Gadfly

The Music Industry's Still Off Key

The power brokers aren't responsible for its revival.
From
Photographer: Hulton Archive/Getty Images

The music industry is having its "Mission Accomplished" moment. 

For the first time since Americans were prowling for compact discs at Tower Records, sales of recorded music are on the upswing. And in a historic milestone, about half of global revenue for the music industry is now coming from digital sources such as advertisements in YouTube music videos and $10 monthly subscriptions to Spotify's streaming song buffet.

The music business should be relieved that the destruction caused by people ditching CDs for Napster, iTunes and Pandora stopped short of doomsday. But like George W. Bush on the deck of that aircraft carrier, the music industry is declaring victory too soon.

The industry's power brokers haven't reckoned with how little credit they deserve for their own comeback. And they haven't come to grips with the industry's still-precarious position because the very players that dragged music into the digital age aren't on solid footing.  

The danger is the music business learned the wrong lessons from its digital near-death experience. And that should serve as a warning to the television industry and other corners of media that are threatened as people increasingly turn away from 20th-century modes of entertainment and information.

The good news is the music business is on a healthy trajectory again. Thanks largely to the popularity of streaming music services such as Spotify and Apple Music, industry revenue is growing significantly for the first time since the 1990s. Yes, total music sales are far lower than they were at the peak of CD popularity, but it's worth celebrating the music industry for being one of the few media businesses to generate a majority of its revenue from digital formats.  

The bad news is the music labels aren't much responsible for their own industry's revival, and they don't acknowledge this. Executives are patting themselves on the back so hard they risk wearing holes in their Brioni suit jackets. "Record companies are driving this digital evolution," the record industry trade group IFPI wrote in its 2017 annual report. Even when music sales were swooning, the record companies continued "to innovate and transform their practices to usher in a new digital era," the trade group crowed.

Oh really? It seems the industry has amnesia about its own past and present. Allow me to refresh their memories. Many music label bosses had serious misgiving about MTV and CDs -- both of which turned out to be crucial to turning the record industry into a much bigger business. Then executives at big labels such as Warner Music fought Napster to the death. They tried to stop Apple's iTunes before it started. They have sparred with Pandora, Spotify, Google and just about anyone else that had ideas for listening to or buying music in new ways. The track record of the music industry is fighting the digital future, not leading it. 

Some of the music bosses' complaints have been reasonable, but mostly they have pursued self-preservation to the point of self-defeat. Out of the 175 digital music startups launched since 1997, all but nine sold at or near a loss or died, according to data compiled by David Pakman, a technology investor who used to be a digital music executive. Those were potential allies for the music industry, but they were ground into dust by the record companies "driving this digital evolution." 

The surviving digital music players don't make for the healthiest ecosystem to ensure music's future. Early digital music company Pandora has never turned an annual profit. Spotify is unprofitable. Streaming music options from Apple, Google and Amazon are likely not profitable on their own. That doesn't matter because the tech giants can subsidize music to draw people to their money-making businesses. But that makes for few players in the business of distributing music. 

Again, this state of play shows the music powers haven't learned from their own history. In the CD days, they choked off little record shops and independent chains such as Tower Records to the point where Walmart and Best Buy dominated CD sales. And then those retailers grew so powerful they could dictate terms to the music industry. That left the music labels high and dry when those big chains slashed the shelf space they devoted to CDs. Apple, Google and Amazon could be the next powerful retailers to turn the tables on the music industry. 

Fortunately there are plenty of potential opportunities for the music business -- if it doesn't blow it. Increasingly internet-connected cars can become new hubs for streaming music, and voice-activated digital speakers such as the Amazon Echo give people more options for tunes at any moment. Most likely, though, if the music business thrives through the digital age it will be in spite of the record labels' power brokers and not because of them. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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