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«Kate Totaro An honors thesis submitted in partial fulfillment of the requirements for the degree of Bachelor of Science Undergraduate College Leonard ...»

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Despite collective licensing’s success in other entertainment sectors, many music industry specialists doubt its potential for success in the digital music field. One of the strategy’s biggest critics is Universal Music Group’s Jeff Bronikowski. In our interview on the topic, Jeff raised many strong points that argue against the future success of ISP collective licensing. First, and most importantly, the economics of the endeavor do not add up. The figure below runs through the financials of the proposed collective licensing arrangement. If households were charged $5.00 per month for unlimited access, the music labels would receive $2.75 per month from each household after percentages were removed for the relevant players listed below. This would add up to about $33.00 per year from each household. Given the variable margin of a CD, assumed to be about $5.00 in the example below, and the estimated number of units sold in the U.S., the labels bring in about $3 billion dollars a year. For this number to be replicated using the collective licensing system, 91 million households would have to pay the $5.00 tax on ISP service. However, as the last two lines point out, there are only 60 million internet homes in the U.S., and only 34 million of them have broadband access (2004 estimate). As becomes obvious from Bronikowski’s illustration, economically, collective licensing cannot work.

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In addition to the economic barriers to collective licensing, Bronikowski also points out some very practical challenges to implementation. First, since the system could not be opt-in, but only compulsory, people who do not use digital music would most likely object to additional taxes. For instance, my Dad barely knows how to open a browser page, but pays for internet access so he can occasionally email his children. He would not be very open to a compulsory tax for something that he has no idea how to operate and no interest in exploiting. Second, ISPs would likely object to adding costs to their product despite their potential gain. The ISPs are fighting for revenues as well, and may not be so open to raising their prices, even if it all their competitors do so as well. Third, unlike its peer in European broadcast, the proposed collective license on ISPs cannot be limited to one type of media. For instance, if music is included in the licensing, are movies, games, software, or even pornography included as well? All of these concerns raise practical and significant barriers to a collective license.

Third, Bronikowski raises the point that collective licensing caps revenues and effectively removes incentives for artists and labels to be creative and shoot for a number one hit. Because the pool of available music would be so large, an artist would have to be downloaded an incredible amount of times to equal the sales of 100k-250k CDs. As the figure below describes, with approximately 36 billion downloads per year, labels would have a margin of about $.08 per download (given approximate 2004 margins of 3 billion per year on CD sales). The small margin per download would require artists to be downloaded 6 million to 15 million times to reach sales equivalent to 100k-200k CDs. This huge number favors large catalogs and disincentives artists and labels from doing anything new.

FIGURE 5: CD VERSUS DOWNLOADING MARGINS

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While some may argue that Bronikowski’s numbers are biased because he assumes a complete replacement of tangible music, even accounting for a potential surviving tangible music market, the numbers still do not add up in the labels’ favor.

Bronikowski’s arguments undercut the idea of collective licensing based on ISP taxes;

however, there are other options for collective licensing. Perhaps another, more appropriate avenue for collective licensing could be a tax on digital media and media players such as CDRs, iPods, and CD burners. This tax would again create a pool of money, but would also target specifically those customers who use digital music. This structure is more equitable because it is opt-in and only affects those individuals taking advantage of digital music. In fact, this structure is currently being used to some success in Canada and Japan. And while this type of tax may only create a relatively small pool of money, it too would not kill the tangible music market as the ISP tax would have because the music in the second scenario still has to be paid for (or stolen) on a piecemeal basis.

3.2.7 ARTIST/LABEL RELATIONS

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Traditionally, record labels have played the role of marketing expert, production specialist, and sugar daddy, all in the effort to sell albums. However, with the increased availability of cheap recording technology and marketing and distribution outlets, many artists are questioning the role of traditional music labels. With the advent of software and internet technology, anybody’s music can sound professional and be accessed around the world at very little to no costs to the artist.

Additionally, with traditional artist/label contracts, in which the label basically owns the artist’s content and makes their money on album sales not the artist’s overall success, many are questioning whether the two parties’ interests are aligned and appropriate for the changing world of music consumption. As Kusek cunningly states, “The common contention that the music companies actually represent the artists…is, in most cases, a far cry from the truth. Ownership of the artist, or their intellectual property, may be a better term to characterize the record label/artist relationship. […] This plantation-style proposition (“You work—I own”) is an insult to today’s artist, and it is being rapidly abandoned in favor of a more balanced approach that marries the convenience and value of digital music with the consumers’ hunger for music, in a way that actually makes sense for tomorrow’s artists and fans (Kusek, 2005, p.52 & 32). In order to remain relevant, the record label of the future will have to be active in the overall success of the artist, including roles in artist management, publishing, touring, merchandising, as well as recording. This change will shift the artist/label relationship from “owning” to “sharing” and will allow for common goals and incentives, not to mention, the label’s hedge against declining CD sales. In effect, the label will be firing from all cylinders.





There have already been a few notable examples of this movement towards greater involvement and alignment. Interscope Records recently signed a deal with The Pussycat Dolls that includes the sharing of profits on touring, ringtones, and a line of cosmetics, to name a few.

Other deals include Warner Music’s negotiation with My Chemical Romance, and EMI’s deals with Robbie Williams and Korn. All of the above deals shift power and creativity back to the artist, incentivize all pertinent parties to work together towards common goals, and take a longerterm approach to an artist’s success. These types of “all encompassing” deals also greatly hedge labels’ against stagnant or falling CD sales.

The traditional role of record labels is changing rapidly, and beyond their customary functions as filter (lending credibility to artists), marketer, producer, and sugar daddy, the labels of the future will be more deeply aligned with the overall success of their artists across multiple mediums including recording, publishing, touring, merchandising, sponsorship, and other activities.

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Another interesting label innovation currently being experimented with is the E-label. Elabels such as the independent Protest Recordings and Warner Music Group’s Cordless Recordings, are based and operate strictly online, only producing digital media, no tangible products. Their products are distributed as MP3s available globally via online retailers and their own private distribution channels (BBC, “The Digital Music Revolution”, 2006). This label structure allows artists to release music much more quickly and regularly at minimal costs, mimicking the singles structure of the ‘60s and ‘70s in which artists released new songs almost every 6 to 8 weeks. This structure also allows labels to take chances with a greater variety of artists because of the smaller amount of funds necessary to launch a group digitally (no manufacturing and distribution costs to name a few). However, as Catherine Moore points out, these e-labels seem to be a stepping stone, not an ends in and of themselves. For instance, Cordless offers Warner an inexpensive “testing period” with which to judge an artist for a longer-term traditional relationship.

While it remains to be seen if e-labels will become full blown, legitimate labels and not simply a novelty or means to an end, they are certainly offering artists and labels increased flexibility and creativity.

3.2.9 CONCLUSION ON DIGITAL ALTERNATIVE REVENUE STREAMS

In my opinion, the industry’s optimal strategy for digital music distribution encompasses many of the proposed strategies above. The industry will not be limited to one digital medium, but instead will utilize many techniques to reach the customer ubiquitously while still protecting their licenses. For instance, the mobile phone market will be a significant revenue and growth generator in the future, and the changes to artist/label relations will create better incentives for both parties and therefore lead to more innovation. I will go into more depth on this topic towards the end of the paper after I investigate the role of tangible music.

4. PRIMARY RESEARCH In order to determine the impact of the above discussed industry trends as well as the utility of tangible music in the student demographic, I conducted primary research on students at various schools (principally NYU). My primary research consisted of one focus group and one multiple university survey. The details of the research are contained below.

4.1 FOCUS GROUP

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The purpose of the pre-survey focus group was to hone the survey questions and structure, gain deeper insight into music consumption patterns, and assure that the survey was inclusive. The focus group was unfiltered, meaning that subjects were not chosen based on any specific variables concerning music consumption. I structured the focus group in this manner in order to gain insight into a wide variety of music consumers.

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I selected seven personal acquaintances to participate in the unfiltered focus group. I mediated the hour-long session (held on January 25, 2006) with scripted questions but allowed conversation among the participants to develop freely as well. Below are two sample questions with related subsets.

Have you purchased a CD recently? Last week? Month? 3 Months? 6 Months? Year?

- Did you buy it on the internet or in a store?

- Why did you purchase over download?

- Was it an artist you already were familiar with?

- Do you carry your CDs or do you burn them onto your computer for an MP3 player?

- How do you feel about downloading music for free?

Do you download songs? For free or purchase?

- Have you ever had problems downloading?

- Do you worry about the legality of it?

- Do you generally download singles or albums?

- Do you listen to songs in the order they are on an album?

- Do you think that if CD prices were lower you would buy more CDs?

- What about favorite artists? Do you buy their CDs?

- Have your musical tastes changed or expanded since being able to download?

–  –  –

I chose to focus my studies on college-aged students (primarily between 18 and 23 years) because they are one of the industry’s most lucrative demographics. Not only is the college aged demographic a huge tastemaker for the industry, but it is also on the cutting edge of technological advances (and has high speed access in the dorms). Also, they have the time to invest in a wide variety of entertainment activities. Additionally, this group has the means as well as the access (credit cards) to pay for their entertainment. As has been cited many times in industry critiques, the biggest problem with online purchasing is that kids do not have the means to pay for it. (It is the very kids under the age of 18 who cannot get their own credit cards who are the most likely to be interested in downloading single tracks.) The college aged demographic combines all of the attributes that the music industry values most: interest, time, and ability to access (both technologically and monetarily).

With regard to the focus group specifically, the participants included two females and five males. All of the participants were either Juniors or Seniors from three different NYU schools. One participant attended Steinhardt, two CAS, and four Stern.

–  –  –

The focus group allowed me not only to refine the survey structure and content, but also to gain valuable new insight into motivators for music consumption. Below are selected excerpts

categorized into relevant topics:

Artistic Content MC: Yeah, if I really like an artist, I’ll actually go out and buy albums even if I already have them [downloaded].

JM: Loyalty to the band definitely makes me buy [as opposed to downloading].

DG: For me, albums tell a story and you don’t get that story when you buy “Greatest Hits”. If you really want to saturate yourself with an artist and get to know an artist, if you know the “Greatest Hits” you don’t know anything about that artist; you just know what songs might show up on a TV show or at a bar.

Visual Art JM: I look at this cover [RH Factor album insert] and I see a lot of color so I think the music would be very creative and I don’t think you’d be able to download it and appreciated it as much without the cover [album insert].

MC: It’s [the insert and jewel case] like part of the thing of owning a CD, you have like a nice collection and shit.



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