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| This article was written as an Academic analysis of the impact of Napster and other file-sharing technologies on the Music Industry as a whole. It is a personal opinion and should be read as such. This article is based on a Strategic Management Case Study prepared by Charles W.L. Hill of the University of Washington. Essentially, the recorded music Industry is a commission-based retail business with 'suppliers' being musicians, record stores being 'distributors' and record labels taking the place of manufacturers. Although artists may create the raw materials, record companies are heavily involved in 'manufacturing' the final product, often from unrelated component parts. It is very much a high-capacity, high-turnover business with emphasis on unit numbers rather than quality or durability. It is innovation-driven and yet tries to reproduce successful products as often and easily as possible. It is, conversely, always on the look out for the next blockbuster. In that respect, individual labels may focus on churning out low-cost 'generic' products that copy or recycle other successes, similar to generic drug producers in the pharmaceutical industry trading on the successes of previous-generation drugs (e.g. K-Tel and other compilation and collection producers). Alternatively, there are labels (less and less, it has to be said, and primarily in the 'indie' label sector) that concentrate on a small number of high-potential products, probably for licensing, while accepting that their success may be a matter of luck, timing or other non-commercial factors. It is generally accepted that the Big Five (the 'Majors') have enormous power in the wider music-based Industries, even those they are not directly involved in. Many people believe it to be a cosy cartel with tacit, or even specified, strategic arrangements designed to maintain their position. As a simple, but little-known example, in recent years none of the big five have bid for an independent label that was the subject of a bid from another. Equally, courting established or valuable artists from a rival in the big five is "frowned upon" as it is generally believed that it drives up costs. Because of all this there was, until recently, a very static industry in the top level of the Music Business, while the lower levels kept throwing up pretenders who were either snapped up themselves or had their Artist (probably only one of any real value) snapped up instead. There was no industry competition, the threat of substitutes was all-but nil as the substitutes were created by subsidiaries, and even though the barriers to entry into the Industry were ? and still are ? tiny and easily surmountable, it is the other ?arrangements? that prevent any new arrival taking a foothold. Napster changed that static industry outlook as it?s innovative new technology created a system where customers could get a ?substitute? that was free. Not many products can compete with that. The 'Majors' have a huge market penetration and use that as a tool to ensure their products are successful. A lot of their power stems from the fact that they own a huge proportion of the supposed independent labels and producers and a large number of ancillary companies such as publishing houses, media companies, even recording studios and distributors. There is also the inherent power they have because of the sheer volume of individual products (or Artists). One threat that has been used by the Majors - even in the relatively unimportant Irish market - is the threat of refusing to allow ancillary industries use of their product. Essentially, their position is "Do as we want or you won't have access to our Acts/material". This is a huge threat, albeit a declining one, for such industries as radio, retailing, licensing, advertising etc. Even though the revised Copyright Act introduced in Ireland a few years ago, and similar legislation almost worldwide, is designed to prevent this, not too many industry businesses are willing to incur the wrath of the Majors. Non-businesses or fringe players will do so, and already do so, by using loopholes to get around the power of the Majors, and effectively daring the Majors to make an issue out of it, thereby making more and more people aware of the loopholes. Another distasteful factor that give the majors huge power in ancillary businesses is the Charts system. In the UK until about a decade ago, in the US until more recently and in Ireland even now (as well as other Countries) the record companies commission the ?Music Charts? to be made. They can, if they were so inclined, tinker with positioning, knowing that radio play (and therefore royalties and increased sales) are based on chart positions. This is a very powerful tool and has been used ? and abused ? over the year. It is becoming less prevalent as Countries introduce independent Charts and radio uses other metrics for schedule planning. The major record labels in most Countries have been under fire for a number of years, not least about price-fixing. Indeed, two of the majors (Vivendi and Universal, 2003-08-12) were last year 'convicted' and admitted price fixing in the US. The case was not tested by the EU but there is an ongoing investigation by the Commission into alleged breaches of EU competition legislation. Nevertheless, the majors do not seem to have taken much of a hit as a result of this. Even the advent of file sharing was not a major concern until the prevalence of high-speed and/or flat rate Internet access. While independent releases took advantage of the technology to increase exposure for their artists very cheaply, the Majors - much to the delight of grass roots artists ? only slowly realised the dangers and soon there was not an Artist anywhere who did not have music being swapped over the Internet. The file sharing concept itself did not do the damage. Internet availability of established music acts was common long before then. What file-sharing seemed to do was move the whole copyright-infringement question away from "Is copying legal?" to "Is facilitating sharing illegal". Essentially, in most legislation, it is not. There is nothing inherently illegal about swapping music or other copyright material. The illegality arises if either there is a fee involved and/or both individuals keep their copy. Either one can, but not both. As a technicality, though, it is illegal to swap, share, or even give away a copyrighted item other than in its original form so making a music file from a CD for distribution of any kind without permission is illegal. Napster seemed well placed to capitalise on this loophole by saying they did not copy or distribute the material, merely facilitated finding it. In the minds of some in the music industry (on both sides of the file-sharing debate) there is no real difference here to what Google, Altavista etc are doing with search engines. The technology that underlies file-sharing is not in itself likely to kill off the music industry. It does disrupt the controlling positions of the major Industry players, reshapes the way the industry works, and focusses their minds on their future in the technological arena of the music industry. However, there will always be music buyers and they are becoming more and more the corporate sector. Music in the workplace, music in advertising, background and incidental music and so on, are on the increase. Purchase of recorded music for personal use is, and has been for years, decreasing dramatically. Last year saw, for example, a 14% decrease in sales of CD singles and cassette singles are almost obsolete. Like vinyl, every technology has its day, and its day of reckoning. Customers have been switching away from singles sales for approximately a decade. American labels have, for a few years, been looking for ways of using singles to promote albums by giving them away in a coordinated manner. Napster and programs like it only serve to speed up the process that the majors had already decided must be examined ? wider distribution of music for little or no cost to encourage purchase of albums. The Industry now has convenient enemies to blame when things have to be done that are not going to be met with good PR. While peer-to-peer file sharing technologies have the capacity to widen the scale of piracy in the Music Industry, as well as in film, videos, and even literature, this does not mean they are an inherently bad thing. There are those artists (Smashing Pumpkins are cited in the article but there are tens of thousands of them) who are delighted to have a relatively easy and free distribution mechanism they can use to distribute their product without relying on an Industry generally seen as vicious and soul-destroying by large numbers of the Artists involved. Simply saying that file-sharing is a bad thing because it encourages piracy is imbecilic and juvenile. Rarely is there an invention or technology that is inherently good or bad ? it is the use they are put to that is acceptable or not acceptable, and so it should be with this type of technology. Just as J. Robert Oppenheimer could not have foreseen the impact of his discovery paving the way for the most powerful bomb in the history of the planet, so the developers of Napster and those of the other over-the-internet communications technologies it relies on should not be demonized because of the uses ? legitimate or otherwise ? their technologies are put to. The Music Industry now has to do two things after the advent of peer-networking for file-sharing. First, they have to look at different ways to market their product. Initially, the Industry reaction was that CD releases would come with a video, for example, that was too big to bother downloading but that people would want ? especially fans of an Artist ? for their collection and would therefore buy even if they had downloaded the track already. That soon fell through when it was pointed out that files are getting smaller and bandwidth is getting bigger. Labels will have to find some other reasons for us customers to buy their products. Secondly, they will also have to focus more on marketing to the corporate sector as they are less likely to pirate the music they need to use for various reasons. Shawn Fanning?s idea for Napster came about because of his own frustration at not being able to find the tracks he wanted. As with a lot of technology, it was the result of the need to get something done and not having an existing technology to do it. In this arena the re-phrased slogan ?Frustration is the mother of innovation? is often seen to be true. Online radio is another example of this, in the same industry, where most online radio stations were started by people or groups totally fed up with the mass-marketed packaged-pop they were being offered on traditional radio. In the end, Napster did a lot of things well and lot of things badly. There was no real business model that was ever going to work; there was no clearly thought out mission or strategy; there was no long term view of direction etc. It was, in essence, a hobby that suddenly got turned into a business (albeit an unprepared one). The technology has shaken up the major industry players but has not given them any real shivers over the long term. Perhaps complacently, they believe that they will always win out as they are business-minded and the rest of us are, well, amateurs and will probably go away after a while. Unfortunately for them, and for established big name artists, but fortunately for up and coming grass roots artists, the cat is out of the bag and the Industry as we know it is on the way to major shakeups over the longer term. Labels will turn towards online-distribution just as any business should consider doing in modern times, and they will perhaps spend huge amounts of money protecting their ownership of intellectual property while at the same time the rest of the Industry at grass roots and indie level will be doing everything in it?s power to capitalise on the ?annoyance? factor that people will eventually get with the protection employed by the majors Although it is fairly obvious that the Major?s have been given a fright by the likes of Napster, Grokster, Kazaa, and so on, they seem to think they can overcome the problem by following the route they took with Napster (as they did with independent record labels for decades) ? buy them up and get a percentage of their turnovers. It does not seem to have occurred to them that there are literally thousands of file-sharing networks on the go at the moment and it is likely that this will increase steadily. There is a lesson, but the Major industry figures either don?t want to learn it or simply think (arrogantly, it has to be said) that they will come out of this ?battle? on top just because they are big and they are businesses. |
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| ron@irishunsigned.com |
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