How Collective Idiocy Left the Record Companies in Bits

Spotted On: The Guardian

“When the history of our digital times comes to be written, one of the questions that will puzzle historians is why the record companies missed the significance of the internet.”

What a great thought (and a very catchy headline). Here is a summary of the article, with some commentary.

Since World War II, the record industry had a total monopoly on the recording, packaging, and distribution of music. They controlled the careers or artists, the way the music was disseminated, and dictated terms to music retailers. When the CD came around in the early 1980’s, and as the article says “recording studios converted the sounds made by musicians into bitstreams – long sequences of ones and zeroes – while, at the consumer end, CD players converted those bits back into high-fidelity sound.”

The sales model for this era was to create the plastic disks and packaging, ship them distribution houses, and then off to retailers. While this model proved to be profitable, the overhead costs were astronomical, with up to 50% of the retail price of a CD eaten up by production costs.

The internet was poised to change all of this for major labels. It presented the opportunity to drop production costs to the floor, while expanding profits. But the internet was ignored at first, and then it was treated as a realm for legal prosecution. Even bands chimed in, complaining about the evils of the internet. This practice got so widespread that the RIAA began prosecuting teenagers and single moms. And as the industry resisted the internet, CD sales bottomed out.

To put it simply, the major labels did not want to let go of CDs in the face of an evolving marketplace. Rather than adapt to the climate, they attempted to maintain the status quo. The writer of the article states “The obvious hypothesis – that the senior executives of all the record companies were idiots – has always seemed implausible to me. Or it did until I read the recent interview in Wired magazine with Doug Morris, chairman and CEO of Universal Music Group.”

Because CDs were so profitable, the music industry turned a blind eye to what was next, and settled into a short sighted approoch rather than looking at the big picture.

Bottom Line: The record industry can turn itself around virtually overnight by embracing and adapting to technology. Welcome to the Future.

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  1. Hm

    Well dont give them so much created for just “ignoring” the internet.
    Maybe they were just coc’d up to much in the late 90’s from all that money they made…as a result they missed an opportunity because they were to stupid.
    This really is a lesson on how to be a success and how to be a failure.
    People with the hunger (Napster, Apple, iRiver) they stayed up all day and night and solved the problem of MP3 Players, easy to download online, etc.
    But those who partied day and night (Sony, Universal, Columbia Records, etc) well they enjoyed the good times and let a major and obvious opportunity slip.
    End of story.
    Moral of story: have fun but do some work as well.

  2. Trumpton

    I’ve just done some deep research on this topic, and from a scholary point of view the main points I’ve found are:

    a) Competing Ego’s – ASCAP, RIAA, DiMa & IFPI some or all could be out a job with P2P distribution, therefore each is trying to keep itself in a job!

    b) Polarization of offline distribution. Look at how Wal-Mart and Best Buy in the US limit choice of music available to consumers. And guess what, a study in Spain showed that P2P users like using P2P because of the range of music available. Outcome: Good case for digital distribution.

    c) Record companies “we invest a lot in promotion and any hits we do have cover those acts that do not return a revenue”. This sounds like an industry that needs has been running on excess fat for a long time.

    d) P2P is having a direct impact on our sales. Look at the Canadian experience where the private copying levy actually took $120M in the first 5 years, offset against $2M in lost revenues at the cost of piracy as submitted by CRIA.

    e) business models for online music : Monthly subscription services such as Napster. Single item downloads such as ITunes. The problem is the latter system, runs the risk of the credit card processing adding up to more than the cost of the transaction. With a better sytem, costs could be reduced and music be made available more cheaply.

    f) Publisher/Artist conflicts – a study actually showed that illegal P2P networks had a positive effect on artists revenues taken through live performances (they get more well known). On the other hand the publisher loses out because they loose the publisher monopoly on the music in the markets where P2P exists, therefore less money made through sales.

    Bottom line: The answer is not simple but a change is needed.

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