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The week of June 12, Napster (www.napster.com) snared Microsoft slayer David Boies to defend it against a looming Recording Industry Association of America lawsuit (www.riaa.org). One week later, the outlines of a business plan began to emerge when Napster signed a deal for exclusive distribution of songs with upstart hip-hop label Ark75 Entertainment. On June 20, Napster scored big again, adding a powerful music-biz insider to its executive stable. The Internet file-sharing company, headquartered in San Mateo, Calif., hired Milton Olin, former A&M Records senior vice-president for business and legal affairs, to be chief operating officer.
The troika of savvy moves by Napster's CEO Hank Barry appears to have outflanked the entrenched music industry and the RIAA. But Barry is hardly the only one outpacing the slow-moving record labels. From once-stodgy symphony orchestras taking their music directly online to free-music fiends itching to build an open-source version of the proprietary MP3 file-compression standard, cracks in the foundation of the traditional music business are widening.
"GUERRILLA MARKETING."
The industry's breakdown starts at the grass roots, where a new breed of bands have successfully harnessed the power of the MP3 music files that Napster has come to symbolize. Take the Pilfers (www.pilfers.com). This New York City reggae/ska band managed to sell 10,000 CDs without a record-label contract or much of a marketing budget. Band manager Randy Nichols spearheaded a "guerrilla marketing" strategy. He made sure the band's Web site featured concert dates and locations, as well as MP3 downloads, T-shirts, and other items for sale.
Before each concert, Nichols contacted a small army of about 400 teen and young-adult volunteers (often called street teams) who copied flyers from the Pilfers' Web site, printed copies, and plastered them in nearby neighborhoods. For their work, Nichols gave them free CDs and free tickets to the concerts as well as a chance to meet the band. Nichols also bartered for ad space at the fan Web sites of more well-known reggae/ska bands, such as Sublime and No Doubt.
The band became successful enough to sign with major label Universal Music Group last year, hoping to get serious marketing help. But the album they cut for Universal, which was distributed in retail outlets, didn't sell any better than what the band had achieved on their own. Now the group is debating whether to go independent again. "We probably would have seen a lot more money if we had released our second record on our own," laments Nichols.
RHAPSODY IN MP3.
The Pilfers' entrepreneurial spirit seems to be contagious, infecting musicians across all genres. In the City of Brotherly Love, the Philadelphia Symphony Orchestra has composed a new-media strategy. In a groundbreaking agreement between the orchestra's management and the local musicians' union, a new-media entity was created to oversee the PSO's digital distribution. That will include everything from streaming media on the Internet to downloadable music and possible recording deals that circumvent the big labels.
"It costs the same amount for the Philadelphia Orchestra (www.philorch.org) to record Tchaikovsky whether you sell 50,000 units or 10,000 units. By using the Internet, we lower the breakeven point," says Joseph Klueger, president of the Philadelphia Orchestra Assn. The PSO is hardly alone in the symphonic wilderness. Last week Klueger and other major orchestra presidents hammered out a national agreement among symphonies and the traditionally conservative musicians' union, which could be ratified by local symphony unions later this year.
The tentative agreement could turn violinists into musical venture capitalists as symphonies across the country dream up new-media ideas to create desperately needed revenue and raise the genre's visibility. Klueger says 1,800 small orchestras cut out of the national recording pie due to their limited resources will now have an international distribution channel and a means of scaring up revenues either directly through downloads or indirectly through marketing that might lead to better ticket sales.
DIRECT SELLING.
"Every orchestra from Osh Kosh to New York City will be able to put their stuff out there," says Klueger. The PSO and the Pilfers are symbols of a healthy musical middle class emerging in an industry long divided between the haves and the have-nots. They are joining the ranks of better-known stars, who decided early not to depend on record labels and seized the potential of the Internet. Pop singer David Bowie's Web site, (www.davidbowie.com) offers exclusive content and an Internet service provider link for monthly fees starting at $5.95 per month.
In the late 1970s, niche-music visionary and electronic wizard Todd Rundgren never sold huge amounts of records, but he built a loyal following. Now his Web site (www.tr-i.com) offers a $25 subscription to diehard fans, who will get exclusive access to live Webcasts, weird merchandise, and other special goodies. "It occurred to me that with the aid of some modern advances, I could go directly to my audience, ask them if they would commit to buying the music, and then deliver it to them as it is produced, thus eliminating the middlemen," writes Rundgren on the site.
Yes, the big-label record companies are making some similar efforts. But the distribution contracts Warner Bros. and BMG signed with MP3.com earlier this month, and the tactic of selling downloadable singles for the same price as in-store CD singles, seem like ho-hum responses to the burgeoning online music movement. Industry insiders say the pressure on labels and the established music business to create innovative and flexible pricing structures is heating up.
"You can price per listen. You can price per byte. You can price per download. If a song catches on, then raise the price," says Jonathan Potter, executive director of the Digital Media Assn.
LUCKY FEW.
To be sure, big questions surround the long-term viability of Internet-based music business models. MP3.com CEO Michael Robertson crowed at this week's MP3 summit about handing out $1 million in May for the monthly "Payback for Playback" program. The scheme rewards artists whose music gets requested the most on MP3's Web site. Robertson claims that the artist for the month, 303infinity, earned $23,786.81. The band's lead singer, Mikel Fair, now has an advertising budget, a home studio, and a business plan paid for in part with his MP3.com earnings.
But few of the bands that posted songs on the MP3 Web site could ever hope to make a living off of the deal. Meanwhile, many popular musicians are still fuming at Napster, claiming the "new" system exploits them. The courts, too, could strike a body blow against Napster if they decide to approve the RIAA's petition, which would force Napster to remove all major-label content from its system. "David Boies is a good lawyer, but it won't help their case," predicts Amy Weiss, a vice-president at the RIAA.
Even the harshest critics don't expect the big labels to disappear. Ironically, the music establishment so far seems to be benefiting from the Web-fueled music boom. Although the RIAA has claimed that Napster and other file-swapping software have sabotaged brick-and-mortar sales, the numbers tell a different story. In 1999, domestic full-length CD unit shipments grew 10.8%, from 847 million in '98 to 939 million in '99. The dollar value of those shipments grew 12.3% over the same period, from $11.4 billion to $12.8 billion.
LOST HAMMERLOCK?
Perhaps the Madonnas and the nSyncs of the world will continue to operate through the record companies. And the Internet will serve as an informal network of amateur musicians who can use the Web to prove their worth to the big players. The labels are already a bit more open to the MP3 phenomenon. They've increased sample downloads on their Web sites and displayed a decidedly heavier presence at this year's MP3 Summit.
In the future, the kind of marketing power that only big labels can muster will likely remain necessary to push mega acts. But the majors may have permanently given up the hammerlock they once had on distribution. Even the grip of MP3s -- a proprietary format -- could soon come unstuck should a new freely distributed musical compression format called Vorbis, (www.vorbis.com), catch on.
"In the past, shelf space was limited. You needed somebody to get those CDs onto shelves at stores. You don't need that anymore," says Tim Quirk, managing editor at music site Listen.com. And with each independent success story, more and more musicians will likely decide to take their business into their own hands. And that means more business for the Napsters of the music world.
Salkever is a staff reporter for Business Week Online
EDITED BY BETH BELTON
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