The Internet and wikinomics offer the music industry a powerful chance to reinvent itself, argue authors Don Tapscott and Anthony D. Williams
…Just about everywhere, the Web and the principles of wikinomics are changing the way music is produced and disseminated, deepening the bond between performers and music lovers. In this chapter we document: a radical new idea for a streaming music service that would give listeners access to all recorded music on any combination of devices they like; a new online community where music fans take over the A&R function of major labels; emerging creative platforms where amateur community members remix one another's artistic works into powerful new combinations; and a rising indie label called Nettwerk that is finding clever new ways to monetize the emotional connection fans make with the music its artists produce.
All of this and much more would be possible on a larger scale today except the foundation of the contemporary music industry, the major record labels, is standing in the way. Instead of seeing the Web as an opportunity, the record companies cling belligerently to their old analog business model, and the industry has become the poster child of failed digital opportunities.
The percentage of Americans labeled "active music buyers" (those who purchase more than four CDs per year) has plummeted to just under 20 percent a year for the past three years. Despite the efforts of Apple and Steve Jobs, online music sales, initially opposed by the record labels, make up a tiny portion of the lost revenue. Only a fraction of the billions of songs downloaded in the United States every year are paid for. The International Federation of the Phonographic Industry, a trade body, estimates that 95 percent of music downloads worldwide are illegal. And industry insiders tell us that after sales of CDs and online songs, lawsuits against customers are the third largest source of revenue. The labels' attitude toward digital disruption causes them to engage in one irrational behavior after another….
The labels' problems predated the Internet. Recorded music is a bloated industry with huge costs from its physical distribution model. It also has many intermediaries, such as distributors and promoters, looking for a cut of the action. To take a band from obscurity to popularity is hugely expensive, but that's what companies have had to do to be given coveted shelf space at the record store. The upshot is that the record companies have been in constant quest of superstars, since less than 10 percent of CDs released actually make a profit. Revenues generated by the best sellers cover the losses incurred by their poorer-selling cousins.
It's as if the game of baseball only counted home runs. Anything less is considered a strikeout, so if you don't look like a home run hitter, you don't get to play. In this context, the Internet should have been a godsend, allowing labels to distribute a digital copy of a song to hundreds of millions of listeners at virtually no cost. By sidestepping the industrial age infrastructure, many more musicians can be profitable. Continuing the baseball analogy, suddenly players capable of hitting only singles or doubles are moneymakers.
Even a musician who only bunts could make a living. Record companies, reinvented as digital networks of artists, fans, and entrepreneurs, could nurture many small artists, rather than focusing all their energies on potential superstars. As a society and culture, we would be much better served by such an approach.
The solution to restoring the music industry to economic health is not to sell songs at a dollar a pop. Instead of clinging to late-twentieth-century distribution technologies, like the digital disk and the downloaded file, the music business should move into the twenty-first century with a revamped business model using innovative technology. The industry needs to think wikinomics. As we've advocated for many years, there is one obvious solution: music should stop being a product that you buy and instead be a service that you subscribe to. Instead of purchasing tunes, listeners would pay a small fee—say $4 per month—for access to all the songs in the world. Recordings would be streamed to them via the Internet to any appliance of their choosing—such as their laptop, mobile device, car, or home stereo. …
Musicians, songwriters, and even their labels would be compensated through systems that track their popularity. But this would require collaboration and even sharing. All the music would be pooled, and using actuarial economics, the total pie would be divided up according to the number of times the songs of a given artist were streamed. Technologies and companies already exist that can do this.