Music Advocacy Journal Issue #7: Technical Treatise on Record Piracy – Part 6, The Impact of Piracy

In Part 1 “Yin and Yang”, I laid out the critical questions surrounding music piracy and shared a true story that exhibited a polarized point of view on the topic. We talked about how MYnstrel approached the problem of music retail from a neutral position – concerning ourselves with all of the competing interests of different parties, and digging up the facts.

In Part 2 “Where Does Your CD Money Go?”, I shared some of our analysis that was generated in our music retail Business Process Engineering activities. The key question was simple:

  • Where does your money go when you purchase a CD?

It’s important to know where the money for a CD goes to understand how piracy impacts the workers responsible for getting the album from the artist’s mind and into your hands.

In Part 3 “Stratification & Levies”, I continued answering the line of inquiry we began in Part 2. Who exactly is responsible for getting a great-sounding recorded piece of music in your hands? What do they get paid for their labor from that CD sale? What does an artist actually make?

In Part 4 “Writers & Hegemonies”, we finished showing where all the money of your CD purchase goes by reviewing the Songwriter’s Team (Mechanical Royalties) and the Record Label.

In Part 5 “Breaking Even”, we looked at all the people who get paid from your CD purchase, and what kind of sales they need to make to break even.

In Part 6, “The Impact of Piracy”, we will have a revelation – and discover that Music Piracy and “sharing” has killed music sales, as demand for music has remained strong and grown, but consumers are choosing to spend their money on things they can’t get for free.

These are just some of the questions our analysis will answer today. You will be able to use this Treatise over and over again as the most thorough reference material on the subject in print to date. Let’s get to it!

Piracy has killed music sales

I’ll start out by casting my stone. I say that piracy has killed music sales. The only thing that surprised me was how much intricate financial analysis was required to discover beyond a reasonable doubt, the thing that all of our common sense tells us anyway: most people are not going to pay for something if they can find a way to consume it for free. I predicted it back in 1999 when I first saw Napster. Over the years, many people have challenged this idea. Now we’ll investigate the truth by looking at the hard numbers.

The numbers are in – “Napster/music sharing” advocates were wrong

There used to be people who said that “file sharing” would help music sales by offering ‘free promotion’. I haven’t seen any hard data from those people lately. Reason? They were wrong. For the analysis that I will present to you, I wanted to measure growth or decline of various factors that impact piracy. I did the following:

  • Adjusted for inflation – all values were converted to 2008 Dollars
  • Started at 1991 (because that is the earliest accessible Music Retail Revenue data)
  • Adjusted for population growth – all values are normalized on a per-capita basis
  • Divided every resulting figure by its 1991 value to get the ratio of growth or decline

The first thing we’re interested in is how Recorded Music sales have changed over the years. Have they gone up or down? And what about Home Broadband access for Americans? A burglar isn’t breaking into your home without a lock pick. If there is a portion of the population who is okay with stealing the music online, they’ll probably need the tool to achieve their goals. That tool is high-speed internet from their house (or campus). And finally, we should make sure that other economic factors aren’t impacting Recorded Music sales. With all this talk about the economy, a casual observer might think that it’s “the economy’s fault.”

The trends are astounding:

MAJ 7 pic 1

Some events related to the chart:

  1. In 1991, we were on an upswing from the new prevalence of the excellent technology: CDs
  2. This held throughout the 90s until its peak in 1999 (historically typical for the advent of new technologies)
  3. In 1998, widespread MP3 music stealing was becoming rampant on college campuses and in high schools. In addition, the availability of CD Burners allowed people to copy CDs too.
  4. A sharp decline began in 1999 when Shawn Fanning released Napster. This aggressive decline in sales continued through 2003 as more people found music to steal online through Napster, Kazaa, and any other P2P service-du-jour. They could burn the stolen music onto their own CDRs, and take it with them anywhere if they didn’t yet have an iPod.
  5. You can see that in 2002, the decline of the music sales slowed down a bit and even stabilized up through 2004. This corresponds to widespread adoption of the iPod and makes sense. New technologies usually pique interest. Unlike the CD though, the iPod and personal MP3 players only halted the decline for a few years.
  6. What’s fascinating about the upwards slope from 1991 to 1994 representing the boost from the CD technology? When compared to the iPod from 2002 to 2004, if you superimpose the expected near-40% increase that the iPod should have created, it would almost exactly cancel out the declination trend from 1999 – 2002. Actually, THAT’S EXACTLY WHAT YOU SEE! The decline is halted from 2002 – 2004, indicating a strong possibility that the excitement over the iPod technology gave the boost for some paying customers and technology enthusiasts, but that the proliferation of stealing continued during the same time period at the same rate (for those who were already savvy to the ‘sharing’ process).
  7. In 2004, the exponential decline in sales continued as users continued to systematize the way they can steal the music with their friends, through online services, and other P2P software that just won’t go away.

What is fascinating is that home high-speed internet increases at almost the same rate that Music Retail Sales decline. In addition, it is myth that a “tough economy” can be to blame for this, since Discretionary Income increased steadily.

Let’s drive that fact home by looking at the growth of entertainment-related industries:

MAJ 7 pic 2

Disregarding the practical limitations of earned income, people borrowed money like crazy throughout the 90s and 2000s and you even see aspects of the internet/software bubble of the late 90s in there. The total of all entertainment industry growth by 2007 was nearly the same as the growth in Discretionary Income at around 30 – 35% (the light blue line). In fact, it follows the growth in Discretionary Income almost exactly.

As for the fact that people have been spending an ever increasing amount on entertainment for the last two decades with their ever increasing Discretionary Income – this much is evident. So people can’t blame ‘the economy’ for the decline in music sales. People are just choosing to spend their money on other entertainment-related expenses.

In 1991, people spent an average of $49.09 per year on recorded music (in 2008 dollars). At the peak in 1999, we were spending $69.10 per person per year. In 2008, we are now only spending $27.89 per person per year on recorded music.

There is big trouble for music and the economy is not a significant factor in the decline, but a question remains…

Why are people choosing to spend less on music and how much does piracy contribute to the decision?

Hopefully, we’re free-market individuals and if people are just not as interested in music as they used to be, that’s fine. As an Artist, it pains me, but it’s been a nice ride, as they say. From the purview of a Music Biz Pro, I say that music needs a revival! Well, we’re inventing that anyway at MYnstrel, but is music really suffering from lack of interest? The facts show that this is not the case! If you combine the legitimate music sales with illegal music downloading, the consumer demand and consumption of music has never been higher.

Sadly though, this demand has not translated to fair compensation; Artists and the music business are not getting paid for that increase in demand. While sales of concert tickets, licensing, and merchandise have experienced normal historic growth (when corrected for inflation and population), they have not nearly made up for the recorded music retail loss that we just looked at. This should make sense, because:

  1. People only have limited time to attend concerts. They have family, they have friends, they have jobs, and they have school. There is not that much more money that people can spend on tickets, since it requires consumption of their limited free time, and ability to line up their personal schedules to tour dates. These are more significant limiting factors than the ability to pay for a $15 – $30 lawn seat or club ticket.
  2. If people are playing their own stolen digital files, they will not be tuning into the radio more. Why do they want to listen to your DJ and suffer exposure to commercials, when they can play their own music? Some might enjoy the DJ, but I bet those people are the ones already tuned in. Licensing won’t make up for record piracy loss.
  3. If people want a shirt from your band, they’ll pay the $20 – $25. The big fallacy is that if they have a few more bucks because they didn’t pay for your album, then they’ll spend that money on a shirt that they don’t want anyway. Why wouldn’t they be just as inclined to buy their girlfriend a few margaritas, or maybe a DVD or video game with that extra money in their pocket? There’s no telling what they would do with that money, but buying your merchandise is not a probability. Artist merchandise sales are not going to cover the loss for music theft, nor have they even come close to doing so in the past decade, as the numbers prove.

On the one side of the spectrum, you have organizations overstating piracy loss by citing facts like:

  • There were 40 Billion music files stolen online in 2008 (IFPI, 2008)
  • In 16 countries, only one out of 20 downloads are legal (IFPI, 2008)

Well that’s all very alarming, but what percentage of that theft represents the music that people would have paid for, versus the music that they’re just taking advantage of, not listening to, and just passing around like cheap water? The fact that file sharing is rampant, doesn’t mean that people would have paid for those songs if they had to. The numbers we already talked about speak more truth to the impact of piracy than the overstated conclusions that people draw from those “file sharing” figures.

On yet another side of the argument, you have the Napster/file-sharing apologists citing this fact:

  • Legal digital downloads now account for 20% of recorded music sales (as opposed to CDs and other formats), up from 15% in 2007 (IFPI, 2008)

They draw the conclusion that “things are looking up” and “that’s fantastic growth for legal digital downloads”.

No, it’s not. Are they crazy? Maybe they didn’t look at the overall numbers and see the 100% decline of sales in 10 years from our 1999 peak, since Napster. Moreover, the financial model we looked at before is for the United States sales, the largest market, but also one of the cleanest and most law-abiding markets, with lower piracy incidence compared to most other countries. The IFPI figures are worldwide. So even if we extract piracy impact from our model, it will be a very conservative estimate for the worldwide music market.

Thwarting computer hackers – how does it relate to music theft?

The bottom line is that most people are not going to pay for something if they don’t have to. Our common sense tells us that, because we have experience with human nature. You see the proof in our charts. I said this back in 1999 and also predicted other psychological impacts of the Napster culture. When I was doing Software Security Development one principle we used in the process of thwarting hackers was the Clark and Davis cost-benefit ratio for criminals. We will not discuss that complexity here, but we broke down one aspect of its usage based on the 10:80:10 principle:

  • 10% of people will not break the law, even if they know they can get away with it
  • 80% of people are opportunists – they balance the personal risk and selfish rewards of doing the wrong thing before they decide to break the law
  • 10% of people cannot be deterred, they will break the law even with a high chance of getting caught (“the evil 10”)

By raising the probability of getting caught and lowering the chance of successful hacking, we could deter the 80% and make the task harder for the “evil 10”.

I said way back then, that illegal music downloading, with no penalties, and no threat from law enforcement, is going to leave us at somewhere between 10% and 25% of music consumers actually paying for the product and consuming it legally.

After looking at the numbers from a decade of trends, I feel justified in my prediction.

Was DRM (copy protection) ever the answer to this puzzle? Maybe if there weren’t easily accessible alternative unprotected MP3s everywhere. The great solution to this puzzle that MYnstrel believes in is a holistic approach that has nothing to do with locks, shackles, and enforcement.

Other explanations and finding the bottom

I think that a portion of the music sales drop is caused by people choosing DVDs, video games, and some other entertainment over recorded music; however, as children from the late 80s and 90s, we were just as excited about video games that cost the same amount of money back then, but we also bought CDs because we couldn’t steal music online. Oh, and our families also had less Discretionary Income.

I think that the majority of the drop is caused by unfettered access to illegal downloading and CD burning. There’s the claim that the ‘quality of music’ in the last decade was poor, but that is so lame that it’s been regurgitated for decades. Experts have predicted the ‘death of rock and roll’ since the 60s, about once every decade. Even after the grunge craze, we saw tons of great rock bands emerge from the blending of hip hop, funk, and rock with even a spattering of Art Music from the progressive rock influence.

My Zune has never been so happy to be full of incredible music that I paid for and consume legally. Many music insiders also enjoy this luxury. Of course, there could be a lull in content, but a ten-year, 100% decline? I don’t think so. In fact, the point that illegal downloading continues at such astronomical levels indicates that people are still interested in the music content, and approve of its quality.

Where’s the bottom? I say we might see a decline as low as $5 to $20 per person per year spent on recorded music in the future, with technology-inspired peaks that could bump it to $30 to $35. I think it is very unlikely that we’ll see the success of $49 of 1991, and especially not the $70 of 1999.

Of course, a groundbreaking recorded music invention might blow these predictions out of the water. I think MYnstrel has a great shot with our secret recorded music invention that we’ll be releasing by 2019. I don’t think the smorgasbord deals of subscription access (Zune pass, new ISP deals, new legal-Napster subscriptions, etc.) are going to achieve this breakthrough, although they might have a shot at bumping revenues to a short-lived $30/$35 peak in the next decade as they help to mitigate the problem.

Sources

The sources used in this article do not divulge trade secrets of MYnstrel, so we reveal them as follows: Bureau of Labor Statistics (www.bls.gov) to derive Discretionary Income (that’s the money that the average person has after the government takes taxes and after essential spending is covered like food, shelter, and clothes), RIAA (www.riaa.org) for Music Retail Sales, Bureau of Economic Analysis (www.bea.gov) for entertainment-related industry growth, and Pew Internet (www.pewinternet.org) for home broadband penetration.

Next time…

In Part 1 “Yin and Yang”, we laid out the concepts surrounding music piracy and exemplified the philosophies with an entertaining story.

In Part 2 “Where Does Your CD Money Go?”, we established a robust analytical model to determine where all of your money goes when you buy a single CD and elaborated the front-end transactions (Government & Retailer).

In Part 3 “Stratification & Levies”, we laid it out for Distributors, Manufacture/Packaging, Free Goods, and Performance Royalties.

In Part 4 “Writers & Hegemonies”, we showed you where the rest of your money goes – to the Songwriting Team, Publisher, Risk/Losses, and the Record Label.

In Part 5 “Breaking Even”, we looked at all the major players who get paid from your CD purchase, and what kind of sales they need to make to break even.

In Part 6 “The Impact of Piracy”, we established beyond reasonable doubt, the impact of piracy.

In the next article, Part 7, we will use conservative estimates to figure out whose pockets the loss comes out of, and how it impacts all the parties involved. If we’re going to adapt to the market forces and ride the waves that we can’t control, that knowledge is vital.

Music Advocacy Journal Issue #6: Technical Treatise on Record Piracy – Part 5, Breaking Even

In Part 1 “Yin and Yang”, I laid out the critical questions surrounding music piracy and shared a true story that exhibited a polarized point of view on the topic. We talked about how MYnstrel approached the problem of music retail from a neutral position – concerning ourselves with all of the competing interests of different parties, and digging up the facts.

In Part 2 “Where Does Your CD Money Go?”, I shared some of our analysis that was generated in our music retail Business Process Engineering activities. The key question was simple:

  • Where does your money go when you purchase a CD?

It’s important to know where the money for a CD goes to understand how piracy impacts the workers responsible for getting the album from the artist’s mind and into your hands.

In Part 3 “Stratification & Levies”, I continued answering the line of inquiry we began in Part 2. Who exactly is responsible for getting a great-sounding recorded piece of music in your hands? What do they get paid for their labor from that CD sale? What does an artist actually make?

In Part 4 “Writers & Hegemonies”, we finished showing where all the money of your CD purchase goes by reviewing the Songwriter’s Team (Mechanical Royalties) and the Record Label.

In Part 5, “Breaking Even”, we’ll take a look at all the people who get paid from your CD purchase, and what kind of sales they need to make to break even.

These are just some of the questions our analysis will answer today. You will be able to use this Treatise over and over again as the most thorough reference material on the subject in print to date. Let’s get to it!

The rankings are in…

We’ve gone through all of the people and organizations that get paid from your CD purchase in the previous articles of this series. For the first time ever, MYnstrel brings you an analysis model that speaks to all of the major concepts underlying recorded music production and sales. Key to unraveling the mysteries that we are the first to uncover was asking the right questions. It wasn’t just “how much money do I pay for the CD on average”, but rather, “How much revenue does my decision to buy a CD generate for everyone, how does the retailer and government extract that money from me, and how does the money flow from the retailer to everyone else?” The following figure shows the entire cash flow that we’ve explored in Parts 2 – 5:

MAJ 6 pic 1

Now it’s time to rank all the major players and see who’s breaking even! We’ll make a few assumptions here to simplify our example:

  • Let’s consolidate the Publishing business team (Publisher, Harry Fox Agency, and Copyright Administrator)
  • Let’s say that the Artist wrote all the songs that they recorded on the album
  • The Artist’s business team (legal, management, accounting) is consolidated
  • Let’s use the real estimated values of the cuts, instead of the standard contractual values (our goal is to get better insight as to what is really happening to your money, so this makes sense)

Furthermore, let’s stratify the artists into their primary sales tiers to see what kind of revenue the players can expect:

  • A Low Tier album sells 60 CDs (69% of all new releases)
  • A Mid Tier album sells 3,900 CDs (30.6% of all new releases)
  • A High Tier album sells 368,000 CDs (0.4% of all new releases)

With this, we can finally show you where your money goes for a CD purchase, and how much money each party gets for their respective responsibilities (please don’t mind the rounding errors throughout this article):

MAJ 6 pic 2

Is your mouth agape now? Doesn’t look so much like what you see in the music videos, huh? Remember that the Recording Artist / Songwriter has to split that money amongst the band members too. Oh and did I mention something? The artist was paid money up front to spend on the recording and promotion, and they don’t even get paid more until they’ve earned that money back. That loan is what your $6.20 expenditure on Risk is paying for – the majority of artists who will default on that ‘advance’.

Our High Tier example is one that might have just broke even, because it takes between 250,000 and 500,000 CD sales to break even for the recording costs of a major label release, and remember that most artists in the high tier are signed to major labels.

Many of the players you see on that list have their reasons for their costs – the distributors have a lot of logistics personnel and warehouse costs to pay. The retailer has their own costs. The artists and manufacturers responsible for packaging have pretty low-margins, but so does the Record Label after they’re done underwriting the financially failed albums. We’re not talking pharmaceuticals’ net margins here.

The Free Goods are a cost of doing business. A consulting firm would spend time courting prospective clients, writing Scope of Work documents, proposals, and then suffer similar losses to get new business. The thing that frustrates me for Music Fans, Artists, and Music Biz Pros is the high-risk, unhealthy and obscure dynamics between the Record Label, Government, Retailer, and Artists. And if you think things are going to get better in the digital era, I hate to bear the bad news, but you should read the latest IFPI report that touts the fantastic deals in the making with ISPs. We’ll get into that stroke of Machiavellian genius in future editions of the Music Advocacy Journal.

Things could be better for many reasons, but MYnstrel identifies decisions that are being made today that work against our mission. Aren’t there better ways?

Let me reiterate, I don’t begrudge the Record Label for the levy that they take from album sales – this is an industry-wide issue that arises from the universal business processes and market-driven factors. The large cut of your CD money needs to be skewed heavily in the Record Label’s favor – it’s an insurance premium. Did you see all those albums in the low and mid tier? The Record Label fronted millions of dollars to make and promote those albums that couldn’t make the money back – so if they didn’t have the huge profits from the high tier, how would they continue to gamble on signing new acts (that will most likely lose money)?

And that’s what it is – a gamble. Remember, I say that you can either look at it as a casino or a high-risk insurance pool. I bet you never would’ve guessed that most of your money that you spend is going towards the luxury of enjoying hugely diverse and stratified genres (narrowcasting) and the result that comes from having to limit the predictive scope within those genres-within-genres. Are the Record Labels just really bad at picking the winners? Not necessarily, but we’ll have a full discussion on Narrowcasting in future editions of this journal.

Does it have to be this way? That’s a huge question for another time. What would you propose to reinvent a more stable and lower-risk environment? MYnstrel has invented our own solutions to all these problems and many more.

Industry averages reveals some profitability…and bankruptcies

Let’s look at the industry-wide averages and combine them with my cash flow model. We’ll validate with numbers, yet another real-world fact that will astound you. In a recent year, the averages for indies and majors were thus:

  • An average new indie label album sells 1,438 CDs in the first year
  • An average new major label album sells 41,109 CDs in the first year

So what is the total money that an average album will pull in on the first year? We compare the majors and indies:

MAJ 6 pic 3

Now let’s say that the average recording and promotion cost for an indie album was $12,750. Let’s say the major label average cost was about $255,000. Well that means that about 20% of indies are operating at a loss or going bankrupt – which explains the rise and fall of so many indie labels every year. It also means that the major is just squeaking by at a 12.6% gross profit margin. After looking at Government taxes and the 23 – 25% gross margin of the retailers, sure does make the Retailers and Government look like the real fat cats, doesn’t it? Of course, unlike the Government, Artists and Record Labels can’t devalue the currency by printing their own money and borrow billions of dollars from other Countries at the expense of future citizen labor.

Breaking Even

Now that we’ve gotten to the bottom of this convoluted money pool, we can finally answer the burgeoning question on everyone’s mind: how many CDs does the artist need to sell in order for the Record Label to break even?

Or…wait…is that really the question we want to answer? You know, in all of the thousands of pages I’ve read about the music business, not a single author has ever considered the labor of the musician. They talk about how the artist doesn’t get paid until the Record label’s costs of recording and promotion is recouped – but no one thought about what’s a fair price to put on the Artists’ time and labor. Well I’m going to do that here.

I’m going to say that these are fair salaries, and that the band will spend 3 months aggregate time writing material and recording in the studio. We’ll figure that this is a five-member band. That gives us:

  • Indie Nominal – $52,500 for labor of 5 people @ an annual salary of $42,000 per member for a small-budget indie band (prorated)
  • Indie High – $75,000 for labor of 5 people @ an annual salary of $60,000 per member for a large-budget indie band (prorated)
  • Major Nominal – $100,000 for labor of 5 people @ an annual salary of $80,000 per member for a small-budget major label band (prorated)
  • Major High – $125,000 for labor of 5 people @ an annual salary of $100,000 per member for a maximum-budget platinum-selling band (prorated)

The following table shows album expenses, how many CD units need to be sold for the Record Label to break even (RL Break Even), the artist labor described above, and how many albums need to be sold for the Artists to compensate themselves fairly for the labor it took to make the album (Art. Break Even):

MAJ 6 pic 4

And we haven’t talked about additional expenses on top of the ones listed above. A major label figures that when they sign a new artist, they’re investing $1M. It’s from this figure they derive the ‘break even sales’ of 250k to 500k CD units. Who’s thinking of the Artist’s lifelong career? Who’s thinking of the labor of the Artist?

As usual, the organizations with their hands on the big bucks – the Government, Retailers, Major Labels, and Distributors possess the power to levy the taxes, file suits in courts of law, and manipulate the contracts to look out for their own people first. That’s just business. The only way that’s changing is to decentralize power in favor of the independent companies who are closest to the product – that is – each and every single band, which is supposed to be their own company according to the IRS and all of these ‘partners’ signing contracts with them.

Moral of the story: love music, look to the future, believe in yourself

I’ll reiterate for one last time – in terms of industries I’ve developed technologies for, the Major Labels and Distributors really aren’t making out like bandits, even if they have to monkey the contracts to subsidize their losses and stay afloat.

One thing is for sure – if you like uncertainty, risk, and gambling with your life’s career and daily toils, you might enjoy this long-standing business model in the music industry. The supposed trajectory for a hard working artist historically is to work a day job, play clubs for years as a second job, working at nights, sacrificing family, friends, relaxation, and every other semblance of a stable life, hoping to get signed to a major where they have a chance at super-stardom, and then ride off into the sunset.

The reality is that the sacrifice is certain, but once the record label contracts are signed, it’s more like having all your hard work compressed into a 20-sided dice. The market of fans and the record label rolls that die with your life, and if it lands on 20, you’ll be around for a while. If it lands on anything else, you’ll be out on the street in 4 to 5 years, having gained nothing, which will put an end to about 15 years of struggling with your musical passion and hopes and dreams.

Maybe you’ll come off onto an indie label and make some decent money with a moderate fan base gained from the exposure you got by being on a major label. Maybe you’re cool with not making your music into a career, and just reaching out to a few hundred people in a local scene – just doing it for fun.

Whatever the case, you’ve got to love music with all your heart, not just to make it but to stay sane throughout the process. As funny as it sounds, MYnstrel team members started this company just like we played in our bands in our free time – working 60 to 90 hours per week. It takes most startup companies 5 years to see any money – the ones that don’t crash and burn. Do you see a parallel between startup companies and bands?

We’re working and sacrificing so much because we believe we can make a difference for music fans and artists everywhere. Do you love music that much? Will you work that hard to succeed in your band? If you do, you’ve got a chance. A lot of passionate artists just don’t know where to look to improve their odds. MYnstrel’s community initiatives are all about filling that gap.

For our part, we’ve invented ways to improve the business processes that can put more certainty into the business – making your prospects and rewards as an artist more tangible and certain, and making the quality of music getting to music fans better than ever.

What of music theft? Isn’t this treatise supposed to be about record piracy?

Well, you’ve been introduced to the major players and artists who ply their respective trades to bring your lifeless stereo speakers to a state of vivid resonance. You also now know about key financial concepts surrounding those players. Now we can finally talk about how widespread music theft affects all of these laborers and companies who depend on your purchases to continue bringing your speakers to life and being able to feed their families by doing so. That’s the next article.

Next time…

In Part 1 “Yin and Yang”, we laid out the concepts surrounding music piracy and exemplified the philosophies with an entertaining story.

In Part 2 “Where Does Your CD Money Go?”, we established a robust analytical model to determine where all of your money goes when you buy a single CD and elaborated the front-end transactions (Government & Retailer).

In Part 3 “Stratification & Levies”, we laid it out for Distributors, Manufacture/Packaging, Free Goods, and Performance Royalties.

In Part 4 “Writers & Hegemonies”, we showed you where the rest of your money goes – to the Songwriting Team, Publisher, Risk/Losses, and the Record Label.

In this article, Part 5, we looked at all the major players who get paid from your CD purchase, and what kind of sales they need to make to break even.

In the next article, Part 6, we’ll tie everything together to see how piracy hurts the workers who get that CD in your hands. Which of all these workers we’ve talked about suffers from piracy? Who suffers the most? Can’t artists just make money from the live shows? Isn’t that enough (Radiohead tried it)?

Music Advocacy Journal Issue #5: Technical Treatise on Record Piracy – Part 4, Writers & Hegemonies

In Part 1 “Yin and Yang”, I laid out the critical questions surrounding music piracy and shared a true story that exhibited a polarized point of view on the topic. We talked about how MYnstrel approached the problem of music retail from a neutral position – concerning ourselves with all of the competing interests of different parties, and digging up the facts.

In Part 2 “Where Does Your CD Money Go?”, I shared some of our analysis that was generated in our music retail Business Process Engineering activities. The key question was simple:

  • Where does your money go when you purchase a CD?

It’s important to know where the money for a CD goes to understand how piracy impacts the workers responsible for getting the album from the artist’s mind and into your hands.

In Part 3 “Stratification & Levies”, I continued answering the line of inquiry we began in Part 2. Who exactly is responsible for getting a great-sounding recorded piece of music in your hands? What do they get paid for their labor from that CD sale? What does an artist actually make?

In Part 4, “Writers & Hegemonies”, I’ll finish showing you where the money from your CD purchase goes.

These are just some of the questions our analysis will answer today. You will be able to use this Treatise over and over again as the most thorough reference material on the subject in print to date. Let’s get to it!

Mechanical Royalties: $1.27

Mechanical Royalties go to the artists who invented the songs and all of the people responsible for managing that intellectual property. Not every artist who records an album writes their own material. The Songwriters’ cash flow from your album purchase looks like this:

MAJ 5 pic 1

Now is a good time to talk a bit about intellectual property, and explain this cash flow.

If we were living in anarchy, mechanical royalties could not exist, since intellectual property law is the only way that the creative genius who composed the song can get paid. Without the law and its enforcement thereof, if I wrote a song today and shared it with a few people, there would be no recourse for me when they steal it and call it their own. There would be no way to prevent unscrupulous people from using my creation to make themselves rich, without my permission and without paying me for it.

Intellectual property law incentivizes people to work hard at creating something inherently good – something that is valuable to the mass public. In the music realm, it’s not always easy to write great songs. It takes lots of time, patience, inspiration, life experience, skill, creativity, discipline, and yes – born talent. Intellectual property law exists to make sure that there is justice – that all the time, labor, talent, genius, and willpower is credited to the right people. Once the copyright is secured, the inventors/owners have the right to protect their invention from other people leeching off their ingenuity and taking advantage of those inventors.

With a Copyright prerequisite, Mechanical Royalties are paid when a song is used on a recorded album, film, TV, commercials, video games, or printed as sheet music or in magazines. For our purposes here, we’re interested in what is paid for a CD. For our model, we assumed the CD has 14 tracks that are 4 minutes each on average. This would yield $1.27 in royalties as of 2007 (when we conducted the study).

As strange as it sounds, the Songwriter team doesn’t get all that money. They only get half of it. The other half goes to the Publisher.

The Publisher is responsible for critiquing your songs, helping you to improve them, coordinating collaboration with other songwriters, facilitating the demo recordings, and pitching the songs to Record Labels, recording artists, producers, movie makers, video game studios, and band managers. The Publisher also must administer your accounts – collecting the royalties (money), monitoring them, distributing them, and keeping track of all your licenses.

The Publisher is much different than the Record Label. The Record Label signs and develops Recording Artists – not songs. Just remember that the Publisher is all about the invention of the song and songwriting; whereas, the Record Label is all about the recording of performances by artists who may or may not have written the songs.

In the case that the artist recorded and wrote the songs, they would be entitled to the Songwriter’s share of the Mechanical Royalties in addition to the Performance Royalties previously mentioned. The business players behind those two very different things will always be separate entities – a Publisher vs. a Record Label.

For all of their responsibilities, the Publisher will take $0.40 of the money that the CD buyer paid for the CD.

Now that we have that straight, let’s talk about the Publisher’s partners: a Copyright Administrator and the Harry Fox Agency. These two entities provide services to register, audit, monitor, and collect royalties using sophisticated technologies and business processes. You pay them a total of $0.24 for their services when you buy a CD. Their job is to ensure that the songwriters get paid everything they’re entitled to for their inventions on the CD – a very important job.

And finally, last, but certainly not least, we have the Songwriting Team. They are the creative geniuses who invent those songs you love. Of course, they come with their own lawyers and business managers/accountants. If the Songwriter is also the Recording Artist performing the song on the CD, then this ‘business team’ is likely the same one that’s used on the recording team. Then there’s this strange character called a Songplugger. It’s their job to get the litany of songs that the songwriter creates actually recorded. They’re essentially the salespersons of a song portfolio.

Breaking down the Songwriting Team: the business team gets $0.14, the Songplugger gets $0.13, and the Songwriter(s) get $0.37.

It should be noted that there are detailed formulas for calculating the Mechanical Royalties due, which involve statutory rates, song length, and number of songs on the album. Because we’re performing an estimation to convey concepts, we’ll not discuss those details here. I haven’t written about much of the mathematics behind our analysis in order to keep the discussion focused on the concepts. If I did include those calculations, you might be sitting at your computer all day long reading these articles.

The Record Label: $3.68…but not really, more like $0.89 for majors and bankruptcy for 20% of indies

Now we finally get to the Record Label. According to typical contracts as we’ve described, they claim to only be skimming the remaining $3.68 off the top. But as we discussed in Part 3, they’re also getting a levy from overstated Free Goods and Manufacturing parameters. After these obscure levies are taken into account, the record label is getting somewhere around $7.10 of the money you spent on the CD.

“Those sneaky, dirty crooks!!!” you shout while waving your fist at the air!

Not quite.

As much as some music industry players want to paint a rosy picture about the success of the business to attract investors, and so that Artists in music videos can appear to be larger-than-life, the financial reality for the vast majority of artists is a much different story.

I won’t stand up for the Record Labels; but I will stand up for truth! We can’t afford to be ideological if we want MYnstrel to bring great value to Artists, Fans, and Music Biz Pros. Don’t just take my word for it; let’s look at what Record Labels actually have to put up with to stay in business.

I choose the words “put up with” carefully because you can only imagine how heartbreaking it is for the artist and business team to borrow between $12,750 (indies) and $1,000,000, and to work so hard, just to find out that the music fell flat on the floor and people aren’t buying it.

So, from whom do they borrow that money? Well, look in the mirror, my fellow CD Buyer! That $7.10 of each CD sale is really like a huge insurance premium that covers the immense losses that most albums will suffer. Remember our Tiers of sales and averages from Part 3? Let’s recap:

  • Low Tier (69% of new releases): 60 CDs sold per album
  • Mid Tier (30.6% of new releases): 3,900 CDs sold per album
  • High Tier (0.4% of new releases): 368,000 CDs sold per album

While the major-record-label CDs comprise the vast majority of the Mid and High Tiers, they also spend a fortune to make and promote their albums. The major label record costs between 20 and 25x the amount of money that an indie record costs to make and promote! If an indie spent $12,500 on an album, a major spent $250,000!

In 2006, only 3% of indie records recovered what it cost to make the album. In the same year, only 5% of the majors recovered their cost on an album. All of those losses are subsidized by the few successful albums that sell like hot cakes. High risk, high reward…but lower reward…because the ones that succeed have to subsidize the huge losses of the majority. That money you spend on a CD is going into a big casino, or insurance pool – however you prefer to look at it.

How does it break down? Well, we’ll get into the details in next issue, but basically the industry averages show a 12.6% gross profit off the album sales for majors. As for the indies, they’re in the red! Averages indicate that it is likely that 20% of the indies are operating at a loss every year (oh sweet horizon of bankruptcy).

So your payment to the gambling game caused by a huge diversity of music subdivisions (narrowcasting), and the other risk factors which make music investment so volatile, including the high cost of producing and recording the album, is actually $6.21. That’s the money that the Record Labels will use to subsidize all those albums that couldn’t even make back the money they spent, and the cost of producing all albums. The major record label is left with $0.89 to pay for the employees it takes to scout & nurture talent, legal, accounting, business administration, production, design, and marketing/promotion.

Payola is a bigger topic for another time – let’s just say that “independent promoters” are still legally taking millions of dollars every year, which determines what gets played on the radio – and largely, who ends up in that 0.4% High Tier of sales.

In the game of indie labels versus the majors – the majors’ huge capital expenditure on promotion is largely what determines the hegemonic realities of music sales. This truth is self-evident, and the logic is punishingly simple; can you buy something that you don’t know about? There are other psychological factors in the hegemony that manifest from ‘perceived’ popularity, but it’s a topic for another time.

The final piece of the cash-flow puzzle, the Record Label, looks like this:

MAJ 5 pic 2

Next time…

In Part 1 “Yin and Yang”, we laid out the concepts surrounding music piracy and exemplified the philosophies with an entertaining story.

In Part 2 “Where Does Your CD Money Go?”, we established a robust analytical model to determine where all of your money goes when you buy a single CD and elaborated the front-end transactions (Government & Retailer).

In Part 3 “Stratification & Levies”, we laid it out for Distributors, Manufacture/Packaging, Free Goods, and Performance Royalties.

In this article, Part Four, we showed you where the rest of your money goes – to the Songwriting Team, Publisher, Risk/Losses, and the Record Label.

In the next article, Part Five “Breaking Even”, we will break all of the numbers down for Low, Mid, and High Tier sales categories and see what a typical artist has to go through in their gamble for fortune and fame. We’ll see what everyone gets paid in ranked order, and we’ll wrap up the entire cash flow from your CD purchase. If you’ve made it this far, I guarantee that you’ll never look at your CD purchase the same way again.

Music Advocacy Journal Issue #4: Technical Treatise on Record Piracy – Part 3, Stratification & Levies

Introduction

In Part 1 “Yin and Yang”, I laid out the critical questions surrounding music piracy and shared a true story that exhibited a polarized point of view on the topic. We talked about how MYnstrel approached the problem of music retail from a neutral position – concerning ourselves with all of the competing interests of different parties, and digging up the facts.

In Part 2 “Where Does Your CD Money Go?”, I shared some of our analysis that was generated in our music retail Business Process Engineering activities. The key question was simple:

  • Where does your money go when you purchase a CD?

It’s important to know where the money for a CD goes to understand how piracy impacts the workers responsible for getting the album from the artist’s mind and into your hands.

In Part 3, “Stratification & Levies”, we will continue answering the line of inquiry we began in Part 2. Who exactly is responsible for getting a great-sounding recorded piece of music in your hands? What do they get paid for their labor from that CD sale? This will eventually lead to what the Artist and Record Label makes off of your CD purchase.

These are just some of the questions our analysis will answer today. You will be able to use this Treatise over and over again as the most thorough reference material on the subject in print to date. Let’s get to it!

Your Money at the Front End: $16.83 per CD

We went over details in Part 2, but let’s quickly recap what you pay:

  • For the actual CD, you’re getting an average price of $12.99
  • For the subsidy the retailer (Best Buy, Walmart, etc.) manipulates (using the CD as a loss leader), you’re still paying another $3.05 – that’s going straight to the retailers pocket from another highly profitable item you buy from them at any other time
  • The Government is taking another $0.79 from average sales tax on $16.04
  • When all is said and done, $16.83 is coming out of your pocket and $14.58 is headed to the music business and artists

Your Money at the Back End: $14.58 per CD

Now that the sale is done, and the Government and retailer have taken their share, there is $14.58 from your pocket headed to the people responsible for getting that CD to you. Who are those people? What do they (or their organizations) actually do? In this article, we’ll address the Distributor, Manufacturer, Free Goods, and the Performing Artists. Picking up where we left off, we have the following cash flow:

MAJ 4 pic 1

Let’s summarize each major player.

The Distributor: $2.92

Distributors manage retailers ‘privilege’ to sell back albums that the retailers don’t want to try and sell anymore. Yes, that’s right. The retailers can sell back albums to Record Labels via the proxy – a distributor.

Distributors buy albums from the Record Labels right from manufacturing, and then sell them to the retailers, who sell them to you. They ship, warehouse, and manage the logistics of distribution. Often, they will give marketing and promotion support to retailers and record labels too.

Distributors have deals that range from 18% to 35%, but the median contractual rate is 20%. So for all of these services, you pay $2.92 per album. All of the mail/shipping workers, warehouse workers, logisticians, and marketers would like to thank you and the artists for putting bread on their tables!

Here’s a side note. In the digital age, when CDs are no longer an item – the cost doesn’t really go away. The job of the Distributor goes to Information Technology teams and maintenance of computer systems and networks. This is a topic for another time.

Hold the holds please

Because the Distributors are compelled to buy back the CDs that the retailers don’t want, there are some mind-boggling practices used for paying people based on the contracts. They can actually hold the payments for a period of time after the release of the CD to see how many CDs get returned by the retailer. There are all sorts of complexities, approximations, assumptions, and obscurities associated with that.

In the end – these obscure calculations related to holds are supposed to ensure that the money is paid only on CDs that actually were sold to a customer – not ones that were sold to a retailer and then returned to the Distributor.

Because we used the actual sales numbers in our model (units & total revenue) to derive our average wholesale price, we can completely avoid this mind-numbing maze of holds, because we’ve achieved the same net effect with the design of our analytical model.

Manufacture/Packaging: $3.65 hmmm…really?

It’s no mystery what the manufacturer does – they mass produce all those jewel cases, replicate the actual CDs, and print all those CD insert booklets. The packaging team is responsible also for buying the custom artwork, photography, and designing the concept of the visual imagery used in relation to the album.

One thing is well known – most recording contracts include this obscure 25% levy. We have a problem with this obscurity. We understand that all of these services cost significant money, but 25%? Anyone can get 1,000 CDs replicated for about $1.00 – $1.20 each. Even if you added a 16-page printed insert and only produced 500 CDs, it would only cost a total of $2.35 per CD.

That’s just the cost for print and manufacturing. What about the artist, marketing team that worked on the packaging, and photographer? At the majors, a sample budget for album art is $2,000.

Are you really paying the marketing team and artist/photographer the difference of $1.30 to $2.65 per CD? This isn’t working out. All of these costs seem to be highly volatile. It’s time to stop this track, and rewind a bit…

Intermission: how many CDs will an artist sell?

Because the artist/photographer/marketing team cost is fixed, we have to know how many CDs are going to sell in order to prorate an average cost per CD.

Well the numbers are staggering, so here are a few of them. We’ll divide albums into 3 tiers of sales – Low, Mid, and High:

  • Low Tier – About 69% of new releases will sell less than 1,000 CDs, and account for only 1.5% of sales with an average of 60 CDs sold per album in the release year
  • High Tier – About 0.4% will sell over 100,000 CDs and account for 56% of sales with an average of 368,000 CDs sold per album in the release year
  • Mid Tier – The rest of the 30.6% will sell somewhere between 1,000 and 100,000 CDs. Although there is great stratification within this tier, we will give them an average of 3,900 CDs sold per album

The stratification is even more disparate when you consider whether or not the album is a major label or indie label release – but we’ll just stick to industry-wide stats for now.

It’s important to note that the indies are working with a lot smaller numbers across the board in everything but inventory – they account for 82.6% of new releases every year. Their low sales numbers really drag the averages down, but it’s important to note that they also spend a lot less money to produce the albums. A future article will discuss this more.

Manufacturing & Packaging, Revisited: Real cost of $1.25, hidden levy of $2.40 by the Record Label

Well, if you’re doing the math in your head now, you see how utterly confusing this can be to pin down. There’s a fixed cost for the artwork & packaging. There’s a per-CD cost for manufacturing. I know that I have a broad audience here, but if you want to replicate MYnstrel’s in-depth analysis (not discussed publicly), you’ll have to know your way around COGS and P&L.

We will assert that after artwork, manufacturing, and design that the average cost to a major label per CD is about $1.25. This cost can be higher for an indie record, depending on how they cut costs to give you a less fancy package. The cost for an indie record is not likely to be less (because of volume discounts).

Free Goods: The contract says $2.19, but experience says it’s $1.17

This is the cost of discounted and free CDs for radio stations, record clubs, educational organizations, military bases, and distributors. In some contracts, the artist gets a reduced royalty for the discounted sales. The net effect of free goods is said to be 15% in most contracts.

It’s anyone’s guess as to the actual validity of this levy. If you take the record label at their word, they are handing out 3 out of 20 CDs for nothing, in the hopes of getting more sales. If you listen to the industry insiders who publish books on the music business, you might believe that the truth lies somewhere between 5% and 11% for an average of 8% of wholesale. We use the 8% figure.

I don’t like the obscurity. With modern computer systems, there are better ways of managing this factor of COGS (cost of goods sold) than pre-empting with a suppositious levy in a contract.

Performance Royalties: $0.87

Who is the artist/band that performed the music that was recorded in the studio? They are the ones that get performance royalties. Whatever percentage is stated in their contract is calculated only after removing the previously stated values for Free Goods and Manufacturing from the sale. There are many other sticking points, but overall, the artist that records the album in the studio can expect about 5.2% of what you actually paid.

Oh, and surprise, the artist has their own personal team to pay (lawyer, business manager/accountant, Artist Manager, mixer, producer). After all of those people are paid, the recording artist is only splitting $0.59 amongst themselves. And yes, unfortunately, unless the band has very good business administration, legal, accounting, and studio recording skills, it’s unlikely that they’ll cut many costs here. The expense is an important cost of doing business, and an overhead cost that artists share with all businesses, large and small. Unfortunately, as I continue to serve up this reality-sandwich, you realize that these overhead costs are about a third of the Artists’ royalties.

The Performing Artists’ cash flow looks like this:

MAJ 4 pic 2

Next time…

In Part 1 “Yin and Yang”, we laid out the concepts surrounding music piracy and exemplified the philosophies with an entertaining story.

In Part 2 “Where Does Your CD Money Go?”, we established a robust analytical model to determine where all of your money goes when you buy a single CD and elaborated the front-end transactions (Government & Retailer).

In this article, Part 3, we talked about what happens to your money after the retailer takes it. We defined Distributors, Manufacture/Packaging, Free Goods, and Performance Royalties (Recording Artists). We also showed you how much of your CD money goes to each!

In the next article, Part 4 “Writers & Hegemonies”, we will show you where the rest of your money goes. Here’s a teaser – it’s related to the people responsible for writing the song (the artist who performed the song on the record may not be the one who actually wrote the song) and the ones who take the big financial risk on the album recording and promotion.

Music Advocacy Journal Issue #1: What’s a sell-out and who’s doing it?

Introduction

MAJ 1 pic 1

Welcome to the Music Advocacy Journal, and thank you for your participation!

Here at MYnstrel we debated and deliberated for a long time about what the first Music Advocacy Journal article should be. You see, there are so many problems in the music and entertainment industry right now, we have seemingly endless work to do on behalf of music lovers – and on behalf of our culture. No worries, MYnstrel is on top of the job!

We chose to address the infamous “sell-outs” of the music industry first because the issue impacts so many aspects of the music we choose (and the music that we would like to choose if we even knew it existed).

We’re all about the music, Artists, and Fans; therefore, spreading the ability to correctly identify “sell-outs” will definitely help the music community. It may also give you a refreshing perspective on certain artists and businesses!

Definitions & frame of reference

First of all, what is a “sell-out”? It’s important to define up front, because if we aren’t all operating within the same frame of reference, we’ll get lost in semantics. I will define a sell-out as a person, artist, band, or business who turns their back on their pre-existing mission with a primary motivation to make more money or to gain popularity.

The term, “pre-existing mission”, is critical. Incorrectly identifying that will lead us away from the real problems, and probably create fuzzy definitions of a sell-out. I’ve come across a few cases of this mistake:

  • People call a business a “sell-out” if they turn their back on previous “customer expectations” – First of all, customer expectations can vary from person to person, just like the things that fans think are important about a band. Sometimes a business needs to change what they promise to customers based on changing market forces, in order to continue to serve their greater mission to the maximum potential. If a band changes their music against previously built fan expectations, it may not necessarily be all about money or popularity.
  • People call a band a “sell-out” if they turn their back on their artistic integrity – This one is tough. Can you define artistic integrity? If an artist has music that’s coming from their heart and serves their mission, are you confident enough in your judgment to tell them it’s not genuine?

Let’s now get deeper into music-exclusive anti-definitions. A sell-out is not necessarily:

  • An Artist that got popular – The fact that an Artist’s work was so well-liked that it made them famous is not a black-and-white indicator of artistic integrity.
  • An Artist that changed their sound – Music evolves over time and artists change their interests.
  • An Artist that sounds like another popular Artist – Imitation is the highest form of flattery. As you get more into the technical aspects of music, you realize that the vast majority of a composition is an amalgam of pre-existing sounds that inspire and influence the Artist. In addition, how many times have you had an original idea, only to find out that someone thought of it first? There are artists out there who have been doing original things for years only to see someone else beat them to the public.

So if we can see into the hearts of artists and understand what their motivations are, and what their mission is with their music, maybe we can figure out who is selling out. This leads to another interesting question: why do we care who is selling out? If we enjoy the music, are we all that concerned about what the motivations behind it are?

Many people are concerned because they hope that the inspiration for their favorite music is truly genuine and coming straight from the heart and soul of the people who are performing it. Moreover, it is a logical conclusion that when popularity and money become the primary driver of artistic creation, the overall effect on the greater market is that the music products lose their genuine passion and originality that makes them timeless.

On behalf of the MYnstrel community, I say, we are concerned with the potentially negative impact of sell-outs on the quality and integrity of the greater music industry. The bigger question for MYnstrel is: what can we do to address the root causes of selling out?

It starts with this journal article, MYnstrel technologies, and with your participation, so read on!

Is earning a living a double standard for Artists?

Since we’re on the same page with the definition of a sell-out, we can talk about the apparent double standard that artists are held to in regards to earning a living with their products, services, and talent.

Now, for many professions society doesn’t seem to have a problem with workers who are primarily motivated by financial compensation. Does anyone believe that a hard-working patent attorney enjoys every aspect of their meticulous job? I’ve got to tell you, I’ve loved the challenge of high-technology for many years, but there were a few nights in my engineering program when I sat hovered over that green grid-lined paper, just wishing that I could pick up my guitar and escape some frustrating error which would have sent my satellite burning up in the atmosphere instead of into the intended orbit.

For many different jobs, we’ve heard apologies in the spirit of “they’re just trying to make a dollar to help themselves, to support their families, or to pay for college.”

Do we hear this apologetic rationale for hard-working musicians who perfect their craft over many years?

I remember seeing a satire related to this topic on a popular comedy show, in which a fictitious band called “Moop” was used to put forth two erroneous points of view:

  1. If you play music and make any money at all, then you’re a sell-out
  2. That it’s morally acceptable for consumers to steal digital music online because they’ll still pay to see a band play live ‘if the band is good’

As for the bad definition of a sell-out, we’ve already addressed it somewhat with our accurate definition. Ideally, we’d like to see truth, fairness, and virtue prevail by retiring the double standard for artists. Why shouldn’t an artist be able to make a fair living for their work? How is what they do any less important or worthy than any other entertainment worker, whether they are in sports, video games, motion pictures, or literature? Are musicians superhuman creatures who don’t need a shelter over their heads, or food on their tables? Do people really believe that the vast majority of music-related workers are living the uncommon lives of luxury that are portrayed in music videos?

As for justifying the theft of digital music, by supplanting a purchase of digital music with a promise of attending live shows – an examination of the facts proves this mantra to be misguided as well. Without delving into the realities of compensation for live music performance and recorded music, for now, let’s just say that this isn’t a fair trade, and that no other business would apologize for analogous expectation of ‘free goods’ (we’ll talk about this in greater depth in a future Music Advocacy Journal edition).

To be certain, we do sympathize with the level of confusion in the marketplace concerning music products. Part of the reason that there are so many pervasive myths about compensation in the music industry is because within the last century, there have been many shady dealings – some of which persist today.

MYnstrel technologies, business innovations, and community organization will increasingly help to rectify those iniquities. When our dream is fully realized, sell-outs will have a harder time competing with true artists, and the double standard for artist compensation will be just a blip on the radar of music history.

How can we spot sell-outs?

MAJ 1 pic 2

I remember a certain song by the band Tool off of their album Aenima in which they satirize a fan who accused them of selling out, to make the point that the eternal value of the music experience is all about the synergy between fans, the art, and the artist. Of course Tool is one of my favorite bands, and in their prescient words: “All ya know about me’s what I sold ya…I sold out long before you ever even knew my name.”

Of course the grand irony of anyone accusing Tool of selling out is that they are the band that was going against the popular fad of grunge rock with their progressive rock styles, and they are the band that has continually pushed the boundaries of rock music with virtually no homage to popular music trends. Here, we see another example of bad sell-out definitions – in Tool’s case, they were slandered by the notion that if a band gets popular and succeeds, they must be a sell-out.

Notice that Tool is still selling out arenas decades later, while the vast majority of fad-grunge rockers from the early 90s are doing what? Right, I don’t know either. There must be something very special about Tool, something genuine and intrinsically good. And these are the artists who could never be fairly labeled as sell-outs. You know the real deal when you hear it, because no one else can do what they do, even if there are droves of passionate imitators. Can money create that originality, inspiration, passion, and born-talent that people can just feel? I don’t think so.

Chances are, if you’ve got the music flowing through you with an open heart and mind, you can tell who is selling out when you fire up your stereo, and crank up the volume, only to get that disappointing feeling of stale inspiration, generic blandness, and fleeting catchiness that’s here-today-gone-in-two-weeks.

I’ve found that some of my most treasured, long-lasting, and enduring songs are the ones that took me a few listens to really appreciate; music that is much like a fine wine, or a young adult slowly gaining appreciation for coffee or beer.

Who’s selling out?

By now you might expect – I’m personally not ready to accuse artists of selling out. It’s not that I don’t believe there are many sell-out music workers hanging around, waiting for the next trend to latch onto, and then streamline it into a cookie-cutter press for a quick buck. It’s not that I couldn’t name a few scandalous songs of 2008 which were blatantly uncreative mockeries of the art of music – using a prospect of gross controversy in lieu of exceptional musical development, just to get attention and sell more albums. Why would I call out these travesties and give them more press?

Really, it’s just not worth our time to even spend negative energy on things that deserve absolute zero attention, when there are so many incredibly talented and well-meaning artists out there who deserve our energy. MYnstrel has built the Artist Spotlight in order to feature an ever-increasing number of the truest and best artists of past and present. We promise that you will never find a sell-out artist on our prestigious Artist Spotlight.

And finally there’s that perplexing question bouncing around in the back of our heads – do we really care about who is selling out? Maybe we do, maybe we don’t. Those droves of grunge bands that just disappeared along with the fad may or may not have really been sell-outs. Many of them may just have been passionate and enthused imitators; it is true that imitation is the highest form of flattery. Can we know for sure what their motivations were? Are we confident enough in our own judgment to be so bold? Is it critical to know what our ears can’t discern from the audible product?

For my part, I would gladly welcome a dozen more bands that sound like Faith No More, Lo Pro, Led Zeppelin, Element Eighty, Vivaldi, Pavarotti, Lee Ritenour, and so many more of my favorites. The question in my mind is – will they be genuine enough to not sound generic, stale, or fleetingly catchy? I suspect that if they’re not selling out, they might just have a shot.

I remember being one of the first fans of Incubus before anyone knew who they were. I also remember identifying immediately how they were overtly inspired by many aspects of my favorite band, Faith No More. Yet Incubus never disappointed me, having delivered dozens of fantastic songs over the years that became some of my all-time favorites.

As music lovers, we hope that artists continue to discover the genuine inspiration that elevates our art and the business. At MYnstrel, we will continue to build technologies, invent products, and business processes that will make the music landscape more difficult for sell-outs to traverse, and more negotiable for the incredible artists who deserve our attention.

I am Tommy Kurek, on behalf of the MYnstrel community, thank you for your participation in the Music Advocacy Journal! We hope you’ll tune in next time as together, we continue to elevate the art, business, and technology of music.

Music Advocacy Journal Issue #2 : Technical Treatise on Record Piracy – Part 1, Yin & Yang

Introduction

MAJ 2 pic 1

Some have said, we should just copy each other’s digital music collections. They say that record-sharing technologies like the original Napster should be legal. Where is the harm? Unlimited ‘free’ music is actually ‘free’ promotion for the bands who want people to hear their music, and the bands will just make their money in some other way to put food on their table. Besides, bands don’t make that much money off of a record sale anyway, so people who take records without paying (digitally or otherwise) are kind of like Robin Hoods – getting economic revenge on the ‘corpulent’ major labels.

As with much of the common knowledge in the postmodern era, the previous conclusions are novel ideas based on half-truths, and they are only possible in a vacuum of full awareness. Personally, I wanted to avoid rushing to judgment on record piracy, Napster, and record labels, so I chose years ago to go against the grain – to educate myself on the business of music so that I may discover the truth.

As a huge Music Fan, an accomplished Artist, and an aspiring technology and business guru, I sought to find the answers. I wanted to constantly shift gears to view the problem from the purview of three roles – Music Fan, Artist, and Music Business Professional. I believed that only by understanding the experiences of everyone involved, could I arrive at valid answers to the burgeoning questions on everyone’s minds:

  • Is it wrong for me to take MP3s (or other record formats) and not pay for them?
  • Who does it hurt if I take those records without paying for them?
  • Can the Artists find another way to make money, so they can get paid fairly for their hard work, dedication, and skill?
  • When the practice of taking MP3s without paying becomes more commonplace, how will it affect the music that I get to listen to? Will record companies still be able to offer me the same quality, variety, and choice?
  • How can record labels truly protect their products from piracy? Is Digital Rights Management (DRM) the answer?
  • Free Goods have always been a part of record promotion (estimated at around 10 – 15% of the gross) – so how does a nominal proportion of consumer-forced Free Goods (i.e. piracy) mesh with the historical model?
  • People have been copying records for a while now – the only difference is with tapes, you could only copy a tape so many times before it lost sound quality and the copying process was relatively slow. In contrast, the propagation of digital records is unlimited, fast, high quality, and mostly uncontrollable. So how does unconstrained, illegal record propagation and unfettered catalogue access impact the consumer’s perception of the actual product – a recorded piece of music?

Part One of this treatise simply introduces the questions for you to ponder, and shares an entertaining story from my life concerning music piracy to illuminate conflicting philosophies. Future parts of this treatise will illuminate:

  • DRM’s inevitable crash into oblivion
  • Attempts to thwart music theft from past to present
  • A breakdown of where your money actually goes when you buy an album
  • What can the philosophy of technology and technocracies tell us about the problem of music piracy?
  • Finally, my conclusion on the subject which has guided MYnstrel’s own music retail Research and Development (R&D)
  • Why MYnstrel is the first music organization in the world (yet again) to take these riddles seriously and solve the issues, rather than responding in a reactionary manner

If you ever decided to get involved with a “Napster” conversation, or discussions on MP3 freeloading, or music piracy, you will definitely enjoy this treatise. I would encourage any Artist or Music Business Professional to consider the information that I present here.

With the premise well-established, let’s continue!

Yin and Yang (one more epic light-saber clash, Jedi-style)

MAJ 2 pic 2

Sometime in 2008, I was at lunch with twelve coworkers at a local Indian Restaurant. I happened to get seated next to a guy who immediately gave me an unpleasant vibe. He was tall, thick, balding, almost twice my age, and apparently a decent amateur basketball player for his age. Let’s call him “Johnny” for the sake of anonymity.

Johnny was the kind of guy who could take a normal conversation and destroy it with a single sentence, leaving everyone silent. To some people, he might have imposed an intimidating presence; to me, it was quite the opposite. I’ve had many rewarding experiences in taking on aggressive opponents. The trick is to turn them upside-down on their heads, as if applying verbal judo to the unwieldy girth of their arguments. It’s at that point when age, nor title, nor money, nor heritage seems to matter at all. Big Johnny was about to choose to make himself my next challenger.

Johnny initiated an argument with me about the business of music. Apparently he played basketball with a big shot lawyer from the RIAA. He didn’t have a very high opinion of this lawyer (berating him with various insults), and proceeded to excuse himself from moral wrongdoing for his vast pirated digital music, MP3 collection (which he apparently acquired by posting huge illegal MP3 file shares with his friends at work). After letting him do most of the talking, I just asked him a few questions:

“True, artists make a small percentage from album sales, but what do you know of the total compensation package for artists, and what it costs to make that album, promote, and produce their products?”

He didn’t know.

“What do you tell an artist who you know is talented, but they failed their sales expectations? They might just need some time to become known and make the kind of sales that can subsidize a $50 – $250k expenditure on just the recording. There were many stars that came out of the late 70s who failed on their first 3 albums, only to make it big. Artists today don’t get that shot – and a large part of the judgment to drop them is based on record sales. What do you tell them when you pirate their album? You don’t care if they’re around for a 2nd or 3rd album?”

He didn’t know.

“Would you change your mind if you knew that 95% of artists in 2006 did not even make up the costs that they consumed in getting their music to market, and actually lost money for their labels, and that less than 0.5% of albums accounted for over 50% of all sales for 70,000 albums released? Are you comfortable with that homogeny and disparate stardom?”

He didn’t really know. He thought quickly on his feet, and proposed that 99.5% of the music out there is garbage anyway, so he didn’t think that was a bad deal. I just disagreed with him and moved on. No need to go off on a tangent about good music vs. popular music. I continued:

“You can only sample perhaps 100 albums in one year, if you are an avid listener. Most of what you’ll sample is what’s being put right in front of you by promoters. Since the music you are being spoon-fed has big promotion money behind it, don’t you think there is a chance that some of your favorite music is hiding somewhere, perhaps not even accessible in the record store, just another one of those 70,000 albums per year that you’ll never even know about?”

He had an idea about this one. He said that it’s the same scenario for authors and their books.

I told him that I was not educated on the industry of literature, so I couldn’t disagree with him (although I had a feeling he really wasn’t a scholar of that business either). I retorted:

“Pointing to a similar iniquity in another industry doesn’t negate the severity of the matter at hand for people who care about music. Since we’re talking about music, let’s focus on that. Just because there are challenges in the literature business, doesn’t mean we should just accept similar unfairness in the music business. We’re trying to solve the problems, not excuse them away.”

Now Johnny was very frustrated. He direly wanted to go home and feel like a fantastically moral guy with his immense illegal music collection. I’ll never forget his last words on the topic to me, “You know Tommy, haven’t you ever heard of the ‘starving artist’? They’re supposed to have it rough and live turbulent lives so they can entertain us better.”

You would think he was joking right? But he wasn’t. He was 100% serious. I closed out the conversation with my crane kick, Mr. Miyagi-style. Again, paraphrasing what I told him:

“Well Johnny, I’ll have to agree to disagree with you. Because I’m a passionate musician myself, I deeply want to see music be a viable occupation that is rewarding and stable. I feel terrible for some of my favorite bands that have spent decades of their lives perfecting their craft, only to get sucked up by a broken business system, spit out the other end, and then dropped from their labels after only a few albums. You spent many years of your life perfecting your skills in business to get where you are today; can’t you image what it would be like if those skills were so devalued that someone made a similar comment about guys like you, who pursue your career?

Not only does it break my heart to see this happen to Artists, but also to know that fantastic artistic potential is being crushed, never to be shared throughout our culture again. No, I don’t think you are bankrupting Michael Jackson because you stole some of his MP3s, but without the money to subsidize future gambles on up and coming artists, your piracy may have been part of the financial losses that created the fiscal situation in which one of my favorite new bands couldn’t get a shot at a second album. The money that was lost on piracy could not go to subsidize more losses on struggling bands – which as I’ve stated, is the majority of them.

Don’t get me wrong, there are many broken business processes in the music industry, and piracy isn’t the only variable. And I don’t think that the RIAA suing people is going to be the solution to the problem. It’s a large, multifaceted problem. I’m trying to look at it from everyone’s point of view, and figure out viable solutions to do what I can to help. I think there are a lot of people who want to help make music better, but I don’t see how you’ll be part of the solution with the attitudes you’ve expressed to me.”

And that was it. A few months later, I told Johnny about a death in my family and he never offered condolences. Sometimes you just get a feeling about people. Johnny’s mentality was a great example of an extremist point of view, which made my experience with him interesting. He gave me a great inspiration. I asked myself, “How can I get a guy who thinks like Johnny to support artists, and buy more music products?” You see, in Johnny’s mind, it wasn’t a question of whether or not he wanted to consume the music products, but rather, how much he could get for nothing.

If I could figure out how to get Johnny to pay for the music, I would be able to solve the problem for all Music Fans, Artists, and Music Business Professionals. When we began MYnstrel’s R&D on our revolutionary music retail products, this was the inspiration I gave to my team. Our objective was simple and clear: make Johnny enjoy paying for great recorded music.

Next time…

We’ve laid out some concepts about music piracy in Part One of this treatise. In the next article, Part 2 “Where Does Your CD Money Go?” we’ll establish a robust analytical model to determine where all of your money goes when you buy a single CD. It’s important to know where the money for a CD goes to understand how piracy impacts the workers responsible for getting the album from the artist’s mind and into your hands.

Music Advocacy Journal Issue #3: Technical Treatise on Record Piracy – Part 2, Where Does Your CD Money Go?

Introduction

In Part 1 “Yin and Yang”, I laid out the critical questions surrounding music piracy and shared a true story that exhibited a polarized point of view on the topic. We talked about how MYnstrel approached the problem of music retail from a neutral position – concerning ourselves with all of the competing interests of different parties, and digging up the facts.

In Part 2, “Where Does Your CD Money Go?”, I will share some of MYnstrel’s analysis that was generated in our music retail Business Process Engineering activities. The key question in this issue of Music Advocacy Journal is simple:

  • Where does your money go when you purchase a CD?

It’s important to know where the money for a CD goes to understand how piracy impacts the workers responsible for getting the album from the artist’s mind and into your hands. In addition, there have been numerous ideas about music piracy in the past five years that seem to have some validity, but are actually harmful to artists and fans because the ideas don’t consider the full realities of music recording, production, distribution, and manufacturing. For around 100 years, music has been fixed into recorded vehicles of consumption that the public has enjoyed. Over the years and behind the scenes many things have changed, but many of the principles are the same.

Haven’t you always wondered what you’re paying for when you purchase recorded music? I think this is a fascinating article not just for Artists and Music Biz Pros, but also Music Fans. Let’s dive in!

Those evil record companies…

More than a decade ago, before I knew much about the actual business of music, I was an engineer-in-training, learning how to solve complex problems with applied mathematics, computer science, physics, chemistry, biology, and economics.

I heard word on the street that the major record companies were evil corporations, and they ripped off artists and fans. The only justification I heard for this judgment is that “Artists only make a dollar or two from a record sale.”

In my younger more impressionable years, I was more inclined to believe subjective claims. Now, with a plethora of facts at my disposal, I have a different opinion.

My conclusion? It is likely that history is repeating itself. During the Great Depression in the USA, the record industry’s annual revenue declined from $100M to $20M because they blew off the impact of radio, erroneously confident that music fans would always want their own personal record collections.

The music industry didn’t predict the Great Depression, and they didn’t predict the widespread sufficiency of radio as an alternative to personal record collections. Does anyone see a parallel today, in 2009?

In addition, by the time we get through this series of articles, you’ll realize something – the vast majority of the money collected from a music retail sale is not going into the Record Label’s pocket. It is going into an insurance pool that the Record Label manages. This pool was created by everyone who has listened to popular music for the past five decades. It is the effect of narrowcasting, the price we pay for diversity of choice – and the immense financial risk that is created by that uncertainty.

This is easily observable any time you hear a fan say something like, “Yes, I like rock, but not rock style x, y, z, metal, nu-metal, hard rock, soft rock, pop rock, funk rock, emo, screamo, classic rock, punk rock, goth rock, etc. etc.” Although Urban/Hip Hop/Rap is less narrowcasted because of its relatively young age, it’s well on its way too.

Today, musical sounds and bands are so highly specialized, it’s difficult even for the most trained ear to pick the ones that will make their money back – and on the contrary, the albums that will burn up hundreds of thousands of dollars without coming close to making the money back. The albums that succeed largely subsidize the albums that fail. It’s a gamble. Most of your money pays for that gamble, so we get the wide variety of choices and diversity that we create with our highly specialized preferences.

Today, I don’t believe that record labels are evil, although they are definitely unscrupulous at times (like any business). I purport that the record industry has made some crucial miscalculations over the past two decades, and all of the people who depend on them for music – Fans, Artists, and Music Biz Pros – have suffered the consequences of those miscalculations. When you see the economics that underlie a record sale, you might agree with me.

Where does my money go?

When you buy anything in a store, your money is going somewhere. So where exactly does the money from a single record sale go? What are you paying for? Seems like a simple question, right? Buckle your seatbelt for a real treat! MYnstrel dove into over 2,000 pages of textbooks on music business, legal proceedings from major law suits, and dozens of annual reports from music industry publications, so that we could extract the figures that would underlie a normal CD sale. It took over 20 spreadsheets to generate our analytical model of the cash flow from a CD sale.

Now, understand that there are all sorts of variables. In most record contracts, the artists don’t get paid for largely discounted CD sales. Some cuts of the money from the sale are hard and fast amounts, some are percentages, and others depend on the number of songs on the album (and length of the song).

We’ll start by figuring out how much front-end revenue an average CD generates ($16.83), accounting for the retail stores and the government. It’s important to note that all the individual numbers in this analytical model are estimates that might be off by small orders of magnitude, because of how many dozens of factors and variations contribute to the model. Regardless, the model is very accurate as a whole, and the concepts shine through because we used industry-wide stats, values present in standard music contracts, and the Law of Large Numbers. By the time we’re finished, we will have derived a comprehensive cash flow diagram. For this issue, we will only cover Retailers and the Government. The following diagram illustrates the cash flow that we’ll explain in this issue:

MAJ 3 pic 1

A little intrigued? Let’s start explaining all the interesting facts that our model illuminates.

Retailer Cut: $1.46 (8.7% of the total money out of your pocket) – and they took it from you when you bought something besides the CD

Stay with me, because the retailer is a tricky player. We have to start here, because…well, that is where you spend your money! It all starts with your decision to buy a CD at a retailer like Best Buy, Amazon.com, or Walmart.

Let’s determine the average price of a CD in 2007. Well that shouldn’t be too hard…or should it? Based on the 2007 RIAA Market Sales Report, the number of physical CD units shipped was 511.1M. The gross revenue for CDs was $7,452.3M. Their numbers are very accurate because they only count the manufacturer’s unit shipments and retail value, after returns. In addition, we dug around to find prices online offered by various companies for wholesale CD lots (minus the ones who sell liquidated inventories). Interestingly enough, typical wholesale costs for CDs were right in line with the RIAA Market Sales Report. So we estimate the average wholesale price of one CD in 2007 to be:

MAJ 3 pic 3

Now this might give you pause. When you go to Walmart, Best Buy, or Amazon.com, you will rarely pay more than $14.58. So am I telling you that when you buy a CD for less than $14.58, that the retailer who sells it to you is not making any money, and in some cases, losing money? Yes, that’s what I’m telling you – at least the vast majority of the time.

Sometimes there are “bargain” CDs that have been slashed in price by the record label, and sometimes CDs are priced higher for special features like dual disc or DVD extras. But those outlier cases are negligible in our model thanks to the Law of Large Numbers (we’re estimating here, folks).

You ask, why in the world would a merchant sell something at a price that makes them lose money? This is nothing new in retail. It’s called a loss leader. Those retailers are making huge amounts of money on your other purchases for electronics and other devices; they use CDs to bait you and increase the frequency that you go to their stores. In addition, the volume of sales for their media products is so large that even if they make a small amount on the normally priced items, it also subsidizes the low-priced CDs.

So don’t feel like retailers are doing any favors for you – if you’ve ever bought something other than media from them, then you’re paying more than the difference out of your own pocket.

You can even do your own little experiment (not that MYnstrel has tried this, or recommends it). Put on your spy hat and go to your local electronics retailer like Best Buy or any other. Start up a friendly conversation with any worker, and ask them, “What is your employee discount on store items?” They’ll tell you “We get huge discounts on car audio devices. We never get discounts on CDs that cost $10 to $13, because they call them ‘sale’ items. Even on CDs that are $15 or $16, we barely get any discount.”

Now you might be asking, “Why do retailers choose to sell CDs at a loss?” Let’s drive the point home: because it generates lots of foot traffic and you will then buy other things with huge profit margins. Oh, and there is one more concealed motivation – running other companies out of business, and ensuring that no more pesky music-only stores can pop up as time rolls on. Look to the lawsuit filed in August, 2000 by 29 states, led by New York, Florida, California, and Texas. But that’s a story for another day. Trust me, these large retailers are profitable for discernable reasons.

So let’s do this. Let’s say the average price of a CD to the CD buyer is $12.99. Sounds fair, right? Now consider a gross profit margin for a large retailer like Best Buy during a quarter close to the time we did this analysis – 23.5%. They’re hedging their bets that in a macro sense, their items will yield a 23.5% gross profit margin, and that foot traffic they generated with the undercut CD price will yield 23.5% return on that $12.99 CD purchase you made. So what do they get out of it? They get:

MAJ 3 pic 4

Consequently, the electronics-buying customer is subsidizing the $1.59 loss on the purchase, and giving the retailer an additional $1.46 in profit. A company like Best Buy will actually pay the loss of $1.59 per CD to the record distributor, hedging their bets that using the CD as bait to increase foot traffic will continue to drive a typical gross profit in 2005 of 23.5% – 25%.

By doing this, even though they’re selling the CD to you at a loss, they still get a net positive from subsidizing that with volume transactions and sales of more profitable items – the sales that the CD foot traffic drive. In addition, they get to monopolize the retail space so that all those small pesky music-only stores can’t come back and take some small bites out of the business. Let’s face it – it’s a lot more expensive to make a new Best Buy/Circuit City/Walmart chain than it is to open a music-store chain.

Among the large retailers, they now all possess nearly the same business model. I’ve got news for the judges, state governments, and plaintiffs involved in that lawsuit – consumers are still paying the $1.59 per CD, we’re just doing it through an obscure process.

So what about those music-focused stores? If you’re really motivated, maybe you’ll be able to put small record stores in malls where there is a lot of foot traffic and people will pay a little bit more for the CDs, and forget about the cheaper prices while they’re out with their friends at the mall (FYE, anyone?).

Next up, what else but…

The Government: $0.79 (4.7% of the total money out of your pocket)

With an average retail sales tax of 4.9%, the Government is taking $0.79 of the sale from the customer’s pocket (the handful of states with zero sales tax drag the average down). Of the total money out of your pocket, that turns out to be 4.7%. This is over and above the $12.99, because we will credit the tax on the loss leader subsidy and total revenue generated by the CD since the retailer attributes that “foot traffic” to generating the subsidy revenue and more. These facts yield the average sales tax revenue from a CD sale:

MAJ 3 pic 5

Your average CD cost: $16.83

Let’s now summarize the average figures for a CD sale. The record distributor sells the CD to your retail store for $14.58. In turn, the retail store offers it to you for $12.99, but you pay an additional $3.05 out of your own pocket whenever you purchase something else with a higher profit margin. The tax on the final cost of $16.04 comes out of your pocket too, for a total of $0.79 per CD.

You can look at it one of two ways: either you’re paying too much for the price of electronics that subsidize the cheaper CD, or you’re getting a steal on the CD by never buying electronics from such retailers, instead opting for bargain hunting online for electronics (in which case, other consumers are paying for your discount). Whatever way you look at it, $16.83 is coming out of your pocket. The retailer gets huge amounts of profit as they draw you to the store to purchase high-profit items using CDs as bait.

So what amount of money is headed to the music companies and artists? You got it – $14.58 per CD on average, as depicted below (average wholesale price for one album):

MAJ 3 pic 2

Next time…

In Part 1 “Yin and Yang”, we laid out the concepts surrounding music piracy and exemplified the philosophies with an entertaining story.

In this article, Part 2, we have established a robust analytical model to determine where all of your money goes when you buy a single CD.

In the next article, Part 3 “Stratification & Levies”, we will show you what happens to your money on the back end after the retailer has made the sale. Who exactly is responsible for getting a great-sounding recorded piece of music in your hands? What do they get paid for their labor from that CD sale?