"Power
corrupts. Absolute power is kind of neat."
-- unknown.
I'd like to put
two seemingly unrelated thoughts together to explain why I'm glad
we're not invested in record companies. The first is that
"disintermediation" is a wonderfully long word. The second
is that intellectual property is a funny thing. Let me explain.
This isn't the
first time a Rule Maker column has talked about
"disintermediation." But I for one didn't actually know a
word for it until I read this column the other day. The word means
cutting out the middleman -- something the Internet has proven
remarkably successful at, as Amazon.com, Dell, and even The Motley
Fool can attest.
Intellectual
property is simultaneously worthless and almost infinitely valuable,
depending on whether or not you can cash in on the spread of
information. Especially on the Internet, information spreads
instantly around the globe. Trying to control its flow is something
that has frustrated government agencies for years. From U.S.
encryption export restrictions to Chinese software piracy, any
attempt to enforce restrictions on the spread of information without
the consent of the enforcees has been resoundingly ignored by Netizens.
Together,
disintermediation and intellectual property are the reason the music
industry is rather unhappy at the moment. The Internet is threatening
the industry's exclusive control over music distribution. So far, the
music industry's reaction to the situation is a classic example of
how NOT to deal with this problem.
The music
industry's problem is the "MP3" audio file format, which is
capable of storing CD-quality sound compressed into 1/10th the space,
allowing a single CD to store over a hundred songs. While this seems
like a fairly obvious technological advance, especially considering
that the CD format is now 20 years old, it has the music industry up
in arms.
The problem with
the MP3 is that, like the CD, it contains simple digital data that
any modern computer can copy and transmit an unlimited number of
times without any loss of quality. Friends can share copies of the
data that are identical to the originals, without any loss of quality
after being copied a thousand times. People can and do download MP3
files off the Internet. While standard uncompressed CD audio has
(until recently) been protected by its sheer size, the MP3 is
eminently portable, and free software exists allowing anyone with a
PC and a CD-ROM drive to create MP3 files from standard music CDs (a
process called "ripping").
The obvious result
is that not everyone listening to MP3 files bought them from the
recording industry. This is why the Recording Industry Association of
America (RIAA) has treated the MP3 format as an evil that must be
stopped. "Piracy" is a direct threat to their revenues.
Unfortunately for
the recording industry, they alone are harmed by this. They act as a
middleman between music producers and music consumers, and both of
those groups have expressed strong support for MP3 music.
The artists who
record the music usually want their music to be heard to increase
their fan base, so that they can rake in money from sold-out
concerts, T-shirt sales, posters, and ultimately even sell more music
than they give away. Fans who will buy a T-shirt will buy a CD. Heck,
fans have been able to tape music off the radio for years anyway. One
of the most popular bands in history, the Grateful Dead, even set
aside special sections for audience members to tape their concerts
for free. They didn't exactly suffer from cash flow problems as a result.
In fact, the
Grateful Dead has put MP3 files on its website. Many other artists
have done the same (although their record companies are often forcing
them to remove the files). The list includes David Bowie, Tom Petty,
and The Beastie Boys, just to name a few. Then again, disputes
between artists and record labels are nothing new. For example,
"The artist formerly known as Prince" changed his name to
an unpronounceable glyph while trying to annoy his record company
into letting him out of an unpleasant contract. His most recent CD is
sold primarily through his website.
New bands love MP3
as a way to break into the industry. Put a demo tape on your Web page
and maybe you can get a gig because of it, or wind up on the radio,
without coming up with thousands of dollars to burn and distribute
CDs. With the recent consolidation in the music industry, many
established but mid-list musicians have had their contracts lapse,
and have turned to web-distributed MP3 music as an alternative.
Fans love the
convenience of downloadable music, the increased storage capacity of
devices that play MP3 files, and the increased control allowing the
listener to package together individual songs they like rather than
buying an entire album to get a single song. The fact that a lot of
the music is available free doesn't hurt, but it's not the entire
reason for the format's popularity. A nominal cost of perhaps a
dollar per song in exchange for access to a virtually unlimited
library of downloadable music sounds like a viable business model to
many people, especially if the quality of the recordings is assured
and royalties are paid to the artists. MP3 distributors could take
over the distribution, advertising, and quality assurance niche
formerly held by record companies, only at a greatly reduced cost to
consumers. Disintermediation at its best.
Traditionally, the
recording companies provided a service to the artists and fans
consisting of distribution and advertising services. In recent years,
however, the record companies' attempts to increase profitability to
please Wall Street investors have led them to reduce the variety of
music they carry (concentrating on the top sellers) and to reduce the
promotional services they provide (cutting expenses). These moves
have reduced the recording companies' value to those for which they
were acting as intermediaries. Meanwhile, artists and fans have
accelerated the search for alternatives.
Rather than taking
advantage of the new technology, the recording companies are fighting
tooth and nail against the market forces dragging down their margins.
Now that their comfortable, dominant position is under assault, the
recording companies are fighting to maintain their niche in its old
state instead of adapting to the new one that's more beneficial to
the rest of their economic ecosystem. As a result, they've alienated
their partners and been forced into a holding pattern they can't hope
to win. If the current record companies don't fill the newly created
niche of online music distribution, other companies will.
