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RIAA – Just as Effective as the UN

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Posted Mar 31, 2007 by Paul
Filed under: Commentary

Don Dodge is a technologist working for the Emerging Business Team at Microsoft – which means he helps identify trends in technology and find what people are looking for. But before going to work at Microsoft, Don was the VP of Product Development at a little internet application business known as “NAPSTER”.

For any of you who remember the Napster wars, you’ll remember it wasn’t very pleasant for either side – I’m talking of course about indie artist vs. major label artist, not the RIAA vs. Napster itself.

Many heated arguments erupted over Napster, with most ‘signed’ artists walking a fine line and not getting too out of place with what the record label wanted them to say, or believe – while most indie artists saw Napster as a way to spread their music virally and hope to pick up their sales.

From my perspective, (and I told everyone from Jim Griffin, former head of Technology at Geffen Records and the first man to release an MP3 on the web, to Mark Cuban, owner of various entertainment properties, to Michael Robertson, founder of MP3.com) I tended to believe the opposite. I believe Napster was great for the ‘signed’ artists, but a horrible deal for the indie. I think I was the only one at the time making this argument, though my little voice wasn’t loud enough to really be heard.

Here was my argument then:

Signed artist sell records, Indie artist don’t. Simple as that.

For an indie to have their music swapped for free reduced (even further) their ability to make sales. They may grow their fan base, and more people might hear their music, and more people might even become fans – but most indie artist don’t have the distribution needed to translate that ‘new’ fanbase into sales.

Signed artists on the other hand, remained relevant and had a much greater opportunity to increase their sales as a result of traded files – especially artists on their second or third outing, as sales typically decrease from album to album (looking at it from a politicians point of view, a traditional drop of 30% from first album to second could be only a 20% drop because of Napster opening up the fan base a little larger, therefore increasing sales by 10% – get it?) . The record labels have the marketing money, but beyond that – major labels control distibution! And seriously, 99% of sales is product availablity and distribution. When you have those, you own the game.

So what got me talking about all this, and why right now?

Well, Don Dodge, the Microsoft guy who used to be the VP at Napster wrote an excellent post on his blog about the Napster wars – from an insiders perspective. Here’s some choice gems (though if you care about music, and in particular labels, you should read the whole thing):

The goal at Napster was to be the online distribution channel for the record labels, much like iTunes and the *new* Napster is today. There were several offers made to the labels that would have given them the vast majority of all of the revenue. The numbers were staggering. We had over 50 million users, many of whom were willing to pay $5 per month or $1 per download for digital music. That translates to about $250M a month or $3B per year. Even if Napster kept just 10% of the revenue that would be $300M per year against expenses of less than $10M. At the stock market multiples of the day that would have been a $15B IPO.

Just so you get it, the labels and the RIAA in their wisdom, turned down close to $3 Billion (with a B) a year so they could make $0.

The economics of the record industry are puzzling and their accounting methods are very creative. At the time CD’s were sold for about $17 at retail. The retailer and distributor took more than half of the price as their mark-up. The manufacturing costs took another couple bucks. The promotional costs of advertising, music video, payola to radio stations, and other PR typically ate up all the rest of the revenue. Only the most successful artists made any money from recording contracts, and even then only $1 or so per CD. The vast majority of music groups never make any money for themselves, and barely cover costs for the labels. Cost is a flexible term in the music business, and the way those costs get allocated can be creative indeed. The successful artists cover some of the costs of the less successful artists. The bottom line is that the record business only drops about 10% to the bottom line in good years.

Don’t you think the system is really messed up when even a technology guy and not a music guy understands that the accounting at the labels is puzzling and “creative”? I said this is one reason CD sales are down, because people don’t want to support the RIAA, they choose to support artist, and everyone knows, artists aren’t being paid.

“Then the RIAA (Recording Industry Association of America) sued Napster on behalf of the major record labels….. We made one last effort to convince the labels that they should do a deal with us.”

Here it goes!

“The RIAA succeeded in shutting down Napster, but lost billions in potential revenue over the next several years to Gnutella, Grokster, Morpheus, Kazaa and others. CNET has reported that the RIAA has finally succeeded, five years later, in shutting down Grokster.”

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