At the Second MCI Workshop

I ve had just a few hours to look at the draft music subsector report and I have only minutes to comment, so my observations are limited to only two or three areas. You have asked for a view from the industry, so you must indulge me if my thoughts tend somewhat toward the party line just because a few points are pro music industry does not mean they are wrong. At the Second MCI Workshop Discussion around a draft of TNO s music industry subsector report (draft dated October 16, 2011) First, let me say that I very much appreciate how difficult it is to pull a report of this type together when there is so little reliable data available and when there is no consensus on what it is that constitutes the subsector. I think Andra and her colleagues have produced a fine draft under less than favorable conditions. As you might expect, it is largely when the report veers away from solid data that things get a little contentious. 1 of 21

From the First MCI Workshop, May 31, 2011 The music business includes venues (such as concert halls, stadiums, clubs); touring and tour management; concert promotion; performance (whether on stage, live over the airwaves, or recordings over the airwaves via radio, Internet, telephone, television and in film); artist management; instrument sales; audio equipment sales; studio use and equipment; songwriting; publishing; rights and collection societies; booking and talent agencies; and recording. There s more, but you get the picture it s not a simple business. All of these parts are highly correlated over time they rise and fall together or follow each other up and down. -- Stephen Drath, Alta 2 When I spoke here a few months ago, I tried to convey the interdependent nature of the various parts of the music industry and that, inevitably, over time, the elements follow each other up and down. The TNO report includes an IFPI table showing revenue numbers from some of the actors. Let me say that I struggle a little with the inclusion of gross radio advertising billings among the IFPI s broader music industry valuation. 2 of 21

Figure 15 Page 42 Source: IFPI Likely gross revenue to record labels and music publishers: $200 - $300 million 3 I can see an argument, based on most radio using music programming to deliver an audience for the advertisers, but I m forced then to wonder about whether, for example, the drinks served in a dance club should be included. Page 41, Paragraph 3 More recent IFPI figures show that in 2009-2010 main revenues come from radio advertising The Alta View As far as statistical analysis goes, and particularly for the purposes of the TNO report, the IFPI s inclusion of radio advertising revenues as part of its broader industry valuation is a red herring yes, there is an argument for its inclusion, but largely it diverts attention from the more important numbers. 4 3 of 21

How about the food served to a muzak background in a restaurant? On the basis that workers will down tools and leave the manufacturing plant if their piped radio station is switched off, will we include the revenues from the goods produced at those plants? I don t say it is necessarily wrong to include it but I do think it draws everyone s attention away from the more important numbers. From the First MCI Workshop, May 31, 2011 Artists seldom enjoy a successful touring career without a successful recording. A successful recording is seldom unaccompanied by artist performances. Mainstream radio seldom broadcasts recordings that are not hits, while recordings seldom become hits without radio play. The recording is never a success unless the song has that special something. The collaboration between songwriter, artist, producer, engineer, and A&R person is essential to the mix; and often the location and ambience of the studio contribute significantly. The A&R person will motivate the label s marketing and promotion groups, who will seek exposure through radio, TV and Internet and encourage touring and public appearances. Sales people will enthuse retailers and arrange displays and webbased programs. Artist managers will coordinate tours. Venues will crossmarket performances with retailers. Radio stations and advertisers will sponsor performances. And on and on. -- Stephen Drath, Alta 5 Back to the First MCI Workshop I also talked about the collaborative nature of the business and particularly of how artists worked with so many others in order to achieve a level of success. It takes a village. 4 of 21

Page 8, Paragraph 5 in theory, could offer artists more tools to run their own business and become more independent from music companies. The Alta View This is popular thinking and is often put into words by artists themselves as well as those who support them. The reality is that artists have for a long time been able to approach the market directly and to remain independent if they so choose. The Internet has added another communication and distribution channel but as for new acts establishing themselves or existing acts taking things to a new level through the use of online tools and platforms, there is no indication that this has or will happen. 6 Sure, artists often say that they want to do things their way and that they want to work on their own, and I personally, and many music executives I know, very much encourage the artists independent thinking but in practice artists also need and want to work with others all the time. Most have a manager; most work with a producer in the studio; most get input on lyrics and music; most don t book their own tours; most seek out a music publisher to represent their songs. When things don t work out for them, and if they re determined not to give up, then most will change some of their collaborators: a new studio, a different engineer, time for a new manager, and so on. Music artists generally do not want to work alone and it is almost always through a collaboration that they enjoy success and the biggest of those successes come along when they work with music industry professionals. True then true now. 5 of 21

Figure 1 Page 20 Social networks Online Blogs/personal websites Content creators (musicians, composers, studio engineers, songwriters) Copyright Collecting Societies Music publishers and record companies Concert promotors Videoplatforms Online stores Subscription services Television/ movies Digital (e.g. itunes) Physical (e.g. Amazon) Consumer CD manufacturers Radio Wholesale distributors Live performances Music stores Hardware provider Retail Supermarkets 7 The TNO report also provides us with a nice graphic detailing most of the actors in the industry. As you can see, it s not simple. Figure 1 Page 20 Social networks Online Blogs/personal websites Content creators (musicians, composers, studio engineers, songwriters) Copyright Collecting Societies Music publishers and record companies Concert promotors Videoplatforms Online stores Subscription services Television/ movies Digital (e.g. itunes) Physical (e.g. Amazon) Consumer CD manufacturers Radio Wholesale distributors Live performances Music stores Hardware provider Retail Supermarkets 8 Look particularly at this area in the middle. 6 of 21

Figure 1 Page 20 Social networks Online Blogs/personal websites Content creators (musicians, composers, studio engineers, songwriters) Copyright Collecting Societies Music publishers and record companies Concert promotors Videoplatforms Online stores Subscription services Television/ movies Digital (e.g. itunes) Physical (e.g. Amazon) Consumer CD manufacturers Radio Wholesale distributors Live performances Music stores Hardware provider Retail Supermarkets 9 And that s before we add further connections. Figure 1 Page 20 Social networks Producers Online Blogs/personal websites Content creators (musicians, composers, studio engineers, songwriters) Copyright Collecting Societies Music publishers and record companies Concert promotors Videoplatforms Online stores Subscription services Television/ movies Digital (e.g. itunes) Physical (e.g. Amazon) Consumer Attorneys CD manufacturers Radio Agents Unions Others Wholesale distributors Hardware provider Live performances Retail Music stores Supermarkets 10 7 of 21

And then there are other actors: agents, attorneys, record producers, artist managers, PR companies, unions and many more. Figure 1 Page 20 Social networks Producers Online Blogs/personal websites Content creators (musicians, composers, studio engineers, songwriters) Copyright Collecting Societies Music publishers and record companies Concert promotors Videoplatforms Online stores Subscription services Television/ movies Digital (e.g. itunes) Physical (e.g. Amazon) Consumer Attorneys CD manufacturers Radio Agents Unions Others Wholesale distributors Hardware provider Live performances Retail Music stores Supermarkets 11 And once we throw a few of those in, it starts to get really complicated. Anyways, the point again is that these players all have to work together, or at least in a somewhat coordinated fashion, to develop hit recordings and hit shows. 8 of 21

Page 39, Line 1 lack of creativity in the music industry (KEA, 2006). and, yet Page 39, Paragraph 2 performance rights sales are growing as well. Page 60, Paragraph 2 Revenues from live performance and DJ-ing have increased considerable in recent years. Live performance is becoming more and more an alternative to compensate losses in music sales. and so, we are left to wonder 12 Which brings me to the next, very popular, but patently unjustified assertion: that one of the key reasons for the decline in record label revenues from 1999 onward was a sudden, global, genre-blind loss of creativity among those labels. If contemporary performers only attract significant live audiences as a result of exposure through recordings; and if successful performers have previously been signed to publishing and recording deals; and if non-live performance relies entirely on recordings; then how is the theory that music companies are lacking creativity supported? 13 9 of 21

If contemporary performers only attract significant live audiences as a result of exposure through recordings; and if successful performers have previously been signed to publishing and recording deals; and if non-live performance relies entirely on recordings; then how is the theory that music companies are lacking creativity supported? I do not say that music companies are perfect. Many mistakes are made. But I do not believe for a moment that more mistakes are made in the music industry than in any other industry. Certainly, there was no sudden, catastrophic, industry-wide, irrecoverable loss of creativity in 1999. Page 7, Paragraph 2 Others however, argue that there are also other, likely explanations. The growth in CD sales had already stopped by the end of the nineteen nineties, because most consumers by then had replaced their vinyl collections by CDs. Moreover, artificially high prices for CDs suppressed consumer demand. The Alta View The vinyl and cassette replacement wave, such as it was, most likely crested in 1991 or 1992 and had become a quiet ripple on a very calm shoreline by 1995. 14 While I m busy myth-busting I read the first edition from Aris and Bughin back in 2005 and, while they undoubtedly make many good points, I cannot agree with their views on the replacement wave, where recordings originally purchased in vinyl or tape formats were purchased again in compact disc form. I discussed this issue in 2005 with a number of industry figures and with the person responsible for IFPI reporting and there was wide agreement that this wave, such as it was, was already largely over well ahead of the peak in recorded music sales. All involved pointed to the mid-eighties introduction of the compact disc and to the fact that the format overtook cassette sales by the mid-nineties, while also expressing the view that replacement was not quite the phenomenon these writers believe. 10 of 21

Page 7, Paragraph 2 Moreover, artificially high prices for CDs suppressed consumer demand. in which record companies artificially kept prices high Page 44, Paragraph 5 in which record companies artificially kept prices high The Alta View There were no artificially high prices there were just prices. Like there are $60 price tags on video games, like there are $120 price tags on concert tickets, and of course like there are tags on almost everything the consumer desires. A price is a hurdle for the consumer. Any price is a hurdle for the consumer. With Starbucks at $4 a cup, implying that the music industry deserves a terrible fate because its retailers asked for a couple of bucks for lifelong access to a song that s in the realm of outlandish. 15 And before I move on, I can t let the suggestion that artificially high prices for CDs suppressed consumer demand go by without comment. How is it determined that prices are artificial? Is it on the basis that once people realize they can download without paying and with impunity, they may gorge themselves and therefore prove pent-up demand for lower prices? I don t think so: that only proves that if you leave the doors to the warehouse open tonight, the shelves will be empty in the morning. Is it because there is some special rule on pricing recordings that doesn t apply to fashion or oil or food or houses? Can t be right? So what could it be? Well, it could be that people try to justify wrong-doing with questionable mitigation: I wasn t speeding, I was keeping up with traffic; I took the candy because Mary had candy and I didn t; I wouldn t have bought the necklace from the man in the bar if they weren t so expensive in the stores your honor. There were no artificially high prices there were just prices. Like there are $60 price tags on video games, like there are $120 price tags on concert tickets, and of course like there are tags on almost everything the consumer desires. A price is a hurdle for the consumer. Any price is a hurdle for the consumer. With Starbucks at $4, implying that the music industry deserves some terrible fate because its retailers asked for a couple of bucks for lifelong access to a song that s right out there in the realm of outlandish. 11 of 21

Page 38, Paragraph 2 According to the industry, piracy is the main reason for decreasing sales of CDs. KEA suggests that other factors might also contribute to negative sales figures, such as competition from other entertainment sectors for the consumers attention, higher spending of young consumers in ICT products The Alta View Recording companies do indeed blame piracy for decreasing sales, but for overall sales rather than those of CDs alone. for the leisure dollar is undoubtedly at its fiercest but, while games and mobile phones may reduce the monies available for music products, it is the competition of piracy with which the the industry cannot contend. 16 All these ideas about pricing, vinyl replacement and competition from other entertainment segments and from other sectors are just ignoring the elephant. Sure, there s a little something in each theory, but none of them, even together, remotely stand up against the obvious and straightforward: Napster arrived in 1999 and revenues from recordings peaked in 1999 and have then fallen relentlessly year after year. We are now almost 40% down from the 1999 number while we re all aware that music is listened to more often and by more people than at any other time in history. There simply is no other possible explanation for the revenue loss but what you call piracy. 12 of 21

Page 7, Paragraph 2 The music industry claims that piracy of illegally shared and downloaded music from P2P networks is the main explanation for these losses. The Alta View Piracy as competition is not simply a value adjustment while the overall impact is ultimately felt net on corporate bottom lines and in the pockets of the individual content developers, the effects are inflicted gross upon the community. Marketing, promotion and artist development are all severely compromised by the loss of control. 17 Piracy has a clear financial impact upon actors in the music industry but this sometimes masks the broader impact it has on artist and songwriter careers and, as a result, the careers of music industry staffers and executives. While the bloggers take shots at the industry for what they think is a lack of creativity, the industry tries to cope with a constantly shifting environment. Marketing, promotion and artist development are all severely compromised by the loss of control. 13 of 21

Page 6, Paragraph 5 The dominant business models in this sector used to be the model in which publishers provide artists the resources necessary for the creation of music in exchange for the right to exploit copyrights. Page 22, Paragraph 2 Publishers have lost their key position as gatekeeper and dominant supplier and now have to compete with new players on the market, such as concert promoters and hardware manufacturers. The Alta View The dominant business model in 2011 is the same as it was in 2001, 1991 and 1981. Record labels and music publishers remain the driving force and, unless one of the new sideline players makes a substantial and successful foray into content development or acquisition, that is unlikely to change. 18 Moving along, I have to make the point that the record companies, with other (you call them) legacy music companies clearly still dominate both in terms of the business models employed and as content suppliers. No other legal group is statistically significant and, unless one of the new sideline players makes a substantial and successful foray into content development or acquisition, that is unlikely to change. You may point to artists doing their own thing I ask for a dozen names that have sold more than a few thousand MP3s or CDs. You may point to live event firms making recordings with artists I ask for a dozen names, again and I spotlight that live event firms go to record companies to handle releases and that they only sign existing megastars, originally signed of course to the record label that discovered them. You may point to artists coming to the attention of record labels through exposure on the Internet I say you re right, but it has by no means turned the model on its head there is much more to consider when gauging talent than how many hits they ve had on YouTube. 14 of 21

Page 35, Paragraph 3 PWC (2010) predicts that the figures for physical sales will further decline, but this decline will be more moderate and at some point stagnate, because according to PWC (2010) there is an expanding group of relatively affluent people above 45 years who still prefer music in physical formats. According to PWC estimates, globally, digital distribution will pass physical distribution in 2012 and will account for61 percent of spending in 2014. The Alta View We are not yet to a point where projections can be taken too seriously. Not so much has changed since 2005, when PwC s Media Outlook projected $48 billion in recorded music revenues by 2010. 19 Next subject. There is always a demand for predicting the future and some consulting firms do a great job on doing just that. PwC is one of them and I m always going to pay attention to any projection it makes for any industry. But PwC knows that there are situations where the scale of the assumptions pushes the chances of being right way out on the edge. 15 of 21

20 I had reason to take a good look at PwC s projections for the recorded music business back in 2005, so I had the numbers handy. This could happen to anybody, even the best. But just take a look at these figures. Growth every projected year; 21 16 of 21

Growth every projected year; Growth every projected year; growth across all regions; 22 growth across all regions; Growth every projected year; growth across all regions; with no negative in any year in any region; 23 17 of 21

with no negative in any year in any region; Growth every projected year; growth across all regions; with no negative in any year in any region; and a market of almost $48 billion by 2010. 24 and a market of almost $48 billion by 2010. I don t think I need to explain that it didn t happen. It s not yet time to rely on projections for this industry. Nuance Page 22, Paragraph 3 In some publications on the music industry the traditional distinction is made between music publishers and record companies, but often the term music publisher is now also used for record companies. The Alta View If there is any desire for buy-in from the music industry, it would help considerably to understand its terminology; use that terminology early in the report; and reconcile the terminology with any more general descriptives. Page 14, Paragraph 1 According to Hesmondhalgh (2007) the music industry is constituted of three parts: recording, publishing and live performance. Of these three live performances are not included in the Eurostat category sound recording and music publishing. 25 18 of 21

I wanted to spend just a couple of minutes on nuance and terminology. I appreciate that these reports are provided to a broad community and cannot necessarily be geared toward the industry they attempt to describe but I wonder if a little more work could be done to reconcile descriptions. Clearly, policy documents, academic literature and Eurostat categories are not aligned and certainly not with industry terminology. Hesmondhalgh apparently most closely grasps the industry speak, naming the three pillars of the industry as anybody within it would. It may not be important to you I just don t know but if at some point you will want the industry to buy in to what you re doing, that s not going to happen while the first few pages suggest to insiders a lack of credibility, merely based on terminology and industry lore. Nuance Page 17, Paragraph 1 new recording techniques and the gramophone were invented by Edison, Columbia and Victor. History Emile Berliner, a German immigrant working in Washington, DC, produced the first gramophone system in 1887. He later settled the rights with Victor for North America but retained ownership for many territories, including the United Kingdom, where he established The Gramophone Company, one of the key components of what would eventually become EMI Music. Not history It is said that Emile s mother often called him Emi 26 In the music industry, a music publisher makes arrangements with and represents writers, much as a book publisher does. A record company or label makes arrangements with performers and causes recordings to be produced and marketed. A record producer is a little like a movie director, but way more collaborative and not at all like a movie producer. I could give you many more examples but I only want to make the point that, if there is any desire to connect with the people in the industry, you need to connect your language with theirs. 19 of 21

Nuance Page 17, Paragraph 1 and whose sheet music could be played at home. shellac discs. First these were used to promote the sale of gramophones History Sheet music was sold to promote instrument sales also particularly pianos for the home. There has always been exploitation of content to sell hardware: Sony acquired CBS Records for that reason; Best Buy used CD bargains to attract customers for big ticket items; itunes still makes little or no profit but promotes lucrative ipod and iphone sales; and cover mounts (CD and MP3 giveaways) are used to sell newspapers. 27 Knowing the lore and history is just as important. Mentioning the early recording business without mentioning Berliner is like leaving Fleming out of the history of antibiotics. Nuance Page 17, Paragraph 2 During the 30s and 40s, through bankruptcies, mergers and acquisitions three firms came to dominate the international music industry; RCA/Victor, CBS records and EMI, of which CBS (Sony) and EMI are still at the core of today s major music firms. History From the 1930s, there have consistently existed a relatively small number of major record companies that, as a group, control the lion s share of the market. In the 1930s, American Recording Company (purchased by CBS in 1938), Decca, EMI and RCA Victor were the leading companies; by the 1950s, Mercury had been added; by the end of the 1960s, the list read CBS, EMI, MCA, Polygram, RCA and Warner and, although ownership changed, it was to remain that way until MCA (by that time, Universal) acquired Polygram in 1999 and Sony (CBS) first formed a joint venture with BMG (RCA) in 2004 and then bought out the BMG interest in 2008. 28 20 of 21

I m going to leave it there because I m conscious of the time. Having set the cat among the pigeons, I ll leave this check list up to remind you what to shoot me down on. Summary The elements of the industry are interdependent Collaboration is good for artists and writers The industry did not suffer creative meltdown Illegal downloading is the elephant Record labels and music publishers still the key Still too early for meaningful projections Music speak is important if you want buy-in 29 21 of 21