‘NAPSTER HAS CHANGED EVERYTHING’
A decade ago, even at the height of the war against Napster, the writing appeared to be on the wall for the major labels. In the spring of 2001, Eagles singer Don Henley traveled to Washington to cheer on the digital revolution.
To Henley and many other artists, the nation’s largest labels were little better than loan sharks. At worst, they were career saboteurs.
“A typical artist could sell a half-million records and not see one dollar in royalties,” Henley told the Senate Judiciary Committee, which was debating a congressional response to Napster. “It is as though you have paid off your mortgage and the bank still owns your house.”
Nor were the major labels especially kind to their customers. A year before Henley’s testimony, they settled with the FTC for colluding to raise CD prices, a practice that had generated $480 million for the labels over three years.
“Napster has changed everything,” Henley said. By failing to establish a sustainable, standardized system for licensing digital music, “the record industry fiddled on the sidelines while the digital revolution went on without them.”
In the years since Henley’s testimony, the music market has changed dramatically. According to data from the Recording Industry Association of America, a trade group representing major labels, U.S. sales revenue peaked at $14.8 billion in 1999 (one of the years in which the FTC accused the labels of colluding to raise CD prices). That annual figure is now closer to $7 billion, a decline fueled by lower prices online, piracy and a sluggish economy.
But last year, the industry’s slide finally stopped. Sales revenue actually grew, while the total number of purchases reached an all-time high. A little over half of all music sales today are digital, not physical.
One service above all others has been responsible for creating a viable commercial market for music online: iTunes.
Since opening its music store in 2003, Apple has become the largest music vendor in the U.S. By 2009, it was responsible for 25 percent of all U.S. music sales, physical or digital.
Labels take 70 percent of the retail sales from iTunes — a bigger cut than they take from traditional record stores. And by offering listeners a legal service that is as convenient as Napster was, and where songs cost as little as 99 cents, iTunes radically diminished the appeal of illegal downloading.
When Apple CEO Steve Jobs prepared to launch iTunes, he did what every digital music startup has done since: negotiate licenses with the big labels.
Traditionally, whenever a record is purchased in a store or a song is played on the radio, songwriters and publishing companies receive a small portion of the proceeds. These royalties are set by Congress, which limits the amount that big publishing companies can demand from radio, while at the same time securing a stream of income for songwriters. Radio stations have never had an obligation to pay royalties to performers or record companies, however. For the most part, radio has served as a free advertising platform for the labels.
On the Internet, by contrast, a new service must obtain a license from whoever owns a recording. There are no statutory royalty standards for recorded music in the digital universe, giving record companies the ability to demand any form or amount of payment they want from a new tech startup. Without buy-in from the major record companies, any new platform is limited to a tiny fraction of the music universe — a situation that isn’t very attractive to most listeners or to venture capitalists looking for a return on their investments.
Apple needed the majors to get iTunes moving, and Jobs sought a licensing deal with one label that could serve as a template for the others. He eventually got Warner on board, then Universal and EMI. But as Walter Isaacson detailed in his biography of Jobs, Sony Music dragged its feet. From Sony’s perspective, iTunes wasn’t just Apple’s play for the digital music software market, it was a major bid for the hardware market, too, which would dramatically increase the appeal of Apple’s iPod and threaten Sony products like the Walkman.
“The holdout was Sony, in part because Sony had Sony Electronics, thought Walkman should be the heir to the digital future, and didn’t want to license to a competitor,” Michael Nash, former head of digital music for Warner Music, told HuffPost.
Sony eventually decided to get on the iTunes train, however, rather than risk being left at the station.
“After Jobs had other labels on board, Sony thought it would make them look bad, that they would lose out not being part of the launch,” Nash said. “And [they] knew there was a credible threat that iTunes could launch without Sony, that they’d get left behind.”
No single company could hijack the entire process if others wanted to play ball.
According to Paul Vidich, a former Warner Music executive who closed the iTunes deal, the pending merger between Universal and EMI could put an end to that state of affairs.
“Without a UMG-EMI license, they won’t have a business,” said Vidich, referring to new digital startups. “Within the new UMG-EMI there will be only a handful of senior executives who make these key licensing decisions. So this small group will become the gatekeepers for music startups that require these licenses. The psychology, pay packages and strategic interests of these executives will have an outsized impact on diversity and innovation in the entire online music industry.”
A post-merger Universal could convert the current oligopoly effectively into an monopoly, with a single company determining the commercial viability of all innovation in the digital music space.
“When you get to a position where you have a 40 percent market share, you can dictate the terms of new services, and that can be quite harmful to innovation,” said Martin Mills, founder of Beggars Group, which co-owns some of the biggest independent labels in the world, including XL and Matador Records.
Not that tech companies are necessarily angels, either.
Apple’s dominance of the music downloading sphere has led to separate antitrust inquiries from the Department of Justice, with some record labels complaining about Apple punishing them for marketing arrangements with Amazon, the second-biggest online music retailer.
And many music industry executives have long blamed Apple’s low prices and popularization of individual song purchases for the decline in more lucrative sales of full albums.
Apple and Amazon did not respond to requests to comment.
“Whether there was any intelligent way to resist [the digital revolution] is an open question to me. It’s not like the newspaper and magazine business have done it any better,” said Danny Goldberg, former CEO of both Mercury Records and Warner Brothers Records, who now manages artists including Tom Morrello.
“I don’t think the music business is as venal as, say, Wall Street,” Goldberg said. “I also don’t think that tech companies and computer companies are populated by saints who only care about freedom.”