Business Week Op Ed “One Way to Save the Music Industry”

One Way to Save the Music Industry, Business Week, 29 July 2010

By Johnny Ryan and Allègre L. Hadida

Given the persistence of digital music piracy, a new subscription-creation model borrowed from online gaming could aid ailing record labels

Does the answer to music retailing’s collapse lie within the computer game industry? Global music revenues suffered a 10th year of decline in 2009, with sales and performance rights falling to $17 billion. In contrast, revenue from the computer game industry’s sale of portable and console hardware, software, and accessories rose from $7.98 billion in 2000 to $20.2 billion in 2009 in the U.S. alone. The music industry may find inspiration in the game industry, where the prevailing Internet-driven trends of online subscription and community participation are reducing piracy and keeping consumers actively engaged.

The first illicit encoding and online distribution of music using the new MP3 standard in 1996 was a landmark event for the music industry. From this point on, music retail has been a dwindling pursuit. In the U.S. alone, shipments of music fell 12 percent from 2008 to 2009, to $7.7 billion. The decline is greater still if one excludes digital distribution from this number: Physical distribution, mainly CDs, fell 21 percent in 2009. In response, the music industry has attempted to embrace digital distribution. Yet despite expanding from virtually nil in 2001 to 27 percent of global sales in 2009, the digital distribution of music has not reversed the overall decline in music sales caused by the plunge in physical distribution and the rise of online piracy.

Legislative “graduated response” or “three-strikes” measures may eventually limit illegal downloading. These are targeted at peer-to-peer downloading, however, which accounts for only 20 percent of illegal downloading and is easily replaced by other means of file sharing. Moreover, legislation to introduce such measures is proving difficult to pursue in a number of jurisdictions. Other initiatives, such as offering free access to music as part of subscription deals with ISPs, may yet produce dividends. Nonetheless, if the music industry is to continue to be a dynamo of creativity, it must do more than simply protect its decaying position. The computer game industry and its approach to participatory entertainment may provide the music industry with strategic alternatives to compete with illicit downloads.

Deepening Sense of Community

The computer game industry’s approach to subscription has married conventional subscription entertainment service models, such as monthly payments to premium TV channels, with social club models, such as annual fees for a golf club. The result is a two-sided network in which game co-creation and players’ rivalry and collaboration increase the value of the subscription to its holders over time. Members of the 11 million strong World of Warcraft gamer community typically pay close to $170 annually to play, on top of an initial investment in software and upgrades ranging from $50 to $195 per player. As subscribers continue to play, three factors keep them hooked: Their prestige grows among other players of the game; they can access more challenging content; and their connection to the online community grows broader and deeper.

Many other games are similarly leveraging the power of community to maintain subscription figures. Xbox Live, Microsoft’s (MSFT) online subscription service for owners of its Xbox console, now boasts an active membership topping 20 million players. At least half of these pay for Microsoft’s premium service, Xbox Live Gold, which costs $60 to $90 per year. To understand what this means in a practical sense, consider that 2.2 million subscribers were online at the same moment in December 2009, playing against each other. The game Call of Duty: Modern Warfare 2, in which teams of players confront each other on virtual battlefields, offers a bare minimum in the way of community-building. More experienced players can select upgraded weaponry to hunt down their peers. This game alone enticed players to invest more than 1.75 billion hours of game play in the six months since November 2009 on the Xbox platform—no doubt further billions of hours were spent playing the game on Sony’s (SNE) PlayStation and on PCs, too.

The computer game industry’s approach to subscription is protected against illegal download and duplication in a way that music retail has not been. Online subscription services such as Xbox Live not only enable players to find each other and to download new content. They also put the computer game companies in a position to prevent illegally downloaded copies of their software from connecting. A user might manage to copy a game and play it in isolation at home. To play online, however, and enjoy the additional benefits of prestige, content, and community of online play, he must purchase a legitimate copy. Better still: Some games do not have single-player modes and work only online.

From Passive to Participatory

Here lies the promise for the music industry. The computer game industry could become the hinge between the old model of retailing music for passive listening and a new music business based on subscription for community participation and active co-creation. The digital revolution has not negated the enormous cultural and monetary value that the music industry holds in its back catalogues. Even in crisis, the music labels are uniquely placed to leverage this value, using their catalogues to shift to the digital era.

The key to this is that while individual listeners may now be able to grab music online for free, the computer game industry is still required to purchase the right to use music in its products. The computer game industry also targets young, computer-savvy consumers whom the music industry has now all but written off. It can sell them the participatory co-creation experience.

The rhythm computer games Guitar Hero and Rock Band, in which users participate to a limited degree in the performance, generated $1.6 billion in 2008 just in North America. Next-generation input devices, such as the Xbox’s Kinect, which can relay the positions and movement of players’ bodies in real space, will soon allow for much more sophisticated games and performances.

A Kind of Hyper Karaoke

Online platforms may allow families and local bands to perform their own variations, remixes, and mashups of classic tunes, in competition for the votes of their peers against other amateur musicians, ultimately arriving at national and international contests. This form of hyper karaoke might even produce a record deal for the winning band, with the company behind the system having accrued subscription fees—including music copyrights—from all players for the duration of the contest. In the longer term, innovations in gaming and participation and remixable access to a music label’s back catalogue could also lead to artistic benefits well beyond the initial foray into remixing between two tracks that featured in the 2009 game DJ Hero. One example of the future is Scott Humphrey’s and Dale Huxford’s thepublicrecord.com, a collaborative online platform that allows the general public to remix and add to recording stems. (Stems are the musical components that make up a professionally mixed track.) Users can then resubmit the remixed track back to the artists who participate in this initiative, and the best tracks are included in the final mix released to the public on CD. Were an online subscription service to allow participants to recombine, reedit, and reperform the contents of a label’s back catalogue at will—and to harness the benefits of online game playing—the potential for profits and creativity would be enormous.

The dream of participatory co-creation of music is not new. What is new is technical feasibility and commercial necessity. Such mashup experiments, however, require the full collaboration of the artists and copyright owners. On this front, a number of hurdles apply. First, while a growing number of artists, including the Beatles, granted back catalog licenses to video game publishers, others remain ferociously protective of their works. Moreover, whereas video game publishers typically retain the full rights associated with content created on a “work for hire” basis, the rights associated with a single music track are usually fragmented between a diverse range of commercial entities and artists.

Nevertheless, the difficulties associated with getting all copyright owners to agree to allow general audiences to mash up original tracks can be overcome, as demonstrated by EMI’s opening of 300,000 tracks for licensing in early 2008. Rights may also be fragmented in different jurisdictions, and clearing a track for use can be a complex process. Within Europe, this may be simplified somewhat by the European Commission’s initiative to establish a “multi-territory” licensing system for online music and films across the 27 European Union member states.

Resolving these issues will allow smart players in the music industry to leverage the value of their older titles and to design new licensing contracts to seize opportunities created by the computer game industry. Mergers and acquisitions, as in the case of Vivendi’s purchase of Activision, the publisher of Guitar Hero, will give the music industry a chance to establish a new hybrid business model that capitalizes on the value of the back catalog and on the lucrative and pirate-proof game subscription model. Retail for listening is dead: Subscription for co-creation is the future.

Some of the ideas presented here are further developed in Ryan’s A History of the Internet and the Digital Future (London: Reaktion, September 2010; and Chicago: University of Chicago Press, November 2010).

Ryan is a senior researcher at the Institute of International & European Affairs in Dublin; Hadida is a lecturer in strategy at Cambridge Judge Business School at Cambridge University.