeat the mistake, only to do so a dozen or so years later when the world discovered digital music. As MP3s became all the rage, the major labels ignored the trend, since they were collecting the most revenue in their history. Profits have a way of making it easy to pay little attention to the canary in the coal mine, and this certainly was the case here as their best customers began to migrate to digital, and for free no less, while the labels slept.

Then came the effort to monetize digital music, as MP3.com, then Napster rose in prominence. The industry looked upon Napster as an enemy of the state, accused of stealing its profits and contributing to the dreaded scourge of piracy, which was blindly condemned as the major reason for declining sales. Instead of embracing the new technology and the company, the industry instead sued it out of existence, which did little to stop the problem. The file distribution service they used ultimately matter didn’t, as music consumers liked the portability of the digital song file, and the horse was now out of the barn forever.

Along came Steve Jobs with a plan to legitimately monetize digital music through AppleAAPL +0.01%’s new iTunes service, and faced with falling profits and the feeling that the digital dam was about to burst, the industry reluctantly bought in. With the introduction of the iPod, iTunes became a raging success – at least for Apple. The labels were now managing to monetize digital music, but at a fraction of the revenue of a CD. Worse still, it took distribution out of the hands of the industry, a move that is regretted to this day.

Had the industry found a way to work with Napster, it might (that’s the magic word) have found a way to monetize digital music in a way that could have at least weakened the grip that iTunes eventually held around the label’s collective necks. The financial loses would still be there, but they could have kept their distribution in-house rather than ceding it to the tech industry.

And Then There Was YouTube
When Google GOOGL -0.91% purchased YouTube in 2006 for $1.6 billion, most wondered how the company would ever see a return on the investment. Flash forward to 2014 and the service now brings in roughly four times that amount in ad revenue per year, with music leading the way as the main traffic driver.

YouTube has now become the top way that users discover new music online, and the way primary way that teens (the major label’s primary customer target) consume music. It’s M
TV and Napster rolled into one, and once again it’s beyond the control of the music industry.

For a while the industry once again ignored this newly growing digital trend, but when it discovered that fan generated cover songs and lyric videos were producing big view totals and ad revenue, the industry made a concerted effort to get involved. First it started Vevo, which is a YouTube portal for its artist’s official music videos. Then labels began to actually post their own lyric videos, or even just videos with only a simple picture of the artist so the viewer could have YouTube access to the song. Soon the labels began to go after anyone using one of its artist’s song in a video without permission in an effort to monetize it.

The real problem is that unlike so many other YouTube channels, Vevo is not a destination. No one says, “I’m going to check out what’s on Vevo today.” They accidentally access it when looking for the latest Katy Perry video. While the industry has been able to pivot faster than in previous situations and actually take advantage of the technology at hand, it was still caught by surprise when droves of music consumers began to consume most of their music on YouTube, once again for free.

Through all this, the major labels did learn a lesson – the most powerful thing they now own is their catalogs. As a result, they’ve driven harder and harder licensing bargains when a digital distribution service wanted to use its songs. This has provided not only an influx of up-front cash, but many new deals includes partial ownership of the service as well. As a result, Universal Music just pocketed a cool $404 million when Apple purchased its stake in Beats Music, and all three majors are hoping to cash in on their portion of Spotify if and when it’s sold.

That said, the recorded industry could have been in much better shape overall had it kept its eyes on the ball when these three opportunities presented themselves. Would music consumers have been better off as a result? That’s a topic for another post.

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