The whole point of digital music is the risk-free grazing”

Cory Doctorow, Canadian journalist and co-editor and of the off-beat blog Boing Boing, is an activist in favor of liberalizing copyright laws and a proponent of the Creative Commons non-profit organization devoted to expanding the range of creative works available for others to build upon legally and to share. Doctorow and others continue to write prolifically about the apocalyptic changes facing Intellectual Property in general and the music industry in specific.

In this article, we will explore the cataclysm facing U.S. industry through the portal example of the music industry, a simple industry in comparison to those of automotive or energy. However, in the simplicity of this example we may uncover some lessons that apply to all industries.

In his web-article, “The Inevitable March of Recorded Music Towards Free,” Michael Arrington tells us that music CD sales continue to plummet alarmingly. “Artists like Prince and Nine Inch Nails are flouting their labels and either giving music away or telling their fans to steal it… Radiohead, which is no longer controlled by their label, Capitol Records, put their new digital album on sale on the Internet for whatever price people want to pay for it.” As many others have iterated in recent years, Arrington reminds us that unless effective legal, technical, or other artificial impediments to production can be created, “simple economic theory dictates that the price of music [must] fall to zero as more ‘competitors’ (in this case, listeners who copy) enter the market.”

Unless sovereign governments that subscribe to the Universal Copyright Convention take drastic measures, such as the proposed mandatory music tax to prop up the industry, there virtually exist no economic or legal barriers to keep the price of recorded music from falling toward zero. In response, artists and labels will probably return to focusing on other revenue streams that can, and will, be exploited. Specifically, these include live music, merchandise, and limited edition physical copies of their music.

According to author Stephen J. Dubner, “The smartest thing about the Rolling Stones under Jagger’s leadership is the band’s workmanlike, corporate approach to touring. The economics of pop music include two main revenue streams: record sales and touring profits. Record sales are a) unpredictable; and b) divided up among many parties. If you learn how to tour efficiently, meanwhile, the profits–including not only ticket sales but also corporate sponsorship, t-shirt sales, etc.,–can be staggering. You can essentially control how much you earn by adding more dates, whereas it’s hard to control how many records you sell.” (“Mick Jagger, Profit Maximizer,” Freakonomics Blog, 26 July 2007).

In order to get a handle on the problems brought about by digital media in the music industry, we turn to the data most relied upon by the industry. This data comes through Neilsen SoundScan which operates a system for collecting information and tracking sales. Most relevant to the topic of this column, SoundScan provides the official method for tracking sales of music and music video products throughout the United States and Canada. The company collects data on a weekly basis and makes it available every Wednesday to subscribers from all facets of the music industry. These include executives of record companies, publishing firms, music retailers, independent promoters, film entertainment producers and distributors, and artist management companies. Because SoundScan provides the sales data used by Billboard, the leading trade magazine, for the creation of its music charts, this role effectively makes SoundScan the official source of sales records in the music industry.

Quo vadis? According to Neilsen Soundscan, “In a fragmented media world where technology is reshaping consumer habits, music continues to be the soundtrack of our daily lives. According to Music 360 2014, Nielsen’s third annual in-depth study of the tastes, habits and preferences of U.S. music listeners, 93% of the country’s population listens to music, spending more than 25 hours each week tuning into their favorite tunes.”

For most Americans, music is the top form of entertainment. In a 2014 survey, 75% of respondents stated that they actively chose to listen to music over other media entertainment. Music is part of our lives throughout all times of the day. One fourth of music listening takes place while driving or riding in vehicles. Another 15% of our weekly music time takes place at work or while doing household chores.

It has become no surprise over the past five years that CD sales have diminished while download listening and sales have increased. Bob Runett of Poynter Online comments, “Start waving the cigarette lighters and swaying side to side–the love affair between music fans and their cell phones is getting more intense. Phones with music capabilities will account for 54 percent of handset sales globally in five years, according to a report consulting firm Strategy Analytics Inc. The report suggests that we keep watching the growth of cellular music decks (CMDs), devices that deliver excellent sound quality and focus on music more than images.” (“A Few Notes About Music and Convergence,” 25 November 2014)

Stephen J. Dubner summed up the mess quite well almost a decade ago. “It strikes me as ironic that a new technology (digital music) may have accidentally forced record labels to abandon the status quo (releasing albums) and return to the past (selling singles). I sometimes think that the biggest mistake the record industry ever made was abandoning the pop single in the first place. Customers were forced to buy albums to get the one or two songs they loved; how many albums can you say that you truly love, or love even 50% of the songs–10? 20? But now the people have spoken: they want one song at a time, digitally please, maybe even free.” (“What’s the Future of the Music Industry? A Freakonomics Quorum,” 20 September 2007).

Like many of us, I (Dr. Sase) also have worked as a musician/producer/engineer/indie label owner releasing esoterica since the 1960s. While occasionally made an adequate living off my music, I also developed my talents as an economist, earning a doctorate in that field. Therefore, I comment from this dual perspective of an economist/musician.

The post-future, as many music pundits call it, does not really differ that much from the past. How and why folks obtain their music continues to reflect at least three related decision drivers. We can summarize the three most relevant as 1) Content, 2) Durability, and 3) Time-Cost. Let us explain further.

1) Content

When I started to record music in the early 1960s, the market was filled with “one-hit wonders.” It was the age of AM (amplitude modulation), DJ radio. It was also the age of the 45 RPM record with the hit on the A Side and usually some filler cut on the B Side. It was not uncommon for anyone with a 2-track reel-to-reel to “download” the one hit desired from their favorite radio station. There were few groups that offered entire twelve-inch LPs with mostly great songs. The first such LP that I purchased was Meet the Beatles by those four lads from Liverpool.

During the late 1960s, the industry turned more to “Greatest Hit” collections by groups that had previously turned out a string of AM hits and to “concept” albums. During this golden age of LP sales, the Beatles, the Stones, the Grateful Dead, Yes, King Crimson, and numerous other groups released albums filled with solid content. Bottom line: consumers don’t mind paying for product if they feel that they are receiving value.

2) Durability

Why would someone buy a twelve-inch LP when they could borrow a copy and tape record the songs to a reel-to-reel or, later on, to a compact cassette? The answers at that time were simple. First, it was “cool” to have a great album collection, especially one that a member of the opposite gender could thumb through in one’s dorm room. Let us simply say that one’s album collection could inform another party about one’s tastes and possible sub-culture and personality. Therefore, an attractive collection provided a certain degree of social currency. Might this account for the resurgence of
vinyl in recent years?

The second part of the equation came in the form of actual product durability. Like current downloads, self-recorded reel-to-reel and cassette tapes generally suffered from some loss of fidelity in the transition. More importantly, the integrity and permanence of the media also left something to be desired. Thirty to forty years ago, tape would flake, break, and tangle around the capston. Unless one backed up their collection to a second-generation tape, many of one’s favorite tunes could be lost.

Today, computer hard drives crash. Without the expense of an additional hard drive and the time involved to make the transfer, the same durability issues ensue. What about CDs? As most of us who use CD-Rs for multiple purposes know, the technology that instantly burns an image leaves a product that remains more delicate and subject to damage in comparison to a commercially fabricated CD, stamped from a metal master. Will the Internet clouds provide the same level of comfort for music producers and listeners? We will just have to wait and see.

3) Time-Cost

This third element basically reflects the old “tape is running/time-is-money” economic argument and may explain why younger music-listeners prefer to download songs either legally or illegally. It echoes the same economics that led listeners in the 1960s to record their favorite hits off of the radio. The substance of the argument has to do with how an individual values his/her time. If music-lovers works for a low hourly wage (or often no income at all), they will value the time spent downloading, backing up, and transferring cuts in terms of what they could be earning during the same time.

Let us consider the following example. Assuming that twelve downloads or a comparable CD costs $12.00, a baby-sitter earning $6 per hour could afford to spend as much as two hours of time ripping music to achieve the same value. However, someone with a skilled trade or a college degree may be earning $24.00 or more per hour. Spending more than one half hour at ripping would exceed the value derived. The counter-argument of the time-cost of travelling to a brick-and-mortar music store gets offset by a person’s ability to log-on to Amazon or elsewhere in less than a minute and possibly receive free shipping. The market will always change as the primary market demographic ages. It happened with the Baby-Boomers of the 1960s and 1970s and it will happen with Generation X, Y and Z in the current century.

The bottom line of all of this debate rests in the fact that a consumer will choose the mode of deliverable that optimizes his/her bundle of values. This bundle includes quality and quantity of content, durability, and time-cost effectiveness. These remain the lessons that music makers and music deliverers must understand to survive. The more things change, the more they stay the same.

“When I’m drivin’ in my car, And that man comes on the radio, He’s tellin’ me more and more, About some useless information, Supposed to fire my imagination, I can’t get no, oh no, no, no.” -Michael Philip Jagger, British Economist, London School of Economics

In conclusion, we recognize that certain values motivate consumers as well as businesses. These values include content, durability, and time cost. It does not matter whether the good or service under consideration exists in the form of real, personal, or intellectual property. The premise remains the same for making music, building automobiles, teaching economics, and providing legal services.

The British economist Adam Smith summarized this phenomenon 229 years ago in his concept of an invisible hand at work in the marketplace. In effect, markets work because all market participants seek to optimize their own self interests. As long as both parties involved in a transaction perceive that they will emerge better off after consummating the transaction, they will participate. If one (or both parties) does not share this perception, no music, automobile, education, nor legal services will change hands. In effect, the market fails to produce a satisfactory outcome.

As the technology grew, music got more technical, complex and in demand. Others take credit for using music they don’t own. Nowadays, independent musicians are well aware of protecting their work for legal purposes. Through music licensing, you can be ensured of your asset/work being protected legally.

What is music licensing? Music licensing is the licensed used for copyrighted music. This allows the owner of the music to maintain the copyright of their original work. It also ensures the owner of the musical work to be compensated if their music is being used by others. The music licensing companies has limited rights to use the work without separate agreements. In music licensing, you could get your work licensed in the form of music, composition and songwriting.

During the music licensing process, there are terms that would be discussed by the groups involved. If you are an independent musician, you would be the licensor. You are the one responsible of the music created, thus you are the copyright owner of the licensed work. A licensee would be the music licensing company as they would be the one who will distribute your work to other industries. They will also collect the royalty fees as distribute them back to you if your music is included in live performances, TV shows, ads, campaigns, video games, etc.

There are also two kinds of contracts in music licensing, namely exclusive contract and non-exclusive contract. Exclusive contract means having your work licensed exclusively to a single music licensing company. Only a single company has the authority to distribute and market your work. If you signed an exclusive contract to your song or album, you cannot use the same music contents and get it signed by other music licensing companies. The agreement is exclusive and confidential to the licensor and the licensee.

Non-exclusive contract allows a second party to distribute your work and it doesn’t prohibit the licensor to sell their music to other music licensing companies or licensees. An independent musician can sign a non-exclusive contract to multiple companies using the same music content. Non-exclusive contracts are generally used to prevent an individual from being locked into a restrictive contract before their work gains popularity. This type of contract is designed to protect music artists from being taken advantage of in the early stages of their respective careers while on the process of getting their music out to larger audiences.

There are also cases which involves direct payment for used music content. This is called Sync Fees. Sync fee is a license granted by a holder of a copyrighted music to allow a licensee to synchronize music with visual media such as ads, films, TV shows, movie trailers, video games, etc. For example, a video producer is in dire need of music content for a certain project and is in a limited time of finding one.

In these cases, the artist and the music licensing company will be contacted directly for the possible use of the original work and negotiate the upfront payment involved. Sync fees can range from a few dollars to a couple of hundred dollars or up to thousands. The payment usually depends on how big and established a company is. If it is a well known company, there is a probability that the sync fee will spike up in value.

We need to understand that businesses nowadays are paying premium for music at an all time high. The influx and revenue generated on different industries are worth billions of dollars and the music artists who got their music licensed will get a big share of that money. The content of music is very important. Every single company need visual and audio content. You can’t do ads, shows and movies without having any music content.

Music licensing brings compensation for assets used. This is called royalty fees. A royalty fee is the payment collected by one party from another for the ongoing use of a copyrighted asset. You can get compensated if your work is featured on live public performances. For every live use of your music, you get compensated as you own the copyright of your work.

The American Society of Composers, Authors and Publishers (ASCAP) has collected over $941 million dollars in licensing fees and distributed $827.7 million dollars in royalties to its members back in 2014. BMI on the other hand, collected more than $1.013 billion dollars in license fees and distributed over $877 million dollars in royalties to its members during the year 2015.

Music licensing is the modern way of earning through music. In the past few years, the physical sales had gone down. Streaming music has taken over because it’s more convenient and practical with the help of the World Wide Web. With the rise of streaming sales, the figures that could be collected as royalty fees could spike up in the years coming. In fact, as stated in an Australian financial review website, streaming generated $2.5 billion dollars in US music sales last year, overtaking digital downloads as the industry’s biggest source of music revenue. As stated in the picture below, the global streaming of music is projected to reach greater heights in terms of revenue in the upcoming years.

The internet contributed greatly for the rise of music licensing and streaming. 20 years ago, the distribution of music hasn’t been exactly this big. Television shows and filmmakers are the top two industries that need music content. Today, there are more and more TV shows, films, commercials, movies, ads and tons of video games that need music content. It is safe to say that the internet opened the public eye about the opportunities involved behind it.

One of the most visited sites on earth is YouTube. People use, duplicate, rework, copy, revise and perform music from different artists around the world. It also has an influx of ads which contains music content. To track all these data, YouTube has a Content ID System. If your music is licensed, you can contact this site and they will take a look at their data and see if your work is being used by other parties. As the licensor, you have the authority to take actions such as mute the audio which matches your music, block a whole video from being viewed, track the video’s viewership statistics or monetize the video by running ads against it. Every country has different rules about it. But YouTube runs a lot of ads and monetizing work from this site is very probable.

If you are an independent musician, you must improve and instill professionalism in your craft to get your chances up of being signed by a music licensing company. With billions of dollars of revenue involved today, you want at least a slice of the pie. Monetizing your passion is never easy but taking the necessary steps to make it work is a must to reach success.