Why The RIAA Will Fail

The RIAA is fighting a losing battle – they just don’t know it yet.

There’s been a lot written on DRM, the crash of the CD business, P2P and illegal file sharing. Sometimes you have to step back to get a clearer look at what’s happening and the inexorability of forces shaping the outcome.

I would argue there are three primary drivers impacting the music business which, looked at dispassionately, point to how this will resolve over time:

1. Technology
2. The Music Business Model
3. The Body of Music Law

Technology

Technology’s major role is to enable a paradigm shift. Two businesses which dramatically changed due to technology were vacuum tubes and flash cubes (remember these?). The transistor decimated the vacuum tube business almost overnight, as did cheap on-camera electronic flashes. Both of these businesses were extremely profitable and kept factories and workers employed for some time.

However, when the change hit it was brutal – the flash cube business literally disappeared in a few years, shuttering factories and creating big holes in financial statements for affected companies. More interesting: there was no “FCIA” (Flash Cube Industry Association) lobbying for laws against electronic flash, trying to roll back technology legislatively.

The plain and simple fact is that over the long run, technology will win out every time. Trying to fix the crumbling dike by plugging small leaks is destined to fail. For the RIAA, digital technology has so altered the landscape that the digital genie is out of the bottle and any attempts to put him back are laughable.

The Music Business Model

As for so many businesses, the business model is based on scarcity and control. Until recently the only way to collect music was on CDs sold by music stores. The record companies collectively monopolized the source – the artists – and the manufacture and distribution of CDs.

Per “The Record Industry’s Decline” in Rolling Stone:

“In 2000, U.S. consumers bought 785.1 million albums; last year, they bought 588.2 million (a figure that includes both CDs and downloaded albums), according to Nielsen SoundScan. In 2000, the ten top-selling albums in the U.S. sold a combined 60 million copies; in 2006, the top ten sold just 25 million. Digital sales are growing — fans bought 582 million digital singles last year, up sixty-five percent from 2005, and purchased $600 million worth of ringtones…”

Unless you’re a super star, the share artists get from CDs is small – I’ve seen figures of something like $1 on a $15 CD – about 6%. The rest of it goes to the record companies and the music stores – control and distribution takes the lion’s share of revenues. Digital eliminates the middle-man, much to their dismay. Hence, the RIAA fights to intimidate users and blunt the technology to protect a failed business model.

For artists, the payoff is NOT in CD sales but concert revenues:

“At least one sector of the music industry has continued to enjoy robust success: the concert business. Ticket sales in North America in 2008 rose at least 7 percent, to $4.2 billion, according to Pollstar, the touring-industry trade magazine. But in keeping with the trend of recent years, slightly fewer tickets were sold for more money: attendance for the top 100 tours dropped 3 percent, but the average ticket price climbed 8 percent, to $66.90.

The record industry has been eager to share in touring’s bull market, and many of the major labels’ new contracts are for so-called 360 deals, which give the company a much wider share in an artist’s income, from touring to merchandising to product endorsements. But those types of contract are still far from the norm.”

Sounds like razors and blades to me – digital distribution whets the appetite for concert sales. The key point here is that the business model is obsolete and RIAA’s efforts to hold back the digital tide will fail.

The Body of Music Law

The last part to fall in place is the legal underpinnings – the copyright laws in this case. The wheels of justice move slowly and if anything enabling laws are usually last to fall in line with technological and business model changes. As we see with the RIAA, the initial thrust is to protect what is – a consequence of spheres of influence based on where the money is – or was.

Politics being in part an exercise in networking among the rich and powerful, legislating for a new reality will lag, but eventually this too will change. For example, in the Pirate Bay case we are seeing the possibility of a new political force springing up.

To sum up, the RIAA’s business model is broken, the technology genie is loose and the probability of wholesale changes to copyright laws is increasing.

Hang on RIAA – it’s going to be a bumpy ride!