Final Examination: Take Home Essay

1)         There were two options for Napster in creating alliances that would have prevented the RIAA-led lawsuits. They could have approached, as the Offspring’s manager Jim Guerinot suggested (Menn 166), a group of artists and attempted to create a business model that would be more beneficial for the artists than their major label deals. There were several bands that supported Napster wholeheartedly, but it is unclear whether artists would choose to give up the massive promotion and fame that comes with major label deals in return for a greater cut of any profits from their music. The band Ween, when attempting to release an album on their own after more than a decade at Elektra, saw for themselves the economic gains to be had without having to pay for the backing of a major label. Despite this, they saw major labels as being able to give them a broader audience (Menn 167).

It is possible that Napster would have been able to provide both, but it would have required a business model as innovative as its technology platform.            Alternatively, Napster could have approached the music industry as partners in collaboration. Perhaps, had Napster bothered to come up with a workable business model, industry would have listened.

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Perhaps, for reasons explained below, the labels would only have tried to crush them before they reached the heights of success that they did. Regardless, there are several tacks they could have taken instead of their own dubious adoption of ‘fair use’ laws. As litigator David Boies suggested, they could have concentrated on the legal decisions concerning VCR’s, creating a space for new artists (as was attempted by Eileen Richardson but ultimately abandoned) in order to prove that Napster was “capable of substantial non-infringing uses” (Menn 235). At the same time, they could have used the VCR argument as an incentive for the music industry to support Napster; after all, video and DVD sales have become a major part of movie industry sales.

Additionally, they could have attempted to debunk the music industry claims that file-sharing was killing CD sales. In the year 2000, the one of Napster’s meteoric rise, album sales were at a record high of 800 million items sold (Hanson). Clearly, file-sharing was not hampering record sales, and may even have been stimulating them.The most all-encompassing mistake the music industry made in its dealings with Napster and peer-to-peer file-sharing generally is to take a hostile, suspicious stance toward the new technology. In All the Rave, Joseph Menn described the industry as being slow-moving in accepting new technology:After all, the big labels had a history of opposing most innovations in technology. They were used to bands complaining about their onerous contracts or lack of marketing support. They were even used to griping from legitimate companies or individuals owed hundreds of thousands of dollars (149).

Each new advance in music technology has helped to provide for the sale of what had once only been passed down through communities; sheet music, radio, the phonograph and records, compact discs and finally electronically transmitted music. And with each new advance, the music industry declares the death of their business (Rosenberg). This attitude accounts for the manner in which the industry attempted to deal with Napster. Afraid of lost profits, music industry executives from the top five record labels chose to batten down the hatches and lock away any possibility of negotiation with Napster. According to Menn, this is partially due to a generational divide within the individual labels. Top-level executives are often “old-school leaders who turn purple with rage at the very idea of an MP3” (153), while younger up-and-comers saw the possibilities of this new technology. Old-school music industry leaders were associated with the Mafia, they engaged in payola with radio stations, and they took a hard line in all aspects of the business.

By the time Napster came along, the major labels had cut ties with the Mob, but there were still plenty of industry leaders whose approach was more in line with the 20th century than the 21st (Menn 149).The attempt to shut down Napster, and file-sharing, was a result of this outdated style of management. Menn describes a meeting between MusicNet’s Alan Citron and Sony’s Al Smith as ending in a shouting match between the two men, each predicting the other’s downfall: “It was all so primitive. The industry valued tough guys, the more street-smart the better. “There were all these ‘whose-is-bigger’ arguments,” said Citron.

“It’s people clinging to a way of life”” (157). The only executive to attempt to create an alliance with Napster was a younger CEO with a keen interest in new media, Thomas Middelhoff of Bertelsmann. His actions were promptly disavowed among the other major labels, and even in his own company’s music division at BMG (Menn 264-266).

While Middelhoff’s bet didn’t pay off, he was on the right track in attempting to corral this new technology and its consumer base. One complication was the backhanded manner by which his company dealt with Napster; while Bertelsmann’s e-commerce division was providing funding for Napster; BMG continued its suit against it (Menn 265).In the end, mistakes made by both sides contributed to the downfall of Napster. Rather than trying to stuff the file-sharing genie back into the bottle, the music industry should have seen the opportunity for finding new listeners (and new targets for advertising and marketing) and creating fans, as well as promoting new artists. Had Shawn Fanning decided to dump his sleazy uncle and found a skilled business partner to create a workable business model; had the music business not been so anxious to strangle Napster in its crib; had both sides listened to what both fans and artists wanted – Napster might well have been an enormous financial and social success. Instead, it merely paved the way for new, decentralized file-sharing sites, and itself became a tethered subscription service with a fraction of its previous membership. (wc 993)2)         There has been much ink spilled over the supposed death of the music industry.

While this worry may be a bit premature, the most pressing economic issue facing the music industry today is the slow but steady push toward a complete restructuring of itself. With the increased prominence of independent labels, file-sharing websites, and innovative artists who are creating their own methods for releasing albums, the traditional record business is becoming increasingly irrelevant. In economic terms, this has so far meant declining record sales among the major labels, a recent spate of firings, and the loss of big artists, who are moving either to concert promoters like LiveNation, independent labels, or their own recording studios.            Over the past year, artists from Radiohead to Coldplay to Trent Reznor have released songs and entire albums for free over the internet.

They have almost universally been a success, although some less well-known artists, as well as various industry insiders, have argued against this being a workable model. Michael Laskow, CEO of an independent A&R company, TAXI, argued that Radiohead allowing consumers to pay what they choose for a digital album is not indicative of the future of the music industry:While the band, its fans and artists alike are celebrating what looks like a success for Radiohead’s bold move in releasing their new album using the ‘pay what you’d like’ model, I think everybody has overlooked one very important aspect of this, and it doesn’t bode well for the future of the music industry. Radiohead has been bankrolled by their former label for the last 15 years.

They’ve built a fan base in the millions with their label, and now they’re able to cash in on that fan base with none of the income or profit going to the label this time around. The question is: how will new artists be able to use this model in the future if they haven’t built a fan base in the millions in the years leading up to the release of their album under the pay what you’d like model (Lipsman)?The worry that new artists won’t be able to give their music away for free (disregarding the 40% or so of people who voluntarily paid from one to twenty dollars for the album), is a valid one. However, Laskow seems to view major labels as the only answer to new artists looking for an audience and a way to make a living with their music.

On the contrary, the rising prominence of independent labels over the past several years has proven that it doesn’t take millions of dollars to create an album and promote it. Labels like Kill Rock Stars, Bloodshot Records, and Rounder Records have all seen their profits rise over the past few years, at the same time that major labels have seen their sales dip or stagnate. Cameron Strang, founder of New West Records, points out the economic advantages in not having the huge overhead of major labels. “That’s the difference between us and them. Artists on our label who sell 200,000 copies make a very good living” (Margolis). Artists like Aimee Mann and Michelle Shocked are releasing albums on their own. (Dare I even mention Ani Difranco?) Clearly, independent labels as well as individual artists are capable of doing the work that major record labels have been doing for years.  In All You Need to Know About the Music Business, entertainment lawyer Donald Passman said that “I think the spread of indies is incredibly healthy for the biz.

It’s like the record industry in the 60’s, when independent labels like A;M, Chrysalis, and Island changed the face of music. Great music has always come from doing things out of the mainstream” (110).With the advent of webcasting and podcasting, along with XM and Sirius radio networks, traditional radio doesn’t have the same hold on the music buying public’s imagination that it once did. Increasingly, new artists are discovered by getting their songs played on television shows like The Hills and Grey’s Anatomy. The music industry is attempting to do to webcasting what it did to Napster, which is to essentially strangle it through lawsuits in the hopes of being able to squeeze money out of the webcasters. Instead of viewing web-based radio as a unique promotional opportunity, the mainstream music industry only sees profits being taken out of its pocket. At the same time, artists, like the ones discussed above, are realizing which way the wind is blowing.

Digital Music News publisher Paul Resnikoff notes thatA growing number of superstars are – or soon will be – grazing in post-major pastures.  And for them, the bigger basket – touring, merchandising, publishing, relevance, and even album sales – remains more important than a paid download, protected or otherwise (Resnikoff).These additional streams of revenue are often the more lucrative for musicians than album sales. It only makes sense that artists would look at digital music, including webcasting and file-sharing, as ways to gain fans that will purchase concert tickets and merchandise.File-sharing continues almost unabated, although the popularity of iTunes despite much of its music being DRM-protected has provided a model for money-making in the digital era. Despite iTunes and growing copyright protection on albums and songs, paid downloads account for, at most, five percent of all music downloads. Even ringtones, which are currently a substantial slice of the digital revenue pie, aren’t turning a profit. Labels are considering raising prices, but it is unknown whether customers will pay for them, or that a single line of revenue will pull record labels through financially.

Warner Music Group and EMI have had massive layoffs over the past year in an effort to restructure and shore up the companies financially. Clearly, continuing to hold on to past business models and attempting to fit new trends and technology into it has not worked out well for the major labels. (wc 986)3)         Minimum Advertised Pricing, or MAP, is the setting of minimum prices by manufacturers for retailers. In the case of the music industry, the major labels colluded in the mid-1990’s to require discount retailers to advertise higher prices or give up joint marketing funding, which could mean giving up millions of dollars (Menn 152). The history of MAP, at least in the music industry, appeared to end on September 30, 2002, when the five major labels settled a lawsuit brought by 30 states in an effort to end the practice (Menn 152). In 2000, the Federal Trade Commission investigated price-fixing by major labels and the majors signed a consent decree getting rid of minimum-advertised pricing policies (Christman, Pricing). The FTC has estimated the cost to consumers in the years when MAP was practiced to be at half a billion dollars (Menn 152).

For nearly the past 100 years, since the passage of the Sherman Act, mandatory pricing restraints were deemed to violate antitrust laws. It wasn’t until the summer of 2007, when the Supreme Court overturned the law against setting mandatory minimum pricing in a case brought by an accessories manufacturer, that the practice was made legal (Christman, Why Labels). This has potentially enormous ramifications for the music industry and music fans alike; it remains to be seen whether those ramifications will be for the benefit of music fans or to their detriment.The music industry has argued that requiring discounters to sell CDs at the same price as specialty stores will lead to greater selection and a halt to the bleeding that independent record stores have experienced (Dugas, O’Donnell and Petrecca). At the same time, music fans have bemoaned the high price of CDs for years, and raising prices unilaterally could drive down music sales even further. The major label system, which requires millions of dollars in overhead to promote certain artists, is at least partly to blame for the rising prices.

At Scott Rosenberg argues that:Even more than the artists, the victims of this system are music fans — who end up paying exorbitant prices for CDs to fund bloated recording-company marketing budgets. That money gets spent manufacturing a handful of superstars, leaving serious music lovers to fend for themselves in ferreting out unusual new music that the business considers too “niche-y” to be worth promoting (para.

6).In this view, the pricing system set by the majors is inherently unfair to both fans and the majority of artists who aren’t “superstars”. Rather than setting minimum pricing restraints for discount stores, major labels could lower wholesale prices to ensure that independent record stores could stay in business. This would largely be to the labels’ benefit; over the last five years, their reliance on big-name stars to sell huge amounts of records has been a losing proposition. Titles from unknown artists and back catalogs are often nowhere to be seen at discount stores. The personal service and deep selection at independent stores creates an opportunity to sell these types of titles.  The $9.99 price point set by discount stores and iTunes has surely contributed to declining album sales, but the burden of maintaining that price point has been shouldered almost entirely by independent music retailers, while the major labels continue to raise list prices (Christman, Why Labels).

            Majors are contributing to declining sales while preserving their own profit margins. Mike Dreese, quoted in Billboard, also points a finger at discount stores that lure customers in with low CD prices:Wal-Mart, Target and Best Buy have succeeded in almost destroying the specialty-music account base and are now setting the rules for the industry. If minimum pricing were implemented, it would keep the discounters from finishing the job.

Those discounters, which have limited selection, have such dominance that labels now spend more money on supporting low retail prices and much less advertising the availability of the product (Christman, Why Labels).The tide of public opinion seems to be turning toward the use of minimum pricing restraints. When price-fixing in the music industry was first being investigated, still-new stores like Best Buy maintained a relatively deep catalog of music, knowing that it was competing directly with independent music stores. Now that discounters have succeeded in putting many small stores out of business, their catalog consists largely of the Billboard Top 100. What seemed revolutionary in 2000 – music priced at a reasonable amount over cost – has had unforeseen consequences. The prominence of discount stores in the music industry has contributed to the lack of choice and variety so unappealing to music fans.

Wal-mart has surpassed Apple to become the number one music retailer in this country.            The driving down of CD price points to $9.99 has been salutary for customers, but may have longer-lasting effects by eliminating space for new artists and broad selection. Furthermore, even the $9.99 price point has been artificially constructed by discounters hoping to entice customers and labels hoping to propel all-important first week sales (Deutsch). Noting the possible risks of this new low price point in Billboard, Ed Christman points out that “After all, at $9.

99 the U.S. music industry currently has the lowest CD pricing at retail since the format was introduced here in 1983.” It is unclear whether imposing minimum advertised pricing at this point would even make a difference in terms of independent music stores. Many have already closed, and those that have stayed open have diversified or moved to a location free of big box discounters.

The music industry may impose mandatory minimum pricing again, but low CD price points and the decreasing number of brick and mortar music stores will likely continue unabated. (wc 942)WORKS CITEDChristman, Ed. “Pricing Perils for Record Labels.” Billboard 26 May 2007. Lexis-Nexis. 15 May            2008 ;http://www.;.Christman, Ed. “Why Labels Should Set Minimum Price Restraints.

” Billboard 1 September 2007. Lexis-Nexis. 15 May 2008 ;http://www.lexisnexis.

com;.Deutsch, Claudia. “Suit Settled Over Pricing of Music CDs at Three Music Chains.” New York            Times: 1 October 2002.

11 May 2008 ;       fullpage.

html?res=9C05E5D91238F932A35753C1A9649C8B63;.Dugas, Christine, Jayne O’Donnell, and Laura Petrecca. “Ruling May Hurt Discount Pricing.”   USA Today: 28 June 2007. 10 May 2008 ;http://www. money/industries/retail/2007-06-28-supreme-court-retail-prices_N.htm;.Hanson, Kurt and Jay Rosenthal.

“Can the Music Industry Sue Its Way to Profit?” 15 June 2007. 15 May 2008 ;,0,43795.story?coll=la-opinion-center;.Lipsman, Andrew.

“For Radiohead Fans, Does ‘Free’ + ‘Download’ = ‘Freeload’?”   5 November 2007. 16 May 2008 ;            press/release.

asp?press=1883;.Margolis, Lynne. “Independents’ Day.

” Christian Science Monitor: 11 April            2003. 15 May 2008 ;;.Menn, Joseph.

All the Rave: the Rise and Fall of Shawn Fanning’s Napster. New York: Crown            Business, 2003.Pass, Donald. All You Need to Know About the Music Business.

6th ed. New York: Free Press,            2006.Resnikoff, Paul. “Resnikoff’s Parting Shot: Putting Napster’s MP3s Into Perspective.” DigitalMusic News:

19 May 2008. 19 May 2008 ;http://www.;.

Rosenberg, Scott. “Napster – Friend or Foe?” Salon 30 March 2000. 15 May 2008 ;http://  ;.;


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