Mark Cuban tests the RIAA logic…

The guy's grammar doesn't hint at his brainpower, fortunately.

Cuban points out the red herring that the RIAA has pimped for the past five years: it seems logical that illegal downloading may be at least partially responsible for lower sales but there's still no convincing proof.

He then points out that...

"DVDs - Huge Increase in Sale
Digital Photographs - Huge Increase in Sales (see corbis and other outlets)
Video Games - Huge Increase in sales
Software - Not huge increase percentage wise, but increases in actual dollars… I couldnt find a specific reference. Anyone have one ?
Ringtongs - Huge increases in Sales"

It's not that the RIAA is totally wet on this matter, it's that their argument isn't convincing and worse, it's the linchpin of their competitive strategy.

And THAT'S why people keep breaking the law. The RIAA is effectively fighting not only a changing market, but a much more pervasive changing of our culture. That culture is not rooted in theft, it's rooted in convenience and other obvious appeal.

iTMS is going to sell 350 million songs this year. That's a phenomenally huge number, one that's increased fourfold in only one year.

Billboard has questions, I have answers

Billboard PostPlay: Can The Music Industry Make More Money from Digital Downloads Than It Does from CD Sales?

"Could a similar type of unexpected result also happen again as the music industry morphs towards downloads, subscriptions file-sharing, and secondary sales of used media files?

The culture shift has already happened. The tween demographic is trending towards an absolute preference of downloads or, to be blunt, anything but CDs as the standard music delivery system. A Discman is bigger than PSP, bigger than a cell phone, and not nearly as reliable. The transition to cellphones by pre-teens has already exceeded expectations, and with a large number of cellphones already capable of playing music via memory cards, the only people who think that CDs will be relevant in a decade are the people who still cling to vinyl. Yes, the standardization of CDs (and vinyl) will result in a lasting market, but that market is dwindling.

Exactly what is the opportunity cost of trying to keep distribution control?"

This is the question that no one has answers to, or at least answers that will satisfy a CFO sitting atop a large conglomerate whose main asset is catalog.

How long until this catches up to Apple?

Boing Boing: Apple steals iTunes customers' paid-for rights to stream

For all the good press the iTMS receives, it's pretty rare that negative press ever focuses on the moving goalposts at Apple Computer.

The value proposition ($.99 per song) has changed, for the worse, ever since the iTMS has opened. Your rights as user of downloaded tracks are shrinking--less burns, streaming restrictions, etc. There are "workarounds" to all these issues, but from a distance, things aren't getting better (still can't buy lossless tracks, if your purchased tracks get erased they are lost for good, etc.)

This strikes me as an opportunity in the making. Instead of fortifying the offering, Apple is weakening it.

Coolfer: sipping the DualDisc Kool Aid

a thimble from Wharton doesn't get it: ""'The industry aspires to get back to the point where people’s physical collection of albums is their prize asset as opposed to junk on a hard drive.'"

Let's consider the value proposition for the consumer of a DualDisc vs. the cynical longview:

SACD (and more) quality on side A
Was or is there a demand for more storage space by musicians on the current medium (compact discs)?

flip the disc and voila, gigs of goodies
What is the value proposition of giving one CD (dualdisc) vs. packing two pieces (a CD and a DVD), especially considering the packaging marketing advantages? The add-on style of packaging is a very effecient communicator. DualDisc means larger stickers to tell the story, or expanded Digi-pak schemes. Where's the big advantage of DualDisc again?

it's physical product! Like, with album art!
Uh, isn't it digital technology that makes this all possible? Isn't it then subject to pesky technologies such as BitTorrent? Is a broader bandwidth more or less likely in the next couple of years? What's the impact of impending broadband on cellular and wi-fi?

Yep, it's nice that there's now another physical distribution opportunity for the labels. But--if the past, and present, judging from the DD titles that are on the kickoff list--this will probably be another opportunity to rape and pillage catalog, not develop new artist or more importantly, confront the future head on.

Coolfer's very, very hesitant to admit what is going on beyond label myopia. After all, the post kicks off with "I don't see physical products going away any time soon," said Universal Music Group marketing VP Paul Bishow in an article about the hopes the music industry has placed in a new technology. Not long ago, such a statement would have been laughed at. That was before the introduction of DualDisc, a format that combines CD and DVD content on one disc.

You think Bishow would dare make a different call? He's head of marketing in a fading industry, a mature industry that is showing textbook signs of collapse. Not only that, but has anyone checked how easily p2p and iTunes have destroyed the market for physical singles? That market is over, over, over. How was it accomplished? Because on broadband, it takes barely a minute, if that, to download a song. Five years from now, and probably more like two, it's going to take seconds to download a song, maybe a minute to download an album. Five years from now, multi-terrabyte hard drives will be standard--a DualDisc will be smaller, in comparison, to a floppy disc of today. It may have moved the spotlight back to temporary products, but there's not one kid in America who is going to think twice about DualDisc. And if you're not marketing to teenagers right now, your head is in the sand.

Home Networking is the future right now.

50 Million homes will be home networking this year.

I did it last year, for the express purpose of making my large music collection (thousands of CDs) as easy to use as Tivo. I don't have the same graphical user interface (it's not on my TV) but it's at least as organized and nearly as easy to use as Tivo.

Still, in order to playback my DRM'd AAC files on my stereo over a network (tracks I bought from iTunes), you have to either jump through hoops or go the jHymn route. Guess which route I took?

This is another issue of copyright stubborness that will be crushed in the coming two years--consumers think that when they buy a song or a DVD, they should be able to watch it how they want to watch it. They think that if they buy a CD, they should be able to load it into their computer so that they can play it on the stereo all over the house. They don't understand or agree that DRM is a reason to make AAC impossible to play over a network. Consumers think this is bullshit. And as the price of hard drives continues to plummet, consumers will start ripping all their DVDs to their computer because it's a MILLION TIMES EASIER TO ORGANIZE AND STORE DIGITAL INFORMATION ON A COMPUTER THAN FILLING UP ENDLESS CABINENTS IN A LIVING ROOM.

This is so ingrained in the culture that "market forces" like DRM are going to be a serious hurdle for all involved. It is vital that the entertainment industry focuses on relieving consumers of this sort of hassle, or they will simply turn to alternative sources like Napster.

The Big Picture: The False Mathematics of the RIAA

Now here's an article that should appear in the Wall Street Journal. Ethan Smith, are you listening?

I just realized that The Big Picture had fallen off my newsreader when I updated a few months ago. And most of the time, the guy doesn't comment on music--he's more of a finance/econ kinda guy.

But this post is relevatory, the kind of banner that should be waved in the executive suites of every major label. The RIAA, in a classic case of blind devotion to its client, hasn't seen the forest for the trees in five years, as the above post illuminates.

As I've said over and over, there is a compelling, very real interest in controlling copyright. But culture has been revolutionized by p2p networking, and it continues to spin the old school around in circles. The only way to address the problem (lost revenue, which, The Big Picture mostly dismisses) is not to try to fight something that's already happened, but to try to plan for the next war. And that war is not going to be over p2p networks or secure transfer of copyright via DRM. You should be obsessing about new revenue streams and not old ones.

The utter failure of DRM

TidBITS: Why DRM Offends the Sensibilities:

"According to Professor Burk, the peer-to-peer tracking company BigChampagne has found that it takes about 4 minutes after release for a song using copy-prevention technologies to appear on the file sharing networks. "

If you are a content owner, step back for a minute and consider how this affects your business plan and business model--not only in the short term, where you actually have legal recourse, but in the long term, where years of p2p sharing have fundamentally changed culture.

This is good news for the major labels. Assuming, of course, that they'll hear it.

A lot of famous recording studios are closing.

Like the film studios, the major labels will, at some point, have to address the absurd costs in making hit records.

The labels, acting as banks (or, in some cases, loan sharks), have long put up ridiculous recording advances and spent hundreds of thousands of dollars to make records. Functioning as holding companies, the labels look more like venture capitalists than anything else.

Changing technology is going to improve the bottom line, assuming that labels will notice the reduced recording costs. Labels have two values: their cash flow and their marketing expertise. A&R is a frivilous, unmeasureable competitive advantange and shouldn't ever be considered a key asset to a label--the failure rate is simply too high among acquisitions. Marketing, however, is more easily measured. Labels should be looking to improve in this area, trying to emulate the Proctor & Gambles of the world instead of wasting money buying name producers and exorbitant studio time.

Hunter S. Thompson: A mile wide and an inch deep

He perverted the whole concept of "writer is the star"

The elephant in the room when it comes to Hunter S. Thompson is that he was an asshole with no regard for rules. He was an asshole on the level of, say, Anton Newcombe (drug addled, overrated leader of the Brian Jonestown Massacre) and just as overrated.

Thompson coasted on his schtick, which amounted to getting wasted and then writing about getting wasted. Yes, there were some erudite revelations from time to time, but he wrote for the drug generation and they swallowed him hook, line, and sinker.

Snarling rhetoric--Thompson's only formidable weapon in his arsenal--is the discourse of a bar or a prison, and just as entertaining. For while Thompson dared call a spade a spade, his lack of subtlety repelled people more than it drew them in. He made up shit on a regular basis yet never tarnished his legend status. What does this tell you about the writing profession?

Andrew Lack doesn't like the new cultural model.

Speaking at the Billboard Music & Money Conference, he gives a nod to the next few years: lots of lawsuits and criminal charges.

So, it looks like (arguably) the biggest force in consumer entertainment (Sony) is going to play the piracycard.

Which is a fair, legitimate card to play.

The biggest problem the content holding companies (the labels and studios) are going to have is the way they educate consumers on what piracy is.

The biggest tangible financial and intellectual property drain is going on outside U.S. borders. China, Russia, places that are larger, developing markets with vast potential compared to the United States. Is peer-to-peer a piracy problem here in the U.S.? Yes, but in the long term the problem is much, much smaller. And in the short term, it's a complicated issue--simply saying it's an issue of stealing hasn't worked for five years and it won't work well in the future. Technology is going to force labels and studios to change the model.

The labels and the studios need to protect their intellectual property in the context of current laws, yes. But they way that they do this is very important. If domestic consumers only read about kids and 50 year old soccer moms getting arrested, the P.R. battle will continue to be an abject disaster. All owners of intellectual property need to band together and start developing a plan to address worldwide piracy first, and consider the domestic problem secondarily.

And you'd think the gaming industry--a much, much bigger industry than music, Mr. Lack--would be a pointman on this issue. Microsoft has a huge, demonstrable problem with piracy in China. Software piracy in the U.S. is a historical problem--serial numbers and code cracks are still circulated widely, and it's been going on since the mid-80s, long before the Internet ever showed up. How does that factor into everything, especially given that virtually every pieces of software is vulnerable to this?

Lack says it's not the fault of the young, and that we have to educate them. True. But that "we" is the parents and not the role of Sony playing bad cop to kids. They don't give a shit what Sony or Lack think. The entertainment companies, who have shot themselves in the foot for the past five years, need to wake up. The Hilary Rosens of the world have led this battle with astounding incompetency, and instead of reversing cultural trends, it's embedded them.

Lack complains again and again about how piracy has devastated the industry--do we really want to get out the growth charts, Andy? Are you ready to see a graph of music sales compared to the teenage population over the past 20 years? The focus on piracy--that word in particular--needs to be aimed at third and second world countries. Does Lack think that massive celebrity salaries are part of the problem on a project that flops? Or how about the $500K that is routinely spent on record marketing? Or the same amount spent on production, while indie kids can get a project out the door for less than $50K? Start lowering your production costs, put stars on your payroll, and pay them only points. There are a myriad of problems in the entertainment business, but now that a new fundamental problem has shown up, no one seems willing to confront existing ones.

Browsing is out, filtering and recommendation is the next phase

Gerd Leonhard at Sony states the obvious

And then there's this from Mike Gaumond, VP & GM, Motorola Media Solutions, speaking on a panel [paraphrase]: "I think a model which allows consumers to discover new music and then acquire it is the best business model. No one does it well yet: Apple's music discover function, or anyone else's, sucks."

Uh, yeah Mike.

Except that Amazon's referral, er, "discover function" is pretty damn robust, market proven, easily duplicated, and more or less used by Apple at iTMS. As in, "People who bought this track also bought these tracks." I don't have click-through statistics for either Amazon or iTMS, but I'm pretty sure that in between that and lists and lists and a host of other novel filters (hits, mixes, playlists, exclusives) that the filtering system is getting some heavy use.

Gaumond, who works for a phone hardware company, probably thinks that the key is being in a club or a bar or a schoolyard and being able to have peer-to-peer interaction that results in filtering or more real-time recommendations. In other words, you're at the bar and hear a great song on the PA, you can push a button on your Motorola phone and download it. Or, your friend at lunch casually mentions a great new track or new jingle or whatever, and you can just turn on your Motorola phone and grab it. That's a nice pipe dream, inhibited only by technology but so obviously likely to come in the next few years that it's fairly embarassing to describe Apple's current function as "sucking."

Coolfer takes on the download pricing trial balloon

He unfortunately blames Apple for the pricing system.

Coolfer's the best industry blog, even the best industry website aside from the Velvet Rope.

But he's a little off base when it comes to download pricing.

Coolfer correctly points out that Apple's iTunes Music Store success is largely due to factors other than pricing--namely the iPod and the overall user experience. If anything, iTMS is a lot like Amazon.com in that the user experience transcends pricing as long the pricing is reasonable i.e. market rate. Price would be the premier sales driver if another vendor was selling songs for $.49 per track. That's not happening, and that's also where Coolfer misses the boat.

Apple has repeatedly stated that they're not making much, if any, money on the iTMS. It's pretty much an open secret that Apple is paying $.65 or more per track, which, at $.99 retail only leaves a 50% markup to find profit after expenses. Slim pickin' for sure; if it were easy money then why would the labels bother licensing Apple in the first place? The value of the portal (iTunes) isn't all that established.

There's no evidence that Apple is insistent on the pricing system, given that Apple probably does all the work for no direct profits off of sales. So Coolfer raises a good point--that pricing should be unhinged from $.99--but he assigns blame in the wrong direction. It's the labels and the copyright owners that have the largest bearing on pricing. And it is those two groups that see the greatest benefits from economies of scale, not Apple. Imagine the margins on any track available on iTunes that was released before, say, 2002. Virtually none of the $.65 label/copyright cost is new--it's all a unique revenue stream with no marketing or manufacturing cost. All gravy.

Coolfer's right that a multiple-tiered pricing scheme is attractive. But it also completely ignores the emotional premise and key marketing angle of iTMS--that people go there for the singles, not the albums. So even if you want to buy off an established catalog--Journey's "Open Arms", for example--why should Apple charge less? The market value is arguably the same as buying a new 50 Cent track. And even in the case of a greatest hits, many of those compendiums have a lot of clunkers.