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What Comes First In the Music Business? Music or Business?

By Shelly Palmer (bio), Managing Director, Advanced Media Ventures Group, LLC

RIAA Seeks to Penalize Musicians for Industry Failures

"Mechanical royalties currently are out of whack with historical and international rates," RIAA executive VP and general counsel Steven Marks commented recently. "We hope the judges will restore the proper balance by reducing the rate and moving to a more flexible percentage rate structure so that record companies can continue to create the sound recordings that drive revenues for music publishers."

This rather disturbing quote was found in an equally disturbing article in the Hollywood Reporter last week.

This kind of "have it both ways" mentality used to surprise me, but not anymore. Now, I realize it's just business. Sadly, the RIAA's lack of vision is so profound and the game they are playing is so dangerous, it is worthy of a moment of your time to review.

On one side we have composers, producers and publishers who represent the "music" side of the music business. On the other side, we have the RIAA. They represent most of the big recorded music companies and some of the small ones. In other words, they represent the "business" side of the music business. The RIAA is petitioning the court to allow recorded music companies to pay a smaller royalty for the music they sell. Why?

According to Bloomberg News, recorded music sales in the U.S. fell 6.1 percent (to $4.9 billion) in the first half of 2006, led by a 14 percent drop in CD sales. Declines in demand for CDs, tapes and other traditional formats far exceeded the 86.6 percent jump (to $945 million) in digital sales that now account for about 11 percent of the total recorded music market. So, since they can't raise their top line, they are trying to cut costs to maintain their bottom line. Simple enough. But it's not the whole story.

If this were an ordinary year, we would not have to wonder about this particular self-serving, profit-motivated petition. The job of any music company executive is to increase shareholder value and that means sound fiscal policy that could be interpreted by some to mean, "go screw the creatives — again." But this is not an ordinary year. This is the year of "self expression."

Look around you … on every computer there is a recording studio, a video studio, a graphic arts studio, a photography studio and a distribution network. In a world where everybody is famous for 15 people or, more accurately 15 megabytes — all you have to do is "drag and drop" your way to the top. But "top" is no longer measured in cash, the currency of the Internet is "fame."

This poses a profound problem for the industry. No matter who "makes" a star — stars are efficient — they are bankable. They are good business. But to make a star you need scale. Personal passion, creative desires and very easy-to-use creative tools have empowered practically everyone to make music, make a music video, create a glamorous (or outrageous) headshot and put it up on MySpace. It does not have scale and it is not scalable — it is individual expression and it uses a new form of currency. The irony here is that the recorded music business practically invented "fame." It's funny that they don't know how to trade it as a commodity.

This is where the recorded music business and the RIAA have completely missed the point. Personal expression, bootleg playlists, loops and low-cost production done by passionate people, who love music is where the business is.

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Instead of trying to preserve the old model, it's time to create a new one. Can you profit from thousands of recording artists doing millions of recordings? Can you help keep the gates? Can you bring order to chaos and use your gifted A&R staff to create valuable communities around each of the myriad sub-genres of music? Can you profit from millions of people enjoying your product if you don't directly charge cash for it?

It's easy to go to rate court and try to screw the people who have made you rich by cutting their pay. It's hard to wrap your mind around the obvious present of personal expression and monetizing the new currency. However, as the old saying goes, "nature abhors a vacuum." So, sometime in the next 12 to 18 months expect to see some very smart people dedicated to filling the void. There is a huge inefficiency in the recorded music marketplace and some excellent ideas and potentially profitable solutions are just around the corner.

According to a Forrester Research Inc. report, the number of iTunes transactions declined 58 percent between January and June of this year, while transaction size fell 17 percent. Of course, iTunes spokesman Tom Neumayr said the report is, "… simply incorrect." In fact, Josh Bernoff, the analyst from Forrester actually issued a semi-apology on Friday, 12/15/06, for mis-calculating Apple's fortune. However, he said he was still sure that Apple sales were significantly off.

If you're wondering how to reconcile Apple's iTunes Music Store numbers with MySpace page views, think about the currency of fame. Then remember that music is a fashion statement. You wear your music like you wear your clothes, your car or your beer. Do you really think you can solve this business problem by paying creatives less for their work? Think again.

About the Author: Shelly Palmer is Managing Director of Advanced Media Ventures Group LLC and the author of Television Disrupted: The Transition from Network to Networked TV (2006, Focal Press). Shelly is also the 1st vice president of the National Academy of Television Arts & Sciences, NY and Chairman of the Advanced Media Committee of the Emmy Awards. You can read Shelly's blog at Shelly can be reached at

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