NEW YORK (CNN/Money) -
Not long ago, I wrote a column lamenting the current state of the digital music biz. The article struck a chord (pun intended) with many of you; I received dozens of responses, positive and negative. One common denominator in the missives was a desire to hear something more than just my gripes about the recording industry's arrogance; many readers wanted me to instead propose some solutions for the industry's woes. That's a fair complaint, so I'm ready to offer up a few ideas. Here goes:
In her keynote interview at the South by Southwest Interactive and Music Festival held in Austin last month, Recording Industry Association of America CEO Hilary Rosen repeated her oft-used analogy that the industry's practice of selling full-length CDs when many consumers just want a single is akin to a beverage company selling drinks only in 2-liter bottles when consumers just want 12 ounces. From an economic standpoint, however, one-size-fits-all makes sense. It costs record companies just as much to manufacture and market a $2.99 single as it does a $17.99 full-length CD, so pushing the full-album format generates higher profit margins.
But that ignores the commercial potential of online singles -- an opportunity that the industry has clearly botched. Among other major necessary changes, the record labels should look into selling singles in digital format -- but not in their current, rigidly protected incarnation. Pushing online singles will succeed only if it's coupled with a more challenging strategy -- offering them in the security-free MP3 format, and relinquishing control over the files' flow.
The current offerings from MusicNet (a partnership involving RealNetworks (RNWK: down $0.21 to $6.92, Research, Estimates), AOL Time Warner (AOL: down $0.47 to $23.15, Research, Estimates), Bertelsmann AG, and EMI Group) and Pressplay (backed by Sony Music Entertainment (SNE: up $1.14 to $52.29, Research, Estimates) and Vivendi's Universal Music Group (V: down $1.01 to $36.54, Research, Estimates)) complicate consumers' fair-use rights, which legally allow limited copying for personal use. Only by adopting the MP3 format, and accepting the inherent "dangers" that come along with it, will the labels begin to see the tide of consumer opinion (and consumer spending) shift in their direction.
The rationale for such a change is simple: Consumers are tired of being treated like criminals. The labels regard their customers as potential file traders and copyright violators, when they should see them instead as consumers who would gladly pay for legal digital music -- without the countless security mechanisms and obstacles thrown up by MusicNet and Pressplay.
If the record industry were to embrace MP3, consumer attitudes would shift. Instead of resenting the labels and viewing file-swapping as a form of civil disobedience, many consumers would probably appreciate the improved convenience and quality of a legally sanctioned online music distribution system. In all likelihood, the music-hacker lifestyle would also lose much of its current cachet. If everyone could get the music they wanted -- directly from the labels, at 99 cents a track with no strings attached -- then would it really seem cool to spend 10 hours a day downloading tracks from Kazaa? I doubt it.
Of course, switching to the MP3 format means giving up some of the control that the industry so desperately wants to keep. But history shows that business is sometimes better served through relinquishing some of that control. "The industry needs to switch to actuarial accounting rather than actual accounting," says digital music consultant Jim Griffin.
What that means is that for the industry to succeed in online music, it needs to create a pool of money and work out a fair method of distributing that money -- a model, Griffin says, that works for radio, restaurateurs, and television. "We don't know what music is played in a restaurant at any given time. We don't know if consumers are videotaping television shows. The restaurant owners pay a flat fee to play whatever they want."
Why is it, Griffin wonders, that restaurants are able to do that, but a similar model isn't available in which ISPs are charged a flat fee through a compulsory license to offer their users music downloads. The record industry will "rue the day" it gives up its granular, song-by-song control, but that must happen for the industry to succeed, he says.
In addition to charging fees for online singles, the labels could also require consumers to provide demographic information: where they live, how old they are, what CDs they purchased recently, how many concerts they go to every year. The labels could then use that information to begin a major transformation: evolving from content distributors to more focused promotional and marketing entities.
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Of course, we already know that the record industry has a hard time with bold ideas; it has fought nearly every technological advance that has come along in the last 30 years, and the Internet is no exception. The complexities of the situation are compounded by the fact that each of the five major labels is owned by a multinational conglomerate (AOL Time Warner, the parent company of Warner Music, also owns Business 2.0 and CNN/Money) -- which means the need to deliver quarterly profits naturally takes priority over radical reinvention.
Yet to start moving in the right direction, the labels need to recognize that there is nothing sacrosanct about their current way of doing business. Even Major League Baseball realizes that the national pastime is "just a business" that must compete for consumers' precious entertainment dollars; that's why MLB is implementing changes intended to reduce the amount of dead time between pitches. The music industry should take a similarly tough look at itself and start making even tougher decisions.
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