Go ahead and burn that MP3. The music biz will thank you later.

Steal This Song 

Go ahead and burn that MP3. The music biz will thank you later.

Hollywood always loves a good murder story, and Michael Weiss made the perfect villain.

In 1978, the Chicago businessman opened one of the country's first video retail stores. Soon after, lackluster sales led Weiss to a new strategy that would revolutionize his business: Instead of selling copies of M.A.S.H. for $90 a pop, he began renting tapes for a couple of days at a time. His company took off -- and the film world responded with fury, fearing that VCRs would suck the life from movie theaters.

"I remember when Jack Valenti from the MPAA said that 'Home video is to the movie industry what the Boston Strangler is to women home alone at night,'" Weiss recalls. Hollywood eventually abandoned hopes of crushing VCRs and instead learned to profit from them. These days, home-video grosses more than double those of the box office, and no one in Tinseltown is crying foul. "He was wrong," Weiss says of Valenti's claims, with a relish undiminished after 25 years.

Now, internet technology has Weiss feeling the entertainment industry's wrath all over again. In 1998, he took over Streamcast Networks, maker of Morpheus file-sharing software, which allows users to swap music online for free. The company is among the primary targets of the music world's jihad against online file-sharing.

Since the emergence of Napster in 1999, the industry has attacked downloading as vociferously as Hollywood once did home video. It squawks about how one in two file-sharers admits to buying less music because of downloading, but fails to grasp ways in which widespread trading of MP3s could be a boon to its sagging profits -- a new outlet for revenue, not an enemy. Rather than adapting to suit the technology, it's suing the pants off Joe Blow and his neighbors. It's propping up big names like Busta Rhymes and Sean Paul to speak out against the evils of file-sharing, and blaming its slump on internet song-swapping -- a practice in which some 61 million Americans engage. Just in time for the holidays, numerous companies are spending millions promoting new, legal alternatives to the widespread piracy that's supposedly starving the children of impoverished record execs.

"The music industry has never experienced a decline of this magnitude," says Jonathan Lamy, spokesman for the Recording Industry Association of America (RIAA), the Washington, D.C. trade group that has led the music industry's fight against file-sharing. According to Lamy, in the last three years record sales have dropped 31 percent -- a skewed figure that's a product of questionable arithmetic. "That's a decline of unprecedented nature. At the same time, peer-to-peer networks are experiencing an exponential increase in traffic and illegal file-sharing."

Lamy's argument is consistent with the industry's response to just about every emerging technology it has faced in the last century. During the first decade of the 1900s, music publishers fought the introduction of the automated piano, fearing that sheet-music sales would tank. In the 1960s, record companies decried the emergence of FM radio, arguing that the signals were so clear that people would simply dupe songs off the airwaves instead of buying albums. In the '80s, congressional hearings attacked recordable audio cassettes as if they were threats to America's moral fiber.

Now they'd have us believe that a schoolgirl and a grandpa are bringing the multibillion-dollar music business to its knees. In recent months, the RIAA has filed suits against both of them.

"Who expects a 12-year-old girl to buy a $20 record with her baby-sitting money for one good song?" young rocker Michelle Branch told Newsweek. "Why not download the song you like?"

Major labels have increasingly clamped down on artists who speak out in favor of file-sharing; most majors contacted for this story declined to grant interviews with artists or executives.

"I can understand why the companies are nervous about this and why they'd want to establish some precedence on it, but it seems to me that going about it in such a legalistic way is not the most useful way to spend their energy," says Artemis Records chief Danny Goldberg, who has run such major labels as Mercury, Warner Brothers, and Atlantic. "You need enforcement up to a point, but as a practical matter, you're a lot better off if you can come up with something that people want to buy."

But why bother adapting, when downloaders across America make such meaty scapegoats?

"If it doesn't stick, you're done"

Judging by the industry's rants about declining record sales, you'd think it operates independent of the national economy. From 2001 till now -- the target period for the RIAA's bitching -- the U.S. has shed close to three million jobs, the worst numbers since World War II. Until Sisqo CDs are distributed in unemployment lines, who would expect albums to move as they did in the previous decade?

Perhaps the most egregious misnomer in the battle against file-sharing is the decline in sales figures proffered by the RIAA. The group routinely cites a 15 to 16 percent drop in sales over the last three years -- a figure that does not represent the declining number of records sold, but the declining number shipped each year. In reality, the industry has suffered an 8 percent decline in annual sales over that period -- no insignificant figure -- but even that number doesn't tell the whole story. Beginning in the late '90s, major labels pointedly began to phase out CD singles in an effort to sell entire albums, not just the hottest songs. From 1997 to 2002, the number of CD singles shipped plummeted from 67 million to 4.5 million, according to the RIAA -- a deliberate drop that clearly affects its sales figures for that span.

The RIAA never mentions that the music business has always been cyclical, with sales rising and falling with the changing trends. Beginning in 1997, teen pop and nü metal propelled CD sales to all-time highs. At the apex of the teen-pop craze, three acts -- the Backstreet Boys, 'N Sync, and Britney Spears -- were each moving more than 10 million records a year. During that time, randy rap-rockers Korn, Limp Bizkit, and Kid Rock also released their biggest hits. By 2001, both trends began sputtering -- the result of oversaturation more than downloading: 'N Sync had released three records in four years; the Backstreet Boys, four in five years; Britney, three in three years; and Korn, four in four years. For every one of those acts, their most recent efforts seriously underperformed, costing their labels tens of millions of dollars.

"The music industry is in a really weird state right now, and I don't think it's all entirely due to downloading. I think part of it is just the lack of quality music and the lack of artist development by labels," says Monte Conner, president of Roadrunner Records, home to platinum-selling acts such as Slipknot and Nickelback, as well as the Cleveland metal band Chimaira.

Throughout the boom years, several unstable business practices were exacerbated, leading to inflated CD prices and albums with one or two hit songs sandwiched between loads of filler. Both circumstances have had a cooling effect on record sales. Beginning in the late '90s, when the major labels merged into five monster companies, hundreds of midlevel bands were dumped in order to trim costs and allow greater focus on blockbuster acts. With superstars in great supply, the plan paid immediate dividends. But the labels' short-term gains didn't translate to the long term: As companies increasingly pursued immediate sales, emphasis went from developing groups to scoring a breakout radio hit or two to propel an album to diamond sales. As long as an album had a radio smash, the rest might as well have been white noise.

According to Conner, labels typically take new music to radio 8 to 10 weeks prior to a record's release. "In some cases, labels are going to radio, the singles aren't reacting, and they're not even putting the record out. Stuff's getting dropped even before it gets released," he says. In effect, labels are cutting their losses before bands get a chance to make a return on the investment.

That scenario played out in the last year with Cleveland hard rockers Erase the Grey. After signing with Universal and releasing an EP, "27 Days," last November, the band was dropped over the summer, before they were able to release a planned full-length debut. Response to the EP fell short of expectations, the band was told.

"Basically, they take a song from a band and they throw it on the wall, and if it doesn't stick, you're done," says Erase the Grey frontman Jon Sayre. "These record companies are going, 'Okay, this one's gotta be huge, and if not, sorry, guys.' The second that it's not, they don't want anything to do with you anymore. It's a tax write-off."

Rising sales expectations, in turn, elevate the standard for what constitutes a hit. And such standards are unreachable without major radio saturation, which costs an armload and raises a label's bottom line. A gold record (500,000 copies) used to be cause for celebration; now it means that a label might break even. Bands that once sold 200,000 to 300,000 copies and showed potential for bigger sales have been largely relegated to independent labels. Groups as diverse as the Steve Miller Band and the Goo Goo Dolls took several albums to hit big. In today's system, they'd be driving beer trucks by now.

The problem with focusing on more radio-oriented acts is that the start-up costs are higher -- the wardrobe for a pop-star-in-the-making costs more than most indie bands get to cut a record, not to mention the cost of getting her song on the airwaves. These days, it takes upwards of $20,000 to get a single song into rotation with a big-time broadcaster.

"Oftentimes, you have to go platinum to make the investment back, and you only really start making money when you sell two or three million copies," says Conner. Ever-growing development costs have made artists who flop particularly costly to labels; to offset those losses, labels have raised the price of albums -- certainly a factor in declining sales. Universal Music seems to have admitted as much, announcing in September that it was slashing its suggested retail price from $16.98 to $12.98.

Of course, the damage has been done, in the form of tens of millions of Americans who have taken up online file-sharing. But far from crippling the industry, internet downloading will eventually awaken labels to the dangers of an unsustainable business model.

"I think that [file-sharing] will end up being the savior and a boon to our industry," says Lee Trinks, vice president of Lava Records (a division of Atlantic), home to Kid Rock and Simple Plan. "I think that it will make the business healthier, in that what we as an industry have been able to do is to sell an album with one great song and 11 tracks of crap. That won't be able to be done anymore."

Looking out for Fred Durst

Record companies would have you believe that by illegally downloading the latest Nelly tune, you're forcing the rapper to swap his Cristal for Riunite. Many performers themselves have taken up the cause.

"Artists, like everyone else, should be paid for their work," Lou Reed says on Musicunited.org, a website sponsored by the RIAA.

But even Lou knows that few major-label artists make much off album sales.

To understand how labels work, it's best to think of them as big banks: Everything you might think they'd pay for -- from videos to tour support to the cost of recording an album -- is actually funded by the band. The labels take care of such expenses up front, but all these costs are recoupable, which means that once an artist puts out a record, he or she won't see a dime until the label has been repaid. Since sales of 500,000 are usually required for a label to merely break even, and only 400 of the 30,000 records released each year sell more than 100,000 copies, it's little wonder that most major-label bands owe money to their record companies and make nothing on royalties.

And it doesn't stop there. Even if a band does square up with its label, the label's accounting practices make it a long shot for the group to see any money. For every CD sold, the label takes 25 percent of the list price for packaging, 15 percent for "free goods" (albums given to distributors for promotional use), and up to 35 percent of the remaining proceeds in order to refund retailers the price of unsold copies. Normally, an artist will get 10 to 15 percent of what's left -- between 30 and 80 cents an album.

Small wonder, then, that many artists oppose the litigious zeal of their own labels.

"I think it's kind of funny," says Tom Wisniewski, guitarist for the pop-punk trio MxPx, which records for A&M. "The people that get the money -- if they ever win one of those lawsuits -- [are] going to be the RIAA and the major labels. The bands won't see any of it, so what do I care?"

Most artists make their money on concert and merchandise revenues -- of which they generally pocket 20 to 40 percent. So while the kid who downloads the new Limp Bizkit CD may have screwed the band out of 80 cents, Fred Durst will forgive him when he coughs up $40 for the concert ticket and $30 more for the T-shirt.

4,000 Chicagoans can't be wrong

Radio has always been the best means for breaking acts, but with the move to centralized ownership in recent years -- Clear Channel now controls four out of every five stations -- a huge amount of air time has been clogged with commercials, which Clear Channel needs to combat the enormous debt it incurred from its rapid acquisitions. More ads means fewer bands getting heard.

Savvy artists know that there are better ways to get the music out. From the start of its career, the Columbus jam band O.A.R. has made its music available online, distributing it free at its website (www.ofarevolution.com). In this way, and with tireless regional touring, the band built a nationwide following before it even had a record deal.

"We were based at Ohio State, and we only had a four-hour radius of travel that we could do on a weekend," explains O.A.R. saxophonist Jerry Depizzo. "When we left school in 2001, we were able to go to different parts of the country and have pockets of fans already exist in places we had never gone before -- because of file-sharing and the internet. We forced radio and labels to have to take a look at us, because we were drawing 4,000 people in Chicago and 8,000 in New York."

O.A.R. signed with Lava Records last year, and its spring debut premiered in the top 100 of the Billboard album chart.

Popular alt-country forebears Wilco have similarly benefited from the 'net. After being dropped by the major label Reprise in 2001, the band made its latest album, Yankee Hotel Foxtrot, available online for a full year before it went to stores in the spring of 2002. The album debuted at No. 13 on Billboard -- no small feat for a band whose previous chart peak was No. 78.

What's more, only about 20 percent of all recorded music is offered in stores, making the internet a vital source for out-of-print or hard-to-find records and obscure artists. Since major labels control 80 percent of the market, they tend to think their music is all that matters. Of course, there's a lot more out there -- from Norwegian death metal to European synthpop to Delta blues. Without file-sharing, most fans might never have discovered it.

"We're actually having one of our best years in ages," says Gerald Cosloy, co-founder of the sizable indie Matador Records. "I happen to believe that some people -- present company included -- use file-sharing not as a substitute for the purchase of recorded music, but as a way to learn about what's out there -- particularly in an era where few music retailers carry deep back catalog, non-pop records, or anything outside of major labelville. Some of us have been buying more recorded music as the result of [peer-to-peer] technology."

Taking down Granny

None of this has stopped the RIAA from filing suit after suit against users of file-sharing programs like Morpheus and KaZaA. Even more off-putting than the suits is the manner in which they're being handled. There is no judicial oversight in the RIAA's subpoena process, no judge to approve the subpoenas before they're issued. Instead, the RIAA merely goes court-to-court, where a clerk stamps the subpoenas before they're issued to various internet service providers (ISPs); the providers then must offer up their list of internet protocol addresses (the digital ID numbers given to all computers connected to the internet), which consists of the ground-level pirates the RIAA hopes to scare. How it tracks down violators and its criteria for filing suits remain a mystery -- the RIAA closely guards its methods. And ISPs aren't required to inform subscribers that they could be sued.

"In a number of cases from people we've heard of, the first that they've heard about being subpoenaed is either they've been sued, or they've found the IP address of their user name in the database we've made available online," says Gwen Hinze, an attorney for the Electronic Frontier Foundation (www.eff.org), a San Francisco-based organization that protects the rights of file-sharers.

On September 8, the RIAA filed 261 lawsuits against file-sharers, seeking up to $150,000 per song downloaded. A few of the cases have been settled for a fraction of what the RIAA originally asked for (when 12-year-old Brianna Lahara of New York was sued for file-sharing, her mother agreed to pay a $2,000 fine). Many of the suits are ongoing.

Already there have been numerous instances of misidentification: A college student in Massachusetts was sued for file-sharing when he wasn't even in the country at the time of the purported violation. A 66-year-old grandmother was sued for allegedly using her Macintosh to download songs off KaZaA -- which is incompatible with Macs. Such foul-ups are possible because many ISPs rely on "dynamic IP addresses." Because ISPs don't have enough IP addresses for every subscriber, the digits are continually shuffled around; if one digit is off, or if the RIAA has the incorrect time of the alleged violation, the wrong person could get sued.

"With the growing use of dynamic IP addresses, it is very hard, if not impossible, to track the identity of a particular user of an ISP's system," says Markham Erickson, a lawyer for the Washington, D.C.-based Net Coalition, which defends the rights of ISPs.

For all its efforts, the RIAA hardly seems to be deterring file-sharers.

"Our number of weekly downloads has doubled, sometimes tripled, from what it was in April," Streamcast's Michael Weiss says of Morpheus.

"I haven't seen any change," says Wayne Grosso, CEO of the Grokster peer-to-peer network. "When the big [lawsuit] publicity hit, it didn't budge." The L.A.-based internet-monitoring firm BigChampagne confirms Weiss's and Grosso's claims.

The RIAA remains unmoved.

"Of course they're going to say that," counters Jonathan Lamy. "At the end of the day, the ultimate measure of success is not so much the day-to-day levels of file-sharing; rather, it's the success of the legitimate services. That's what this campaign is all about: creating a business environment where legal music services can prosper and flourish. We know that we're never going to eliminate piracy entirely -- it's not realistic. You do not change people's perceptions and behavior in a month."

Or seven months, for that matter. Apple's iTunes, a site where Mac music fans can buy songs legally for 99 cents each, boasts sales of more than 10 million songs since it launched in April. Though a PC version has just been unveiled, iTunes is already facing problems: A host of big names -- Metallica, the Red Hot Chili Peppers, Green Day, Linkin Park -- have pulled their material from the site over objections to having single songs downloaded.

Another heavily hyped site, BuyMusic.com, has also met with mixed results, primarily because songs bought on the site can't be transferred to digital portables. A label-approved Napster returned last month, joining a handful of other new music sites, including AOL MusicNet and Realnetworks Rhapsody. All of them are struggling to secure rights to music from bands and labels.

"We want to find a way to keep file-sharing legal, we want to find a way to get artists paid, and there are solutions," Weiss says. "But right now, the labels don't want to hear that. They just want to squash the peer-to-peer companies, because this is something they can't control."

Among the alternatives to pay-by-song sites is a monthly tax on ISP subscribers, in which users would pay a buck or two, and the proceeds would be divided among the labels. The most likely option will be a basic subscription service similar to cable TV, whereby music fans can pay a flat monthly fee for unlimited downloads.

"For music consumers, I think there are many of them that would be willing to pay for an all-you-can-eat buffet, and I think the numbers could really potentially blow up the business," Lava Records' Trinks says. "In this case, the big numbers that we saw in the past would be small numbers. A great album won't sell 10 million, it'll sell 30 million. The revenues won't be three times what a 10-million seller would be, but the revenues will still be great, and the overall business will grow."

For this to happen, labels will have to truly open up their catalogs. This has been made difficult by the fact that, until recently, artist contracts have made no mention of digital issues, so labels have had to negotiate with each act in order to secure internet rights.

They'll also have to jettison their negative attitudes toward technology. Just as the industry unsuccessfully -- and needlessly -- tried to stonewall FM radio and cassette tapes, it is losing ground in the internet battle. File-sharing can no longer be the straw man for the industry's ills; it's not going away.

"There's two ways to get rid of online piracy: nuclear holocaust or licensing," Grosso says with a chuckle. "Unfortunately, the industry has chosen nuclear holocaust."

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