With Chinese Democracy topping 1.5 million in CD sales and downloads in its second week — for a two-week total of 5 million, the best ever — it is now official: the American Music Industry has never been healthier. Even in what is easily the most crippling recession most of us have seen in our lifetimes, people are buying music at a record pace.
How have they done it? According to Frederick Stamphammer, the RIAA’s Vice-President of Digitization — and the man seen by most insiders as the key figure behind the transformation of the music industry into a virtual profit machine — it was by seizing the opportunity afforded by the internet nearly 10 years ago.
You know what, music fans? You suck. You know how I know that? Because Gene Simmons thinks that you killed the record industry.
Look, when I was your age, a band like KISS would come out with an album, and it would get played on the radio, and then you would ride my bike down to Tower Records and buy the album.
Multiply that action by millions of kids — an army! — and boom! the guys in KISS were zillionaires. Just like that. It was all so simple. It didn’t even matter of those albums were mostly singles and filler, because that’s how the game was played.
And nobody ever played it better than KISS, who were — all things considered — an OK hard rock pop band with a handful of undeniable songs, but not all-time-greats. Not musically.
As marketers, however, they were the best ever. Not even Madonna comes close to the sheer marketing chops that KISS showed from day one. Until, that is, the market changed.
It is no secret that most entertainment companies are inefficient businesses — they spend far too much and save far too little. Nothing exposes this inefficiency like digital distribution. Even better — nothing exposes the inequities in artist compensation like digital distribution.
Artist royalties are calculated based on a contractual formula. Depending on your agreement, you might get a percentage of net revenue that takes the sales price less returns, bad debt that sort of thing. Or a percentage of net revenue that factors in certain costs like product manufacturing, mastering, freight, whatnot. The deals differ across industries, but, interestingly, when you look at how book royalties, music royalties, and home entertainment, formerly video, royalties are calculated, they are remarkably similar. Motion picture participations (video royalties are a subset of this) have additional complexities that I won’t cover here.
Sometimes, you hear a story and think, “Hmm, good column material.” Sometimes you hear a story and think, “They’ve got to be kidding. Hmm, good column material.” And sometimes you hear a story and think, “What? They’ve got to be kidding me. Hmm, good column material.” Case in point: Universal’s big plans overhaul their CD packaging.
The proposed scheme was all over the news yesterday — such is the luck of those who live in Los Angeles — and goes something like this. Universal will offer snazzy new packaging with higher prices on new releases and no-frills packaging with lower prices on catalog product. See, ’cause it’s the jewel boxes that will drive consumers to the stores.
Way back in the early eighties, a revolution happened. Giddy with the power of new technology, motion picture studios rushed to release their back catalogs on the new-fangled videocassettes (and some on laser discs, but that’s a story for another day). They knew full well that this was a foolhardy decision, but with dollar signs in their eyes, how could they resist this new revenue stream?
Why foolhardy? Because the existing agreements with talent, from a participations and residuals perspective, didn’t cover this new distribution channel. With residuals, somehow the studios won and were allowed to continue to calculate payments as a percentage of a 20% royalty calculation. As I noted earlier this week, the guilds aren’t likely to take this forever.