Online Music Companies Outplayed - Page 2

The Changing Business Model

Since the beginning of recorded music, record companies have owned a pivotal position in bringing the sounds of artists to the ears of consumers. But when the revolutionary MP3 technology first burst onto the scene, allowing music files to be made small enough to easily zip around the Internet, the world was ripe with exciting new possibilities. Consumers could have access to far more music than flows through traditional channels, perhaps via a "celestial jukebox" device that could access every song ever recorded.

That promise threatens the record industrys traditional business model.

A record company makes money by signing contracts with artists it thinks are likely to sell records. In exchange for the rights to their recordings and a cut of the profits, the company markets and advertises the artists and pays the costs of making and distributing CDs. But, guessing which artists will succeed isnt easy and recording costs are high. Since most of the picks are not profitable, record contracts tend to give a sizable cut of CD sales to the record labels — many times more than what the artists get — and require that the artists pay back CD costs from the royalties they earn.

EMIs Cohen compared the record companys role to that of a venture capitalist: investing in many opportunities, most of which fail, but profiting from the successes.

Once a significant fraction of music sales are in digital form, however, the economics suddenly change. A lot of attention has been given to file sharing technologies, and how hard it is to collect payments. But the record industry has a bigger problem. On the Internet, music can be recorded and distributed far more cheaply, so this sort of intermediary role may no longer be necessary.

To Eben Moglen, a law professor at Columbia University and a self-proclaimed anarchist, record companies "are irrefutably dying. The economics of their industry are unsustainable."

Most critics, however, arent predicting the demise of the record industry, at least in the near term. But, they said, uncertainty about their future is behind the big labels attempts to control the start-ups business models, at the expense of consumers and artists.