A Few Points Paul McGuinness Forgot To Mention

David Pakman 9/02/10  Midem (net) Blog

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In this, the first of a series of guest posts, David Pakman, partner at venture capitalist Venrock & former CEO of eMusic, takes issue with U2 manager Paul McGuinness’ recent assertion that piracy is the main reason for the past decade’s decline in music sales.

Paul McGuinness has managed the business career of one of the greatest musical acts ever to live on this planet. U2 continues to amaze us, delight us and impress the world with a combination of musical genius and indubitable passion. The world is a better place because of U2.

Paul’s essay in GQ entitled “How To Save The Music Business” fails to consider some basic facts as to why the recorded music business is less than 50% the size it once was (and in a continued spiral downward). In an attempt to respond to Paul’s call for a reasoned debate about the future of the business, I’d like to bring to light some of these facts.

Paul, like the position of the RIAA, IFPI, and most traditional record executives, exclusively blames piracy as the preeminent cause of the undoing of the recorded music business. Piracy is certainly a problem. Most reports tell us that illegal file sharing activity dwarfs legitimate recorded music purchase activity on a scale of 10 to 1. But there are many other reasons why people spend less money on music today than they used to and it’s instructive to review them:

The Unbundling of Music

With the birth of Napster, we learned of the incredible demand for singles. Consumers no longer had to buy a record of 12 tracks to listen to the one or two they really cared about. In 2003 when iTunes popularized digital download sales, this trend continued. Now we learn seven years later that singles are once again becoming the measure of an artists’ true popularity, not album sales. The unbundling of the album is probably the single biggest reason for the massive decrease in per capita music spend. As such, the recorded music industry’s revenues were probably over-inflated as a true measure of demand at its peak. That is, although the industry approached $40B in sales worldwide in its 2000 peak, the true demand was probably much less. Once the industry allowed for the unbundling of the CD, they were able to understand consumers’ true appetite for recorded music, song by song. By this count alone, if the same consumers who used to spend $12 – $15 per album now only buy the one or two tracks per album they really want, they only spend $1 – $2 now. This is at least an 87% decline on a revenue unit basis and could easily account for the massive fall-off in sales. (Incidentally, in the U.S., the cable television industry may one day experience the same effect. If U.S. consumers are ever able to pay only for the channels they actually want to watch, or more dramatically, just the shows they watch, total subscription TV revenues may fall dramatically. That’s a topic for another post…)

Mispriced Music

Over the past fifteen years, consumers have been inundated with more entertainment choices for their limited disposable income: video games, text messaging, DVD rentals, streaming movies, virtual goods, ring tones, and more. Many of these products and services have fallen in price over this same period. In the U.S., Walmart sells many DVDs for between $5 – $10. However, until last year, music prices actually increased. To confront falling sales, in 2004, Universal actually raised prices and then again in 2009 led the effort to force Apple to increase prices to $1.29. Since we know music is elastic, rising prices slow unit sales and lower prices increase it. It’s quite possible music is not optimally priced to maximize profit and this, too, has contributed to a decrease in appetite for recorded music, especially in the face of such fierce competition and plethora of choices confronting a consumer with limited spending ability. From my experiences at eMusic as CEO where we experimented with music pricing versus demand, the optimal price for music singles is likely closer to 50 cents than $1 for most music.

Protectionist Licensing Policies

Let us not forget that from the birth of Napster until the launch of Apple’s iTunes was a seven year period. Seven long years. During that time, despite clear evidence from millions of consumers in their interest in downloading music, consumers could not buy digital music legally. This missed opportunity provided consumers with no choice but to steal music in order to get it conveniently — for seven years! Although Paul prefers we forget the past in order to fix the future, one cannot ignore that it was the resistance to widespread licensing of catalogs that likely had the largest effect on enabling piracy. Why is this important to note? Because even to this day, sensible licensing policies do not exist. It takes far too long, is far too unpredictable, and still requires senseless upfront guaranteed minimum fees in order to broadly license music catalogs. These policies have frightened away the best entrepreneurs and investors who see little reason to try to innovate in music. Paul implores the tech industry to apply its resources to help the music industry. In particular, he wants Steve Jobs to launch the “music access” model (despite the fact that this already exists in the form of Napster, Rhapsody, MOG and Spotify with mixed success). In order to get others to launch more music services, the industry must first adopt simple and sensible licensing policies that invite and encourage entrepreneurs to build businesses around the sale of (or access to) music.

It is all too convenient to dismiss those who disagree with Paul’s “The ISPs must police the internet” solution to the music industry’s ills as an angry mob. In the spirit of productive conversation, it’s important to remember that there are other more likely explanations for the decline of the recorded music industry. In order to see it grow again, many of the policies adopted by the executives Paul lauds in his piece will have to change. As a one-time struggling artist myself, I want nothing more than to see musical artists prosper. But it’s the decisions made by the traditional record labels struggling to cope with a vastly changed distribution landscape that just might have brought us to this point.

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One Response to “A Few Points Paul McGuinness Forgot To Mention”

  1. Thomas Marolda Says:

    Many great points and very logical reasons for the state of the industry, but I still feel that it’s just not our time for music to have value as it once did.

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