“Download! How the Internet Transformed the Record Business” by music industry journalist Phil Hardy is a detailed analysis how the majors record companies lost control of the value added chain in the music industry in the digital revolution. He tells the story about self-confident and maybe arrogant music business executives, who had profited from the CD revolution in the 1990s, but were outmanoeuvred by industry outsiders who set up a totally new added value network for recorded music. The once highly profitable record business that attracted investors from other industries in the 1980s and 1990s turned into a laboratory of digitalization with declining record sales, job losses and divestments of pressing plants and distribution networks in the 2000s. “Download!” is, therefore, an important contribution to understand the impact of Internet and new media on the transformation of the recorded music industry.
Phil Hardy, 2013, Download! How the Internet Transformed the Record Business. London: Omnibus Press.
The book’s core is chapter 9 “Digital Problems Galore”. It is about the rise of Apple’s iTunes store as the undisputed music download platform with an US market share north of 70 percent. For the music majors Apple was the last hope in a universe of file sharing services offering music for free. Universal, Warner & Co. failed with their attempt to set up their own download services. Pressplay and Musicnet were widely considered as clumsy and consumer unfriendly and were built on DRM technology. However, iTunes initially also offered music files with DRM but the users could also upload their freely downloaded MP3 files on iPods and later also iPhones and iPads. In a short period of time Apple’s initially welcomed digital music store turned from a redeemer to a paragon of hell from the music majors’ perspective. iTunes dictated the retail price of unbundled single track downloads that lowered the record company’s profit margin from 36 percent for a CD album to 12 percent for a single track music download (p. 138). Eventually Apple grew so important for digital music sales that the majors had to abandon DRM at all. Thus, the record companies searched for other allies that were found in music streaming services. But that’s another story.
2003, when iTunes was launched by Apple to the general public, was the water shed year of the recorded music industry. The record business executives had to accept that digitization was here to stay and caused the decline in physical record sales. In the earlier chapters of the book, Hardy told the story of the rise of the recorded music industry in the 20th century. He highlights the development of the recorded music industry as one “… of the most successful and idiosyncratic modern industries, a history based on the highest possible degree of control over the production, manufacture and distribution of its primary product, recorded music” (p. 12).
In chapter 3 the creation of Warner Music Group (WMG) from a small subsidiary of Warner Bros. film studios in the 1950s to an entertainment conglomerate with a strong recorded music arm under the guidance of Steve Ross is told. WMG was the powerhouse of US American pop and rock music in the 1970s with a legendary artist and label portfolio – Atlantic, Elektra, Reprise, Asylum – to name only a few. When Warner Communication merged with Time-Life to Time-Warner in 1990, the conglomerate hit its peak. In 1992, Steve Ross died and a new generation of business executives who were rather business instead of record men came to the stirring wheel. Even before the digital revolution WMG lost ground with declining revenues and profits and was a candidate for divestment.
In chapter 4 (“Would You Like To Dance? EMI And WMG”) the attempt to merge WMG and EMI is highlighted by Hardy in great detail. The project eventually failed due to the opposition of the regulatory bodies in the US and Europe, which only agreed in the mega merger of Time-Warner and AOL if the EMI-WMG deal was withdrawn.
A few weeks later Bertelsmann stepped in to put an offer for EMI. The family owned German publishing house became a music majors in 1986 when purchasing RCA from General Electric. In 2000 Bertelsmann aggressively rode the file sharing wave in acquiring P2P network NAPSTER with its 20m user base. Despite a RIAA litigation against NAPSTER the Bertelsmann executives believed in a digital future of the recorded music industry. However, they dramatically failed and the NAPSTER deal ended in a disaster. Bertelsmann did also not purchase EMI in 2000 since the two parties feared that the anti-trust authorities would not approve the merger as in the WMG-EMI-case before. The background of how “Bertelsmann Gets Itchy Feet” in the BMG-EMI merger play is highlighted by Hardy in chapter 5.
The failure to merge with WMG and Bertelsmamm Music Group (BMG) respectively left EMI alone as a vulnerable record major in the digitization storm. In “Profit Warnings From EMI” (chapter 6), the author gave an insight into the problems of EMI after demerging from Thorn and purchasing Virgin Records for £560m in 1992. He highlights the problems EMI had with Virgin Records, which was managed by its executives as private fiefdom even hostile to the EMI headquarter. EMI, however, also failed to succeed from the signing of Mariah Carey and other stars and, thus, found itself in the situation to release on profit warning after another.
Apart from EMI, BMG and WMG, Phil Hardy also highlights the development of the other music major conglomerates in the first six chapters. He retraced the emergence of Universal Music Group from MCA and the merger with PolyGram, which was sold by Philips in 1998. He also highlights how Japanese Sony Corp. came into the music industry by purchasing CBS Records in 1988 and the efforts of the music majors to establish the Secure Digital Music Initiative (SDMI) to battle file sharing. However, the project failed due to the divergent interest of the technology and content provider companies (Chapter 7: “Mostly Digital”).
In chapter 8 (“A Revolution of Retailing”) the paradigm shift in physical music distribution is outlined by the author when mass merchandisers such as Best Buy and Wal-Mart entered the music retail scene by using CDs as a loss leader. This was the first step for the record companies to loss control in price setting. The record companies failed to battle the erosion of retail prices by setting a Minimum Advertised Price for record stores. The Federal Trade Commission in the US accused the music majors to form a price cartel and to violate US anti-trust laws. The then five majors had to settle with FTC and had to abandon their fixed minimum price policy. The low price policy of the mass merchandisers, however, only foreshadowed the further revolution in music retailing which culminated in the earlier mentioned market entry of Apple Inc.
“By 2003, it was becoming clearer that in revenue terms it was unlikely that online sales would ever compensate for the continuing fall of physical sales” (p. 156). This hindsight of most of the recorded music executives let to speculations on further mergers of the majors. After 2003, however, the merger activities reflect the defensive attitudes of an eroding recorded music industry. Whereas in the 1990 mergers and acquisitions were made in the music industry to raise profitability and to earn even higher revenues and profits, the M&As of the 2000s were made to cut costs and to layoff personnel. In chapter 10 (“The Conglomerates Think Again About the Music Business”) Hardy tells the story of the second attempt of WMG and EMI to merge. But also the BMG/WMG merger plan came to nothing and thus BMG ending up in a joint-venture with Sony Music Entertainment in 2004 (chapter 11 “The Rise and Fall of Sony BMG”) and WMG being purchased by an investors group around Edgar J. Bronfman Jr., who had established Universal Music Group before but losing it to the French entertainment conglomerate Vivendi (chapter 12 “WMG, The Bronfman Era”). In all these cases the main driver of the mergers and acquisitions was cost cutting. In addition, the majors tried to establish new business models with offering 360° deals to their artists. EMI was the pioneer with its groundbreaking Robbie Williams deal, in which the record company took a percentage of all of the artist’s revenue streams, including merchandising and touring. The other majors but also indie companies followed soon. Some artists realized that it would be better to sign with other labels for a more favourable deal or to do business even on their own as in the case of Radiohead with its revolutionary “In Rainbows” album release in 2007. In the same year Paul McCartney left EMI to sign with Starbuck’s Hear Records, The Eagles teamed up with Wal-Mart to exclusively release “The Long Road Out Of Eden” and Madonna left WMG for LiveNation offering a profitable looking 360° deal.
EMI was hit worst by the ongoing process of digitization and was soon set up for sale (chapter 13 “EMI Finds Independence Lonely”). Venture capitalist Terra Firma successfully bid for EMI paying £3.2bn including debts. Terra Firma financed the deal with support of Citigroup and hoped to resell EMI after successfully reposition the music major in the digital music business. However, Terra Firma had to realize that the music business is different to other industries. Artist cannot be treated as assets and therefore EMI lost major acts such as Paul McCartney, Radiohead, the Stones, Queen and nearly Pink Floyd, to whom EMI had to make great concessions (chapter 14 “Transforming EMI: The Hands Era, Part One”).
However, the main threat for Terra Firma was that the EMI deal was financially backed by Citigroup by £ 2.5bn. Citigroup, therefore, demanded quarterly convenants for a specific level of performance of the EMI Group to cover the interest payment. If these requirements were not met, Citigroup had the option to take control of EMI. Unfortunately for Terra Frima, Lehmann Brothers collapsed a few weeks after the deal, which triggered the global financial and economic crisis. In 2008 and 2009, EMI failed three convenant tests and Terra Firma had to invest its own money preventing Citigroup to take control of EMI. In 2009, Citigroup denied to invest in total £ 1.3bn into EMI. When Terra Firma’s efforts to find outside investment failed, it became clear that it would lose EMI to Citigroup. In an act of desparation Terra Firma’s owner Guy Hands sued Citigroup committing fraud in the course of the EMI purchase resulting in a higher purchase price. When the lawsuit was decided in favour of Citigroup, the band took ownership of EMI in 2011. It was clear that Citigroup would immediately search for a buyer either for the entire group or separately for the recorded music business and publishing businesses.
Before telling the story of EMI’s sale in the last two chapters, Phil Hardy outlines the music industry’s efforts to battle piracy in emering digital markets such as Russia and China in chapter 16. The success, however, was limited. Whereas in Russia the obscure music download site AllofMP3 faded away after losing the support of the two largest credit card companies, the Chinese one-click hoster Baidu won the the court battle against the music majors in 2010. Although the Chinese authories closed down several online music sites and tightened the regulations concerning online music providers, the piracy level remained high. It is, nevertheless, questionable if the piracy problems facing record companies in the BRIC countries (Brasil, Russia, India and China) are on the way to being solved as the author states on p. 267.
It seems to be a long and winding road to succeed in the piracy battle. Even in countries with a restrictive copyright legislation, filesharing and filehosting are still popular. The graduaded response measurements implemented in France (HADOPI), New Zealand, Ireland (Eircom) and in the UK (Digital Economy Act 2010) are either very costly or not effective. In the US, the Stop Online Piracy Act (SOPA) was withdrawn from Congress since the protective measures granted on behalf of the copyright holders were assumed as too excessive. Legislators, therefore, have to consider also the interests of music consumers and ISPs and not only the interests of copyright holders.
The alternative way to battle piracy is to set up new attractive business models for disseminating music. The author, thus, highlights the success of online music video channel Vevo – a joint venture of Universal Music Group, Sony Music Entertainment and Abu Dhabi Media Co. – and of the Swedisch music streaming service Spotify. Despite growing online music sales in Sweden and additional revenue streams for copyright holders the “Spotify effect” is limited. Just the majors benefit by licensing their large catalogues to online music providers, whereas individual artists and smaller and medium independent labels and publishers get only modest payouts from music streaming services. Therefore, Coldplay prevented its album “Mylo Xyloto” from being made available on Spotify. The album sold in greater numbers than expected and charted No 1 in 17 countries (p. 286). The future will show how sustainable the new business models are.
This is the background music for the EMI Group sale, which was completed in 2011. Citigroup sold EMI’s record division for £ 1.2bn to Universal Music Group and EMI Music Publishing for US$ 2.2bn to a Sony/ATV led publishers’ consortium. Thus, Warner Music Group, which was acquired for US$ 3.3bn shortly before the EMI deal by Len Blavatnik’s Access Industries, was again prevented to merge with EMI. However, the EMI deal had to be approved by the anti-trust authorities especially in the US and in the EU. Whereas the Sony/ATV consortium purchase of EMI Publishing was approved by the EU commission and the US Federal Trade Commission (FTC) by Sony/ATV offering the divestures of the worldwide publishing rights of Virgin UK, Virgin Europe, Virgin US, Famous Music UK catalogues and the pblishing rights of Gray Barlow, Ozzy Osbourne, Robbie Williams, Ben Harper, Lenny Kravitz, Placebo and the Kooks, the acquisition of EMI Music Universal Music Group was not an easy game. The deal was severely opposed by Warner Music Group and the US and European music indies’ trade bodies (A2IM and IMPALA). The US Senate Judiciary Committee held antitrust hearings on the merger and the EU commission demanded more divestments than expected. At the end, Universal Music Group had to divest assets worth of US$ 450m – a little less than 30 percent of EMI’s revenues. The divestments included Virgin Records, Chrysalis UK (without Robbie Williams), Mute, Ensign, EMI Classics, Virgin Classics, Sanctuary, Co-Op, Roxy Recordings, MRS, Jazzland, EMI Music Belgium, EMI Czech Republic, Universal Music Greece and top of all Parlophone including Coldplay, Radiohead, Blur, Pink Floyd, Kylie Minogue and others but not the Beatles. This was the price Universal Music Group had to pay for acquiring EMI’s record division. The merger was approved in late September 2012 by the US and EU anti-trust authorities and leaves us with three majors recorded music companies: Universal Music Group with a European market share of about 40 percent and a US market share of 35 percent, Sony Music Entertainment with a market share of 23 percent and Warner Music Group with 14 percent.
However, the market share in the recorded music market seems not to be the main argument of power for a shrinking music industry. As UMG CEO Lucian Grainge pointed out in the US Senate hearings, the EMI acquision aims to strenghen Universal’s position in the digital music market. In addition Irving Azoff, then Live Nation Entertainment/Front Line Management chairman, argued that labels do neither control artists nor music fans anymore. The power shift has already taken place, and he added, “and no one should worry for a minute that is rests with the labels any longer” (p. 323).
Since Universal won the anti-trust authories by convincing them that the EMI acquisition is about strenghening its position on the digital music market rather than on the physical market, Phil Hardy sees this as evidence that the major music recorded companies accepted that digital is the future of the music business. Finally, they accepted the Coperican revolution that the record is no longer in the centre of the music industry’s universe. A paradigm shift has taken place, in which the record companies are no longer the drivers of the music business, but former business outsiders such as Apple, Amazon and Google. Thus, the last chapter ends with the lapidar insight that Apple became the most valuable company in the US in August 2012 as being the biggest media company based on the digital dissemination of music.
To sum up, Phil Hardy’s book provides detailed and exciting insights into the music industry in the last decade. He highlights how the record industry initially rejected the digital revolution in order to accept it at the end. He shows how new market entrants such as Wal-Mart in the physical world and Apple in the digital reshaped the music business. And it unveils the logic behind the mergers and acquisitions in the first twelve years after the Millenium, which marks the beginning of the digital revolution. Phil Hardy’s “Download!”, therefore, is highly recommended to all readers, who want to understand the paradigm shift in the music industry caused by the digital revolution.