Sunday, October 14, 2007

Hidden Costs

It's become increasingly clear ever since iTunes cornered the market for paid digital music files that, while the arrangement has been a goldmine for Apple, it's done little to change the declining fortunes of the recording industry. There are a few reasons for this, not least of which is the revenue split negotiated by Steve Jobs ("indecent" according to one record company executive). But the fundamental explanation is structural. The iTunes model is simply a digital age version of the traditional method of selling recorded music, where digital files replace mechanical copies. The problem, of course, is that the competition faced by the recording industry isn't more efficient distribution of music, it's free distribution of music.

Which is why the deals they'll be seeking with music distributors will increasingly give the appearance of offering free music by rolling the licensing cost into a service or product. In the case of this arrangement concocted by Universal Music head Doug Morris, access to three major label catalogs representing 75% of the American recorded music market would be included in the price of an mp3 player. In the case of French internet service provider Neuf Telecom, Universal's catalog was bundled into the monthly subscription fee. Airplane entertainment libraries and luxury car mp3 players offer similar opportunities to hide licensing costs in the purchase price, and others will be developed.

So as you read about the advent of free recorded music, keep in mind that you're still paying for what you listen to. You're just not being shown the price tag.

Update: Of course, just after I posted this, I ran across a WaPo article discussing whether and how much an artist is "selling out" if they license their music for commercials. This is a 1990's approach that will soon be obsolete. I wouldn't be surprised if in the not too near future, at least a certain amount of licensing rights will be retained by the record company in the standard recording contract. In other words, the record company itself will have product endorsement deals, and by agreeing to that first contract, newly signed artists will be licensing their music to the label's brand roster. Of course, once an artist becomes successful, they can always re-negotiate. But for the length of that first contract, selling will mean selling out.

Posted by Judah in:  Arts & Letters   Markets & Finance   

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