Why Record Companies are Afraid

It must be incredibly stressful to be a record company executive these days. The record companies have had immense control over their environment the several decades of their existence, sitting at the top of the mountain, but now they look down and a plethora of new challengers that have nearly reached the summit.

The most notable challenger, the one that everyone is talking about, is the digital download market, both legal and illegal. But in my book, the strongest contender to upset the balance of power in the music industry crown is the artist, with revolutionary vehicles to self promote. But, even the artists are looking over their shoulder. While the artists are counting on technology to liberate them from the clutches of the record companies, other technology tools threaten to put them back in the box.

In classic old guard fashion, record companies are trying to legislate and litigate their way to maintenance of the status quo by killing off (or at least containing) the burgeoning digital download market, particularly the illegal download market. Across town the movie studio executives’ peaceful slumber is about to be disrupted by this same battle as increasing broadband penetration and terabyte storage devices put illegal movie downloads within the reach of the masses.

Lost on record company executives, seems to be the fact that people have a choice of which music they choose to consume, and that decisions by other industry players could make their “valuable” content worthless. After all, something only has “value” if someone is willing to trade you something else of “value” for it. Assuming that people are inherently good, the growth of the illegal download market shows that people currently feel that music is too expensive, otherwise the ethical cost of illegal downloads would be higher than the benefit they gained from doing so, and so people would choose to purchase music instead. It is hard for people to reconcile the ability to purchase a blank CD for pennies and the $20 cost of purchasing a new music CD.

But it’s not just in the physical music market where music executives seem to be missing the plot. Today there was an article in the paper talking about Amazon’s Digital Rights Management (DRM) free music that they are now selling on their site. People are quite used to selling CD’s into the used market or lending their CD’s to friends or even to Grandma to listen to. But, apparently even though Amazon’s DRM-free music may be free of copy protection, the terms and conditions will actually make it illegal to sell the music on when you tire of it, or even to share it with Grandma. This is supposed to curb the illegal download market?

If the artists and record companies want to all but eliminate the illegal download market, they need to bring the price down to free (or close to it) for those who can’t or don’t want to pay for it. Very soon, every offering on YouTube will have advertising, and a lot of the legal and illegal content there is original or fan-created music videos available for free. Artists could easily offer their music for free on their web sites in both audio and video versions with embedded links to purchase the music commercial free either in a CD, DVD, or downloadable format. If people could go to an artists’ web site and listen to their music for free, suddenly the artists’ web site becomes a sticky destination that people will return to again and again, opening up possibilities for additional advertising revenue, community, and increases in memorabilia and tour revenue as well. Suddenly free music becomes revenue generating and has the potential to expand an artist’s fan base profitably. Why are artists not doing this?

Let’s look more at the artist, and their rising power. Let’s take an act like U2. They started out playing in the clubs in Dublin before one day being “discovered” by record company executives. The record company then helps promote them and they become international superstars. Now what use does U2 have for the record company anymore?

Doesn’t the balance of power in this relationship suddenly flip as soon as their contract runs out?In the recent movie “Ray” you see Ray Charles negotiate a much better deal after he achieves success. Technology today takes negotiations to a whole new level for superstars, enabling them to force record companies to compete just to make a commodity margin on manufacturing/distributing the CD and fight against agencies for marketing and promotions fees.

And it is not just superstars like U2 that are threatening the music industry’s balance of power. You’ve also got bands like the Arctic Monkeys in the UK with two fingers up to the industry and Moe with one finger up to the Americans, choosing to self promote themselves. Could record companies be reduced to commodity manufacturers or pushed into the role of niche marketing agencies?

But it is not all rosy for the artists in this new era. There is something that artists should be scared of if they are not already. Software exists that mathematically decomposes music and can forecast with some degree of accuracy whether a song will be a hit or not. If this software improves in its capabilities, radio stations and music services like Rhapsody and Yahoo! Music could significantly reduce the influence of record companies (and even artists) on what new music gets played or recommended. This kind of software could lead to artists having to fight their way through the software gatekeepers instead of trying to fight or bribe their way through disc jockeys or radio station executives to get airplay.

Taken altogether, that is a lot for a record company executive to ponder in the middle of a sleepless night. It’s either an exciting or scary time to be in the music business.

What do you think?

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Braden Kelley is a Social Business Architect and the author of Stoking Your Innovation Bonfire from John Wiley & Sons. Braden is also a popular innovation speaker and trainer, and advises companies on embedding innovation across the organization and how to attract and engage customers, partners, and employees.