The Man Who Broke the Music Business: The dawn of online piracy.

April 22, 2015

Stephen Witt  4/27/15

Dell Glover manufactured CDs for a living, but he began to wonder: if the MP3 was just as good, why bother with the CD?

One Saturday in 1994, Bennie Lydell Glover, a temporary employee at the PolyGram compact-disk manufacturing plant in Kings Mountain, North Carolina, went to a party at the house of a co-worker. He was angling for a permanent position, and the party was a chance to network with his managers. Late in the evening, the host put on music to get people dancing. Glover, a fixture at clubs in Charlotte, an hour away, had never heard any of the songs before, even though many of them were by artists whose work he enjoyed.

Later, Glover realized that the host had been d.j.’ing with music that had been smuggled out of the plant. He was surprised. Plant policy required all permanent employees to sign a “No Theft Tolerated” agreement. He knew that the plant managers were concerned about leaking, and he’d heard of employees being arrested for embezzling inventory. But at the party, even in front of the supervisors, it seemed clear that the disks had been getting out. In time, Glover became aware of a far-reaching underground trade in pre-release disks. “We’d run them in the plant in the week, and they’d have them in the flea markets on the weekend,” he said. “It was a real leaky plant.”

The factory sat on a hundred acres of woodland and had more than three hundred thousand square feet of floor space. It ran shifts around the clock, every day of the year. New albums were released in record stores on Tuesdays, but they needed to be pressed, packaged, and shrink-wrapped weeks in advance. On a busy day, the plant produced a quarter of a million CDs. Its lineage was distinguished: PolyGram was a division of the Dutch consumer-electronics giant Philips, the co-inventor of the CD.

One of Glover’s co-workers was Tony Dockery, another temporary hire. The two worked opposite ends of the shrink-wrapping machine, twelve feet apart. Glover was a “dropper”: he fed the packaged disks into the machine. Dockery was a “boxer”: he took the shrink-wrapped jewel cases and stacked them in a cardboard box for shipping. The jobs paid about ten dollars an hour.

Glover and Dockery soon became friends. They lived in the same town, Shelby, and Glover started giving Dockery a ride to work. They liked the same music. They made the same money. Most important, they were both fascinated by computers, an unusual interest for two working-class Carolinians in the early nineties—the average Shelbyite was more likely to own a hunting rifle than a PC. Glover’s father had been a mechanic, and his grandfather, a farmer, had moonlighted as a television repairman. In 1989, when Glover was fifteen, he went to Sears and bought his first computer: a twenty-three-hundred-dollar PC clone with a one-color monitor. His mother co-signed as the guarantor on the layaway plan. Tinkering with the machine, Glover developed an expertise in hardware assembly, and began to earn money fixing the computers of his friends and neighbors.

By the time of the party, he’d begun to experiment with the nascent culture of the Internet, exploring bulletin-board systems and America Online. Soon, Glover also purchased a CD burner, one of the first produced for home consumers. It cost around six hundred dollars. He began to make mixtapes of the music he already owned, and sold them to friends. “There was a lot of people down my way selling shoes, pocketbooks, CDs, movies, and fencing stolen stuff,” he told me. “I didn’t think they’d ever look at me for what I was doing.” But the burner took forty minutes to make a single copy, and business was slow.

Glover began to consider selling leaked CDs from the plant. He knew a couple of employees who were smuggling them out, and a pre-release album from a hot artist, copied to a blank disk, would be valuable. (Indeed, recording executives at the time saw this as a key business risk.) But PolyGram’s offerings just weren’t that good. The company had a dominant position in adult contemporary, but the kind of people who bought knockoff CDs from the trunk of a car didn’t want Bryan Adams and Sheryl Crow. They wanted Jay Z, and the plant didn’t have it.

By 1996, Glover, who went by Dell, had a permanent job at the plant, with higher pay, benefits, and the possibility of more overtime. He began working double shifts, volunteering for every available slot. “We wouldn’t allow him to work more than six consecutive days,” Robert Buchanan, one of his former managers, said. “But he would try.”

The overtime earnings funded new purchases. In the fall of 1996, Hughes Network Systems introduced the country’s first consumer-grade broadband satellite Internet access. Glover and Dockery signed up immediately. The service offered download speeds of up to four hundred kilobits per second, seven times that of even the best dial-up modem.

Glover left AOL behind. He soon found that the real action was in the chat rooms. Internet Relay Chat networks tended to be noncommercial, hosted by universities and private individuals and not answerable to corporate standards of online conduct. You created a username and joined a channel, indicated by a pound sign: #politics, #sex, #computers. Glover and Dockery became chat addicts; sometimes, even after spending the entire day together, they hung out in the same chat channel after work. On IRC, Dockery was St. James, or, sometimes, Jah Jah. And Glover was ADEG, or, less frequently, Darkman. Glover did not have a passport and hardly ever left the South, but IRC gave him the opportunity to interact with strangers from all over the world.

Also, he could share files. Online, pirated media files were known as “warez,” from “software,” and were distributed through a subculture dating back to at least 1980, which called itself the Warez Scene. The Scene was organized in loosely affiliated digital crews, which raced one another to be the first to put new material on the IRC channel. Software was often available on the same day that it was officially released. Sometimes it was even possible, by hacking company servers, or through an employee, to pirate a piece of software before it was available in stores. The ability to regularly source pre-release leaks earned one the ultimate accolade in digital piracy: to be among the “elite.”

By the mid-nineties, the Scene had moved beyond software piracy into magazines, pornography, pictures, and even fonts. In 1996, a Scene member with the screen name NetFraCk started a new crew, the world’s first MP3 piracy group: Compress ’Da Audio, or CDA, which used the newly available MP3 standard, a format that could shrink music files by more than ninety per cent. On August 10, 1996, CDA released to IRC the Scene’s first “officially” pirated MP3: “Until It Sleeps,” by Metallica. Within weeks, there were numerous rival crews and thousands of pirated songs.

Glover’s first visit to an MP3-trading chat channel came shortly afterward. He wasn’t sure what an MP3 was or who was making the files. He simply downloaded software for an MP3 player, and put in requests for the bots of the channel to serve him files. A few minutes later, he had a small library of songs on his hard drive.

One of the songs was Tupac Shakur’s “California Love,” the hit single that had become inescapable after Tupac’s death, several weeks earlier, in September, 1996. Glover loved Tupac, and when his album “All Eyez on Me” came through the PolyGram plant, in a special distribution deal with Interscope Records, he had even shrink-wrapped some of the disks. Now he played the MP3 of “California Love.” Roger Troutman’s talk-box intro came rattling through his computer speakers, followed by Dr. Dre’s looped reworking of the piano hook from Joe Cocker’s “Woman to Woman.” Then came Tupac’s voice, compressed and digitized from beyond the grave, sounding exactly as it did on the CD.

At work, Glover manufactured CDs for mass consumption. At home, he had spent more than two thousand dollars on burners and other hardware to produce them individually. His livelihood depended on continued demand for the product. But Glover had to wonder: if the MP3 could reproduce Tupac at one-eleventh the bandwidth, and if Tupac could then be distributed, free, on the Internet, what the hell was the point of a compact disk?

In 1998, Seagram Company announced that it was purchasing PolyGram from Philips and merging it with the Universal Music Group. The deal comprised the global pressing and distribution network, including the Kings Mountain plant. The employees were nervous, but management told them not to worry; the plant wasn’t shutting down—it was expanding. The music industry was enjoying a period of unmatched profitability, charging more than fourteen dollars for a CD that cost less than two dollars to manufacture. The executives at Universal thought that this state of affairs was likely to continue. In the prospectus that they filed for the PolyGram acquisition, they did not mention the MP3 among the anticipated threats to the business.

The production lines were upgraded to manufacture half a million CDs a day. There were more shifts, more overtime hours, and more music. Universal, it seemed, had cornered the market on rap. Jay Z, Eminem, Dr. Dre, Cash Money—Glover packaged the albums himself.

Six months after the merger, Shawn Fanning, an eighteen-year-old college dropout from Northeastern University, débuted a public file-sharing platform he had invented called Napster. Fanning had spent his adolescence in the same IRC underground as Glover and Dockery, and was struck by the inefficiency of its distribution methods. Napster replaced IRC bots with a centralized “peer-to-peer” server that allowed people to swap files directly. Within a year, the service had ten million users.

Before Napster, a leaked album had caused only localized damage. Now it was a catastrophe. Universal rolled out its albums with heavy promotion and expensive marketing blitzes: videos, radio spots, television campaigns, and appearances on late-night TV. The availability of pre-release music on the Internet interfered with this schedule, upsetting months of work by publicity teams and leaving the artists feeling betrayed.

Even before Napster’s launch, the plant had begun to implement a new anti-theft regimen. Steve Van Buren, who managed security at the plant, had been pushing for better safeguards since before the Universal merger, and he now instituted a system of randomized searches. Each employee was required to swipe a magnetized identification card upon leaving the plant. Most of the time, a green light appeared and the employee could leave. Occasionally, though, the card triggered a red light, and the employee was made to stand in place as a security guard ran a wand over his body, searching for the thin aluminum coating of a compact disk.

Van Buren succeeded in getting some of the flea-market bootleggers shut down. Plant management had heard of the technician who had been d.j.’ing parties with pre-release music, and Van Buren requested that he take a lie-detector test. The technician failed, and was fired. Even so, Glover’s contacts at the plant could still reliably get leaked albums. One had even sneaked out an entire manufacturing spindle of three hundred disks, and was selling them for five dollars each. But this was an exclusive trade, and only select employees knew who was engaged in it.

By this time, Glover had built a tower of seven CD burners, which stood next to his computer. He could produce about thirty copies an hour, which made bootlegging more profitable, so he scoured the other underground warez networks for material to sell: PlayStation games, PC applications, MP3 files—anything that could be burned to a disk and sold for a few dollars.

He focussed especially on movies, which fetched five dollars each. New compression technology could shrink a feature film to fit on a single CD. The video quality was poor, but business was brisk, and soon he was buying blank CDs in bulk. He bought a label printer to catalogue his product, and a color printer to make mockups of movie posters. He filled a black nylon binder with images of the posters, and used it as a sales catalogue. He kept his inventory in the trunk of his Jeep and sold the movies out of his car.

Glover still considered it too risky to sell leaked CDs from the plant. Nevertheless, he enjoyed keeping up with current music, and the smugglers welcomed him as a customer. He was a permanent employee with no rap sheet and an interest in technology, but outside the plant he had a reputation as a roughrider. He owned a Japanese street-racing motorcycle, which he took to Black Bike Week, in Myrtle Beach. He had owned several handguns, and on his forearm was a tattoo of the Grim Reaper, walking a pit bull on a chain.

His co-worker Dockery, by contrast, was a clean-cut churchgoer, and too square for the smugglers. But he had started bootlegging, too, and he pestered Glover to supply him with leaked CDs. In addition, Dockery kept finding files online that Glover couldn’t: movies that were still in theatres, PlayStation games that weren’t scheduled to be released for months.

For a while, Glover traded leaked disks for Dockery’s software and movies. But eventually he grew tired of acting as Dockery’s courier, and asked why the disks were so valuable. Dockery invited him to his house one night, where he outlined the basics of the warez underworld. For the past year or so, he’d been uploading the pre-release leaks Glover gave him to a shadowy network of online enthusiasts. This was the Scene, and Dockery, on IRC, had joined one of its most élite groups: Rabid Neurosis, or RNS. (Dockery declined to comment for this story.)

Instead of pirating individual songs, RNS was pirating entire albums, bringing the pre-release mentality from software to music. The goal was to beat the official release date whenever possible, and that meant a campaign of infiltration against the major labels.

The leader of RNS went by the handle Kali. He was a master of surveillance and infiltration, the Karla of music piracy. It seemed that he spent hours each week researching the confusing web of corporate acquisitions and pressing agreements that determined where and when CDs would be manufactured. With this information, he built a network of moles who, in the next eight years, managed to burrow into the supply chains of every major music label. “This stuff had to be his life, because he knew about all the release dates,” Glover said.

Dockery—known to Kali as St. James—was his first big break. According to court documents, Dockery encountered several members of RNS in a chat room, including Kali. Here he learned of the group’s desire for pre-release tracks. He soon joined RNS and became one of its best sources. But, when his family life began to interfere, he proposed that Glover take his place.

Glover hesitated: what was in it for him?

He learned that Kali was a gatekeeper to the secret “topsite” servers that formed the backbone of the Scene. The ultra-fast servers contained the best pirated media of every form. The Scene’s servers were well hidden, and log-ons were permitted only from pre-approved Internet addresses. The Scene controlled its inventory as tightly as Universal did—maybe tighter.

If Glover was willing to upload smuggled CDs from the plant to Kali, he’d be given access to these topsites, and he’d never have to pay for media again. He could hear the new Outkast album weeks before anyone else did. He could play Madden NFL on his PlayStation a month before it became available in stores. And he could get the same movies that had allowed Dockery to beat him as a bootlegger.

Dockery arranged a chat-room session for Glover and Kali, and the two exchanged cell-phone numbers. In their first call, Glover mostly just listened. Kali spoke animatedly, in a patois of geekspeak, California mellow, and slang borrowed from West Coast rap. He loved computers, but he also loved hip-hop, and he knew all the beefs, all the disses, and all the details of the feuds among artists on different labels. He also knew that, in the aftermath of the murders of Tupac and the Notorious B.I.G., those feuds were dying down. Def Jam, Cash Money, and Interscope had all signed distribution deals with Universal. Kali’s research kept taking him back to the Kings Mountain plant.

He and Glover hashed out the details of their partnership. Kali would track the release dates of upcoming albums and tell Glover which material he was interested in. Glover would acquire smuggled CDs from the plant. He would then rip the leaked CDs to the MP3 format and, using encrypted channels, send them to Kali’s home computer. Kali packaged the MP3s according to the Scene’s exacting technical standards and released them to its topsites.

The deal sounded good to Glover, but to fulfill Kali’s requests he’d have to get new albums from the plant much more frequently, three or four times a week. This would be difficult. In addition to the randomized search gantlet, a fence had been erected around the parking lot. Emergency exits set off alarms. Laptop computers were forbidden in the plant, as were stereos, portable players, boom boxes, and anything else that might accept and read a CD.

Every once in a while, a marquee release would come through—“The Eminem Show,” say, or Nelly’s “Country Grammar.” It arrived in a limousine with tinted windows, carried from the production studio in a briefcase by a courier who never let the master tape out of his sight. When one of these albums was pressed, Van Buren ordered wandings for every employee in the plant.

The CD-pressing machines were digitally controlled, and they generated error-proof records of their output. The shrink-wrapped disks were logged with an automated bar-code scanner. The plant’s management generated a report, tracking which CDs had been printed and which had actually shipped, and any discrepancy had to be accounted for. The plant might now press more than half a million copies of a popular album in a day, but the inventory could be tracked at the level of the individual disk.

Employees like Glover, who worked on the packaging line, had the upper hand when it came to smuggling CDs. Farther down the line and the disks would be bar-coded and logged in inventory; farther up and they wouldn’t have access to the final product. By this time, the packaging line was becoming increasingly complex. The chief advantage of the compact disk over the MP3 was the satisfaction of owning a physical object. Universal was really selling packaging. Album art had become ornate. The disks were gold or fluorescent, the jewel cases were opaque blue or purple, and the album sleeves were thick booklets printed on high-quality paper. Dozens, sometimes hundreds, of extra disks were now being printed for every run, to be used as replacements in case any were damaged during packaging.

At the end of each shift, employees put the overstock disks into scrap bins. These scrap bins were later taken to a plastics grinder, where the disks were destroyed. Over the years, Glover had dumped hundreds of perfectly good disks into the bins, and he knew that the grinder had no memory and generated no records. If there were twenty-four disks and only twenty-three made it into the grinder’s feed slot, no one in accounting would know.

So, on the way from the conveyor belt to the grinder, an employee could take off his surgical glove while holding a disk. He could wrap the glove around the disk and tie it off. He could then hide the disk, leaving everything else to be destroyed. At the end of his shift, he could return and grab the disk.

That still left the security guards. But here, too, there were options. One involved belt buckles. They were the signature fashion accessories of small-town North Carolina. Many people at the plant wore them—big oval medallions with the Stars and Bars on them. Gilt-leaf plates embroidered with fake diamonds that spelled out the word “boss.” Western-themed cowboy buckles with longhorn skulls and gold trim. The buckles always set off the wand, but the guards wouldn’t ask anyone to take them off.

Hide the disk inside the glove; hide the glove inside a machine; retrieve the glove and tuck it into your waistband; cinch your belt so tight it hurts your bladder; position your oversized belt buckle in front of the disk; cross your fingers as you shuffle toward the turnstile; and, if you get flagged, play it very cool when you set off the wand.

From 2001 on, Glover was the world’s leading leaker of pre-release music. He claims that he never smuggled the CDs himself. Instead, he tapped a network of low-paid temporary employees, offering cash or movies for leaked disks. The handoffs took place at gas stations and convenience stores far from the plant. Before long, Glover earned a promotion, which enabled him to schedule the shifts on the packaging line. If a prized release came through the plant, he had the power to ensure that his man was there.

The pattern of label consolidation had led to a stream of hits at Universal’s factory. Weeks before anyone else, Glover had the hottest albums of the year. He ripped the albums on his PC with software that Kali had sent, and then uploaded the files to him. The two made weekly phone calls to schedule the timing of the leaks.

Glover left the distribution to Kali. Unlike many Scene members, he didn’t participate in technical discussions about the relative merits of constant and variable bit rates. He listened to the CDs, but he often grew bored after only one or two plays. When he was done with a disk, he stashed it in a black duffelbag in his bedroom closet.

By 2002, the duffelbag held more than five hundred disks, including nearly every major release to have come through the Kings Mountain plant. Glover leaked Lil Wayne’s “500 Degreez” and Jay Z’s “The Blueprint.” He leaked Queens of the Stone Age’s “Rated R” and 3 Doors Down’s “Away from the Sun.” He leaked Björk. He leaked Ashanti. He leaked Ja Rule. He leaked Nelly. He leaked Blink-182’s “Take Off Your Pants and Jacket.”

Glover didn’t have access to big-tent mom-rock artists like Celine Dion and Cher. But his albums tended to be the most sought after in the demographic that mattered: generation Eminem. The typical Scene participant was a computer-obsessed male, between the ages of fifteen and thirty. Kali—whose favorite artists included Ludacris, Jay Z, and Dr. Dre—was the perfect example. For Glover, the high point of 2002 came in May, when he leaked “The Eminem Show” twenty-five days before its official release. The leak made its way from the Scene’s topsites to public peer-to-peer networks within hours, and, even though the album became the year’s best-seller, Eminem was forced to bump up its release date.

Every Scene release was accompanied by an NFO (from “info”), an ASCII-art text file that served as the releasing group’s signature tag. NFO files were a way for Scene crews to brag about their scores, shout out important associates, and advertise to potential recruits. Rabid Neurosis NFOs were framed by psychedelic smoke trails emanating from a marijuana leaf at the bottom:

Team Rns Presents

Artist: Eminem

Title: The Eminem Show

Label: Aftermath

Ripper: Team RNS

192 kbps-Rap

1hr 17min total-111.6 mb

Release Date: 2002-06-04

Rip Date: 2002-05-10

The most important line was the rip date, which emphasized the timeliness of the leak. Kali drafted many of the release notes himself, in a sarcastic tone, often taunting rival releasing groups. “The Eminem Show” NFO ended with a question: “Who else did you think would get this?”

Who was Kali? Glover wasn’t sure, but as their relationship evolved he picked up some clues. Kali’s 818 area code was from the Los Angeles region. The voice in the background that Glover sometimes heard on the calls sounded as if it might be Kali’s mother. There was also the marijuana leaf that served as RNS’s official emblem: Glover thought he could tell when Kali was high. Most striking was the exaggerated hip-hop swagger that Kali affected. He only ever referred to Glover as “D.” No one else called him that.

“He would try to talk, like, with a slang,” Glover told me. “Kinda cool, kinda hard.” Glover suspected that Kali wasn’t black, though he sensed that he probably wasn’t white, either.

Glover was not permitted to interact with the other members of the group, not even the one who served as the “ripping coördinator.” His online handle was RST, and his name was Simon Tai. A second-generation Chinese immigrant, Tai was brought up in Southern California before arriving at the University of Pennsylvania, in 1997. As a freshman with a T1 Internet connection, he’d been in awe of RNS. After hanging around in the chat channel for nearly a year, he was asked to join.

He also applied for a slot as a d.j. at the school’s radio station. For two years, Kali cultivated Tai’s interest in rap music and told him to make connections with the promotional people at various labels. In 2000, Tai, now a senior at Penn, was promoted to music director at the station and given a key to the office, where he had access to the station’s promo disks. Every day, he checked the station’s mail; when something good came in, he raced back to his dorm room to upload it. Beating rival Scene crews was sometimes a matter of seconds.

Tai scored two major leaks that year, Ludacris’s “Back for the First Time” and Outkast’s “Stankonia.” With his Scene credentials established, for the next two years Tai managed RNS’s roster of leakers. Along with Kali, he tracked the major labels’ distribution schedules and directed his sources to keep an eye out for certain albums.

To find the albums, RNS had international contacts at every level, who went by anonymous online handles. According to court testimony and interviews with Scene members, there were the radio d.j.s: BiDi, in the South; DJ Rhino, in the Midwest. There was the British music journalist who went by KSD, whose greatest coup was 50 Cent’s “lost” début, “Power of the Dollar,” scheduled for release in 2000 by Columbia, but cancelled after the rapper was shot. There was DaLive1, a house-music aficionado who lived in New York City, and used his connections inside Viacom to source leaks from Black Entertainment Television and MTV. There were two Italian brothers sharing the handle Incuboy, who claimed to run a music-promotion business and had reliable access to releases from Sony and Bertelsmann. In Japan, albums sometimes launched a week or two ahead of the U.S. release date, often with bonus tracks, and Tai relied on kewl21 and x23 to source them. Finally, there were the Tuesday rippers, like Aflex and Ziggy, who spent their own money to buy music legally the day that it appeared in stores.

The only leaker Tai didn’t manage was Glover—Kali kept his existence a secret, even from the other members of the group. Glover resented the isolation, but being Kali’s private source was worth the trouble. At any given time, global Scene membership amounted to no more than a couple of thousand people. Kali was close to the top. A typical Scene pirate, bribing record-store employees and cracking software, might be granted access to three or four topsites. By 2002, Glover had access to two dozen.

His contacts made him an incomparable movie bootlegger. He built another tower to replace the first, with burners for DVDs instead of CDs. He upgraded his Internet connection from satellite to cable. He downloaded the past few years’ most popular movies from the topsites, then burned a couple of dozen copies of each. Expanding his customer base beyond his co-workers, he started meeting people in the parking lot of a nearby convenience store. Around Cleveland County, Glover became known as “the movie man.” For five dollars, he would sell you a DVD of “Spider-Man” weeks before it was available at Blockbuster, sometimes even while it was still in theatres.

Glover started selling between two hundred and three hundred DVDs a week, frequently making more than a thousand dollars in cash. He built a second PC and another burn tower to keep up with demand. He knew that this was illegal, but he felt certain that he had insulated himself from suspicion. All transactions were hand to hand, no records were kept, and he never deposited his earnings in the bank. He didn’t sell music, DVDs weren’t made at the Universal plant, and he was sure that his customers had never heard of the Scene.

Scene culture drew a distinction between online file-sharing and for-profit bootlegging. The topsites were seen as a morally permissible system of trade. Using them for the physical bootlegging of media, by contrast, was viewed as a serious breach of ethical principles. Worse, it was known to attract the attention of the law. Kali put the word out that anyone suspected of selling material from the topsites would be kicked out of the group. Thus, for most participants membership in RNS was a money-losing proposition. They spent hundreds of dollars a year on compact disks, and thousands on servers and broadband, and got only thrills in return.

Glover was an exception: he knew that he wouldn’t be kicked out of anything. With Universal’s rap acts ascending, Kali needed Glover.

Napster lasted barely two years, in its original incarnation, but at its peak the service claimed more than seventy million registered accounts, with users sharing more than two billion MP3 files a month. Music piracy became to the early two-thousands what drug experimentation had been to the late nineteen-sixties: a generation-wide flouting of both social norms and the existing body of law, with little thought for consequences. In late 1999, the Recording Industry Association of America, the music business’s trade and lobbying group, sued Napster, claiming that the company was facilitating copyright infringement on an unprecedented scale. Napster lost the lawsuit, appealed, and lost again. In July, 2001, facing a court order to stop enabling the trade of copyrighted files, Napster shut down its service.

That legal victory achieved little. Former users of Napster saw Internet file-sharing as an undeniable prerogative, and instead of returning to the record stores they embraced gray-market copycats of Napster, like Kazaa and Limewire. By 2003, global recording-industry revenues had fallen from their millennial peak by more than fifteen per cent. The losing streak continued for the next decade.

The R.I.A.A. tried to reassert the primacy of the industry’s copyrights. But civil suits against the peer-to-peer services took years to move through the appeals courts, and the R.I.A.A.’s policy of suing individual file-sharers was a public-relations disaster. To some at the music labels, Congress seemed disinclined to help. Harvey Geller, Universal’s chief litigator, spent years futilely petitioning legislators for better enforcement of copyright law. “Politicians pander to their constituents,” Geller said. “And there were more constituents stealing music than constituents selling it.”

Leaking was viewed differently. No one was advocating for the smuggler. So album leakers adhered to a rigid code of silence. Scene groups were the source for almost all of the new releases available on the peer-to-peer networks, but most file-sharers didn’t even suspect their existence. Civil litigation against such actors was impossible: unlike Kazaa, RNS did not have a business address to which a subpoena could be sent. Only criminal prosecutions would work.

In January, 2003, Glover leaked 50 Cent’s official début, “Get Rich or Die Tryin’,” to Kali. It became the bestselling U.S. album of the year. He followed that up with albums from Jay Z, G Unit, Mary J. Blige, Big Tymers, and Ludacris, and then began the following year with Kanye West’s début, “The College Dropout.” After a scare, in which Glover worried that a release might be traced to him, the timing of leaks became more and more a point of focus. Glover’s leaks began to hit the Internet about two weeks before the CDs were due in stores, neither so early that the leak could be traced to the plant nor so late that RNS risked being bested by other pirates.

The group’s ascendancy came during a period of heightened scrutiny by law enforcement. In April, 2004, the F.B.I. and foreign law-enforcement agencies conducted coördinated raids in eleven countries, identifying more than a hundred pirates. The R.I.A.A.’s anti-piracy unit was staffed with investigators, who hung around the chat rooms of the Scene and learned its language. They tried to infiltrate the Scene, and tracked the leaked material and its dissemination throughout the Internet. Their research began to point them to one increasingly powerful crew, RNS, and they shared their findings with the F.B.I.

Journalists poked around the fringes of the Scene, too. A December, 2004, article in Rolling Stone, by Bill Werde, introduced RNS to the general public. A photo caption in the piece read, “In a four-day period, one group leaked CDs by U2, Eminem and Destiny’s Child.” The article quoted a source close to Eminem: “The rapper’s camp believes Encore was leaked when it went to the distributors, who deliver albums from the pressing plants to chain stores such as Wal-Mart.”

The information was wrong. The CD hadn’t come from the distributor; it had come from Glover. Three days later, he leaked the U2 album “How to Dismantle an Atomic Bomb.” (Destiny’s Child’s “Destiny Fulfilled” had come from elsewhere.) Facing increased attention, Kali decided to strip the group’s NFO files of potentially identifying information; from now on, they would consist only of the date that the album was ripped and the date that it was due in stores.

Kali ordered the RNS chat channel moved from the public IRC servers to a private computer in Hawaii. He instructed members to communicate only through this channel, which was encrypted, banning methods like AOL Instant Messenger. And he reasserted the prohibition against physical bootlegging. But Glover refused to follow the Scene’s rules. He used I.M. whenever he felt like it, and kept his duffelbag of leaked CDs in his closet. He wasn’t as interested in music anymore, or in earning Brownie points from some Internet group. All he cared about was topsites. The more he could join, the more leaked movies he could get, and the more DVDs he could sell.

In a good week, Glover on his own might sell three hundred disks, and make fifteen hundred dollars in cash. Now he began to branch out. At the beginning of each week, he dropped off four hundred disks at each of three trusted barbershops in Shelby. At the end of the week, he returned to collect his share of the profits—roughly six hundred dollars a week per shop. His best salesman made more selling bootleg movies than he did cutting hair. Seeing the profits Glover was earning, other bootleggers began moving into his territory. But Glover retained a pronounced edge. “I had access to so much stuff,” he said. “No one on the street could beat me.”

Many of Glover’s best customers worked at the plant, and for those he trusted most he devised an even better deal. Rather than paying five dollars per movie, for twenty dollars a month you could buy an unlimited subscription—and you didn’t even need the disks. Glover had set up his own topsite, and once you’d bought an account you could download anything you wanted. There were current DVDs, plus the latest copies of games, music, software, and more. At the time, video on demand was the technology of the future, but, if you knew Glover, it had already arrived. He was running a private Netflix out of his house.

Glover began to make extravagant purchases. He bought game consoles and presents for his friends and his family. He bought a new off-road quad bike, then a second. He bought a used Lincoln Navigator, and upgraded it with xenon headlights, a hood scoop, and an expensive stereo. For years, rappers had favored rims called “spinners”—metal hubcaps on independent bearings, which continued rotating even when the car had stopped. Looking to switch up the game, Glover bought “floaters”: the weighted rims stood still even when the wheels were moving.

In 2005, RNS leaked four of the five best-selling albums in the U.S. The No. 1 and No. 2 slots were occupied by Mariah Carey’s “The Emancipation of Mimi” and 50 Cent’s “The Massacre,” and Glover had leaked them both. RNS leaks quickly made their way onto public file-sharing networks, and, within forty-eight hours of appearing on the topsites, copies of the smuggled CDs could be found on iPods across the globe.

By the end of 2006, Glover had leaked nearly two thousand CDs. He was no longer afraid of getting caught. Universal had sold its compact-disk-manufacturing holdings, which allowed the company to watch the deterioration of physical media from a comfortable distance. Although still on contract to print music for Universal, the new ownership treated the plant like a wasting asset, and stopped investing in maintenance. The musicians signed to Universal complained constantly of album leaks, but the label’s supply chain was as insecure as ever.

Although RNS was still wildly successful, many of its members were tiring of its activities. When the group started, in 1996, most of the participants were teen-agers. Now they were approaching thirty, and the glamour was fading. They outgrew their jobs at college radio stations or found more lucrative fields than music journalism, and lost their access to advance albums.

Listening to hundreds of new releases a year could lead to a kind of cynicism. The musicians all used Auto-Tune to pitch-correct their voices; the songwriters all copied the last big hit; the same producers worked on every track. Glover didn’t connect with rap in the way that he used to. Tony Dockery had been born again, and listened primarily to gospel. Simon Tai still hung around the chat channel, but he hadn’t leaked an album in years. Even Kali seemed a little bored.

Glover had been thinking about retiring from the Scene. He started leaking when he was in his mid-twenties. He was now thirty-two. He had worn the same haircut for ten years, and dressed in the same screen-print T-shirts and bluejeans, but his perception of himself was changing. He didn’t remember why he had been so attracted to street bikes, or why he’d felt it necessary to own a handgun. He found his Grim Reaper tattoo impossibly stupid.

Glover’s DVD profits began to decline. Leaks from the Scene were now publicly available within seconds of being posted to the topsites, and even those who were technologically challenged could figure out how to download them. Within a couple of years, Glover’s income from bootlegging dropped to a few hundred dollars a week.

Glover began to make his feelings known to Kali. “We’ve been doing this shit for a long time,” he said in a phone call. “We never got caught. Maybe it’s time to stop.” Surprisingly, Kali agreed. Though the plant’s security was increasingly loose, the risks for leakers were greater. Between foreign law enforcement, the F.B.I., and the R.I.A.A.’s internal anti-piracy squads, there were multiple teams of investigators working to catch them. Kali understood the lengths to which law enforcement was willing to go. Some of the targets of the 2004 raids were his friends, and he had visited them in federal prison.

Then, in January of 2007, one of RNS’s topsites mysteriously vanished. The server, which was hosted in Hungary, began refusing all connections, and the company that owned it didn’t respond. Kali ordered the group shut down. RNS’s final leak, released on January 19, 2007, was Fall Out Boy’s “Infinity on High,” sourced from inside the plant by Glover.

Dozens of former members flooded into the chat channel to pay their respects. Dockery, logging in as St. James, started changing his handle, over and over, in tribute to former members. “Even if we quit now, I’ll think about it always,” Kali wrote. “I don’t know about you guys, but why keep taking a chance.” Soon afterward, the RNS channel was closed forever.

Within months, Glover was once again leaking CDs from the plant, to a guy he knew as RickOne, a leader in a Scene releasing group called OSC. Though this was no longer as profitable for Glover, his desire for free media was undiminished. “To know that I could be playing Madden two months before the stores even had it—to me, that was heaven,” Glover told me.

Kali wasn’t able to give up, either. After RNS was shut down, he had continued sourcing and leaking albums, attributing the leaks to nonsense three-letter acronyms that bewildered even Scene veterans. In the summer of 2007, he contacted Glover and told him that there were two more leaks they had to have: new albums by 50 Cent and Kanye West, both with the same release date. The rappers were competing over whose album would sell more copies, and the feud had made the cover of Rolling Stone. 50 Cent said that if he didn’t win he would retire.

But, as Kali probably knew better than anyone, both artists were distributed and promoted by Universal. What looked like an old-school hip-hop beef was actually a publicity stunt designed to boost sales, and Kali was determined to get involved. RNS had leaked every release the artists had ever put out, and going after 50’s “Curtis” and Kanye’s “Graduation” was a matter of tradition.

The official release date was September 11, 2007, but the albums were first pressed at the plant in mid-August. Glover obtained them through his smuggling network and listened to both. “Graduation” was an ambitious marriage of pop rap and high art, sampling widely from sources as diverse as krautrock and French house music, with cover art by Takashi Murakami. “Curtis” played it safer, favoring hard-thumping club music anchored by hits like “I Get Money” and “Ayo Technology.”

Glover enjoyed both albums, but he was in an unusual position: he had the power to influence the outcome of this feud. If he leaked “Graduation” and held on to “Curtis,” Kanye might sell fewer records. But if he leaked “Curtis” and held on to “Graduation”—well, he might make 50 Cent retire.

Glover decided that he would release one album through Kali and the other through RickOne. He offered RickOne the Kanye West album. On August 30, 2007, “Graduation” hit the topsites of the Scene, with OSC taking credit for the leak. Within hours, an anguished Kali called Glover, who told him that he wasn’t sure how it had happened. He said that he hadn’t seen the album at the plant yet. But, he said, “Curtis” had just arrived. On September 4, 2007, Kali released “Curtis” to the Scene.

Universal officially released the albums on Tuesday, September 11th. Despite the leaks, both sold well. “Curtis” sold almost seven hundred thousand copies in its first week, “Graduation” nearly a million. Kanye won the sales contest, even though Glover had leaked his album first. He’d just run a controlled experiment on the effects of leaking on music sales, an experiment that suggested that, at least in this case, the album that was leaked first actually did better. But Glover was happy with the outcome. “Graduation” had grown on him. He liked Kanye’s album, and felt that he deserved his victory. And 50 didn’t retire after all.

On Wednesday, September 12th, Glover went to work at 7 P.M. He had a double shift lined up, lasting through the night. He finished at 7 A.M. As he was preparing to leave, a co-worker pulled him aside. “There’s someone out there hanging around your truck,” he said.

In the dawn light, Glover saw three men in the parking lot. As he approached his truck, he pulled the key fob out of his pocket. The men stared at him but didn’t move. Then he pressed the remote, the truck chirped, and the men drew their guns and told him to put his hands in the air.

The men were from the Cleveland County sheriff’s office. They informed Glover that the F.B.I. was currently searching his house; they had been sent to retrieve him.

In his front yard, half a dozen F.B.I. agents in bulletproof vests were milling around. Glover’s door had been forced open, and agents were carting away the thousands of dollars’ worth of technology purchases he’d made over the years. He found an F.B.I. special agent named Peter Vu waiting for him inside.

Vu, a veteran of the bureau’s computer-crimes division, had spent years searching for the source of the leaks that were crippling the music industry. His efforts had finally led him to this unremarkable ranch house in small-town North Carolina. He introduced himself, then began pressing Glover for information. Vu was particularly interested in Kali, and Glover gave him the scattered details he had picked up over the years. But Vu wanted Kali’s real name, and, although Glover had talked on the phone with Kali hundreds of times, he didn’t know it.

The next day, Kali called Glover. His voice was agitated and nervous.

“It’s me,” Kali said. “Listen, I think the Feds might be onto us.”

Vu had anticipated the possibility of such a call and had instructed Glover to act as if nothing had happened. Glover now had a choice to make. He could play dumb, and further the investigation of Kali. Or he could warn him off.

“You’re too late,” Glover said. “They hit me yesterday. Shut it down.”

“O.K., I got you,” Kali said. Then he said, “I appreciate it,” and hung up.

In the next few months, the F.B.I. made numerous raids, picking up RickOne, of OSC, and several members of RNS. They also found the man they believed to be Kali, the man who had cost the music industry tens of millions of dollars and transformed RNS into the most sophisticated piracy operation in history: Adil R. Cassim, a twenty-nine-year-old Indian-American I.T. worker who smoked weed, listened to rap music, and lived at home in the suburbs of Los Angeles with his mother.

On September 9, 2009, Glover arrived at the federal courthouse in Alexandria, Virginia, and was indicted on one count of felony conspiracy to commit copyright infringement. At his indictment, Glover saw Adil Cassim for the first time. Cassim was clean-shaven and wore his hair cropped short. He was stocky, with a noticeable paunch, and was dressed in a black suit.

A month later, Glover pleaded guilty to the charge. The decision to plead was a difficult one, but Glover thought that his chances of acquittal were poor. In exchange for sentencing leniency, he agreed to testify against Cassim. The F.B.I. needed the help; the agency had thoroughly searched Cassim’s residence, and a forensic team had inspected his laptop, but they had found no pre-release music. Cassim did not admit to being a member of RNS, though two pieces of physical evidence suggested a connection to the group. One was a burned compact disk taken from his bedroom, containing a copy of Cassim’s résumé, on which, in the “Properties” tab, Microsoft Word had automatically included the name of the document’s author: Kali. The second was Cassim’s mobile phone, which contained Glover’s cell number. The contact’s name was listed only as “D.”

Cassim’s trial began in March, 2010, and lasted for five days. Glover testified, as did several other confessed members of RNS, along with a number of F.B.I. agents and technical experts. In the previous ten years, the federal government had prosecuted hundreds of Scene participants, and had won nearly every case it had brought. But on March 19, 2010, after a short period of deliberation, a jury found Cassim not guilty.

After the trial, Glover began to regret his decision to testify and to plead guilty. He wondered if, with a better legal defense, he, too, might have been acquitted. He’d never been sure exactly what damage leaking music actually caused the musicians, and at times he seemed to regard it as something less than a crime.

“Look at 50 Cent,” he said. “He’s still living in Mike Tyson’s house. Ain’t nobody in the world that can hurt them.” He continued, “It’s a loss, but it’s also a form of advertising.” He paused. “But they probably lost more than they gained.” In the end, Glover served three months in prison. (Tony Dockery also pleaded guilty to conspiracy to commit copyright infringement, and spent three months in prison. Simon Tai was never charged with any wrongdoing.)

In their sentencing guidelines, the attorneys for the Department of Justice wrote, “RNS was the most pervasive and infamous Internet piracy group in history.” In eleven years, RNS leaked more than twenty thousand albums. For much of this time, the group’s best asset was Glover—there was scarcely a person younger than thirty who couldn’t trace music in his or her collection to him.

On the day that Glover’s home was raided, F.B.I. agents confiscated his computers, his duplicating towers, his hard drives, and his PlayStation. They took a few pictures of the albums he’d collected over the years, but they left the duffelbag full of compact disks behind—even as evidence, they were worthless. ♦

Revenge Of The Record Labels: How The Majors Renewed Their Grip On Music

April 16, 2015

Zack O’Malley Greenburg and Nick Messitte   04/15/15

While Jay Z’s streaming service gets headlines, music’s majors have quietly coopted the multibillion-dollar digital revolution. Photo by Stephen Webster for Forbes. Story by Zack O’Malley Greenburg and Nick Messitte.

Last October SoundCloud–a free music-streaming service with a massive 175 million monthly users–appeared to be running out of cash. News broke that the Berlin-based company had lost $29.2 million in 2013, and when a rumored $2 billion buyout bid by Twitter fell through, it looked like music’s hottest startup might be in danger of going bust.

Then something strange happened: Warner Music Group became the first major record label to strike a licensing deal with SoundCloud, instantly legalizing scores of songs posted to the service. More surprisingly, Warner acquired up to 5% of the company, adding to funding that’s passed $120 million; the company is now valued at over $1.2 billion.

Yet despite the credibility they bestowed on each other, Warner and SoundCloud have largely eschewed talking about the partnership–neither side would comment to FORBES–and have zealously guarded the terms. Why? A source with knowledge of the agreement says the record company acquired its SoundCloud stake at a discount of about 50% from what other investors paid. And such details illustrate a quiet revolution in digitization of the music industry that all sides seem to prefer go unnoticed .

Left for dead by most investors and pundits, the surviving Big Three labels–Warner, Universal and Sony–have quietly muscled out stakes of the hottest digital entertainment startups, including 10% to 20%, collectively, of the established streaming services, such as Spotify and Rdio. Terms are similarly stark for younger startups: The labels take stakes for free or on the cheap, and then often give themselves the right to buy larger chunks at deep discounts to market later on. It’s not just streaming: The labels have gobbled up pieces of startups ranging from choose-your-own-adventure music video purveyor Interlude to song-recognition giant Shazam–valued at $1 billion in its latest round–which counts Carlos Slim, the second-richest man in the world, among its investors.

And what have the labels been giving the startups, aside from legitimacy, to secure these sweetheart deals? All-encompassing access to the artists and their songs–a neat little trick. Sure, the artists derive some minimal amount of royalties from these new channels, but they aren’t getting any of the ownership.

“That’s the story of the music business,” says John Oates, one-half of Rock and Roll Hall of Fame duo Hall & Oates, who went independent almost 20 years ago amid frustration over their financial arrangements with labels. “It goes back to the earliest days–take it back to, ‘Give him a bottle of wine and take all his publishing for the rest of his life.’ “

The artists are starting to fight back–and not just by opting out of the system. Earlier this year Jay Z purchased Swedish high-resolution-streaming services WiMP and Tidal for $56 million, merging them into a single service to compete directly with Spotify. At the official launch 16 of music’s biggest acts were introduced as the new “owners” of Tidal, including Beyoncé, Calvin Harris, Kanye West, Alicia Keys, Jason Aldean and Daft Punk. Each was reportedly offered a 3% stake.

Representatives from all three major labels–as well as Beats, Spotify and Rdio–declined or did not respond to requests for a comment on whether or not the majors demanded free or cheap equity in streaming companies as part of the price of doing business. But in industry circles, the practice is an open secret.

FORBES estimates that the three labels have amassed positions in digital music startups valued at almost $3 billion–or around 20% of the $15 billion or so the labels are collectively worth. The percentage will shoot even higher if and when Spotify goes public. And some bets have already paid off: Universal Music Group took an early position in Beats by Dr. Dre and owned 13% when Apple bought the company for $3 billion last year, resulting in a $404 million score. Artists + leverage = digital windfall. That’s the kind of math, applied across all their revenue models, that the labels hope puts them back atop the musical food chain.

To understand the urgency the labels feel, it’s helpful to walk through what they’ve endured. Total U.S. album sales peaked at 785 million in 2000–the year after a pair of teenagers named Shawn Fanning and Sean Parker created Napster, which allowed anyone with a computer and a reasonably fast Web connection to trade music.

By 2008 annual album sales had plummeted 45%. Between then and now, even as the labels reined in illegal downloading, sales dropped another 40% to 257 million. That means, at $15 per album, the industry is currently taking in $7.9 billion less in annual retail sales than it was a decade and a half ago. Initially, the labels’ response was to fight piracy in court and to fold into one another. There were six majors in 1999; now there are three.

Apple provided a respite. Selling billions of 99-cent songs on iTunes gave labels a few years to catch their breath as the streaming revolution approached. Now, as the MP3 heads the way of the eight-track tape, it seems the labels have learned from their mistakes. Led by Warner’s new billionaire owner, Len Blavatnik, Universal CEO Lucian Grainge and Sony’s music chief, industry veteran Doug Morris, the majors have figured out that it’s smarter to bully their way into companies seeking to eat their lunch rather than perpetually try to sue them, Whac-A-Mole-style, out of existence.

So far two dominant streaming models have emerged: Internet radio companies like Pandora that allow subscribers to passively listen to music that’s customized for their tastes and interactive ones like Spotify that allow users to pick songs.

The former can operate under a government-mandated license that dictates how much they have to pay. By contrast, Spotify and others must strike deals with labels and publishers in order to license music for legal use in the U.S.

One insider says YouTube alone paid the majors more than $1 billion in advances over the past two years. Spotify pays out about 70% of its revenue–at a rate of 0.7 cents a spin–to labels and publishers, who then pass along a small fraction to their artists and songwriters.

These arrangements offer labels another way to leverage their artists to make money from digital streaming: arbitrage. The formula for how much Pandora, YouTube and Spotify pay the labels isn’t related to the formula that the labels use to pay the artists whose songs are played. The latter is determined by a combination of individual contracts and a structure so byzantine that it goes by a moniker only a secretive hedge fund quant could love: the “black box.”

So how do the labels make money from the spread? Let’s understand the concept of “breakage.” The labels generally ask for digital partners to front an advance, not unlike how they worked with the record clubs of yesteryear. When a contract expires, there’s often a difference between the royalties earned and the initial advance. The labels generally keep that difference. When the labels re-negotiate, it’s with entities in which they hold significant stakes, ensuring the same rules apply all over again.

The black box has many other ways to squeeze money from the artist. For example, “Drunk in Love” is undoubtedly a hit single performed by Beyoncé and Jay Z–but it exists under many different names (“Drunk in Love” by Various Artists, by Beyoncé feat. Jay Z, etc.). In cases of mislabeling, royalties don’t typically go to music’s royal couple but rather a pool of unclaimed cash eventually doled out to the labels at a rate commensurate with their market share.

And while U.S. laws exempt broadcasters from paying out royalties on the recording side, foreign laws often do not. When an American act scores a hit in the U.K., it’s not clear how often the U.K. label pays through to the U.S. label and performer. FORBES estimates that labels are collecting $300 million worth of putatively “unattributable” money each year.

“By not having great data and not having a worldwide database,” says John Simson, who used to run SoundExchange, a nonprofit trade association responsible for collecting artist and label royalties on digital transmissions, “it just makes it easier for money to go to the black box.”

Labels have also increasingly used their leverage to get a piece of concert revenue. This is relatively new: Historically, touring was often a loss leader to boost album sales. Now that it’s reversed–most of the profit in the music industry comes from live shows–the majors take a piece of the profit in exchange for their promotion and marketing for the acts overall. These so-called 360 deals date back to the days of the Monkees and became prevalent when Live Nation started shelling out nine-figure advances to the likes of Jay Z and Madonna (both now stakeholders in Tidal) for such arrangements about a decade ago.

These days 360 deals are mostly reserved for young acts with little leverage; under such an agreement they typically give up 10% to 20% of what they net on shows to the label. Of course, these sorts of heavy-handed tactics have existed since the early days of the phonograph. Thomas Edison himself founded Edison Records–and refused to even print artists’ names on his products, let alone pay transparent rates.

The difference is that artists now have choices. Most of them rail about the system–and then buy in anyway. But some put their money where their mouth is and go their own way. Taylor Swift owns a piece of her label, Big Machine Records, and she pulled herself off Spotify after a reported dispute over her fees (months later she agreed to put her music on Jay Z’s Tidal). Hanson puts out its own albums, cuts it own deals and books its own shows. “We have a really good 360 deal,” says Isaac Hanson, one of the three famous brothers in the group, “with ourselves.”
Music Mavericks: Making Money Without The Majors

Alternative rocker Amanda Palmer took to crowdfunding to finance her last studio album–she raised a record-setting $1.2 million on Kickstarter in 2012. “I’ll probably make enough money on Spotify to buy me a sandwich,” she says. “[But] I don’t think you can put this genie back in this particular bottle. I think you’re better off trying to cope with the reality instead of pretending that the reality doesn’t exist.”

Even by coming up with new takes on old tricks and accumulating pieces of popular streaming services, the majors still have a rough road ahead: Universal and Warner recently reported quarterly revenues that were flat or down on a year-over-year, constant-currency basis. Sony Music’s revenues were up 13% thanks to releases by Garth Brooks, One Direction and Pink Floyd–and the favorable depreciation of the yen against the dollar. In some cases their startup stakes are held by the label’s parent companies, so positive results wouldn’t necessarily show up on the same balance sheet–but for the most part streaming services aren’t yet in the black anyway.

That may change as usage scales up. According to MusicWatch’s Russ Crupnick, in 2013 only 45% of the 190 million Internet users in the U.S. bought music in any form, spending an average $55.45 per year. A full year of premium service on Spotify or Rdio (or Tidal) costs $120.

“It’s a mathematical case,” says Robb McDaniels, founder and former CEO of INgrooves, which handles digital distribution for Universal Music Group (and is now partly owned by it). “If everyone signed up, the pot would be many times as big. So that’s actually good for artists. The key is, we have to get the average music consumer to sign up instead of just the early adopters.”

Spotify is making steady progress–as of January 2015 it had 60 million active users, 15 million of whom were paying for the premium version; both these numbers are up about 150% from March 2013. And the company doesn’t need to be profitable to go public: In the event that it does, the labels will likely share a windfall in excess of $1 billion. The per-spin payouts may continue to grow, but there will be no pro rata share of an IPO jackpot going back to the artists and songwriters who made the music responsible for the company’s rise.

Though, tellingly, none of the majors was willing to comment for this story, their executives have been transparent enough about their intentions. In a memo laying out goals for his company in 2015, Universal Chief Grainge expressed a desire for the company to “be a formative player in shaping and developing the music platforms of tomorrow.” By looking forward, while squeezing the models of the past, the record label seems to be on its way to avoiding extinction.

US streaming revenues overtake CD sales

April 14, 2015

Matthew Garrahan 3/18/15

Streaming music services such as Spotify have eclipsed CD sales and are closing in on digital downloads as the largest source of revenue in the music industry’s biggest market, according to new data from the Recording Industry Association of America.

US revenues from subscription streaming brands such as Spotify and Rhapsody and streaming radio services including SiriusXM hit $1.87bn in the US in 2014, a 29 per cent increase on 2013 and equivalent to 27 per cent of total music industry revenues.

Sales of CDs slipped 12.7 per cent to $1.85bn, even as the decline in total sales of physical formats was cushioned by the renaissance of vinyl records, which accelerated in 2014, with a near 50 per cent jump in sales of LPs to $315m.

Downloads have been the US music industry’s largest source of digital revenue for a decade but they peaked in 2012 and have been in decline ever since. In 2014 download revenues fell 8.7 per cent to $2.58bn, equivalent to 37 per cent of total industry revenues.

“The music business continues to undergo a staggering transformation,” said Cary Sherman, chairman and chief executive of RIAA. “Record companies are now digital music firms, earning more than two-thirds of their revenues from a variety of digital formats.”

The growth of streaming has sparked a new power struggle in music between the creators of music and the companies that distribute it. Taylor Swift, pictured above, pulled her music from Spotify late last year following a dispute about its free service, which it uses to attract paying users.

Music labels such as Universal Music Group are also pushing for the company to amend its free tier because they think it is overly generous and is not converting enough users into paying subscribers. Spotify, meanwhile, has insisted that the free service is an essential and necessary marketing tool.
Chart: US streaming and permanent download revenues
Income from advertising-supported free streaming grew slightly in 2014 to $295m in the US and continues to represent a relatively small proportion of industry revenues, compared with downloads. However, revenues from streaming radio services, such as Pandora — which are collected and distributed by SoundExchange, the digital rights agency — grew sharply from $590m to $773m.

All physical music sales together — including CDs, vinyl and music videos — slipped below a third of the industry’s total revenues for the first time, falling from 35 per cent to 32 per cent.

Across the US music industry, retail revenues were flat for the fifth year in succession at $6.97bn.

US takes first step towards paying artists for radio play

April 14, 2015

Tim Ingham 4/14/15

US Congressman Jerrold Nadler and Marsha Blackburn yesterday introduced the Fair Play, Fair Pay Act of 2015 – which seeks to impose a performance right that would see artists and labels paid when their tracks are played on AM/FM radio.

Songwriters are currently paid when their tracks are broadcast on traditional radio, but performers are not – setting the US apart from almost every developed nation in the world.

Confusingly, artists are paid in the country – via SoundExchange Collections – when their tracks are played on personalised digital radio such as Pandora, and satellite radio such as Sirius XM.

The Fair Play, Fair Pay Act of 2015 seeks to correct what its supporters consider three ‘significant injustices': the establishment of a sound recording royalty for AM/FM radio, removing satellite radio’s below-market-rate exemption, and treating pre-1972 recordings with the same level of respect as those made after February of 1972.

However, the Act faces a lengthy fight if it’s to be enshrined in law. The next key legislative steps would be having the bill considered in the House Judiciary Committee either with a hearing on the issues or through a vote. The Senate will also need to consider the bill, but at this point it has not been introduced there yet.

The next step for the Fair Play Fair Pay lobby is grassroots mobilising and putting pressure on Congress.

However, it faces fierce opposition from the radio trade body the National Association of Broadcasters. The NAB is strongly lobbying against the FPFP act with its own ‘Local Radio Freedom Act’, while claiming that any measure to force radio to pay artists and labels would devastate local stations.

Music First, a collective of artist representatives who have been calling for Fair Play, Fair Pay said in a statement: “Thanks to Reps. Nadler and Blackburn, we stand at the doorway of an incredible opportunity – a once-in-a-generation chance to make radio work better for music creators, radio services, and, most importantly, music fans.

“It is time for Congress to update music licensing laws. AM/FM radio, satellite radio and Internet radio exist side by side in car dashboards and compete for the same listeners. But whether performers and copyright owners are paid, and how much, depends solely on what button you press or app you choose. On Internet radio, it is one rate. On satellite, it is a different, lower rate. And on AM/FM, there is no rate at all – music creators get paid nothing. I think that we can all agree that makes no sense.

“Now, some digital services are claiming they don’t have to pay for pre-72 recordings. Several court decisions have already dismissed this absurd claim.

“The solution: all radio services should pay under the same ‘fair market value’ royalty standard for all of the music they play. Like everyone else who works, creates, or innovates, music creators deserve fair pay for their work.

“It’s a question of basic economic fairness, but it is also a matter of fair competition between music services. No more special privileges for old technologies. No more giveaways. No more special interest exemptions and subsidies. No more picking winners and losers among radio platforms. Let the best services win – fair and square, on the depth of their playlists and the quality of their products.

“Fair market value for music will encourage creativity by music creators. It will promote innovation among music services. And – most importantly – it will give fans the best music they have ever heard – delivered in the most exciting ways they could ever imagine.”

And Michael Huppe, president and chief executive officer of SoundExchange said: “For decades, music services have gotten away with building their business on the backs of hard working musicians, paying unfair rates — and in the case of the $17.5 billion radio industry, paying nothing at all — for the music they use. The Fair Play Fair Pay Act introduced today will bring much needed reform to the music industry and addresses many of the issues that plague the recorded music industry.

“It is time that we properly pay the artists who put so much hard work into creating the music at the core of these services. If it weren’t for them, these stations would be broadcasting little more than static.

“At the nexus of music and technology, SoundExchange is at the very center of the industry, representing the entire record music industry. In June 2014, we testified before Congress and laid out SoundExchange’s guiding principle: all creators should receive fair pay, on all platforms and technologies, whenever their music is used. This past February, the Copyright Office put out a comprehensive report that laid out a similar principle and today we have a bipartisan coalition in Congress heeding the same call.”

The Fifth Man: Brian Epstein and the Beatles

April 13, 2015

Michael Beschloss 4/10/15

In a ceremony last year at the Barclays Center in Brooklyn, the Beatles’ original manager, Brian Epstein, was inducted into the Rock and Roll Hall of Fame.

The honor was well deserved. Epstein’s early oversight of what many consider to be the most popular musical act of the 20th century led some to call him the fifth Beatle. Some of the strategies he used to propel the Beatles to prominence (while also probably costing them a fortune in lost potential revenue) would be ill suited to today’s world of digital streaming, music piracy and YouTube, which makes Epstein a case study in how much music management has changed since the early 1960s
Epstein was born in Liverpool in 1934 to Harry and Queenie Epstein, who were of Eastern European Jewish origin; they owned a group of stores that sold furniture, appliances and records. Brian Epstein was worldly, elegant and eager to escape the bonds of the family business. Having dropped out of London’s Royal Academy of Dramatic Art and living again in Liverpool, he decided one day to see John Lennon, Paul McCartney, George Harrison and their then drummer, Pete Best, performing in the dank Cavern Club. It was November 1961.

Impressed by “their music, their beat and their sense of humor onstage,” Epstein soon decided that the Beatles would be “the biggest in the world.” He later said, “My own sense of inferiority and frustration evaporated with the Beatles because I knew I could help them.”

His prospective clients were little known beyond Liverpool and Hamburg, West Germany, where they also performed, and they were flattered that Epstein, the local scion, whom Harrison called a “very posh, rich feller,” would take an interest in them. As quoted in Mark Lewisohn’s 2013 history of the early Beatles, “Tune In,” Lennon later said, “We were always waiting for the big man with a cigar.”

In 1962, the Beatles, now with Ringo Starr as drummer, signed contracts that put Epstein, 28 that year, in command. Unlike today’s top entertainment managers, who often have training in business and law, Epstein was a neophyte who relied on his own strong instincts to shape the group’s image. He told them to stop smoking, eating and swearing during performances, made them bow together onstage and got them similar haircuts, mohair suits and neckties. Leather jackets and jeans were prohibited.

Lennon said, “I’ll wear a bloody balloon if somebody’s going to pay me.” Epstein had put the Beatles on the ladder to world renown. Using his relationships with higher-ups at London record labels — his family’s stores were important customers — he got the Beatles a deal with EMI’s Parlophone Records.

Epstein was also a shrewd marketer. In late 1963, he flew to New York and told Ed Sullivan, who had seen the Beatles being mobbed in London, that when they began their first American tour that winter, he would allow them to appear on Sullivan’s enormously popular Sunday-night television show on CBS (in exchange for expenses and a relatively modest fee) only if they received top billing. Epstein’s vision of what the Beatles could achieve helped move their concerts from theaters and auditoriums to sports arenas like Shea Stadium in New York, paving the way for other groups to do the same

In other areas of Beatles management, however, Epstein was out of his depth. Eschewing the kind of legal help a modern manager would secure, he unwisely allowed majority control of copyrights and royalties to pass to others, causing Mr. McCartney and Mr. Lennon to lose ownership of their classic songs.

Some of Epstein’s missteps also cost the Beatles merchandising arrangements for commercial use of their names and images that might have earned them millions of dollars. As Debbie Geller reported in her 2000 book, “In My Life: The Brian Epstein Story,” Mr. McCartney gave Epstein the benefit of the doubt, explaining, “British people didn’t know that stuff at that time.” Mr. McCartney added, “I think he looked to his dad for business advice, and his dad really knew how to run a furniture store in Liverpool.

After an August 1966 performance at Candlestick Park in San Francisco, the Beatles said goodbye to the public spectacles that Epstein had staged with such skill, deciding instead to concentrate on studio work. By 1967, the Beatles’ world had expanded far beyond Brian Epstein — or any one impresario — and he knew it.

An expert at planning events that encouraged mob scenes and screaming fans, he was not as valuable in the studio and was less at home with the otherworldly strains of the group’s 1967 “Sgt. Pepper’s Lonely Hearts Club Band” and its new infatuation with the Maharishi Mahesh Yogi.

By then, an anxious Epstein was predicting to friends that the Beatles would not renew his management contract. He took refuge in gambling and drugs and is said to have scrawled suicide notes. In August 1967, at age 32, he was found dead in his bed in London. A coroner ruled that he had died of an “incautious self-overdosage.” The New York Times reported that in the future, the Beatles would “manage themselves.” Three years later, they broke up.

In our own time, YouTube and social media mean that talented musicians do not necessarily require a gifted alchemist like Epstein to pull them up from oblivion. But with a half-century of hindsight, it is more obvious than ever that the Beatles could never have reached their full potential without the help of Epstein or someone like him.

In 2013, a best-selling graphic novel called “The Fifth Beatle” focused on Epstein’s importance to music history and his struggles with being gay at a time when his country deemed his sexual orientation illegal. (English law was changed in 1967.) At least one feature film on Epstein is reportedly in development. People may not buy many 33 r.p.m. albums anymore, but Brian Epstein lives on.

Why Country Rules the Airwaves: Chronicling the Genre’s Continuing Moment

April 2, 2015

Jeffrey Marlow 3/29/15

The brief walk from dressing room 9 to the stage of Nashville’s Grand Ole Opry takes about 20 seconds, but passes decades of country music’s most prized heritage. There’s the photo of Dolly Parton with Paul McCartney, next to the piano Richard Nixon played and just down the hall from the “duets” room inspired by Johnny and June. On this autumn evening, you might bump into bluegrass legend Ricky Skaggs, Marty Stuart, or the Riders in the Sky, decked out in Stetsons and fringed western shirts. It’s a walk down memory lane here in country music’s home church, a study in nostalgia and past glory.

But the spunky, kinetic Hunter Hayes brings a new energy to the scene, and as he takes the stage at 9 PM, a gaggle of young fans – perhaps oblivious to the musical history infusing this space, perhaps not – reflexively unsheathe their iPhones. Hayes’s performance is in many ways emblematic of country’s new wave, a movement that has seen the genre rise to a new level of national popularity while attempting to navigate the tension between a rapidly changing demographic – of performers, songwriters, and fans – and a longstanding embrace of tradition.

It wasn’t inevitable that country music would thrive in the globalized world of perpetual Facebook updates, a world whose frenetic pace can be felt in electronica, or whose nouveau riche aspirations are extolled in hip-hop. In fact, the co-occurrence of spiraling technological advances and the continued rise of the country genre – which traditionally has valued more off-the-grid sensibilities – seems almost paradoxical. In what is an increasingly impressive balancing act, the country music industry has straddled the line between tradition and novelty, avoiding Luddite instincts while preserving the social structure and sense of comfort that has resonated in the heartland for decades.

To understand the industry’s challenging bargain with technology – a force that can spread the genre further than ever and exert the cultural pressure to leave it behind – I spent a fast-paced Nashville night with some of the city’s most influential talents.

But first, there was a more immediate problem: some sign-wielding teenage girls were standing in the middle of the road

Opryland Drive takes the talent from the Briley Parkway to the backstage entrance to the Opry, and some of Hayes’ superfans have set up shop to get a glimpse of their idol. Bedazzled signs profess their love, and some sort of choreographed welcome dance is taking shape. But once it becomes clear there is no Hunter Hayes in this rented Impala, we gain entrance to the parking lot.

An hour before show time, the Opry’s Marketing Director Dan Rogers guides my photographer Connor and I around the backstage area – part museum, part living room – while tracing the institution’s history. To Rogers, technological developments have always been a part of the show that began in the early 1920s and helped launch Nashville toward its title of “Music City.” “This all started when AM radio was a new technology, and the Opry really embraced that,” he explains, as guitars and wardrobe racks glide by. As an early adopter of AM radio methods, the Opry helped bolster and legitimize the technology. Indeed, the novelty of delivering live music to millions of living rooms kick-started the show’s popularity, and Rogers maintains that the show remains an early adopter of marketing and distribution platforms. “We certainly embrace today’s technology”, he says, “with our own Youtube channel, iphone app, and satellite radio station.” Of course, the in spirit of tradition that defines the industry, the show can also still be heard on 650 AM, WSM.

The live production itself, which for much of the year takes place several times per week, is a well-oiled machine. As the curtain rises, sound engineer King Williams gets to work in the monastic control room at the back of the auditorium. He spins knobs and slides dials with practiced finesse, following pre-determined cues from the performers to spotlight the steel guitar here, the banjo there. With 80 sound inputs coming from the stage to his ears, Williams determines what the in-house speakers will amplify and, by extension, what the audience will hear. The output takes into account the sonic idiosyncrasies of the cavernous concert hall, which may not be ideal for a car stereo or a living room. A separate control room mixes and distributes sound for the radio and streaming broadcasts.

The whole set-up is the inverse of the typical “gold-plated” approach – show business’ instinct to reveal only the shiniest, flashiest features regardless of (or perhaps because of) the talent behind the act. Instead, Williams manipulates top-of-the-line equipment in a hermetically sealed back room while the audience watches the action taking place on a flimsy facsimile red barn stage. The artifice isn’t needed to convince you that you’re watching a world-class concert; it’s there to convince you of the opposite, that you’ve just happened across a jam session at your local barn.

Outside the well-appointed dressing rooms, I put the question of Nashville’s recent rise to Rogers. His response is surprisingly specific. “The summer of 2010,” he says with conviction, “is what did it.” In the throes of historic flooding – an iron bar four feet off the floor marks the high water mark backstage – “the city really came together.” From May to September that year, Rogers and the rest of the Opry production team took the show on the road, moving around town with the iconic mic stands and a show-must-go-on vaudevillian air. The relentless waters damaged millions of dollars’ worth of equipment and music-oriented infrastructure, and the crisis precipitated a soul-searching re-evaluation of the industry’s purpose. In Rogers’ estimation, a focus on wholesome, community-oriented material and a scale back of internecine squabbling struck a chord not only within the regional flood-ravaged community, but also nationwide, as the recession hit a fever pitch. “When things came back online, it was the spark that launched this town on its current rise, I think. A real phoenix rising from the ashes sort of thing.”

Several years later, Nashville is a city transformed. Connor and I geared up for our concert-laden night with some single origin espresso at a café in hipsterville East Nashville, a neighborhood previously considered unsavory. Forbes declared the Nashville area as the 6th most promising city for job development, Google recently announced its intention to bring its high-speed fiber-optic network to the city, and Outside Magazine has praised its bike lanes and trail system.

The prevailing strains of country music have also continued to evolve in the years since the flood: the “bro country” trend has taken off (complete with the requisite backlash), while tendrils reach laterally into hip-hop (Florida Georgia Line’s “Cruise” collaboration with Nelly) and pop (Taylor Swift, Sam Hunt). Even “traditional” country sounds a lot different from Garth Brooks and George Strait, as younger artists like Hayes flavor twang-free, crossover-ready melodies with instruments like the mandolin, banjo, and pedal steel.

Nonetheless, Hayes, for one, still identifies as a country artist. “Absolutely. Country is home to me,” he says, shortly before his performance. (The standard Opry show includes a handful of artists; Hayes is headlining this evening with a four-song set.) Commercial radio wouldn’t disagree, but the 24 year-old’s 21st century life, with his Facebook, tumblr, and Instagram posts, is a far cry from the ranch-owning Lyle Lovett. The tools of the wildly popular modern country trade are unmistakably Millennial. Hayes did all of the songwriting for his breakthrough album on his smartphone, and of his most recent release, “Storyline”, he recalls that “half of the record was done on the bus, it’s mind-boggling that we can do that.”

The relentlessness of modern stardom is a selective trait – if you couldn’t handle it, you wouldn’t be asked to – but Hayes acknowledges the trade-offs. “It changes the way your life is lived,” he says, “in relationships, in keeping in touch with the world – you feel things so much more dramatically because they happen at such a fast pace

As Hayes bounces and bops to the outro of his encore, Connor and I peel out of the Opry parking lot, the GPS set for the Bluebird Café. This unassuming venue occupies several hundred square feet in a suburban strip mall; its “locals-in-the-know” charm was blown up when the ABC show “Nashville” made it a centerpiece of its dramatic machinations. Tonight, several local songwriters are performing the hits they’ve penned.

It’s packed; my chair is millimeters from Shane McAnally, who gets through “American Kids”, one of Kenny Chesney’s latest hits, despite a nudge as I reposition to let a waitress past. It’s an intimate family atmosphere, with the witty repartee and knowing barbs of friends who can crack a joke while writing a song about a marriage gone terribly wrong. The quartet takes turns, referring to their famous benefactors on a first name basis: “This is my latest for Miranda [Lambert],” says Natalie Hemby before jumping into “Priscilla”; “Jake [Owen] ended up recording this one,” says Jimmy Robbins of “Beachin’”.

These 30-somethings are the real tastemakers – it’s their words, informed by their lifestyles, that are heard by the tens of millions listening to country radio or watching YouTube videos. For Hemby, modern tools of the trade have made the creative process smoother, if not radically different. “It’s much easier to write – even simple things like using a thesaurus or dictionary online – or getting a rough sense of a melody you’re writing,” she says. It’s also easier to see where your incipient song fits into the larger sonic landscape, by cross-referencing past song titles or chord progressions; doing these sorts of checks on the front end, before resources have been poured into the production, will likely become increasingly important in the wake of the “Blurred Lines” ruling. Luke Laird, another decorated songwriter who’s worked with the industry’s top talents, finds that user-friendly tools have degraded technological barriers and allowed him to fulfill several links in the production chain. With a few programs on his computer, Laird can mix and edit a demo, something that might have taken several people with distinct skill sets a decade ago. “It gives me more control of the demo,” he says, “so I can tailor it to certain artists or managers I might have in mind for the song.”

Despite the improved efficiency of the writing process, there are artistic downsides to the proliferation of technology and the globalized marketing it facilitates. “Sometimes it makes untalented people suddenly talented,” Hemby explains. “It takes away the natural gift that some people have and puts them in competition with people who maybe really aren’t that great. Autotune has come a long way, even I can’t always tell.” Laird finds that the commercial prioritization of mass-appeal hits has sanitized the airwaves and purged the industry of personality, a concern that has been echoed by other onlookers. “When we pitch material to A&R people,” he says, “they want hit songs, songs that will be on the radio; 90 or 95% of the time they want up-tempo songs, which are often less serious. It sucks because as a songwriter, it’s not usually what you would consider your best song.”

One glimmer of hope has been Kacey Musgraves, the Grammy winner who filled a witty, progressive album with songs that got radio play, even if they weren’t stadium-rocking showstoppers. “She’s been successful without having massive hits,” says Laird, who co-wrote many of the songs, “and it really shows that there are a lot of audiences out there, and there will always be a market for good, well-crafted songs.”

In the car leaving the Bluebird, one of Hemby’s most recent hits, “Automatic” (that’s right, for Miranda), comes on the radio. The song traffics in nostalgia more explicitly than most; its chorus makes a case for doing things the old fashioned way, and devoting time and focus to the things that really matter:

Hey, whatever happened to waitin’ your turn
Doing it all by hand,
‘Cause when everything is handed to you
It’s only worth as much as the time put in
It all just seemed so good the way we had it
Back before everything became automatic

“That song came out of conversations about how easy a lot of things are these days,” Hemby recalls, “but the payoff is so much sweeter when you have to do things by hand, the hard way.”

So what can explain country music’s rising popularity in a time when all cultural indicators seem to point away from relaxing rural life and toward life-hacking efficiency? Technology has certainly eased and broadened the means of distribution, from the Opry’s livestream to artists’ Twitter accounts and songwriters’ editing software. And while it has permeated lives and changed the pace of the industry, it hasn’t fundamentally changed the message. “It’s about the stories,” Hayes explains, “and to me it’s even more than that, it’s a direct conversation even more than it’s a story.” Viewed through this lens, country is a shape-shifting genre free from form-based constraints. Hayes’ suggestion is a generous one – many country “stories” have the intellectual heft of a Bud Light commercial – but you’re likely to find deeper narratives in country than in other genres. “We all strive to write those timeless songs that don’t have anything stamped in there that dates it.”

And it’s the stories, as well as the sense of nostalgia, simplicity, and direct experience with the forces in our lives, that seem to be striking a cultural chord. The genre offers something to hold on to, an anchor in an always-on, 24-hour-news-cycle world. “It’s just harder and harder to focus with so much happening all the time,” Hemby reflects “but there’s got to be a pause button. And that’s what this music is about – taking a breath.”

Behind the Numbers: Song Streaming

March 30, 2015

Michael Driscoll 03/27/15

Payments in the recording industry were once a straightforward affair. A label sold a compact disc through a retailer like Tower Records, and percentages from that one-time sale were divvied up among musicians, the label and others involved in the process of making and distributing the music. That was about it: a single transaction multiplied by, at most, several million albums sold for top artists.

The advent of the streamed file has complicated the equation. A streaming service sells access to a song–a single listen, rather than a permanent copy of the recording–and a tiny per-play sum is split among the same coterie of musicians and industry players. But now what was once a single transaction for a CD purchase is multiplied by hundreds of millions, and even billions, for each individual “listen.”

“You go from selling 10 albums to a hundred files to a million streams, and the amount of data you’re dealing with is phenomenal,” says Martin Goldschmidt, co-founder of the U.K.’s Cooking Vinylrecord label, whose roster of musicians includes the Prodigy, Marilyn Manson and Groove Armada.

The new distribution model may be a boon for those interested in knowing exactly how many times their songs are played, and by whom. But managing per-song, per-play transactions isn’t a simple task.

A figure Spotify AB released last year hints at the scope of the data involved. In a November blog post, Chief Executive Daniel Ek said the company had paid $2 billion to artists and other rights holders since 2008. Given its payments average 0.6-0.84 cent per stream, that would amount to more than 250 billion transactions.

And that’s just Spotify. Songs today are streamed on an array of services, whose big players include YouTube, Rhapsody and Pandora. And those services may have different pricing levels even within their own frameworks, like Spotify paying higher amounts for songs streamed by paying customers than for songs streamed on its free, ad-supported tier.

“You need to build whole new systems to deal with it,” says Mr. Goldschmidt, who thinks the people focusing on minuscule payouts for each stream have their priorities misaligned. “It’s a much bigger problem than just the [per-play] numbers.”

Willard Ahdritz, chief executive of Kobalt Music Group Ltd., has built a system to help manage the data deluge. He founded his company in 2000, in the early days of music on the Internet. Today, in an average week, Kobalt tracks digital royalties for about 40% of the top 100 songs and albums in the U.S., the company says.

Cooking Vinyl has established its own framework to manage the many revenue streams, Mr. Goldschmidt says, adding that he sees tracking such payments as a vital part of his work with musicians.

“We’re really good at it,” he says. “It’s important that artists are accounted to properly.”

Kobalt’s Mr. Ahdritz says he sees addressing accounting problems as key to helping bring cash back to the music industry, whose revenue in the U.S. has fallen by half since peaking around $14 billion in 1999.

“Very few…can process the volume of data so actually people get paid,” he says. The industry can be “significantly more profitable than it’s ever been before, if you run it with the right structure.”

Apple and Beats Developing Streaming Music Service to Rival Spotify

March 26, 2015


In what would be the biggest change to its music strategy in years, Apple is pressing ahead with a sweeping overhaul of its digital music services that would allow the company to compete directly with streaming upstarts like Spotify.

Almost a year after agreeing to pay $3 billion for Beats, the maker of hip headphones and a streaming music service, Apple is working with Beats engineers and executives to introduce its own subscription streaming service. The company is also planning an enhanced iTunes Radio that may be tailored to listeners in regional markets, and, if Apple gets what it wants, more splashy new albums that will be on iTunes before they are available anywhere else, according to people briefed on the company’s plans.

In a sign of how important Beats is in reshaping Apple’s digital music, the company has made a musician a point man for overhauling the iPhone’s music app to include the streaming music service, as opposed to an engineer. Trent Reznor, the Nine Inch Nails frontman who was the chief creative officer for Beats, is playing a major role in redesigning the music app, according to two Apple employees familiar with the product, who spoke on the condition they not be named because the plans are private.

Perhaps most telling for Apple is what its new streaming service will not have: a lower price than rival services.

According to several music executives, who spoke on the condition of anonymity because the talks are private, Apple recently tried but failed to persuade record labels to agree to lower licensing costs that would have let Apple sell subscriptions to its streaming service for $8 a month — a discount from the $10 that has become standard for services like Spotify, Rhapsody and Rdio.

That $2 markdown may be small, but Apple’s failure to secure it reflects a shift in the company’s relationship with the music industry. While Apple once enjoyed enormous negotiating power as the dominant force in digital music — an area it helped pioneer more than a decade ago with music downloads — it now faces an array of new competitors and finds itself in the position of needing to modernize its offerings to catch up to the streaming revolution.

That has weakened Apple’s leverage — and the labels could not be happier about it.

Toni Sacconaghi, a financial analyst for Sanford C. Bernstein, said that Apple’s apparent struggle over lowering the pricing of its music service now was a result of being late to the streaming game.
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“They’re used to being a shaper rather than a responder,” Mr. Sacconaghi said. “This is one of the few times where Apple is playing catch-up and not necessarily coming from a position of strength.”

Tom Neumayr, an Apple spokesman, declined to comment or make executives including Mr. Reznor available for interviews.

Apple’s turn toward streaming is a matter of necessity, as listeners increasingly shift from music downloads to streaming. According to the Recording Industry Association of America, downloads generated $2.6 billion in revenue in 2014, down 8.5 percent from the year before. Streaming made $1.87 billion last year, and overtook CD sales for the first time.
Continue reading the main story Continue reading the main story
Continue reading the main story

As the biggest retailer of music, Apple remains a crucial marketing partner for the music industry. Yet its absence from streaming has let others get a head start. Spotify, which started in Sweden in 2008 and came to the United States in 2011, said in January that it has 15 million paying subscribers around the world, as well as 45 million more who listen free, with advertising. (Apple’s iTunes has more than 800 million customer accounts.)

Exactly how Apple will match Spotify is unclear. Music executives say they have not been shown a prototype of the new streaming service, nor been given much detail on it.

The new music app, which is a collaborative effort between Mr. Reznor and other Apple and Beats employees, including Jimmy Iovine — who founded Beats with the hip-hop star Dr. Dre — will feature the streaming music service with many of the same characteristics as the Beats Music streaming service, one Apple employee said. Those may include curated playlists and a more vivid visual appeal, while conforming to Apple’s sleek and minimal design aesthetic, one person said. The name Beats Music will most likely be shed.

According to an Apple employee, the service is being tested as part of a new version of the company’s mobile software system, iOS, which has been given the code name “Copper” and is expected for public release this year.

Mr. Iovine has set the tone of the transformation of Apple’s music plans, according to music executives. Mr. Iovine, who reports to Eddy Cue, Apple’s head of software and Internet services, has been leading aggressive talks to secure prominent album releases that will be exclusive to Apple, akin to what Beyoncé did when she released her self-titled album on iTunes in December 2013. One music executive involved in the negotiations described this part of the new iTunes as “Spotify with Jimmy juice.”

A crucial difference for Apple’s streaming service is that unlike Spotify, it will have no free tier. That has greatly pleased top executives at major music labels, who have begun to complain openly that so much free music has given consumers too little reason to pay for it.

Apple is also expected to overhaul iTunes Radio, the free service that the company introduced in September 2013 as a competitor to Pandora, and which has had little impact on the marketplace. One new player is Zane Lowe, a former BBC radio D.J. known as a trend-spotter. Last month he announced that he would join Apple in Los Angeles, where the Beats team is concentrated.

Mr. Lowe is expected to play a role reconfiguring iTunes Radio. Among the ideas that have been floated for iTunes Radio are a more geographically targeted approach that would bear some resemblance to a traditional radio station, with Mr. Lowe as the voice, music executives said.

Whether or not Beats is a success, it would make just a small dent in Apple’s overall business. Mr. Sacconaghi of Sanford C. Bernstein noted that if Apple’s streaming music service were to make as much money as, say, Pandora, which generates roughly $1 billion in revenue a year, that amount would be less than one half of 1 percent of Apple’s annual $183 billion in revenue.

Ben Bajarin, a consumer technology analyst for Creative Strategies, said that the hope for online entertainment services like Beats is to add more hooks for people to keep buying Apple products. But a music service is just one potential lure among many others in Apple’s offerings, like apps, movies and the iPhone’s operating system.

“In the grand scheme of things, this isn’t trying to be the next big business,” Mr. Bajarin said of Beats Music. “It’s just trying to be an evolution in their ecosystem that has many moving parts, not just one.”

Roadies: Unlikely Survivors in the Music Business

March 25, 2015

Roadies’ elevation to ‘concert technicians’—the term many practitioners favor—is reshaping their culture
For today’s roadies, sex, drugs, and rock ’n’ roll are out; efficiency, tech skills, and professionalism are in, as musicians take to the road more often to make money

Neil Shah 03/19/15

The shakeout that is rattling the music business is turning up some unlikely survivors: roadies, the black-clad backstage grunts of live shows.

“I know musicians who play on the road who make less money than the tech guys I know,” says Jimmy Davis, the stage manager for country singer Hank Williams Jr.

Roadies’ elevation to “concert technicians”—the term many practitioners favor—is reshaping their culture. Sex, drugs and rock ’n’ roll are out; efficiency, tech skills and professionalism are in. “We’re the Marines of the music business,” says Tom Weber, who got his start filling in for an absent roadie at a Kiss show 40 years ago.
Now 57 years old, Mr. Weber is one of many roadies who have converted a one-off gig into a career. In a good year, Mr. Weber, who lives in Kentucky, earns about $200,000—a princely sum for a nonprofessional job. He is in demand, with high-profile artists such as the Cult’s Billy Duffy balking at touring without him.

Mr. Weber has maintained guitars for Van Halen, Poison and Nine Inch Nails as well as country stars Reba McEntire and Lyle Lovett. Before each show he restrings nearly every guitar and says he has “never had an artist break a string on stage.”

One typical roadie job—sound engineering technician—pays $57,000 a year, on average, according to the Bureau of Labor Statistics. (The figure doesn’t take into account the legion of roadies who are self-employed.) Surveys by the Berklee College of Music say a “front of house” live-sound engineer—the person who controls what concertgoers hear—earns at least $60,000 a year, and can top $120,000. Road managers can earn $125,000 or more. Tour coordinators? $175,000.
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The ascent of the concert technician reflects a seismic shift in the economics of the music industry. As concerts and festivals increasingly become a vital source of profits, cultural “middlemen”—label executives, talent scouts and other traditional tastemakers—are losing clout, experts say. Technical middlemen—artist managers, concert promoters, festival organizers, and social-media promoters, as well as DJs and roadies who mix sound at shows—are gaining it.

That makes bands increasingly reliant on live performances to make money, spurring demand for stage hands, instrument techs, sound mixers, lighting specialists and tour managers. The physical labor needed to erect elaborate, high-tech stages has spared most roadies. Their jobs can’t be moved to China or be done by a robot—at least not yet.

“Employment opportunities in the live-music industry have never been better,” says Gary Bongiovanni, the editor of Pollstar, a trade publication. “While record-company jobs have nearly disappeared, road- and tech-production-crew gigs continue to grow.”

It’s hard to pinpoint how many people work in the music industry because many of them toil in ancillary areas, such as promotion or transportation, that support artists. Federal surveys don’t track the industry’s scores of part-timers and freelancers.

The North American concert industry was valued at $6.2 billion in 2014, Pollstar estimates, up from $1.4 billion in 1994. Multiday festivals such as Coachella, Bonnaroo and Sasquatch! are flourishing, generating jobs to handle setup, security and operations.

Two years ago, Gavin Rossdale, a singer and guitarist in the rock band Bush, hired Mr. Weber for a gig. Before working with Mr. Rossdale, who is married to singer Gwen Stefani, Mr. Weber spent a week reading a 201-page manual for the Fractal Audio Axe-FX II, a complex guitar-effects system Mr. Rossdale wanted to use. To learn the ins and outs of the $2,300 system, Mr. Weber eventually bought one of his own.

“You have to know your stuff,” says Dick Adams, 69, a production manager for Metallica, Pearl Jam and Heart. A big part of the job is keeping up on the latest toys for musicians, he says. “You have to do a lot of reading.”

Despite the enduring caricature of roadies as tattooed guys with beer bellies in heavy-metal T-shirts, today’s concert hands often resemble computer geeks—and many of them are women.

“There are a lot of women in all kinds of positions—not just wardrobe and catering,” says Meg MacRae, 44, a tour manager and production coordinator who has worked with Bon Jovi and Neil Young. On a recent arena-size tour, she counted eight women among 60 crew members.

Ms. MacRae’s main job is putting out fires that inevitably erupt as her crews adapt to different venues. In between 18-hour days, she relaxes with yoga. Her only regret about her career: She and her longtime boyfriend haven’t had children. “I chose to marry the road,” she says.

The occasional brushes with celebrity and other flashes of glamour aside, working concerts isn’t for everyone. The job means extensive travel, which can be hard on relationships, and it often exacts a physical toll, including hearing loss. The flow of assignments can be irregular and the hours long and unpredictable. Roadies often earn a flat fee for a day’s work, whether it runs for four hours or 14.

Glen Rowe of Cato Music Ltd., a U.K.-based tour-production company that handles shows for bands such as Haim and Bastille, estimates that on a typical, arena-size tour, the average wage for crew members is around $450 a day. Entry-level crew members can earn around $200 to $275, Mr. Rowe says, though with experience, that can climb to as high as $1,500 a day.

Concert workers today are more likely to be foodies than junkies, says T.J. Hoffmann, a onetime roadie for Agnostic Front and Skid Row. He is making a documentary about “America’s last blue-collar army,” as he calls his colleagues. Crew members on a European tour don’t spend their days off “drinking and doing drugs,” the 45-year-old Mr. Hoffmann says. “They’re going to the Louvre.”

Harley Zinker, who just wrapped up work on three Interpol concerts in Mexico, says, “I don’t think we drink or do nearly as many drugs as people in finance do.” He started working two decades ago in New York City clubs. Nowadays, Mr. Zinker, 45, handles sound for performances by the Killers, the Strokes and others. He earns enough to take six weeks off between tours and put a chunk of money away for retirement. “It’s a very viable career,” Mr. Zinker says.

Longtime roadie Harley Zinker got his start working sound in New York City clubs like Brownies two decades ago. Now his resumé includes the Strokes and the Killers.

Mr. Zinker is what’s known as a ‘front-of-house’ engineer. While pay depends on the person—their experience, what bands they work for, how big the shows are—some ‘front-of-house’ engineers can make upwards of $120,000 a year, according to the Berklee College of Music.

It’s the job of Mr. Zinker to finalize the position of the band’s drum microphones.

As the band does a sound check, a local stage hand works on video projectors while Mark Powell, bottom right, adjusts lights and Harley Zinker, top left, adjusts sound.

There are more women roadies than in the 1970s and 1980s. Christina Moon, Interpol’s monitor engineer, is in charge of the sound that band members hear in their in-ear monitors during a performance. Ms. Moon, 40, also works for Death Cab for Cutie, Cat Power and Yeah Yeah Yeahs.

Perhaps the most visible roadies for audience members are instrument techs, since they sometimes briefly appear on stage. Here, Shawn Lobb tunes guitars ahead of the March 10 show.

Interpol performs. The band’s lighting is handled by production designer Mark Powell, who favors ’moody side and back light’ and ‘heavily-saturated monochromatic color palettes,’ he says.

Roadies and local workers begin the process of setting up the stage — lights, sound, video, instruments — for an Interpol concert at Auditorio Banamex in Monterrey, Mexico, on March 10.

Roadies and local workers begin the process of setting up the stage — lights, sound, video, instruments — for an Interpol concert at Auditorio Banamex in Monterrey, Mexico, on March 10. Adam Wiseman for The Wall Street Journal

Two local stage hands position a sound-mixing console for the opening band. Adam Wiseman for The Wall Street Journal

Longtime roadie Harley Zinker got his start working sound in New York City clubs like Brownies two decades ago. Now his resumé includes the Strokes and the Killers. Adam Wiseman for The Wall Street Journal

Mr. Zinker is what’s known as a ‘front-of-house’ engineer. While pay depends on the person—their experience, what bands they work for, how big the shows are—some ‘front-of-house’ engineers can make upwards of $120,000 a year, according to the Berklee College of Music. Adam Wiseman for The Wall Street Journal

It’s the job of Mr. Zinker to finalize the position of the band’s drum microphones. Adam Wiseman for The Wall Street Journal

As the band does a sound check, a local stage hand works on video projectors while Mark Powell, bottom right, adjusts lights and Harley Zinker, top left, adjusts sound. Adam Wiseman for The Wall Street Journal

There are more women roadies than in the 1970s and 1980s. Christina Moon, Interpol’s monitor engineer, is in charge of the sound that band members hear in their in-ear monitors during a performance. Ms. Moon, 40, also works for Death Cab for Cutie, Cat Power and Yeah Yeah Yeahs. Adam Wiseman for The Wall Street Journal

Perhaps the most visible roadies for audience members are instrument techs, since they sometimes briefly appear on stage. Here, Shawn Lobb tunes guitars ahead of the March 10 show. Adam Wiseman for The Wall Street Journal

Interpol performs. The band’s lighting is handled by production designer Mark Powell, who favors ’moody side and back light’ and ‘heavily-saturated monochromatic color palettes,’ he says. Adam Wiseman for The Wall Street Journal
Like many freelance or “gig economy” workers, less-experienced concert techs have little bargaining power over pay. Employers—sometimes musical acts, but more often production companies—hold the cards when negotiating contracts.

Wages tend to rise only when a roadie jumps to the next level by getting on a bigger tour, says Adam Zendel, a doctoral student at the University of Toronto who is writing his dissertation on roadies’ working conditions.

Few roadie jobs require formal credentials, so candidates with limited skills or experience can apply. That translates into a wide potential labor pool, he says, holding down wages for newcomers or roadies with scant experience.

Mr. Zendel, 28, paid his way through college in Canada by working as a freelance sound technician for shows by artists such as electronic-music star Skrillex and the metal band Cannibal Corpse. He was paid $300 a day working gigs for 100 fans or 10,000, he says, and after a while, he burned out.

But once a roadie gains a foothold in the industry and establishes a network, one gig often leads to another. Moving up to bigger tours from smaller ones is commonplace, concert workers say. And roadies routinely refer friends to potential employers when they can’t take gigs themselves. “It’s very incestuous,” Mr. Zinker says. On Crewspace, an invitation-only website, roadies land jobs, swap tips and share war stories.

After years on tour, some roadies take part-time jobs in construction or special-events production to smooth out their work schedule and travel less.

Mr. Davis, the stage manager for Hank Williams Jr., makes a little more than half his annual salary working for LogiCom, an entertainment and event-production company based in Nashville, Tenn. All told, Mr. Davis, who is 53 and lives in Alabama, brings home almost six figures a year. “It’s very good money,” he says.

In recent months, Mr. Weber, the guitar tech, has been on the road with Lyle Lovett, who tours with just two acoustics—simplifying Mr. Weber’s job. By evening’s end, if everything goes as planned, no one even notices what Mr. Weber has done.

But that doesn’t mean Mr. Weber leaves anything to chance. He restrings backup guitars, always has a contingency plan and maintains a professional demeanor.

When handing a guitar to Mr. Lovett, he says, it’s “Good evening, sir,” not “Hey, dude.”

How to Become a Roadie »

Eager for a behind-the-scenes view of concerts—over and over? If wanderlust strikes and backstage beckons, here’s some advice for breaking into life on the road. Although many roadies credit their careers to luck and serendipity, today there are a number of instruction options.

Christina Moon is in charge of the sound that band members hear in their earpieces during performances. She earned a music degree and worked in clubs before heading out on tour. Ms. Moon has worked for artists including the Yeah Yeah Yeahs, Death Cab for Cutie and Cat Power.

For newcomers, schools such as Full Sail University in Orlando, Fla., offer sound-production courses. Alabama resident Nick Bryant, who plays drums and wants to be a drum technician, starts classes at Full Sail in August.

For the moment, Mr. Bryant, 20, is working at Zaxby’s, a fast-casual chain restaurant. Much of his family has worked in nearby chicken-processing plants. Going to Full Sail will mean taking on debt, Mr. Bryant says, but after seeing his parents struggle in their jobs, he wants something different. “I want to be happy doing what I’m doing, no matter how much money I’m making,” he says.

Glen Rowe of the U.K.’s Cato Music Ltd. launched a training course last year in London—perhaps the world’s first “roadie school.” He wants to open locations in Los Angeles, Nashville and New York. Roughly half of Cato’s students—who each pay about $2,500 for the 11-week course—have been women.

Mollie MacGregor, a 20-year-old from Cardiff, Wales, took Cato’s course last year. In a guitar-maintenance workshop, Ms. MacGregor and 10 or so other students were put in pairs, given a guitar, tuner and strings, and taught how to tune and string guitars. Among the course’s written materials is a 12-page glossary of “roadie lingo” defining everything from “book of lies” (the tour itinerary) and “gig foot” (the condition of “having bits of tape stuck to your shoe”) to “Ohm’s law” (the “relationship between voltage, current and resistance”).

As in many fields, experience and contacts are critical to getting more concert work—and higher pay. Roadies must network constantly to snag jobs and fellow workers are often the best source of new gigs.

Sales of Streaming Music Top CDs in Flat Year for Industry

March 20, 2015


The American market for recorded music was flat in 2014, but income from streaming services like Spotify and Pandora has quickly grown to become a major part of the business, eclipsing CD sales for the first time, according to a report released Wednesday by the Recording Industry Association of America.

The association, a trade group that represents the major record companies, said that recorded music generated $6.97 billion in 2014, down less than 0.5 percent from the year before, when revenue was slightly more than $7 billion.

Overall revenue from recorded music, after falling from a high of $14.6 billion in 1999 — when CDs were the dominant format — has remained relatively stable for the last several years, hovering around $7 billion, according to the recording industry association. But within that total, the sources of income have changed significantly as consumers have increasingly shifted their purchasing habits online

In 2010, for example, when 253 million CDs were sold, sales of physical formats, like CDs and vinyl LPs, made up about 52 percent of total music revenue; downloads represented 32 percent, and streaming about 6.6 percent. (Ringtones and other miscellaneous income made up the rest.) By last year, the number of CDs sold had fallen to 144 million, and the split between formats was evening out: Physical formats were 32 percent of revenue, digital downloads 37 percent and streaming 27 percent.

The finer details of the industry association’s report, which is compiled from data supplied by the record companies, show how quickly the shifts are happening. In 2014, downloads of singles and albums generated about $2.6 billion, down 8.5 percent from the year before. CD sales were down 12.6 percent to $1.85 billion. (Vinyl records, a growing niche, were worth $321 million, up 50 percent.)

In aggregate, the various kinds of streaming outlets generated $1.87 billion, up nearly 29 percent from the year before — and, for the first time, slightly more than the total for CDs. That figure includes not only paid subscription outlets like Spotify, Rdio and Rhapsody, but also Internet radio services like Pandora, which does not let users pick exactly what songs they will hear, and outlets like YouTube and Spotify’s free tier, which let users pick specific songs and are generally supported by advertising.


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