The Blame Game: Are Labels Truly Dunderheaded When It Comes To The Internet?

It’s true that the record business is suffering partly because labels were slow to respond to the Internet. But the popular notion amongst musicians that the Internet = freedom, and the labels = plantation is not firmly rooted in reality. Here’s the real deal.

The problems affecting the labels are not born from CEOs being unable to operate their email.Major labels weren’t completely ignorant of the opportunities the Internet presented for their business. In the late ’90s, as evidenced by memos and minutes from Universal, BMG, and Sony, the majors spent millions on R&D for Internet distribution models that emulated the film business (think: cable/pay-per-view, but with music streams that result in buys). Then, like a hurricane hitting the shore, a tech protégé run by people inexperienced in intellectual property called Napster came on the scene. The principals of Napster wanted labels to give them the rights to “distribute” their catalogs. Napster’s perception was that labels didn’t pay royalties to their artists and, being pro-artist, Napster wanted to make sure that artists were paid royalties from their downloads.

Obliging the young start-up wasn’t a possibility for numerous reasons—some of which weren’t entirely selfish. A fact glossed over by the media when criticizing record companies was that, between 1999 and 2001, there was nary a majorlabel contract that granted the labels permission for “digital distribution,” and artists were not willing to give these rights up so easily. This hesitation stemmed from an earlier incident when the majors had approached their stable for rights to re-release their music on a new widget: the compact disc. Virtually every artist signed over these rights without receiving any money upfront. They were told that the payoff would be higher royalties, because the disc would sell for about $12 instead of the usual $7.99 for a piece of wax. But, in the end, labels ended up charging the artist a “new technology deduction.” This actually lowered their royalties to what they received for LPs. Many artists felt duped, and they decided that, this time, they would be smart and negotiate. This stalled the process for years, and it cost both the artists and the labels dearly. Of course, the labels could not reveal this vulnerability to Napster for fear they would do an end run and go directly to the artists. Napster tried anyway. But artists were even less inclined to give these rights to computer geeks—no matter how hip and “pro-music” they appeared. And that’s when things got ugly.

Critics claim that labels wanted to sell albums instead of singles because they deliberately want to dilute their inventory— in other words, buy ten crappy songs to get to one good one. That’s ridiculous.

The blame falls squarely on the artists and their management looking to receive publishing advances. See, advances to songwriters from publishing deals were based on projected album sales. Switching over to a singles-driven model may sound good from a consumer point of view, but a sudden change would have seriously affected the economic viability of being a professional artist.

Imagine you are an artist and Sony Publishing is going to give you a $500,000 advance based on the fact that Sony was doing an initial pressing of 300,000 albums with 14 songs on it that you wrote. That’s 4,200,000 songs going to print worth about eight cents a pop. Now, imagine that Sony is going to try something new. Instead of pressing 300,000, they are going to simply post a few tracks, and see how many downloads they get. The result was as could be expected. This was considered too unpredictable a basis to forecast royalties, which would mean little or no publishing or future album advances. No manager during that time was going let his or her client sign that deal.

Due to antitrust concerns, there are limitations to the conversations that a major label can have with another major label—or a tech company—regarding a standard for digital transmissions. In other words, if you, as a record company, make a deal with one company, you could be required to make a deal with all of them. No one was ready to do that in 1999. There were several companies competing for a “standard.” If record companies sided with Napster, others who were developing similar services could slap them with an antitrust suit. At the time, Microsoft and Apple were exploring copy-protection solutions. Napster had none. So the majors tried stalling Napster until the big boys could chime in. Between all the various formats and codecs in the making in 1999, labels needed to wait until the tech industry settled on something consistent. We’re still waiting in 2008.

When you read the opinions of those who think labels had their heads up their asses, remember that the “progress” they are preaching would involve exactly this scenario: A world with no advances where everything is driven by advertising, and where all the money is on the back end. In case you forgot, that’s the end that is most difficult to collect from.

Labels were trying to develop Internet- based solutions in a controlled manner—one that would not upset the current economics. Unfortunately, these important factors were lost on Team Napster, whose average executive was barely 25 years old. And, conversely, labels couldn’t appreciate that their precious industry was now in the hands of people who had no patience for red tape or maintaining a standard that was feeding thousands of artists and their families for several decades.

We all know what happened next. Massive litigation and rewriting of copyright laws eventually closed down the free version of Napster. Labels and tech companies had both drawn blood, and the wounds still have not healed. The labels missed their chance to partner up, and now it’s a duel to the death. To determine the way your art is treated and distributed is what’s on the line. Don’t believe for one second that the tech companies care any more about you than the labels.