Chapter 6: Is the Music Industry its Own Worst Enemy?

Aram

July 10, 2012

¶ 1 Leave a comment on paragraph 1 0 Reputation, reputation, reputation! O, I have lost my reputation! I have lost the immortal part of myself, and what remains is bestial.

¶ 2 Leave a comment on paragraph 2 0 – Othello, Act II, Scene III

¶ 3 Leave a comment on paragraph 3 0 I think it’s karmic. The big record companies got what they deserved. The history of American recorded music is an incredibly vile history of exploitation; in every era, they’ve overcharged the consumer, and underpaid the artist. And then, when the delivery system began to change, they got scared, panicked, rallied their lobbyists, and got everybody to believe the world was coming to an end. But the average consumer out there began to realize just what stupid assholes they are for the first time, because they have other ways of getting this stuff. Which is great, because now the labels have all got to scramble.

¶ 4 Leave a comment on paragraph 4 0 – Music author David Ritz[1]

¶ 5 Leave a comment on paragraph 5 0  

¶ 6 Leave a comment on paragraph 6 0 In 1896, the British House of Lords adjudicated a lawsuit called Trego vs. Hunt, in which two business partners had parted ways, the latter selling his share to the former. After pocketing Trego’s money, Hunt hired a clerk to copy down all of the names and addresses of the firm’s clients, so he could start a new business and poach them from his old partner. Ultimately, Hunt was found to be in the wrong, the reason being that when he sold his share of the company, he had also given up his rights to the “goodwill” – the business reputation and customer relations – that went along with it. As Lord MacNaghten, one of the adjudicators, reasoned:

¶ 7 Leave a comment on paragraph 7 0 Often it happens that Goodwill is the very sap and life of the business, without which it would yield little or no fruit. It is the whole advantage, whatever it may be, of the reputation and connection of the firm, which may have been built up by years of honest work, or gained by lavish expenditure of money.[2]

¶ 8 Leave a comment on paragraph 8 0 Much about culture, law and finance has changed since the late 19^th Century, but goodwill remains the “very sap and life” of business, and, if anything, has only become more vital in our brand-driven, media-saturated information economy. Today, goodwill is a standard element of business accounting, and formally refers to the intangible reputational factors that increase a company’s value above the “book value of its identifiable or physical assets.”[3] Though there are established methods for valuing goodwill (and its loss, or “impairment”), this process is still considered by many finance professionals to be “more of an art than a science.”[4]

¶ 9 Leave a comment on paragraph 9 0 Because of its heavy reliance on marketing and promotion (i.e. “lavish expenditure of money”), as well as its extensive business-to-business dealings (i.e. “years of honest work”), goodwill is even more important in music than in most other sectors. As the authors of industry bible This Business of Music put it, “One cannot overemphasize the value of names in the music industry, [and] the goodwill attached to names in the music business is even more important in music industry circles [than among consumers].”[5] Naturally, then, any impairment or tarnishing of the major labels’ brands and reputations is a serious threat to their market value, and to their ability to do business (according to recent analysis by Echo Research, the average company can attribute 26% of its market cap to its reputation[6]).

¶ 10 Leave a comment on paragraph 10 0 Has the music industry lost goodwill in recent years? It’s an interesting question, and even the major labels themselves don’t seem sure. Warner Music Group, which was a publicly traded company from 2004-2011, was required to disclose any goodwill impairment in its public financial filings during that time period. According to its annual reports (form 10-K), the results of its own tests showed that “no impairment occurred” in 2008, 2009 or 2010. Yet when the IFPI – of which Warner is a constituent member – sued torrent tracker The Pirate Bay in 2009, it specifically claimed that “the damages sought should cover not only record sales lost to the Pirate Bay, but the loss of goodwill and other harm caused by file sharing.”[7] In other words, the major labels were suing for the damage done to their goodwill by P2P, despite the fact that they claimed no such damage in their official accounting records.

¶ 11 Leave a comment on paragraph 11 0 A good clue that the recording industry has, in fact, suffered from some goodwill impairment came in 2007, when the RIAA was voted the “worst company in America” by readers of popular blog The Consumerist, consigning the previous year’s winner, Halliburton, to second place.[8] Thus, I tend to agree with the IFPI that there has been substantial damage to the industry’s brands and business reputation, but differ when it comes to the cause. Far from placing the blame on the shoulders of file sharing services or their users, I believe the industry itself is largely the engineer of its own reputational misfortunes. To the extent that P2P or digital technology in general have played a role in the process, it is only by (a) providing consumers, artists and innovators with an alternative to the industry’s historically cartelized distribution practices and therefore bringing the fundamental unfairness of those practices into sharp relief, and (b) providing a target for the music industry’s ruinous piracy crusade, which has engendered an unyielding torrent of public relations debacles over the past decade. Additionally, the industry’s continuing strategic failure to develop a proactive digital business model (as I discussed in greater depth in Chapter 3) has undermined its credibility among potential partners and investors, further diminishing whatever goodwill remains.