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VCs vs. CDs

Last week I published two opinion pieces based on my book – one in the Guardian and one in Wired UK. The reaction was fierce and generally unfavorable: At least a few dozen Guardian commenters thought I was wishing for a return to the age of the CD, excusing the music industry’s reluctance to change, or defending major-label greed.

Although I plead guilty to having a tough time summarizing a 300-page book in 1500 words, it was not my intent to do any of these – at least not exactly. I do think that major labels have tried to slow the inevitable extinction of the CD because it’s a business model that favors them, about which I’ll say more in a minute. And I know that they try very hard to make as much money as possible, which to many people signifies greed. But this hardly sets them apart other businesses: This is just what companies do.

I’m not saying “Greed is good.” (Neither did Gordon Gekko, apparently.) I’m saying that it is the force that drives companies, which call it “maximizing shareholder value.” They have a fiduciary duty to do this, and I think this is as it should be. (I also strongly believe government needs to do a better job of making sure that companies pursuing profits don’t wreck the rest of society in the process, but that’s another book entirely.) And record labels are hardly alone in their pursuit of profit: One of the ironic parts about controversy over copyright online is that venture capitalists call media executives greedy. Think Class Warfare 2.0 – billionaires vs. millionaires. Whomever wins, musicians lose.

We could certainly argue about whether outsize record company profits are bad for society, but I think that’s a tough case to make – we’re not talking about BP here. The legal term of copyright is indefensibly long, and we should fix it. But it’s more urgent to address the fact that the practical term of copyright is way too short – new albums and movies are available on file-sharing sites hours after they come out. And much of the public anger about record company greed concerns the price of CDs, not an issue that has a tremendous impact on society. Democracy will endure if some people can’t afford Watch the Throne.

Record labels certainly overpay executives, but I’m not sure what to do about that. Salaries in the media business are appalling, but so is the wealth of Mark Pincus, and I’d suggest that Watch the Throne is way better than “Farmville.” And the idea of having a central authority decide how much money people “should” make has a rather unfortunate history behind it (although I do favor higher marginal tax rates). Anyone who invests in media companies – I don’t, since it would be a conflict of interest – should look at how much money they devote to executive pay.

This inevitably raises another question: Do the executives who make all this money actually do a good job? That’s complicated. Certainly, the major labels were far too slow to sell music downloads, which is one reason Apple is eating their lunch. Five years ago, I believed the executives who ran these companies made all the wrong moves. But then I started to wonder who made the right ones. Newspapers are collapsing, Hollywood is in trouble, and the book business is having the same kinds of problems. It’s much harder to know it all then it used to be.

From that perspective, what’s the rush? Abandoning the CD before consumers do would be like putting down the cash cow because it started limping. Wherever you think the music business is going, it seems foolish to stop selling $15 CDs until it gets there.

Even former Napster chief executive Hank Barry – no fan of the major labels, he – sees the logic in this. “To this day it bugs me when people say, ‘They’re so backward,’” Barry told me as I did some reporting on the labels’ negotiations with Napster. “They’re not backward at all. They’ve got a physical model that’s a high-margin, high-revenue model. So it’s a perfectly rational business decision for them to stay in the physical world as long as they possibly can.”

That’s in the short term, of course. What if the best strategy is to give away music and try to make money in other ways, by selling concert tickets and merchandise? In order to do that, labels would need to completely rewrite their artist contracts – assuming that they can even get artists to agree to this new business model. This would take years. In the meantime, they’d have to keep revenue coming in – and the current model of selling music does just that. So even if you really believe that music must inevitably be free – and I don’t – it’s still impossible to give it away immediately without going out of business.

I’m not saying the labels made all the right moves – obviously they didn’t. What I am saying is that a preference for selling $15 CDs instead of 99-cent singles is completely logical. Major label executives aren’t especially sympathetic characters, but I’m not sure how much that should matter. And, as I’ll show later this week, the guys behind the Pirate Bay make them look like angels.

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Discussion

7 thoughts on “VCs vs. CDs

  1. Sadly, pretty much everyone’s narrative in this discussion is dictated by their pockets. Free content is such a wonderful idea, after all. WHAT DO YOU MEAN: I can’t have it?

    The creative industries and the online distributors are pulling each in their own direction – very good, that’s what business is supposed to do, in order to come up with efficient outcomes. The problem is that the new online businesses are bribing the public for support with somebody else’s money (so to speak). If history teaches us anything, it’s that people are amenable to having rich folks deserving of robbery pointed out to them (provided they get some of the spoils) – that’s what a people’s revolution is all about.

    As for the “new business model” mantra, I’ve stopped buying that years ago – it just doesn’t stand up to elementary economic scrutiny. However, it’s important that it keeps getting circulated, because it allows those breaking the law to pin the responsibility on those they steal from:

    “They shouldn’t be dressing like s—ts.”

    Posted by Faza (TCM) | August 18, 2011, 3:50 pm
    • @FAZA

      Agree 100%. There is no such thing as a “new business model”…no matter what a gaggle of 23 year old, barely literate, PR chicks working for over-hyped start-ups put into press releases…every business has the exact same “model”, at some point they must sell something for more than it costs to create and deliver. Period.

      Without the ability to generate revenue in excess of costs, there is no sustainable business, and thus no incentive for the commercial content business to exist.

      Of course, that outcome would do away with James Cameron and Michael Bay movies, that that might not be such a bad thing.

      Posted by buyersstrike | August 30, 2011, 4:15 pm
  2. “One of the ironic parts about controversy over copyright online is that venture capitalists call media executives greedy. Think Class Warfare 2.0 – billionaires vs. millionaires. Whomever wins, musicians lose.”
    ———————————————–

    This is one of the funnier and more inexplicable recurring themes of the copyright debate. The billionaires have, against all odds and reason, actually managed to convince a sizable demographic of idiots that it’s the millionaires who are greedy…

    It’s also amusing whenever some legacy content creator complains about piracy the inevitable peanut gallery squawking is always rife with:

    “He’s already rich…quit whining!”

    “OMG he wants MOAR MONEY?!!!1″

    “Gotta make the payment on that sixth Ferrari, I guess.”

    etc

    None of which are valid arguments in a capitalistic system. Neither are these same inept non-arguments ever applied by these same inept commentators to any company or individual in say, the tech industry. Cognitive dissonance seems to be the preeminent characteristic of the modern freetard.

    Posted by Technotopia | August 29, 2011, 7:26 pm
    • Technotopia,
      I have always enjoyed your comments on Copyhype – glad to see you here.

      Posted by roblevine1 | August 29, 2011, 8:15 pm
    • Funny (or sad..) thing is:
      The actual people ‘they’ legitimately could be mad at for being greedy [eg. hedge fund managers, war profiteers, err..Google et al, ect.] don’t get any focus at all. Somehow the disinformation machine has people pissed off at teachers, the UAW, and entertainers…
      Go figure..

      Posted by James_J | September 1, 2011, 8:20 pm
  3. AKA the shell game.

    Posted by alangallery | August 31, 2011, 2:58 pm
  4. You note that not only music execs, but execs in other copyright industries had not made the right moves in the digital age. I think the jury is still out on films and books, but an equally important point is that no independent record label was able to overcome the challenges brought on by the digital revolution.

    The history of the record business is one of some young guy (almost always men) coming along and launching a new label, and selling out to someone else for gobs of money. That has not happened since Napster. No young tech- and music-savvy youngster or team of youngsters have launched a new label that has had great success. It’s not that the old guys refused to see the answer. There may be no answer.

    Posted by Michael Ostroff | September 16, 2011, 2:28 am

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