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PGL and Mark Thoma on Greg Mankiw

The Record Industry's Decline

Brian Hiatt and Evan Serpick on how the record industry got into its current mess:

Rolling Stone : The Record Industry's Decline: CD sales have plummeted sixteen percent for the year so far -- and that's after seven years of near-constant erosion. In the face of widespread piracy, consumers' growing preference for low-profit-margin digital singles over albums, and other woes, the record business has plunged into a historic decline.

The major labels are struggling to reinvent their business models.... "The record business is over," says music attorney Peter Paterno, who represents Metallica and Dr. Dre. "The labels have wonderful assets -- they just can't make any money off them." One senior music-industry source who requested anonymity went further: "Here we have a business that's dying. There won't be any major labels pretty soon."

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.... 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 -- but the new revenue sources aren't making up for the shortfall. More than 5,000 record-company employees have been laid off since 2000.... About 2,700 record stores have closed across the country since 2003....

[R]ecord executives now seem to understand that their problems are structural: The Internet appears to be the most consequential technological shift for the business of selling music since the 1920s, when phonograph records replaced sheet music as the industry's profit center....

When YouTube started showing music videos without permission, all four of the labels made licensing deals instead of suing for copyright violations....

So who killed the record industry as we knew it? "The record companies have created this situation themselves," says Simon Wright, CEO of Virgin Entertainment Group, which operates Virgin Megastores.... [A] series of botched opportunities... among the biggest... was the labels' failure to address online piracy at the beginning by making peace with the first file-sharing service, Napster. "They left billions and billions of dollars on the table by suing Napster -- that was the moment that the labels killed themselves," says Jeff Kwatinetz, CEO of management company the Firm. "The record business had an unbelievable opportunity there. They were all using the same service. It was as if everybody was listening to the same radio station. Then Napster shut down, and all those 30 or 40 million people went to other [file-sharing services]."

It all could have been different: Seven years ago, the music industry's top executives gathered for secret talks with Napster CEO Hank Barry. At a July 15th, 2000, meeting, the execs -- including the CEO of Universal's parent company, Edgar Bronfman Jr.; Sony Corp. head Nobuyuki Idei; and Bertelsmann chief Thomas Middelhof -- sat in a hotel in Sun Valley, Idaho, with Barry and told him that they wanted to strike licensing deals with Napster. "Mr. Idei started the meeting," recalls Barry, now a director in the law firm Howard Rice. "He was talking about how Napster was something the customers wanted."

The idea was to let Napster's 38 million users keep downloading for a monthly subscription fee -- roughly $10 -- with revenues split between the service and the labels. But ultimately, despite a public offer of $1 billion from Napster, the companies never reached a settlement. "The record companies needed to jump off a cliff, and they couldn't bring themselves to jump," says Hilary Rosen, who was then CEO of the Recording Industry Association of America. "A lot of people say, 'The labels were dinosaurs and idiots, and what was the matter with them?' But they had retailers telling them, 'You better not sell anything online cheaper than in a store,' and they had artists saying, 'Don't screw up my Wal-Mart sales.'" Adds Jim Guerinot, who manages Nine Inch Nails and Gwen Stefani, "Innovation meant cannibalizing their core business."...

In the fall of 2003, the RIAA filed its first copyright-infringement lawsuits against file sharers. They've since sued more than 20,000 music fans. The RIAA maintains that the lawsuits are meant to spread the word that unauthorized downloading can have consequences. "It isn't being done on a punitive basis," says RIAA CEO Mitch Bainwol. But file-sharing isn't going away -- there was a 4.4 percent increase in the number of peer-to-peer users in 2006, with about a billion tracks downloaded illegally per month....

Consumers have bought more than 100 million iPods since their November 2001 introduction, and the touring business is thriving, earning a record $437 million last year. And according to research organization NPD Group, listenership to recorded music -- whether from CDs, downloads, video games, satellite radio, terrestrial radio, online streams or other sources -- has increased since 2002. The problem the business faces is how to turn that interest into money. "How is it that the people that make the product of music are going bankrupt, while the use of the product is skyrocketing?" asks the Firm's Kwatinetz. "The model is wrong."...

Nearly every corner of the record industry is feeling the pain. "A great American sector has been damaged enormously," says the RIAA's Bainwol, who blames piracy, "from songwriters to backup musicians to people who work at labels. The number of bands signed to labels has been compromised in a pretty severe fashion, roughly a third." Times are hard for record-company employees. "People feel threatened," says Rosen. "Their friends are getting laid off left and right"...

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