Big Music Will Surrender, But Not Until At Least 2011

I had a surprisingly candid lunch conversation last week with a big music label executive, and a good part of our talk focused on the future of music. I asked the usual question: Why are you guys so damned clueless? Your business is disintegrating before your eyes, and all you do is go for short term cash gains (lawsuits, mafia-style collection rackets from venture backed music startups, etc.). The long term costs are horrendous – an entire generation or two of young music lovers feel no remorse at outright stealing music. Particularly since most online streaming is now free, it’s hard to understand why downloading or sharing songs should be a crime.

His response: It’s all part of a master plan. The labels fully understand that recorded music, streamed or downloaded, is going to be free in the future (we’ve argued this relentlessly). CD sales continue to decline by 20% per year, and the only thing that’ll stop that trend is when those sales reach zero. Nothing will replace those revenues.

They also understand that recorded music will largely be little more than marketing collateral, meaning that the Internet services being sued today for copyright infringement will be embraced in the future as ways to get the word out on hot new music. These services pay for the privilege today (either through high streaming rates or in court), but in the future they’ll be the ones getting paid by labels. Think radio payola at a whole new level, and there won’t be any more talk about social networks giving stock to labels and artists. Money will flow the other way, as it should.

By 2013 (maybe as early as 2011) it’ll make sense for the labels to finally reorganize their business models around the reality created by the Internet and person to person file sharing services. No longer will the labels be tied to revenue limited to sales of master recordings – by then most or all artists will be under 360 music contracts that give the labels a cut of virtually every revenue stream artists can tap into – fan sites, concerts, merchandise, endorsement deals, and everything else.

But until then, he says, the spreadsheets and financial models dictate that suing customers and partners just makes too much sense. Venture capitalists have directed hundreds of millions of dollars, via their litigation-mired startups, into the label coffers. To some extent those payments will continue, although the big payment days are likely over. Apple still sends a lot of money to the labels for paid downloads, and sites like MySpace Music, Imeem, Rhapsody and pay big streaming dollars. Until CD sales really stagnate, all those revenue streams bring in more money than facing reality.

For most industries, embracing old revenue streams until they are completely petered out is a great way to open the door wide open to competitors with more innovative business models. But the Innovator’s Dilemma problem doesn’t necessarily apply to the music industry. The big labels have a lock on talent, and there’s no reason to believe that new artists won’t continue to strive to lock themselves in to one of them.

What this means for us music consumers – don’t expect much to change for the next few years. But sometime in the next decade we’ll see a real renaissance in how music is distributed and consumed. And who knows, a decade after that we may have all forgiven the music labels.