August 29, 2007

Promoters take over as file-sharing bug bites

Posted in International Economy · 5 comments ·

This weekend, many of the 40,000 people who will travel to Stradbally for the Electric Picnic probably still remember the thrill of getting your hands on a new vinyl album. Even for part-time, uncommitted musos, the new album with its cover, inside sleeve, lyrics and design was a prized procession to be treasured, shared with mates and above all, taped ferociously. A little later, the CD took over, but the buzz and the hype was almost the same.

For example, when Sign o’ the Times, Prince’s 1987 classic album, was released, it sold out in Golden Discs in Dun Laoghaire despite retailing for a steep £15 at a time when the average industrial wage was a little over £100.

For many thousands of Irish music lovers, that CD was an essential foretaste to the Prince concert in Cork a year or two later. But it was clear back then – the CD came first.

Contrast this with today. Last month, Prince’s latest CD, Planet Earth, was given away free in a British newspaper, while anyone who attended his gigs in the London Arena this month got a free CD at the door.

What is happening in the music industry? Yes, Prince’s powers may have waned but the same process – where even the hottest new bands’ CD prices are falling – is happening all over the industry. Bands can sell t-shirts at gigs for two or three times the price of their CDs. If you have ever been in a recording studio with its stateof- the-art equipment and highly- trained editors and producers, it seems a bit odd that t-shirts, made for a few cents in China, might cost more that the perfectly mastered sound. But strangely, they do.

For example, the Electric Picnic will feature headline acts that are making more money from merchandising than from music. People will spend good money to see them and get the t-shirt; yet the same fans will balk at the price of their traditional staple, the album. What explains this willingness to pay for live gigs but unwillingness to pay for the recorded music?

One idea might be that people have always liked the communal experience of a gig or a festival. The Electric Picnic advertises itself as a “boutique” festival, appealing obviously to “boutiquey” type of people. But that alone does not explain why CD prices are falling and why the only place a band can make money is through their live gigs.

Labels obviously realise the change. For example, most bands’ contracts now have to give a cut of the live shows to the record label. Whereas before, the live gig was seen as a way of generating album sales, now it’s the other way around.

Industry insiders claim that in a few years time, music sales will account for only 30pc of a groups earning, with merchandising and gigs paying the rest.

The same process is happening in music as has happened in hundreds of other industries in the past. The music industry, so long the standard for ripping people off, has now fallen victim to the irresistible force of technology. In an i-Pod age, where everything is downloadable at a fraction of the cost, why would anyone pay for a CD?

According to an article in this month’s ‘Prospect Magazine’ in the UK, the now ubiquitous downloading and file sharing trend first started in Germany. By making the digital copies available in the CD form, the industry opened itself up to allow the customer to clone the product. The Germans responded to this opportunity most enthusiastically. German music sales – serving a country of over 82m people – are now smaller than Holland’s.

This German weakness for file sharing has had profound impacts on the industry worldwide. For example, the august Journal of Political Economy, which normally concerns itself with issues of almost laughable economic esotericism, published a piece on file sharing. During German school holidays, when the children are at home and online, the supply of pirated music available to Americans balloons, making downloading quicker and easier.

All over the word the sales of CDs has plummeted. In the US sales last years are down 15pc and 35pc in Canada, while France and Germany has seen CD sales collapse. It’s difficult to get figures for Ireland, but doubtless if the falling price of CDs in Tower Records is anything to go by, sales here are crashing too.

The record companies have lost control over its asset. Music has no value, royalties are nonexistent and back-catalogues are practically worthless.

Not so long ago, David Bowie was able raise cash on the royalties of his back catalogue. This is called securitisation and the idea is that there will always be people buying Bowie CDs, the income from which can be used to pay back interest on a bond and David Bowie who sold the bond, made a huge amount of cash. Bowie, as he was all throughout the seventies, was miles ahead of the pack.

How all this has changed and even the biggest bands would find it difficult to put a price on their work. Once the music is released, it becomes worthless. This might be why we are seeing an explosion in festivals, concerts and smaller gigs. The industry is foisting the artists on the public in an effort to get cash back on their original investment.

But apart from stuffing us with gigs, can the music industry recover? The market for digital downloads in the US was close to $1bn (€0.73bn) last year. However, there is little doubt that this won’t offset the losses in the industry cash cow that was the album or CD.

In economic terms we have seen all this before. When Henry Ford came in and streamlined production of the Model T, he slashed the cost of making cars, which had up to then been seen as a luxury item.

It is not that the album was ever seen as a luxury, rather it was a necessary piece of a teenagers’ identity. Either way, the era of record companies milking their customers is over. Now the promoters not the producers are in control.

If you doubt that look at the back of any paper today at the listings page and you will see hundreds of gigs with all the big names playing in Ireland over the course of the next few months.

One of the biggest promoters told me that the most surprising thing was the lack of any real price ceiling on gigs. People will pay anything to see their favourite band.

On balance therefore, what is interesting is not that the price of CDs has fallen but that they have not fallen far enough. In the years ahead expect the price of music to fall further as the downloading becomes ubiquitous. For music fans all around the world this can only be good news.

  1. David,
    Your final paragraph is the crux of the matter “On balance therefore, what is interesting is not that the price of CDs has fallen but that they have not fallen far enough. In the years ahead expect the price of music to fall further as the downloading becomes ubiquitous“. But what do we mean CDs have not fallen enough? The only thing that keeps up the price is the monopoly profits that the record label enjoy as a result of copyright. Music was always copyable (who didn’t have a stash of old copied tapes when that was the primary medium for music). The issue of course is that the cost (in terms of time /convenience) of copying has reduced to a very low level. But it still has a cost. And record companies are striving to push up that cost by fighting (and often winning) legal battles against pirates. They will never need to make copying impossible, just do enough to keep a certain cost to make most people buy CDs (or pay for downloads) most of the time. I think they will succeed in protecting their industry from obliteration, but as you suggest, at lower levels of monopoly profits.

    On the other hand, I don’t think the ubiquity of concerts in Ireland is down to artists changing how they earn. I would argue that much of it in Ireland is driven by the explosion in consumer spending – basically deeper pockets. (It should also be remembered that the concert profit goes mostly to promoter + artist as opposed to record company + artist). An additional factor may be that, for all the reasons we’ve mentioned the cost of owning a shit load of music is low, so people have more of a music budget to spend on concerts.

    Incidentally the biggest loosers will be record stores. Apparently Tower records shut most of their US stores. And I read somewhere that HMV profits in the US dropped by 73% last year. Tower are trying to reinvent themselves in the online business, but its a different ball game and others are already established so it’s not a given that the old stores will get a slice of the online cake.

  2. jason

    The music industry profits will continue to freefall while they try to force people to buy music online crippled with DRM (simplifying here but basically a type of copy restriction that effectively hamstring the music files allowing you to only play the music on your ipod but not your pc, or only on your phone but not your mp3 player, and god forbid you buy a new pc and try to transfer music).
    Savy music consumers will not pay for an inferior product that locks you into one format. (google video just closed it site and anyone who has bought their (drm restricted) videos, can no longer play them. Imagine itunes did the same)
    Some indie music sites do sell music in mp3 format (un restricted format) and EMI and Time Warner have been prattling on about doing the same for a while now but only for certain artists.
    Remove all the restrictions and sales will go up.

  3. Nelbert

    To add to the above comment, there is a multi-million strong army of Open Source Geeks who would love nothing more than to crack the “uncrackable” locked format and bring out an open source tool which ultimately renders the technoligy useless in the long term.

  4. Paul

    Also, the quality of the music foisted on the consumer by the industry in recent years has been in steady decline. Changing the business model alone will not save the industry – the music has to be good enough to merit the massive revenue streams the industry is now missing. See the New York Times Magazine cover story last Sunday about new co-CEO of Columbia Records, Rick Rubin (yes, that Rick Rubin) . It’s a must-read, at (requires subscription, but it’s free of charge):

  5. Marlon

    People were always prepared to buy concert tickets and cds , what’s changed is the quality of music being produced, acts these days have one song and when thats easily downloadable from itunes or illegally , then why buy the rest of the record ? Where is the Let it Bleed or Ziggy Stardust level of album in the last five years ? I know people like Arcade Fire ( to me they remind me of Chumbawamaba ) and thus they buy their records , its the bands who cant find enough quality in themselves

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