Second of two parts
People like to throw virtual stones at record company executives -- but who are they, and what makes them tick?
In the second half of this discussion about the music industry and one of its key figures, the author of Fortune's Fool: Edgar Bronfman, Jr., Warner Music, and an Industry in Crisis, Fred Goodman tells us how his research led him to believe that subscribing to artists, rather than to generic music services might offer the best way forward.
Goodman also explores how Apple's poor penetration on the desktop helped Steve Jobs convince major labels to license their music to iTunes. He asks whether massive bonuses are justified when a company's stock sinks. And he presents evidence that the major labels might need to abandon adversarial relationships haunting them from the past if they want to solve problems in the future -- within the bounds of antitrust law, of course.
Artist Subscription
Wired.com: In the book, you talked about how the Warner-led initiative of bundling the music with interactive elements seems to have been derailed. On paper, that seems like the answer, but Apple's initiative along those lines isn't really working. Yet, music-app games like *Tap Tap Revenge *and Guitar Hero made music interactive, and those succeeded. What went wrong?
Fred Goodman: I don't know what went wrong, but it's a product that doesn't demand that you buy it. You can pick it apart and get the good stuff wherever you want it for free. They have to figure out a way to give something to somebody that's theirs. It's probably some kind of artist-subscription model, where what you're really selling is regular access to materials from an artist, discounts, that sort of thing. Something that makes people say, "I can't get this somewhere else." It's just not there yet. If I knew the answer, I wouldn't be writing books.
Wired.com: It seems like people might be more likely to subscribe to a band than to something vague like Napster or Rhapsody.
Goodman: Livia Tortella (who does so much of the marketing over at Atlantic Records) says, "Now the deal is not to be in the Atlantic business, it's to be in the T.I. business, the Kid Rock business. It is to find out what those consumers want." If you're in that business, then really develop that act, and find out what those fans want and give them something.
The problem, of course, is that if you're a record company, you have to have some kind of scalable, repeatable format. We can sit here and talk about the things that Trent Reznor has done, but it's really difficult for a record company to reinvent the wheel for each new act and come up with something different to sell. You might be able to do that if you had Iggy Pop with a 35-year career, but what do you do with a new act?
Wired.com: But we already have something scalable -- an app people pay for or subscribe to, and maybe even see ads. You get everything that somebody records, right after they did it, and you don't have to bother downloading anything -- it just shows up on your phone or your tablet, your TV or stereo. If they coupled that with a corporation including both the artist and business side, the pieces are there. But can the labels tilt at such a radical degree from where they're going, moving to an artist subscription that's managed by a label? Warner's been making moves by rolling out artist websites, but did you get the sense they're that maneuverable?
Goodman: That's one thing that impressed me about Warner. In the years Bronfman's been in the industry, it has shrunk 15 percent, yet Warner's revenues have held steady. That's extraordinary -- a really well-run company. They happen to be in a terrible market, but they're doing things to make themselves stronger in a bad marketplace. They've been willing to try different things, whether it's Lala or imeem, which haven't worked (Warner was an investor in both).
You've got to give these guys credit for saying, "That didn't work, let's try something else." I think they look at everything really hard, and that I admire. The question is about this enormous change that you're talking about, which has taught some executives a lot.... It's almost like a generation had to die out. It might take different waves of executives to figure this out.
Wired.com: Did the labels regret licensing iTunes? Your book says the labels went with iTunes because it was Mac-only (which I have independently confirmed), and hardly anybody had a Mac. [In the fourth quarter of 2003, Apple had about 2 percent of U.S. desktop market share.] When the Windows version came out, it gave Apple a lead that it still maintains seven years later. I think that detail has been lost in a lot of people's histories of that decisive moment.
Goodman: Yeah, there were certain limits on the deal that would let them see how it worked, and it was incredible that this was the one time that Steve Jobs throws out his own playbook. Usually, he liked everything to be Apple-centric. He turns around and brings along the iTunes music store for Windows, and these guys are like, "Ugh." I think everyone was surprised when he did it for Windows.
Bonuses and the Bottom Line
Wired.com: Did you talk with Bronfman at all about the insider-trading allegations? [French prosecutors asked that he be acquitted in late June of insider-trading charges related to the plummeting value of Vivendi stock.]
Goodman: I did not cover the insider-trading allegations, just because it was just happening when I was done with the book. But there was talk about how he was paying himself. [Bronfman received a $3 million bonus in 2008 when Warner Music Group had a net loss of $56 million and its stock dropped 25 percent].
It's a very funny thing with the bonuses. Lyor Cohen [Warner Music Group head of recorded music for the Americas] got a $5 million bonus the first year he was there. People said [sarcastically], "Oh -- you're cutting back?"
It's true, but he's getting $5 million at the same time Doug Morris [CEO of Universal Music Group] was getting $16 million. Where are you going to get someone to run this company for $400,000?
Wired.com: Well, lots of people in the Obama administration make barely six figures. Maybe it's because people have such a low opinion of music executives, they have to get extra.
Goodman: It's a lot of money to most people, which it is. That's also part of the reason people are fascinated by Edgar Bronfman. When I first met him, he said, "Why would anyone be interested in a book about me?" And I said, "For starters, I think 97 percent of the world wouldn't work if they didn't have to. They don't understand the fact that you don't have to -- and you do work." And he works hard. You're talking about a guy who could have played tennis his whole life.
Wired.com: Sure. Usually, the thing with people who have billions of dollars is, you figure they spent so much time earning that money that now they can't stop. He really had the option of not starting at all.
Goodman: Exactly right. But to some extent, he's the guy who is supposed to continue the family. He's got this position as the heir to the throne, and I think he really wanted to measure himself against the legacy of his grandfather [Samuel Bronfman of liquor-distribution fame].
Distribution Goes Digital
Wired.com: The major labels bought their distributors in the '80s, and owned trucks. As much as Bronfman talked about how digital is going to make up for physical, and talks about the cellphone potential, did you get the sense that the labels' expansion into manufacturing and distribution was part of the problem?
Goodman: By the time Bronfman gets in there at Warner Music Group [2004], it's not really an issue, because they've already done things like sell the pressing plant to Cinram [in 2003] and they're out of the manufacturing business. It was this integrated business once upon a time, where you made money every step of the way. But that's not the model anymore. They're trying to replace it with various other income streams of the artist.
Wired.com: By trying to get into the other artist-income streams, the labels seem to be giving up on the right to the recording, to an extent. This interactive, bundling idea [iTunes LP, CMX] doesn't seem to be taking off, but did you get a sense of what's next for Bronfman, in terms of not only going after other rights, but how to exploit the sound recording right the way labels always have?
Goodman: They are still hopeful, I think. People around the business are excited this month to see what Google's going to do with their Droid application. It may be another false alarm, but hope springs eternal. Those people, they believe people want that music.
Wired.com: True. And if DRM was the problem with subscriptions, that kind of goes away with cellphones, because they're connected. So maybe the cellphone is still the answer for Bronfman and the others.
Goodman: I just don't know, but it's always so frustrating. I saw them trying to do a lot of things and running up against a lot of problems, both in terms of the outside companies that they wanted to deal with but couldn't quite get there, imeem being a good example, or trying to get together with other companies.
Egos Battle as Budgets Shrink
Goodman: To me, it's still kind of astounding: The record industry is in such dire straits, and these guys still can't get together to do things in an agreed sort of way. I'm not talking about violating antitrust laws. They are bracketed by that on one side, but there are ways in which, as far as I can tell, within legal guidelines, you can have certain discussions.
But these guys are competitors, and they distrust each other. If somebody likes something, the other guy doesn't.
Warner was trying to champion this thing Choruss for a while [view the presentation], where they were going to get universities to basically pay them a licensing fee, which is a pretty brilliant strategy. Anyone who has kids going to college knows, when that bill comes, there's like $800-worth of add-ons for things like copying fees, athletic fees, using the student union -- and there could easily have been $25 for downloading recordings online.
It would have been a painless way, in probably a sympathetic environment from the universities, to get someone to set a precedent that "this should be paid for." But there's really no consensus from the industry, because "Hey, that's their program."
Wired.com: Some people have a problem with a general "music tax," but within a private network like a university, which is kind of different from an average ISP, perhaps that could make sense.
Goodman: They just didn't get enough support within the industry to make it a united thing where they could say, "This is for all record companies." Why would somebody just sign a deal with Warner?
Wired.com: It sounds like the old executive ego game could be at play.
Goodman: It's the same thing that happened when Thomas Middelhoff [former Bertelsmann CEO] first talked about getting Napster for the record companies, and the whole thing was, "Hey, we'll co-own Napster!" And everybody goes, "Gee, great."
Then Universal comes back and says "Well, we're the biggest record company, so we get the biggest piece," and everyone else goes "Just forget it."
This has happened time after time after time. They just can't stay in a room and realize that the boat's sinking and they need to do something together. You mentioned the ISP thing. I'm one of those people who thinks that there should be some sort of payment through ISPs as a content fee.
Wired.com: But then you'll get people asking, "Well, what about newspapers? What about people who say they don't listen to music, or they're deaf?"
Goodman: We're just not used to having it. It exists in other places. In the U.K. they pay a BBC tax. Whether you listen to BBC or not, everybody gets a benefit from it.
Wired.com: That's just never been a way this country tends to do things.
Goodman: It's not a way that we have been doing it, but I'm very concerned that if there is no money in creating things, people will create something else.
Wired.com: I like the quote in the beginning of your book from Ice Cube. He says there won't be any music left worth downloading at a certain point, because creative people will do other things:
But there already are lots of things people download other than music: apps, videogames -- the idea of the "indie rock star app developer."
Goodman: If you value recorded music enough to want it to continue to exist, you've got to figure out how to value it. I'm not talking about enough money that the record companies would get a free skate and not be forced to create new technology. We shouldn't protect people from technology -- if we did, there'd be a stable still in this town. But the fact of the matter is that there is value in content. People own it, they're entitled for something for it, and if you don't pay for it, they just won't make it.
Wired.com: It looks like that might already be starting to happen, in terms of the number of bands getting signed.
Goodman: Like Ted Leo. It's a tough economic equation. If you love these young bands, then help them.
__Wired.com: __So if the market incents live music shows and synch rights to movies, television, ads, etc., we'll get musicians who are specialized in those things instead of recording?
Goodman: Plus, if they all specialize in [live music and synch rights], the prices will go down in those areas. People are paying less and less for TV rights, because the companies looking for it can find a band online willing to do it for less. "Hey, here's this great band I found on Facebook." That's who bands are competing against.
The prices go down, but there's not more opportunity. There might be more ways to be noticed, but not more ways to monetize.
Fred Goodman's Fortune's Fool: Edgar Bronfman Jr., Warner Music, and an Industry in Crisis went on sale this week.
See Also:
- What's Wrong With Music Biz, per Ultimate Insider
- Record Stores: Be an Institution or Perish
- EMI Evolves Along With Music Industry Changes
- Geeks to Music Industry: APIs Can Set You Free
- Why the Music Industry Hates Guitar Hero
- File Under Symbolic: Tower Records Is Over
*Apple Fan Club letter courtesy of the *Ottowa Beatles Site
*Steve Jobs *photo: feastoffun/Flickr
