Rent-Seeking Behavior

Squeezing Money From the Music

As a recording that has sold modestly, but in an array of forms, Akon’s music illustrates the new definition of a hit in pop music — instead of racking up sales of half a million CD’s or more in the first week, it arrives with solid if less impressive sales, but with several revenue streams.

It is an example of the business model that the retrenching music industry is embracing as sales of the CD, its mainstay product for two decades, slowly decay.

As a result, the big record companies, whose fortunes are still overwhelmingly tied to CD sales, are taking a far more expansive view of how to carve out pieces of the music economy, which by some estimates runs as high as $75 billion, including recording sales, music publishing, concert ticket and merchandise sales and other sources of revenue.

Lately, the major labels have in effect tried to move into the talent management business by demanding that new artists seeking record contracts give their label a cut of concert earnings or T-shirt and merchandise revenue — areas that had once been outside the labels’ bailiwick.

[…] CD sales are still the single biggest source of revenue, and the picture there is mixed. The EMI Group of Britain, third largest of the four major record corporations, said in reporting its half-year results in November that recorded-music sales declined more than 5 percent, though a drop in CD sales and net prices had been “slightly” offset by digital revenue. The Warner Music Group, the No. 4 company, said that over all, recorded music sales for the fiscal year rose almost 3 percent, to $3 billion, and that digital revenue had more than offset the drop from CD’s.

Yet digital song sales are not fueling a recovery as quickly as some thought — in fact, sales have been sputtering. After rising 150 percent last year, sales of digital downloads have increased less than half as much this year.

[…] To show the promise of digital sales for individual albums, Warner Music executives provided cost-analysis data from a successful hip-hop record released in the last 12 months. The information was disclosed on condition that the performer not be identified in The New York Times.

According to the data, sales of the CD accounted for roughly 74 percent of domestic revenue the company took in from the project, or roughly $17 million. But sales of an array of digital products added almost $6 million — about two-thirds of that came from ring tones of hit singles. The figure also included roughly $330,000 from mobile phone games related to the performer and $94,000 in sales of cellphone “wallpaper,” or screen backgrounds.

The Many Faces of Consumer Content

  • Hottest Ad Space in Times Square May Be on Tourists’ Cameras

    As a result of the growing popularity of consumer-generated pictures, videos and e-mail messages on Internet sites like YouTube and Myspace, advertisers are getting consumers to essentially do their jobs for them.

    When Target, the discount store operator, suspended the magician David Blaine above Times Square for two days during the week of Thanksgiving, videos shot by viewers were posted on YouTube and viewed more than 19,300 times.

    “Times Square is becoming, in a way, a publishing platform,” said Peter Stabler, director of communication strategy for Goodby, Silverstein and Partners, an advertising agency that is part of the Omnicom Group. “What happens in Times Square is no longer strictly the province of location. You can experience things that are happening there, even if you’re not there.”

  • Music: 2006, Brought to You by You

    All that free-flowing self-expression presents a grandly promising anarchy, an assault on established notions of professionalism, a legal morass and a technological remix of the processes of folk culture. And simply unleashing it could be the easy part. Now we have to figure out what to do with it: Ignore it? Sort it? Add more of our own? In utopian terms the great abundance of self-expression puts an end to the old, supposedly wrongheaded gatekeeping mechanisms: hit-driven recording companies, hidebound movie studios, timid broadcast radio stations, trend-seeking media coverage. But toss out those old obstacles to creativity and, lo and behold, people begin to crave a new set of filters.

Guess Who’ll Be Running the House IP Subcommittee

Berman, copyright fan, to run key panelpdf

It will be a comforting sound to the entertainment industry when Rep. Howard L. Berman pounds a key House subcommittee to order next month.

That’s because the Valley Village Democrat sometimes known as Hollywood’s congressman will be wielding the chairman’s gavel after his party takes control of Congress. The position will give Berman considerable sway over laws regulating the transition to digital media.

But Berman’s oversight of the Judiciary Committee’s panel on the Internet and intellectual property is likely to give a splitting headache to consumer electronics makers and public interest groups advocating unfettered use of digital content.

“There’s two problems with Howard Berman,” said John Palafoutas, the chief lobbyist for AeA, a high-tech trade group that wants fewer government restrictions on digital information. “One, he’s really smart. And two, he knows how to represent his constituents, which in this case is Hollywood.”

The Seduction of Data

Once it can be collected, it will be — and it will be used, apparently: Traveler Data Program Defied Ban, Critics Saypdf

Developed to help customs inspectors target narcotics and other contraband, ATS began scrutinizing air travelers entering and leaving the United States in the mid-1990s, said Jayson P. Ahern, assistant commissioner of U.S. Customs and Border Protection. After the 2001 terrorist attacks, it was used to assign risk assessments to cargo and passengers, officials’ testimony and a February 2005 DHS report to Congress show.

Two years ago, it was expanded again to a limited but growing number of land border crossers, according to the report and Ahern. About 309 million land crossings and 87 million air crossings of U.S. borders are made each year.

Travelers are not allowed to see their risk assessments and must file Freedom of Information Act requests to view the original records on which the assessment is based.

The Center for Democracy and Technology said the program violated the 1974 Privacy Act because customs officials targeted U.S. travelers and shared their data with other agencies without notifying the public. Homeland Security officials say that notice was implicit in an announcement in 2001 about an older program.

“The lack of a notice at all was clearly illegal for however many years they claim this was in operation,” said David Sobel, Electronic Frontier Foundation senior counsel.

“This is everybody’s worst nightmare,” said Kevin Mitchell, chairman of the Business Travel Coalition, who was angered by the revelation that profiles were being kept without travelers’ knowledge.

Rap’s Evolving (Business::Artistic) Model

In major awards, rap gets no lovepdf

Nominations were announced Thursday for the 49th annual Grammy Awards and, for the first time in six years, no rap stars made it into any of the marquee categories such as album of the year or best new artist. Instead, the glory went to soulful singer Mary J. Blige (who led with eight nominations), the scarred rock survivors of the Red Hot Chili Peppers, British newcomer James Blunt and the Dixie Chicks, the latter nominated for album, record and song of the year.

The Grammy snub caps a fairly miserable year for the rap scene.

[…] Some say the malaise of 2006 is due to shifting economic realities.

“Hip-hop and urban music is just as strong as it has been, it’s just that now its success is coming in new places and in new ways,” said Jay Frank, the chief of programming for Yahoo Music. “There’s a lot of digital downloads and ringtones being sold, and in some cases this is music that is being very successful in ways other than selling CDs.”

Sixteen-year-old rapper Jibbs is an example. His debut album has sold a humble 126,000 copies since its release in October. But one sing-song track on the CD, “Chain Hang Low,” an ode to diamond necklaces, has sold 1.4 million ringtones. Those sound clips, used to personalize cellphones, usually cost about $2 each.

[…] Erica Grayson, an executive at Geffen Records, said the label saw ringtones as an integral way for Jibbs to get in the ear of teen fans. “It’s just not the way we’ve done it in the past,” she said. Privately, though, other executives worry that ringtones are a novelty and new phone technologies will make them even easier to steal.

Pushback Over DMCA Exemption

Company Sues Over Cell Phone Rulepdf

The country’s largest provider of pay-as-you-go mobile services is suing the federal government over a recent ruling that allows people to disable the software that locks cell phones to a particular carrier.

Tracfone Wireless Inc. contends the new exemption to copyright law would make it more difficult to crack down on people who disable the locks and sell the phones at a profit overseas. The complaint, filed Tuesday in U.S. District Court in Florida, seeks to force the U.S. Copyright Office to eliminate the exemption it announced last month.

[…] In most cases, federal law bars people from attempting to break electronic mechanisms for enforcing copyrights. The Library of Congress allowed the exemption at the urging of groups that say companies such as Tracfone are stifling competition and hurting the environment because many of the phones would otherwise be thrown away.

A Little Overstated, Maybe….

Or maybe not: China’s virtual currency threatens the yuanpdf [via Salon’s How The World Works]

As if Chinese leaders did not have enough of a headache trying to manage the country’s rising but still undervalued currency in the testy world of international trade, now the growing popularity of virtual money enters the already complex equation.

The so-called “QQ” coin – issued by Tencent, China’s largest instant-messaging service provider – has become so popular that the country’s central bank is worried that it could affect the value of the yuan. Li Chao, spokesman and director of the General Office of the People’s Bank of China (PBOC), has expressed his concern in the Chinese media and announced that the central bank will draft regulations next year governing virtual transactions.

Public prosecutor Yang Tao issued this warning: “The QQ coin is challenging the status of the renminbi [yuan] as the only legitimate currency in China.” In an article published recently in the Nanfang Daily, the prosecutor wrote that the central government would act to “limit the application of QQ coins” and assure that their use is restricted to the virtual world.

Tencent argues that Yang and the PBOC are overreacting, and some Internet analysts agree. Nevertheless, there is no question that the virtual-currency trend is catching on in China, and the endgame is unclear.

OT: For Readers of Cadillac Desert

Or lovers of Chinatown: In Owens Valley, water again flowspdf

The event marked a brief detente in historic water wars that have boiled in the Owens Valley since the early 1900s, when Los Angeles city agents posed as ranchers and farmers to buy land and water rights in the valley. Their goal was to build an aqueduct that would help transform Los Angeles into a metropolis.

The stealth and deception became grist for books and movies that portrayed the dark underbelly of Los Angeles’ formative years.

CNN Pushing The Copyright Maximalists’ View

A student passed this on to me (thanks, Shirley!) (sorry, I’ve been laid low by the brutal cold that seems to be rampaging through MIT this month) — looks like the UK is not going to kowtow to the copyright maximalists when it comes to music copyright terms: Aging rockers set to lose copyrightspdf

When British finance minister Gordon Brown stands up to make his pre-budget speech next week, aging rockers Cliff Richard, The Beatles and The Rolling Stones might do well to tune in.

Not normally the stuff of rock’n’roll, Wednesday’s address looks set to reject music industry calls for an extension of copyright on sound recordings to 95 years from 50, meaning veteran acts’ early hits could soon be free for all to use.

[…] David Arnold, who composed the scores for four James Bond movies, argues that the 50-year copyright limit discriminates against performers and record companies.

“I don’t think anyone involved in music’s creation can understand how, after a certain amount of time, it stops being yours and starts being everyone else’s,” he told Reuters.

“We need to do the groundwork so there is an element of protection for artists and record companies who take a risk with an artist,” he added. “That’s if we value the entertainment industry and value music in our society.”

Richard has said he would like to see copyright protection for singers and record labels extended, pointing out that songwriters enjoy protection for their lifetime plus 70 years.

In the United States, copyright protection is 95 years.

Industry bodies like the British Phonographic Industry (BPI) argue that the failure to extend protection on old hits will jeopardize investment in future talent.

Puh-leeze!! We all know the marginal value of a discounted cashflow (see the Eldred discussions). At a discount rate of 5%, the difference between the NPV of a fixed cash flow of 50 years and 95 years is 7.83% (by the way, the difference between the NPV of 50 years and a perpetual cashflow is 8.72%).

So here’s the question — if we believe that copyright is supposed to reward creativity, are we really expected to believe that over 92.2% of *anyone’s* creative content is entirely his or her own? With no use or application of any prior art at all? Really? (Note that, at higher discount rates, the hurdle rate is even greater. At 10%, it’s over 99%. That means that, after 50 years, over 99% of the possible NPV has been collected. Why should they get any more?)

For more background, see the report that has gotten this all going, Gowers Review of Intellectual Property This bit from the Executive Summary gives you a good sense of the perspective that the report takes:

E.9 Balanced and flexible rights should enable consumers to use material in ways that do not damage the interests of rights holders and will help ensure that citizens have trust in the system. They will enable cultural institutions to preserve our heritage, and help research institutes to further knowledge by using ideas protected by others. The Review recommends:

  • proposing an ‘orphan works’ provision to the European Commission. This will make it easier for creative artists to re-use ‘orphan’ copyright protected material (for which no author can be found), thus unlocking previously unusable material;

  • introducing a limited private copying exception, which will allow consumers to format shift legitimately purchased content, for example music from a CD to an MP3 player. This will allow consumers to use copyright protected material in a manner which does not damage the interests of rights holders;

  • clarifying the research exception. This will create greater scope for research on protected material by universities and business and expand the stock of knowledge; and

  • enabling libraries to copy and format shift master copies of archival works. This will prevent valuable cultural artefacts from deteriorating because they exist only on outdated formats.

A summary discussion on the Open Rights Group blog. Also, Lessig’s summary; note the Reuters news piece recounting the UK music industry blowback (as well as indicating Reuters’ leanings): Help! Ex-Beatle Paul demands copyright fair play pdf

The Second Life Buzz

I get to meet someone from Second Life soon — should be a great time: Music biz seeks Second Life via virtual real estatepdf

Put it all together and Second Life holds great potential to become the next evolution of the social networking/user-generated content. Brands like Adidas, American Apparel, Dell Computer, Toyota and others already have established a presence within the virtual world, and the music industry is close behind — creating branded destinations, live concerts, merchandise stores and even recording facilities.

“Second Life’s combination of social networking, strong sense of community and creativity makes it a very appealing destination,” an EMI spokesman says. “If we’re smart about it, we can help residents of Second Life connect with their favorite artists and discover new ones.”

Also IRS taxation of online game virtual assets inevitable