THE THREE PS OF MP3S: EXPLORING THE FUTURE OF MUSIC EXPLOITATION IN A HIGH SUPPLY MARKET By: Brad Powers Historically,

it has been expensive to access the instruments, technology, and talent necessary to record quality music. In 1927, music producer Ralph Peer transported Victor Records recording equipment from New York to Bristol, Tennessee for fifteen days to discover and record various local old-time music acts. Though the recordings from the Bristol Sessions are widely regarded as the catalyst that started the country music genre, such a hunting expedition for talent would have been unnecessary today. Recent advances, namely digital recording software, have made it easier to cheaply record near studio quality music. More musicians than ever are recording their music independently, using home studio equipment.1 These days, if an enterprising A&R wants to scout regional acts, he can simply navigate his web browser to a band's MySpace page or website and download the posted home-studio recordings to his iPod in seconds. Today, anyone can play guitarvirtually. With the invention of the popular video game Guitar Hero, any person interested in making music can at least pretend to play the guitar using a guitar shaped controller and interactive software. Between 2006 and 2008, the popularity of Guitar Hero and similar virtual musician games has resulted in a twenty-five percent increase in the number of guitar purchases by first-time buyers at Guitar Center.2 Even Best Buy, Inc., traditionally an electronics and appliance store, has started selling musical instruments to fill the consumer demand to rock-out. With the increased supply of musicians and sound recordings, the biggest barrier for fans and labels is sifting through all of the output to determine what music is actually decent. Even though the supply of recording artists has increased since Ralph Peer s era, the profitability of music has greatly diminished over the last ten years because of a different peer: peer-to-peer file sharing networks. Computers, the Internet, and Mp3 technologies made it possible for music lovers to distribute sound recordings cheaply to millions of users. Though mp3 technology increased access to music, it arguably diminished the value and permanence of individual songs and artists. The music industry reacted slowly to these emerging technologies and as a result millions of music lovers learned that they did not need to purchase records, cassettes, or Compact Discs, because they could get the same songs for free in a more convenient format. As a result, many insiders predict a bleak future for music as a commodity. These critics forget that people are always going to listen to and perform new music, because music is cathartic and one of the only experiences that makes other activities more enjoyable. This paper predicts the most reliable and effective ways for companies and individuals to take advantages of current and emerging technology to profit off of music in the near future. Part I traces the recent history of technological advances and legal decisions that have lulled the music industry into its current state. Part II proposes several necessary changes, which will increase digital album sales. The proposal is build upon a system called the three Ps of Mp3s that should be considered by industry execs when exploiting sound recordings: (1) personalize music, (2) popularize music, and (3) pair music. If followed, this system will allow music exploiters to resurrect popular music as both an art form and a commodity.
1 Christopher Walsh, State of the Industry 2008: Recording , (10 OCT 2008), available at http://prosoundnews.com/article/18026. 2 Denise Quan, Is Guitar Hero saving rock n roll?, CNN (20 AUG 2008), available at http://www.cnn.com/2008/SHOWBIZ/Music/08/20/videol.games.music/ .

I. WHERE WE ARE AND HOW WE GOT HERE The music industry has a long history of resisting change. In 1940, industry executives were reluctant to integrate LP technology that captured more efficiently on wax records, because 78's sounded better.3 Sixty years later, record companies refused to accept that the more convenient the mp3 format would quickly replace better sounding compact discs. To combat mp3 piracy, the music industry turned to what had always worked in the past: the law. After all, copyright infringement is still a violation of federal law, even though it did not feel all that wrong to the millions of computer users in dorm rooms across the nation. The industry attacked endusers as well as the third-party facilitators of copyright infringement, who provided the technology allowing users to search for and illegally copy sound recordings.4 Eventually, Napster and Grokster were successfully shut-down, but by that time the devaluation of music had already begun. Prior to peer-to-peer networks, music fans had accepted the idea that an album should cost about twelve dollars. The industry's initial failure to offer legal alternatives to Napster and Grokster resulted in an entire generation of young, thrifty, computer literate music fans who now believe that songs should cost nothing. Even though the Grokster decision protects the industry from any third parties who induce users to infringe, there still is a gap in the law that allows legitimate websites to operate, even if end-users are exploiting the website to infringe copyrights.5 Under 17 U.S.C. 512(d) of the Copyright Act, the operators of any information location tool will not be liable for copyright infringement so long as they take down infringing material upon receiving notice of its existence.6 Today, the 512(d) safe harbor allows YouTube.com to operate legally despite the prevalence of illegal content accessible through the site. On YouTube any song can be uploaded, searched for, and streamed by a user until the copyright owner discovers the infringement and the content is removed. Realizing the popularity of the site, most of the record labels have licensed YouTube to post music videos legally to the website. However, when a copyright holder declines to bargain with YouTube to post a song or video, the song will likely still be available on YouTube illegally. For instance, in December of 2008 Warner Music Group pulled their content from YouTube, after failed negotiations. Twenty days later, the song Save You by Simple Plan, of Atlantic Records (a subsidiary of Warner), was still illegally available on YouTube, and the track had been streamed over 2 million times. Under the current law, there is very little the recording industry can do to stop infringing uses on YouTube, absent any evidence of inducement as articulated in Grokster.7 Now that mobile devices offer increased wireless internet access via 3G networks, YouTube can be used to search and listen to any song ondemand, from virtually anywhere.
3

Stephen J. Dubner, Whats the Future of the Music Industry? A Freakonomics Quorum , N.Y. TIMES BLOG (20 SEPT 2007), available at http://freakonomics.blogs.nytimes.com/2007/09/20/whats-the-future-of-the-music-industry-afreakonomics-quorum/. 4 The RIAA has filed over 35,000 lawsuits against individual end-users suspected of infringement, but the litigation has alienated many fans and did nothing to deter pirating. As of December of 2008, the RIAA announced that it would no longer sue individual users and would instead be working with internet service providers to reduce or block the bandwidth and download capacity of suspected infringers. 5 See Mark Schultz, Will BitTorrent Go the Way of Grokster? Filesharing After MGM. v.Grokster , SCITECH LAWYER (OCT 2005). 6 17 U.S.C. 512(d) (2007). 7 MGM Studios, Inc. v. Grokster, Ltd. 545 U.S. 913 (2005).

The music industry's resistance to format change and reliance on outdated federal protections has led to an unprecedented loss in revenues. In 2008, record sales declined 14% from 20078, and North American concert attendance declined 22% from 2006.9 When these figures are compared against the increasing popularity of musician video games and guitar sales, it is logical to conclude that people enjoy music as much if not more than ever before, but they don't think that music alone is worth as much as it used to be. The forthcoming proposal will both recommend changes to help slumping record companies stay afloat during tough economic times, and simultaneously provide a system that will steadily increase the perceived value of sound recordings. II. WHERE WE SHOULD GO To stay afloat in a troubling economic climate, the recording industry should continue to exploit the revenue streams that are currently profitable, and invest in new technology that allows greater end-user convenience. CD sales should slowly be phased out as labels continue to increase digital track sales. Also, the industry should bargain for greater royalty rates from streaming. By 2015, the 4G network should be implemented that will allow for wireless data transfer speeds of up to 1Gigabite/second.10 These advances in mobile device functionality, combined with free digital radio services like Pandora Music, will drastically eliminate the need to download songs. Also, the popularity of Pandora and similar services will cut into the relevance of traditional and digital radio stations, as well as fee-based subscription streaming services. Since the increase in streaming and digital downloads will not sufficiently replace the revenues lost by declining CD sales and diminished concert attendance, the record labels must proactively create new exploitation opportunities from the existing and emerging technologies. The system I propose involves three categories that will allow music exploiters to profit more efficiently without drastically changing the current business model. The method centers around the three P's of Mp3s, which will enhance profitability without drastically disrupting the industry status quo: (1) personalize music for individual users, (3) popularize particular acts and songs to sustain large gains, and (3) pair music with other related offerings to increase the perceived value of the transaction. A. Personalize Music With the increasing supply of artists and recordings, the industry will benefit from offering a more personalized music experience to individual users for a premium price. One way to achieve this is to offer personal concerts to individual fans for a premium charge. A fan could pay for the opportunity to have an artist record himself dedicating and playing the requested song live via web cam, exclusively for the fan. For a higher fee, the artist will record a longer personalized dedication chosen by the user. The idea is that, while you can always get the mp3
8 Ayala Ben-Yehuda, Digital Boosts 2008 Sales To New Mark, BILLBOARD (31 Dec 2008), available at www.billboard.biz. 9 Ray Waddell, 2008 Year in Music and Touring: The Rules of the Road, BILLBOARD (12 DEC 2008), available at www.billboard.biz 10 See KIM YOUNG KYUN, 4G ROADMAP AND EMERGING COMMUNICATION TECHNOLOGIES 12-13 (Artech House 2006).

of a song illegally, you will never be able to pirate a truly personal recording. Some critics might argue that recording artists will choose not to personalize their music, citing artistic integrity. However, this model is extremely favorable to artists, because an artist can increase revenues from the safety and convenience of his own home or studio, without the costs and hassles of touring. Some artists have already begun to personalize their music to increase fan interactivity. For instance, in 2003 Jay-Z released an a cappella version of his newest record at the time, The Black Album, to encourage fans to create remixes. In 2004, DJ Dangermouse combined the Jay-Z a cappella tracks with instrumentals created from unlicensed samples of The Beatles The White Album. EMI held the rights to The Beatles original recordings and blocked commercial release Dangermouses album. Nonetheless, the album still spread via peer-to-peer networks and went on to be regarded as one of the best record of 2003.11 DJ Dangermouse used the notoriety from the renegade album to spark a successful career as an artist, and was nominated for a Grammy as a producer. Had Jay-z not offered the a cappella tracks for his fans, Dangermouse might still be an inconsequential DJ in England. More recently, artist Third Eye Blind has offered a contest that allows fans to remix the songs that will be on their new album prior to release. Increased fan participation in the creative process will keep music fans satisfied long after they realize they can't actually play the real guitar they bought because it has 6-strings, not 5 plastic buttons. Bands can run these types of interactive projects through their website to increase traffic and generate ad space revenues. B. Popularize Music In addition to providing fans with a more individualized music experience, music exploiters must continue to popularize certain artists and songs. Traditionally major labels have been able to exploit a small number of superstar acts to offset the losses sustained from the release of all other albums. However, the increased supply of music today makes it more difficult to convince a large number of fans to listen to a particular song. In 2008, the top selling album moved 2.88 million units, the lowest number for the years top record since Nielsen started compiling sales statistics in 1991.12 Part of the problem is that radio listeners are moving to more interactive and less advertisement laden radio-like services, such as Pandora Music and Songza. It would benefit music exploiters to develop a more interactive radio station. One idea would be to create a system consisting of a small portable device that allows users to participate in song selection at their leisure. Thirty seconds before each song is finished, the screen on the device will flash the names of three artists and song titles in the queue to be played next. The fans would simply press a button to choose which song they wanted to hear. The devices would instantly beam votes back to the station database and the most requested song would be played next. This would be an improvement over XM radio and traditional radio, because fans would feel like they have some moderate level of control over the song selection, but ultimately the program operators would control which songs the user is able to choose from.

11 ""Records of the year"". Entertainment Weekly. Retrieved on April 13, 2006 12 Jonathan Cohen, Lil Wayne Notches Top-Selling Album of 08, BILLBOARD (31 DEC 2008), available at www.billboard.biz.

C. Pairing Music With the devaluation of music, more fans believe that music recordings alone are not worth that much anymore. Fans are reluctant to pay even one dollar to purchase the sound recording of their favorite song, even though they will spend up to five dollars to purchase the same song in the form of a ring tone or guitar hero download. A fan, who previously spent 12 dollars on a U2 CD just to hear the hit single, is now paying 12 dollars for that single by purchasing the mp3, the guitar hero track, and the ring tone version. Thus, in order to keep consumers interested in purchasing mp3 albums record, labels should pair the digital album with something tangible to make the transaction feel more complex and valuable. If a superstar act is worried about his new album being leaked and pirated, then he can boost advance record sales by pairing the purchase with a t-shirt or some other gift. By securing sales prior to the albums completion, artist will off-set the revenues lost through piracy. Further, by giving away t-shirts with the mp3 album purchases, it will be easier to track sales statistics to plan concert tours, because the shirts will need to be mailed to a physical address. Another alternative model that should be explored by record labels is pairing mp3 sales with live concerts to stimulate an interest in both streams of revenue. For instance, instant-live technology, which allows fans to take home the live recording of a concert immediately after a show, should be sold upfront for a reduced rate with the purchase of a concert ticket. Another way to use live music to foster record sales of big acts is to hold exclusive intimate-venue concerts that can only be attended by fans who legally purchase the artist's entire new album. Every time a fan purchases a participating artists new album directly from the label, the fan will also receive a chance to win tickets to the private concert. Later, 350 participants will be selected to attend the more intimate concert. Tickets to the concert will not be available to anyone who has not legally purchased the album. This will train fans to purchase legal mp3s and will reinvigorate the allure of live music performances. III. CONCLUSION If record companies continue to popularize key acts, personalize the music experience for each fan, and pair mp3 releases with other items, most fans will acclimate to purchasing digital downloads legally. The three P's of mp3s should be considered anytime a new marketing scheme or potential revenue stream is considered. The most successful future revenue streams will involve all three methods of purchase persuasion. For instance, a game should be developed that allows fans to create their own songs virtually. Then, the songs should be uploaded to a website where the fans will be able to vote for, contribute lyrics to, and download their favorite songs. Additionally, Pandora-like technology will be embedded into the website. Each time a user votes for a song, the website will recommend several tracks by professional artists that the fan might similarly enjoy. The software can be manipulated to more frequently recommend the songs that the major record labels want pushed at any given time. In the future, industry executives should celebrate new technology that makes it easier and cheaper than ever to exploit music. The past industry routine of relying on the law to thwart technological advances has shown to be unwise and costly. If labels use new technology to enhance the personalization, popularization, and pairing of music, then the perceived value of music will increase and fans will be more willing to spend money on the musical machine.