Legal Research

Book Review: Appetite for Self-Destruction: The Spectacular Crash of the Record Industry in the Digital Age, Steve Knopper (2009)

I’m not terribly interested in the music business. Nor do I download digital music — my wife is the iTunes maven in our house. But I’m interested in how disruptive technologies — PCs, the Internet, and such — destroy business models that have worked well for years. That’s why I bought this book.

The first couple of chapters are the boring history of the music biz from 1979-1983. There’s the post-disco music crash, circa 1979-1982. Then Michael Jackson saves music with his album Thriller. I was tempted to give up and start reading something else. But then Knopper moved on to the golden years of the compact disc, 1984-2000. During this period the music industry made gobs of money. Knopper quotes Howie Klein, Head of Reprise Records in the 1980s and 1990s:

“The CD became the thing — it was no longer about the cassette, it was no longer about vinyl records. That is the single thing that made the record industry absolutely roll in cash. Cash came in like you would not believe.” (page 35)

To understand the irony of this, you must realize that music execs and many artists initially resisted the CD. The music heads didn’t understand the technology and artists felt that digital music lacked the warmth of analog sound:

“… rocker Neil Young spoke for the digital-equals-soulless camp: ‘The mind has been tricked, but the heart is sad.’” (page 26)

Eventually, they came to love the CD. Why? Three reasons:

• The CD allowed labels to jack up prices. “By the late 1990s, the record business had boiled down much of the business to a simple formula: 2 good songs + 10 or 12 mediocre songs = 1 $15 CD, meaning billions of dollars in overall sales.” (page 106)

• Because the CD was a new music distribution technology, artists were asked to sign new contracts that reduced their royalties. “So labels sold CDs for almost $8 more than LPs at stores, but typical artists made just six cents more per record.” (page 32)

• Music fans loved the fact that they’d no longer have to hear pops and scratches, so they enthusiastically upgraded their collections to CDs in huge numbers.

But there was a problem with this business model: it eliminated the single. Many people hated spending $15 to get the 1 or 2 good songs on the CD. “‘If you only sold hand lotion in five-gallon bottles, pretty soon people would be tired of it,’ says Albhy Galuten, a well-known producer who later became Universal Music Group’s senior vice president of advanced technology. ‘You can’t go around forcing people to buy something they don’t want.’” (page 107)

This wasn’t an issue until the growth of the Internet led to an alternative model: online music-sharing. Knopper recounts the well-known story of Napster (and Kazaa, Grokster, and others.) I don’t need/want to get into all that here. But the important point is this: MP3s and file-sharing software (taken as a whole) were another type of technology that music executives didn’t understand. This time, they didn’t learn to embrace them:

“But label chiefs were so bogged down in the file-sharing battleground that they refused to act on the digital future of the business. Many figured they would simply win in the courts and the CD-selling business would go back to normal. As a result, they wasted almost three critical years before agreeing to a functional, legal song-download service.” (page 141)

The author estimates that if record companies had made a deal with Napster, rather than forcing it to shut down, they would have made almost $16 billion in revenue. (page 142) They wouldn’t have had to create or invest in new technology. And they would have been negotiating at a point in time when they had much more power than anyone else. But that’s moot, because it never happened. By the time they were ready, Steve Jobs made them an offer they couldn’t refuse. In the end, the iTunes store benefitted Apple much more then them:

” Apple had basically taken over the entire music business. Steve Jobs’ agenda was not to make money off 99-cent digital songs, although they were a nice additional source of revenue. He used the songs to profit from expensive iPods. Labels made exactly zero dollars for every iPod sale.” (page 179)

So what’s the future hold for record companies? The author says they’re doomed. Their plans include selling more ringtones, pushing subscription services (in which users “rent”, but don’t own, the music they download), advertising deals with social networks, and asking ISPs to start charging file-sharers for their downloads. These are not long-term, viable business models. The labels will never be as rich, and as powerful, as they were in the nineties.

The author feels the music business, however, has a bright future. He cites the example of the group Radiohead, which released its album In Rainbows in 2007 as a digital download. The group stated that fans could pay whatever they wanted for the album. Knopper says the band made $2.7 million profit.

Overall, not a bad book. If you’re interested, Appetite for Self-Destruction is available from Amazon for about 17 bucks.

Postscript: The NY Times reported on Friday that CD sales declined 7% worldwide in 2008 and by 20% in the U.S., while digital music rose by 25%.

Full post as published by Jenkins Webblits on January 20, 2009 (boomark / email).