Yesterday I went over how I think the music industry got itself into the trouble that it is in now.  Today I'll give you my attempt at fixing those problems.  Below is my advice on how the industry can make a few necessary changes that will allow them to not only survive the digital revolution but prosper in it.

I should say there are two basic principles that run through all of these suggestions.  First, the record industry needs better management from the top down.  Second, file sharing can't be stopped completely but by giving people most of what they want (e.g. the ability to share music) while cracking down on those who really are thieves you can dissuade the great majority of people from trading (which should be good enough for your bottom line)

That said, here is my advice to anyone who runs or would like to run a Record Label in the future.

Streamline the Business: As I laid out yesterday I think the record industry has been badly mismanaged in the last decade or two.  Very much so. 

I'm told there are departments with hundreds of people who deal with booking concert venues alone.  That's ridiculous.  A computer program could do that for gods sakes, it requires at best one person.  There are only so many venues and the people running those venues will decide what acts they want.  All the label needs to do is work out the scheduling.

The record labels are rife with these examples.  As I've said before I don't think most acts are going to go without the record labels.  But the fact that a few artists could go without them shows just how little they are doing right now and just how much they could be streamlined. 

Share Expenses Where Possible: There are few things that the record industry does well but one of those things is collaboration with their competitors.  This is something that should be pursued further.  There are things like manufacturing which every record label does EXACTLY the same and which get cheaper as you scale up. 

Labels should identify those things and collaborate on them just as they do when funding things like the RIAA. 

Cut Costs on Your Product: Look, the last couple decades were good times.  I know.  But now everyone knows a CD only costs a $1 to physically manufacture and if you streamline your business it shouldn't cost that much on the back end either.  Time to face the reality, prices need to come down.  If you haven't managed to streamline down enough to get the cost of a song to at least $.69 than you need to try harder. 

Redesign Your Product: I hate to be the one to say this but the reality is that the days of CDs with full color booklets and fancy packaging is over.  Record Labels need to lower the cost of their physical product by as much as possible.  Still make it look good, but maybe just an insert rather than a booklet. 

That said, they need to listen to the words of Radio Head's lead singer and realize that people want a physical product! But here's the trick...they also want instant gratification.  So give them both, use the physical product to sell your digital downloads.  Make songs available for $.69 per track or allow people to buy (and download) the whole digital album and then have the CD shipped to them for a little more.  Customers get everything they want and the record labels get people to start buying whole albums again rather than individual songs.  Everyone wins.

Make Music Available for Free (but NOT downloadable): People like to share music  and people sharing music MAKES MONEY for the record labels.  As long as those songs aren't being stolen while they are being shared.  The record labels' task is to make their music available far and wide just as long as it can't be downloaded.  They need to stream in a way that makes it easy to send, embed, share, and in any and every way distribute (again, as long as it isn't downloaded)

In fact, they need to go further. 

There are plenty of companies out there doing innovative things with music.  Buy or emulate companies like Last.fm and make some money while you are at it.  This is one of the only items on this list that will cost the labels money but its the most important and there are plenty of ways to make money off it if they try.

Bottom line: all a person should need is a computer and an Internet connection to access and share every song available for purchase.  But if they want to walk away from the PC, they have to buy it.

Use Watermarks & ISP Filtering: Labels need to watermark their music.  No if, and, or but about it there is no reason that a law abiding legal purchaser of music should have a problem with a watermark as long as its just that.  Not something that tries to transmit data back or anything like that, just a mark.  Labels need to earn the purchaser's trust and that means a watermark that is benign.

Then they need to spend some money and hire people to create a filtering mechanism for ISPs.  Software that they will then GIVE to the ISPs for FREE.  Don't expect the ISP to protect the label's product, they need to create a division of their business that works with ISPs to filter music.  In fact they should pay the ISP to do it!  Then, if they fight it, the label can sue them for aiding pirates! 

Carrot and a Stick. 

That said, they can't go overboard.  Filter p2p networks and that's it.  If someone e-mails a song to a friend they need to let it be (unless the person is making a mailing list or something).  Be reasonable with your customers (by giving them a wide berth) and they will be reasonable with you (by paying you instead of trading) 

Sue, Sue, Sue...but give on "out": I'm pro-lawsuit in the music industry.  That's big for me too because I'm a big proponent of Tort Reform.  But File Sharing (now that DRM is all but gone) IS stealing and I have no problem with people who steal being sued for it.  But for it to be effective you have to do it right and that means not looking greedy.  Most people like justice and most people believe file sharing is stealing but no one likes revenge and no one likes greed. 

The irony of the RIAA suits is that the record labels come across as greedy when they really never see the money.  The Defendant's don't have that kind of money so they just declare bankruptcy which means the person's life is ruined (to an extent) while the record industry looks greedy for getting no money.  Its stupid. 

So my advice is this: Sue people's pants off.  Dramatically increase the lawsuits both in how many people you sue and in how much you ask for in penalties...and then give the person an out.  Make the law suits massive to send the message that p2p IS WRONG but then let people off by having them do (a lot of) community service.  It still reinforces that p2p is wrong but it also helps the community, allows the traders to go on with their lives and keeps the record labels from looking greedy.  Everyone wins.

Plead Your Case: Most people know that things don't come for free and most people don't have a problem with that.  Further, those who do have a problem with that will never be convinced.  So focus on putting serious effort into explaining the logic behind paying for music to those you can convince.  Maintain a list of artists who have been dropped from their label because they had poor sales and remind people that p2p deprives fans of music when this happens because these artists will probably never release another album.  Map out every conceivable way that p2p hurts the industry and detail it for people. 

If you sell your product for a reasonable price (see above) and you spend some marketing dollars pleading your case most people will side with you in the end.

Support Alternate Uses: Things like remixes SELL the record labels' product and need to be embraced.  There is a problem in that a remix that is too close to the original product is a bad thing but labels still need to empower these people in every way possible.  Perhaps a review process or something like that would do the trick but whatever it takes the labels need to make it so that these people can do their thing. 

Addendum: For the record, when I said "p2p is wrong" above I meant "if the people selling the music don't agree to it".  I don't know of anyone who has tried to make their money off the p2p model (a.k.a. giving away their music for free in order to make it off other revenue like concerts and other items) but if they did I wouldn't have a problem with it.  My issue is with people who use p2p against the wishes of the people who created the content.

There's an article by Simon Napier-Bell over at the Guardian where he essentially says he realized record companies were useless in the 60s and nothing has changed.  I'm not going to quote from it because, to be blunt, its foolish.   The idea that the industry of the 60s is anything like the industry of today is contrary to everything I have ever heard (from people with more to their credit than "I managed Wham! for a few months").  The fact that they look the same from his limited position shows just how little he knows about what is really going on. 

But for the record...Are there fools in every industry?  Yes.  Do record companies take advantage of new acts before those acts gain enough popularity to dictate terms?  Absolutely.  But that's about where his insight ends. 

His article did get me to thinking though...

One regret I have over all the RIAA talk on this blog is that I've never gotten the chance to say what I think the Industry should do to save itself. 

Due to the circles I travel in I've had the opportunity to talk to record execs, starving artists trying to get signed and everyone in between.  So I have a pretty good idea of what is going on and how I think it could be best fixed.  But I've never got a chance to put it into words.    

Which brings us to this.  I had planned on only one post but there's too much to say so today is what I think went wrong and tomorrow will be how I'd fix it.

All that said I think the reality of the situation, from all I've been able to find, is that the Record Labels are in trouble because they have been badly managed in the last decade or two.  Not because of file sharing or p2p as many would have you believe.  The music industry became so big in the 60s and 70s that it essentially become procedural by the 80s.  It has come to the point where there are whole business units for every step of the process.  Which is why the business practically ran itself for the next couple decades and, as successful businesses that need little management tend to do, became even more bloated.

This is something you see in every business or industry where there isn't much innovation.  The tech industry saw it with early IBM when they essentially sat on their laurels and just became bigger and bigger for years.

Anyway, by the late 90s this had caused the management to be poor.  When the business runs itself the people who rise to the top only need to know how to suck up to board members to be successful. 

So you get situations like the ones revealed in the purchase of EMI where spending was so out of control that they were spending hundreds of thousands of dollars on "Fruits and Flowers" (whatever that means).  Or the CEO of Universal saying "he couldn't find a good technology person" (this was at a time when Computer Science was the fastest growing major in existence).  I could go on and on but the bottom line was that the music industries' fall was a result of bad management not technological innovation.  It is hard to keep revenues rising when you are spending like a drunken sailor and doing absolutely nothing to innovate.

But in the same way that bad management got them into this mess I firmly believe that good management could get them out of it.  In fact, I believe the music industry can not only survive but be reinvigorated by digital technology.  But that, is for tomorrow...

Short Addendum: Since this is a technology blog I wanted to address file trading specifically.

I don't believe file trading had that much to do with the industry's downfall.  There's no question that it costs the labels money though and what bothers me is that so much focus is on kids trading songs

Kids have always made copies of music without paying for it and they would have continued to do so in the digital age.  The only thing that changed is the media.  But by not embracing digital distribution early on (another sign of bad management) the labels forced adults to take up file sharing which has led to most of the losses that file sharing has produced. 

Adults were in the habit of paying for music before the labels forced them into the hands of Napster 1.0.   That's now the problem because people will pay for what they have always paid for but will resist paying for what was once free.  Music now fits into the "was once free" category.

That said, I think good management and a little marketing could stop 99% of file trading and I plan to cover that (along with other stuff) tomorrow.

In my last post I quoted an essay that made the point that piracy is a response to an inefficient systems being in place.

Given that I'd like to ask a question...

Other than the fact that its free, can anyone explain to me how p2p is a more efficient system than DRM free music sold by a company such as Amazon?  By "more efficient" I'll take any definition be it technical, economic, etc...

For the record, I don't expect a response to this post so I'd like to throw out a sarcastic "that's what I thought" in advance.

I'm a fan of Mathew Ingram (I even put him on my blog roll) so I don't write this to attack him.  But he's been on a tear regarding p2p for a week or so now and its honestly getting a little ridiculous.

His most recent post quotes an essay by Matt Mason author of "The Pirate's Dilemna: How Youth is Reinventing Capitalism".  The essay vacillates between the dishonest (quoting the story of William Fox while omitting that Mr. Fox fought his battle legally) to the plain offensive (comparing record companies to drug companies that withhold life saving drugs) but the point it makes isn't inaccurate.

The essay's point is that most piracy is actually the sign of an inefficient market.  I don't disagree with that point nor will I defend the record labels in their (up until just recently) utter botching of the digital revolution.  That said, the bone of contention comes when talking about what individuals have the right to do in response to that. 

Here is a quote from Mr. Ingram's post...

I happen to think that Mason is dead right, and that if the music industry had done more innovating (this is a start, but still rather late) and less suing of its customers, artists and labels would both be a lot better off than they are now. Are many downloaders shameless thieves who would never pay for anything anyway? Sure they are. But many more are music fans who are telling the industry through their actions that it’s not giving them what they want, or at least not how they want.

So, "conduct your business as I want you to or I'm just going to steal your product"

Quick Aside: I had a discussion similar to this with Mr. Ingram in his comments and I'd wanted to link to it but I can't find the post for some reason.  But in that discussion he basically said he doesn't feel that file sharing is stealing at all so I wanted to put that out there before going further. 

Let me first say that I don't have a problem with someone who burns a CD and plays it for a friend.  Nor do I even have a problem with someone who sends a music file to an honest friend who they know will buy the CD if they like it.  But if you are in any way giving music to someone who you don't personally know or allowing music to just be taken off your PC (as with Kazaa and others) you are stealing that music (albeit to give to someone else).  You are taking the money that the other person would have had to give to the artist away from that artist.  

Let me be clear here, I'm not posting this as a defense of the record industry per se but more as a defense of individual rights in general.  You can demonize the "big, bad record labels" but the bottom line is that the artists who created this music have entrusted it to the record labels for distribution.  So it is the artists, as much as the labels, who are being hurt here.

I have many friends who are artists (of various kinds) and the idea that people out there believe they have the right to take that art against the artist's wishes and do with it what they want without any compensation and then have the nerve to say its the artist's fault for not entrusting their art to someone "efficient enough" is upsetting to me. 

When someone creates something they have the right to give it to people in the means of their choosing.  Period.  To say anything else puts all our rights in danger.

Addendum: Again, I like Matthew Ingram and I don't want to pick on him but I encourage everyone to check out  his link blog.  You've never seen such an echo chamber (in regards to this issue) and that tells a lot about people who share this opinion.  They don't want to hear the other side of the issue.  (Ironic from a guy who in many ways crusades against the echo chamber in the tech blogosphere)

There was one last point that I didn't get to address yesterday and that was this lingering theory on the part of the blogosphere that the Record Labels are close to extinction.  That isn't likely to happen and I'm going to tell you why.

In reading this keep in mind that from High School on I grew up in Southern California and I grew up with a parent who acted in live theatre which eventually got me into the tech part of live theatre.  I grew up doing productions and have more than 75 different musical productions to my credit so I know more than my fair share of actors and musicians.

Also, the characterizations below are generalizations and I know they don't apply to every single person in each category.  That doesn't change the fact that they apply to the great majority of each group and because of that fact they are helpful in addressing the issue at hand. 

All that said, lets start by looking at bloggers.

Bloggers like to think the world is filled with people just like them but the fact is that its not.  In this particular topic that is relevant because bloggers by definition are at least mildly entrepreneurial.  Even if they don't run a company themselves the sheer act of putting  up a web site suggests the presence of the entrepreneurial spirit. 

The polar opposite of bloggers are artists who aren't at all entrepreneurial.  They want to focus on their art and they don't want to worry about marketing their art or packaging their art or any of the trappings of selling their art.  Their ideal world is one where they can spend all their time on the art and just have a pay check show up at the end of the day. 

This is why bloggers don't understand the role of Record Labels.

Record Labels rose up to fill the artist's need by doing all the stuff the artists didn't want to do.  Someone had to step up and get the artist's music into the hands of the consumer and the artists themselves had no interest in being that person.  That is why Record Labels exist and that is why they will continue to exist.

Don't get me wrong, it isn't out of the realm of possibility that the current crop of labels will die.  I doubt it will actually happen but it isn't an impossibility.  But the thing to remember is that the only way they'll die is if someone else shows up to take their place.  Because someone has to continue to fill that void. 

If that new group of business people show up they'll still need to protect the artist's interests so they'll still have to hire lawyers and those lawyers are going to advise them to do the same thing the current labels are doing now.  In fact, the odds are good that a new group would make it worse because they will be up for a fight where as the current crop has, to an extent, been beaten down by public criticism.

But one way or the other Record Labels are still going to have to protect their product from being stolen.  That is an inalienable fact.  There is certainly room for new business models but someone is going to have to make the case for those models to a Record Label.  Whether that's the current crop or a new crop really doesn't matter because each will be facing the same issues and each will be advised by the same lawyers. 

You want to make a difference in the industry my advice would be to build a better mouse trap.  Don't bother hoping for, wishing for or predicting the death of Record Labels because it isn't going to happen.  Instead figure out how the Record Labels can still make their money without having to resort to the RIAA's tactics.  Because answering that question is the only way this situation will ever be resolved. 

I thought my last post had gotten too long so I didn't post this in it but the more I've thought about it the more I thought it was a necessary point.  This is taken from a reaction to Scott Karp's post written by Mark Hamilton.  In response to the RIAA's stance he says...

I’m paranoid enough to believe that this isn’t mere legal wrangling on the part of the RIAA. I’ve suspected for a while this is where the music industry wants to take the argument. My reasoning is fairly simple: a huge part of the huge amounts of money flowing into the industry over the past 40 years has come from new technologies and the need to rebuy. Every time the method of delivery changed — from vinyl to cassette tape, from cassette tape to CD — serious music fans have laid out millions of dollars to repurchase music they already had to replace their “old” library.

But then a few paragraphs later he goes on to say...

Small pieces of the industry are changing: any number of smaller, independent labels and a growing number of artists are finding innovative new ways to connect with music lovers and navigate the tricky waters of massive change. Three of the big four labels have dropped DRM from at least some of their offerings.

I'm cherry picking here so I encourage anyone reading this to read his whole post but it was the best way to make a point that I think is really important which is that the industry is making strides to allow people to keep music on their PC digitally and even the most anti-RIAA people know it.  I personally think strides like stripping DRM from new releases shows an industry that is really trying to work with its customers and completely contradicts the characterization of them as people attacking even customers who just want to legally back up their music.

Please Note: I'm not saying the industry has always been this way I'm saying I think they've learned their lesson.

A real quick post on the RIAA's suit against Jeffrey Howell which has exploded due to an article in the Washington Post.  In it the RIAA is claiming that Mr. Howell committed an illegal act simply by copying the music to his computer even before he illegally distributed it.

The reality here is that this issue is much bigger than the blog posts I've read are making it out to be.  The issue isn't the RIAA's greed it is the fact that the United States is becoming an increasingly litigious nation.  So someone gets hurt by a defect in a product that the manufacturer could never have foreseen.  That person then gets a lawyer who convinces a jury to award the person a million dollar settlement out of pity (as opposed to the facts of the case).  Not being able to afford another suit the manufacturer then turns around and changes their user agreement to essentially say "if this product blows up and destroys your whole neighborhood because of a defect that is completely our fault you still can't sue us"

The same issue is at stake in the RIAA's case in that you may not like the RIAA but their product is being stolen and most people don't see it as a big deal.  So they in turn have made an unreasonable user agreement saying that it is illegal to even copy your music to the computer at all.   I honestly don't think anyone believes the RIAA would prosecute someone who was only storing legally purchased music on their PC and had no plans to distribute it.  The RIAA is simply doing what the manufacturer in the above example did and making an unreasonable user agreement to protect their interests.

Saying that its illegal to store music on the PC is simply a way for the RIAA to have an iron clad case against those who are distributing the music illegally.

So Is the RIAA right?  Hard to say.  When society doesn't take things like theft seriously it invites an over reaction from the person being stolen from.  I do think the RIAA's claim is unreasonable on the surface but I'm not sure you can blame them for following the advice of their lawyers.  As long as people continue not to equate the stealing of music to the stealing of a physical product I think you'll see more unreasonable claims like this.  If you want to stop those claims then your argument is for tort reform not against the RIAA.

On a side note, the idea that the media industry will be "utterly destroyed" by digital technology as put forth by Scott Karp is ridiculous.  These issues will exist even if artists self distribute.  The RIAA explained simply is just a group of lawyers hired by the music industry to protect their interests.  So if the labels disappeared tomorrow people would just start stealing directly from the artists who would then hire a lawyer to stop it and be advised to do the same thing the RIAA is advising the labels to do now.  Music will still have to be paid for no matter what happens. 

Addendum: A friend pointed out that the Washington Post article quoted above did not mention that Mr. Howell was sharing songs over Kazaa (a real breach of Journalistic ethics imho) so many might think the RIAA was just going after him for backing up his songs.  That isn't the case, as can be read here: http://www.homemediamagazine.com/news/html/breaking_article.cfm?article_id=11723