June 21, 2007

Writing the History of the End (updated) [12:15 pm]

The Record Industry’s Declinepdf

So who killed the record industry as we knew it? “The record companies have created this situation themselves,” says Simon Wright, CEO of Virgin Entertainment Group, which operates Virgin Megastores. While there are factors outside of the labels’ control — from the rise of the Internet to the popularity of video games and DVDs — many in the industry see the last seven years as a series of botched opportunities. And among the biggest, they say, was the labels’ failure to address online piracy at the beginning by making peace with the first file-sharing service, Napster. “They left billions and billions of dollars on the table by suing Napster — that was the moment that the labels killed themselves,” says Jeff Kwatinetz, CEO of management company the Firm. “The record business had an unbelievable opportunity there. They were all using the same service. It was as if everybody was listening to the same radio station. Then Napster shut down, and all those 30 or 40 million people went to other [file-sharing services].”

It all could have been different: Seven years ago, the music industry’s top executives gathered for secret talks with Napster CEO Hank Barry. At a July 15th, 2000, meeting, the execs — including the CEO of Universal’s parent company, Edgar Bronfman Jr.; Sony Corp. head Nobuyuki Idei; and Bertelsmann chief Thomas Middelhof — sat in a hotel in Sun Valley, Idaho, with Barry and told him that they wanted to strike licensing deals with Napster. “Mr. Idei started the meeting,” recalls Barry, now a director in the law firm Howard Rice. “He was talking about how Napster was something the customers wanted.”

The idea was to let Napster’s 38 million users keep downloading for a monthly subscription fee — roughly $10 — with revenues split between the service and the labels. But ultimately, despite a public offer of $1 billion from Napster, the companies never reached a settlement. “The record companies needed to jump off a cliff, and they couldn’t bring themselves to jump,” says Hilary Rosen, who was then CEO of the Recording Industry Association of America. “A lot of people say, ‘The labels were dinosaurs and idiots, and what was the matter with them?’ But they had retailers telling them, ‘You better not sell anything online cheaper than in a store,’ and they had artists saying, ‘Don’t screw up my Wal-Mart sales.’ ” Adds Jim Guerinot, who manages Nine Inch Nails and Gwen Stefani, “Innovation meant cannibalizing their core business.”

Later: As an indicator of how bad the industry has coped with changing circumstances, the three leading retailers of music in the US are in the business solely as a loss leader for other products they’d rather you bought: Apple now third-largest U.S. music retailer: surveypdf

Later: Rolling Stone’s list of 5 remedies: The Fall of the Record Business: What Next?pdf

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