David Pakman: The Sad State of the Old Music Business

The article below was originally posted on  David Pakman’s Blog. David is a Partner at Venrock in New York, and focuses on early stage venture investing in internet and digital media companies. Previously, David was the CEO of eMusic, the world’s leading digital retailer of independent music, second only to iTunes in number of downloads sold.  

I read with sadness this  New York Times profile  of Irving Azoff and Live Nation. As my friend  Andy Weissman  asked, “How divorced is this world from reality?” The article reminds us of the way the music industry worked for many decades: a world of power by those who manage artists and run record companies. This power was derived by getting artists to agree to allow these moguls to negotiate and navigate their career decisions. Of course, the fans only cared about the artists and their music, but someone had to make business decisions, negotiate contracts and approve marketing plans. I don’t begrudge the many successful music industry executives who built lucrative careers and giant fortunes from the many good decades of music business success. They helped shaped the careers of literally hundreds of great artists.

In surveying the state of the business now, however, many of the decisions made by these very same executives over the past 12 years have resulted in nothing less than complete failure. The recorded music business, which used to be largely responsible for more than 60% of the revenue an artist generated, now brings in about 9% of an artists take (this number from Azoff himself.) The recorded music business at about $18B worldwide is a shadow of its year 2000 peak of $40B. And I don’t see its fall stopping any time soon. In fact, I really think the recorded music business goes pretty close to about $6B – $8B over the next 5 years. And that’s worldwide.

The story of this decline has been well-chronicled. In fact, the mistakes of this industry are studied daily by executives in the movie, book, television and newspaper industries as a recipe to avoid. (I’m not so sure those execs have quite taken away the right lessons, as I have posted about many other times.) There are only two music industry segments in better shape than recorded music: music publishing and live music. The former hasn’t declined nearly as much thanks largely to the increased use of music in advertising and, to a much lesser extent, increased revenue from satellite and internet radio. Live music, as the NYT article makes perfectly clear, has stayed healthy for two reasons: (1) the magic of a live show can’t be pirated online and (2) huge consolidation in venue ownership, promoters and ticketing has allowed a massive increase in ticket prices. It’s hard to celebrate this second fact as a revival of an industry. In fact, I think it is the bellweather of its end.

I agree with Azoff that tickets were underpriced for many years. Scalpers have always showed us that the market had a curve to it that was not optimized by, say, two or three ticket price points. The rise of secondary ticket markets like StubHub showed us that there were more efficient and orderly ways to maximize profit. But massive consolidation and monopoly-building usually signals that there are no other growth opportunities left for a market — the market participants grow by consolidating and raising prices. Azoff’s belief that Live Nation’s upside is in selling t-shirts and fan clubs to the fans sounds like something I heard in 1997 during internet 1.0 days. It’s not only not innovative, it is precisely the opposite of what fans are looking for from the music industry.

I think, like many others, that we have been witnessing the atomization of artistic culture. The internet gives us far more choice than the limits imposed upon us by broadcast media. We know of more bands, we can get tour dates pushed to us, can sample music long before it is released and we can reserve tickets well before the show. But we are doing this across many more artists, spreading our limited disposable income around in ways we didn’t when we had fewer choices. Nevermind that we are offered billions of other entertainment choices from video games, YouTube, Facebook games and even Crowdreel and Bitly.TV.

The future of the business is atomized and decentralized. It is one where the collective power of the many fans actively engaged in discovery and sharing have more power than a few senior execs calling the shots about marketing budgets. Yes, there will always be superstars, largely gained by taking those who are bubbling up and pushing them through the mass media still remaining. But today’s superstars sell a fraction of records/downloads as the ones from years past. And yes, there will always be American Idol programming which is really more about entertainment than it is about creating great music. But the new power, in my mind, is granted to the aggregators who pull together our collective wisdom. The music business today is blogs, Twitter tweets, Facebook links, the Hype Machine, TheSixtyOne, Rockwood Music Hall, Pandora and Foursquare. Honestly, I discover far more music today from  hypem.com  (an aggregator of the best music blogs) than I ever will from the decisions of record execs and promoters. We will continue to pay Mr. Azoff’s company’s service charges for the privilege of seeing great live music if and when our favorite artists reach big arenas. And fewer and fewer artists will. But if you are going to bank your future on nothing more than raising prices and selling me more expensive t-shirts, the fall will be mighty indeed.

Instead, where might today’s execs focus their energy? Providing tools and assets to empower the many fans willing to do their marketing work for them.  Terry McBride  has articulated many times that the secret to his artists’ success is by giving fans the music and other goodies to share with friends, evangelizing their favorite artists. Shouldn’t the music catalogs be available through a click-wrap API, paving the way for thousands of new music filters on hundreds of thousands of web sites? Shouldn’t music be decentralized? Not free, but just available everywhere, especially to developers to create more engaging and relevant online music experiences. Music needs to become part of the fabric of the web, not an overlay on top of it. Like I can embed my Twitter stream anywhere, I need to be able to embed the music driving my life all over the web too. Not just the song names, the music itself. I have a need to share it, but I really can’t today. If this happened, the businesses that could be built on top of it are quite interesting. The data becomes the value here enabling the new generation of music programmers to emerge based on the collective and specific expertise of the masses.

The tech community creating digital media is filled with forward-looking businesses. In the past three weeks alone we’ve seen the launch of the iPad, new Twitter APIs, and extended Facebook Social Graph APIs. As Andy Weissman pointed out to me, “All, or none of those may work – but they are all forward-looking in their nature and in how they want users to experience them. Live Nation is looking backwards.”

I am not arguing that artists should not be paid. But the ways they build their career, reach an audience, and then ultimately sell stuff to that audience, is fundamentally being turned upside down. Ecosystems based on sharing are the future. This is what the net native generation that is the future audience of all entertainment businesses know to their core. And Mr. Azoff’s shouting at business partners and squeezing fans for a few extra dollars on a ticket isn’t going to change any of this.