What's The Next Step For The Music Industry?

This article originally appeared in Rollingstone Indonesia magazine edition 871 (October 2011) in Indonesian. This is the English translation of that article.

A few months ago there was a rumor that the popular file-sharing site, 4shared, would be blocked in Indonesia, as part of the Ministry of Communication and Informatics to stop digital music piracy through that site. Although the rumor turned out false, it brought the issue of digital music piracy back to the surface. The question is, what is the correct course of action?

At the end of July 2011, a rumor that 20 popular music blogs and websites were to be shut down by the Ministry of Communication and Informatics; when actually, the associations of music industry companies supporting the 'Heal Our Music' had sent an official letter to the Ministry regarding this, which was also spread to the press. At the time of writing, there has been no action from the Ministry towards these sites.

This is a sign of the times, something with an apparent long history.

The recorded music industry that we know today, grew from the commercialization of music products through vinyl records. The music that we enjoy could only be heard through a live performance, or the purchase of a vinyl record (and in turn, cassettes and CDs). The recorded music industry had a stranglehold over music distribution, because access to music was limited to a physical product, in the form of vinyl records, cassettes or CDs. A relatively perfect business pattern was shaped - an industry structure that sold all kinds of music, in relatively equal formats and prices, and could be maintained indefinitely; as long as market conditions did not shift.

One of the biggest innovations that helped grow the recorded music industry, also became a big part of the fall of that industry. Music packaged in a CD was introduced to the public in the 1980s, and offered a sound clarity that was almost on par with vinyl records (to the point that the difference was undetectable for most people). After going through the cassette phase which had many technological limits - for instance, if you played it too much, the tape would sound funny - CD gave a pretty consistent experience in listening to music, only limited by the audio equipment used to play it. Add that to the era's mostly centralized news and media system, the promotion and sales of music products soared. The CD era was the golden era for the recorded music industry. But then, the market shifted.

The rise of the Personal Computer (PC) in the 1990s, spurred the software industry to grow - not just by big companies like Microsoft and Apple, but also independent and open-source developers - and finding how to rip an audio CD and copy the files to a computer, in the form of MP3, which was initially developed by the Moving Picture Experts Group as part of a video compression protocol. The first piece of software that could make MP3 files was released by the Fraunhofer Society in 1994, which was quickly followed by the creation of the MP3.com website for independent musicians, and the release of WinAmp which popularized MP3 as a music distribution format by the end of the 1990s. The CD, which previously was very difficult to duplicate (compared to the cassette, which was very easy to copy), was easily copied with special software and a CD writer, and even writable to an MP3 version, easily spread through the internet! The popularity of MP3 as the choice music format was as though cemented by the birth of Napster in 1999.

The recorded music industry's business model depended on two things: music discovery, and control of the consumer's access to that music. With powerful influence to TV, radio, newspapers and magazines, including magazines like Rollingstone, the music labels could introduce new music or new artistes in a well-defined pattern, and could almost guarantee that a song would be loved by the general public. When so many media outlets are talking about the same artist or song, it must be good, right? After a smart promotion plan, the consumer is then guided to choose on how he or she will listen to the music: by waiting for it to play on the radio, or buy the vinyl, cassette or CD. World concert tours were often done to try to ensure high album sales.

Today, the music world is somehow upside down: CD sales keep dropping (and the cassette is virtually extinct) due to piracy (internet or otherwise), an album is also used as a promotion tool for the artist/band so that they would go to watch the concerts, media has become decentralized due to the growth of the internet and the birth of many blogs with it, and until today many MP3 song files still propagate freely through the internet. Planned promotion is tough to do due to the media fragmentation (and the fragmentation of the audience), and control of access to music is difficult to maintain, as once one music file is uploaded to the internet it could mean immediate distribution to the whole world, decreasing the potential amount of consumers that would buy that music product.

The recorded music industry in Indonesia went through a second boom after the introduction of the ringback tone, which has developed into a lifestyle product or an expression medium, just as someone would use a status message on Yahoo Messenger or Blackberry Messenger. Promotion could be planned through the telcos (telecommunications companies) with supporting media elements through TV, radio and print; and consumer access to music was tightly controlled because the RBT service can only be accessed through the telcos. The telcos hence became the 'new best friend' to the music industry, after the CD stores and retailers sadly could not give a significant business volume anymore. To keep in line with technological advancements, the music industry and the telcos developed music services selling music in MP3, AAC or WMA formats. One thing stood in the way of this - uncontrolled distribution of MP3s through the internet. Action: stop or control.

We see that the recorded music industry, albeit light years of change in mindset compared to the early 2000s, are still treating recorded music as a commodity. There is nothing wrong with this - treating music products as a commodity is a sound business principle, and simplifies calculation of funding, profit forecasts, and calculating how much money can be invested into the next product. But a commodity-based business is very dependent on whether or not access and distribution to the product can be done well and measurable. Cassette, yes. CD, yes. But a digital file; difficult, even with Digital Rights Management (DRM). This dilemma remains a problem with the music, movies, books and software industry. Until today, there has not been an all-encompassing solution that can solve everyone's problems practically, and of course, turn a significant profit. Because without profit, business cannot continue - a music label cannot invest money in a new artist or new album, cannot pay the various music industry people who work behind the scenes to ensure a quality record, or to ensure a good concert, and so on.

We have missed one thing - the music industry is not 'just' the recorded music industry. When people say 'the music industry is about to die', it is an erroneous statement. The industry dependent on CD sales is about to die. The industry itself, is in transition to find new forms. But does the search to find new form must involve the blockage of various music sites and blogs, which notably are not just used to spread MP3 files illegally, but are also used as legal MP3 distribution channels by indie bands?

All over the world we see recorded music companies attempting to morph themselves: some have formed their own event organizing arms, some own artist management divisions, even managing merchandise; as part of a diversification of revenue channels, to maximize investment returns already spent by these companies for artist and albums they manage. The downside is, artistes become chained to a quite comprehensive contract that takes profit from all the artist's possible income channels, and all the artist's activities - concerts, merchandise, albums - are treated as a commodity. Not wrong, but not the only way.

One of the first things I learned when working at a recorded music company was, you can't fight with the labels. It's futile. If CD prices were brought down from Rp 75,000 to Rp 30,000, the CD pirates will still profit from selling their CDs at Rp 10,000, because they don't have to pay all the royalties and revenue shares. Also, you can get an illegal MP3 file virtually anywhere: internet, ringtone kiosks at malls, or sent through Bluetooth from a friend. The only way to 'fight' is to be smarter. Is blocking illegal MP3 sites and blogs the only way? I think that it is a necessary action but should not stand by itself - considering how easy it is to make a new website or blog, and how easy it is to find anything on the internet through search engines like Google. Anyway, most of these sites only link to files stored on services like 4shared, which do not operate under Indonesian law.

Now, most of these international sites - namely 4shared, Mediafire, Rapidshare et. al. - generally all adopt the Digital Millenium Copyright Act, which supports the takedown of copyrighted content, with the prerequisite that all content deemed to be copyright violations must be identified and reported to these services for takedown. If you want to control content from propping up in these sites illegally, you'd have to do the work and identify them one by one. This won't be easy for the recorded music companies with hundreds and thousands of songs in their library. But it doesn't mean they can't.

Of course, there is no magical solution that will solve the case of copyright enforcement versus piracy. Digital Rights Mangement? All the 'heroes' of the digital music industry like iTunes Store and Amazon MP3 Music Store have been selling music without DRM since last year. It seems that every case will need its own solution in ensuring that the consumer, the artist and the recording company all benefit.

There is one thing that I have often emphasized - stop treating music as a commodity. The commoditization method will slowly fade away, because it is very dependent on distribution control. Do not depend on music as a commodity; business models must be developed to a direction closer to the product itself: experience.

Why do we like a song? Why do we see preteens screaming their favorite song when watching their favorite artist perform on TV, even on an early morning show? Because songs evoke emotion. Songs are a reflection of our expression: love, hate, sad, happy, anti-establishment, stupid, and so on.The bond between the song - or the artist - to the fan is something that cannot be 'created', and will grow by itself. This emotional connection, is the first step in developing a consumer experience.

This consumer experience would be different for every artist, every song and even every music company. There are many indie bands which live from merchandise and concert ticket sales as elements of a consumer experience, and almost zero from music products. There was also a band which still sold music products, from the free to the expensive luxury box set CD, by using tiers of products (through differentiating quality, price, and additional elements like t-shirts, autographed t-shrits and so on) as a way to create a different experience for their fans. This is what Nine Inch Nails did a few years ago. Another example: the iTunes music store ecosystem. For years, customers of the iTunes Music Store have downloaded millions of songs, oblivious to DRM schemes, because the iPod-iTunes experience is just so simple and practical - a consumer experience which other companies still struggle to emulate. Some may say that the iTunes Music Store is solid proof that the potential of digital music as a commodity is still very big; however, it is actually iTunes that creates the valuable consumer experience. Other recorded music companies or artist management companies use digital songs as 'bait' for people to subscribe to services or attend concerts.

There are so many other business models and activities that can be used as reference, but the principle remains the same: the combination of a variety of activities and products to create a music offering to the consumer, which would be difficult to copy by pirates. Pirates may easily gain access to a digital file of a song, but would not have access to the artist, and would definitely have difficulty investing time and money to create a valuable consumer experience. The artist or band must be smart and think like an entrepreneur, and recorded music companies need to evolve into business enablers. The music publishers, representing the songwriters, must also evolve, and be more flexible towards technological advances. Innovations in technology and business models will continue, so royalty calculation methods must also evolve.

In general, piracy is a side effect of technological advancement, not a conscious act fighting against copyright. Piracy is an entertainment consumption trend that must be studied and actioned upon, because it most definitely cannot be eradicated. Educating the consumer to appreciate copyright can be done by business innovation, but not by repression.

Update: this article was written months before the premium SMS and RBT debacle, but the points of this article remain relevant. Thanks to @AdibHidayat for letting me republish this article.