Month: February 2007

There’s a great article in today’s New York Times Magazine:

Hip-Hop Outlaw (Industry Version)

The big music labels hired DJ Drama to make mixtapes. Then they helped the police arrest him. His crime? Making mixtapes.

Hip-hop has always thrived on mixtapes. They exist in a legal grey area, as mixtape DJs rarely acquire permission or pay royalties on the beats they sample. But at the same time, labels virtually outsource their A&R operations to mixtape shops, which generate street hype for an up-and-coming artist’s album release. According to one major label promoter, “the best D.J.’s have a better brand than the average label does.”

Indeed, despite the less-than-legal method of mixtape distribution, labels take advantage of this method of marketing and cost reduction:

Labels began aiding and abetting mixtape D.J.’s, sending them separate digital tracks of vocals and beats from songs so they could be easily remixed. They also started sending copies of an artist’s mixtape out to journalists and reviewers along with the official label release.

Basically, the mixtape economy is a little model of something vastly different than today’s music industry: content is produced at a very low price, due to the lack of licensing and royalties. CDs and electronic downloads are low-cost, and usually generate high profits. These profits don’t go to a large parent label- they go to independent music stores, and to the people who produced the album. Since there isn’t a huge distribution infrastructure to support, it generates support and exposure for local and emerging artists. And probably best of all, the low overhead allows content to be sold at a low price to the customer. Right now, even the big labels are profiting from this model, since mixtapes generate a lot of publicity for new releases.

Basically, everyone benefits in such an economy: the artists, producers, vendors, and customers. Most of all, this nurtures the music itself, and allows artists to focus on creating quality, original music without worrying about contracts, royalties, and the gigantic companies breathing down their necks.

Overall, this is yet another example of a fear-based reaction from the major labels: their antiquated method of generating profit by allowing artists to take advantage of their distribution network is dying in the face of technology, which has the capacity to completely eliminate the middleman. I’m not talking about illegal piracy; I’m talking about artists being able to sell and distribute their material at much lower cost, while gaining much more freedom than is granted under a major label contract.

In short, big music labels are slowly going the way of the dinosaur. It can be compared to how common people no longer needed to rely on their Latin-speaking priest after the Bible was translated into the vulgate, or to the availablility of free, open source alternatives to expensive proprietary software.

Today, Steve Jobs posted an essay on his company’s usage of DRM and his stance on the technology. It’s a 5 or 10-minute read, but anyone interested in online music should give it a read. For the rest of you who don’t care, I’ll bore you with a quick recap:

Apple catches a lot of flak from customers, competitors and governments for having a “top-to-bottom” distribution model: you own an Apple iPod, which (mostly) only works with Apple iTunes. If you want mainstream music or movies, you have to download them from Apple’s iTunes store. Since they got into all of these markets at the right time, they have almost the entire user base by the throat.

In fact, right now Apple is in deep legal water with a few European governments, notably France, which is calling on Apple to essentially eliminate the DRM that ties users to this model.

According to Jobs, Apple agreed to encode all files sold on the iTunes store because it was the only way that the 4 big music labels (EMI, Sony BMG, Vivendi Universal, AMG) would agree to license their music collections. The hot case of P2P filesharing had just finished with Napster losing big in federal court, and the rights-paranoid labels didn’t want “unprotected” files being downloaded and leaking to P2P networks.

Jobs argues that while Apple went along with the music industry’s demands, “…DRMs haven’t worked, and may never work, to halt music piracy.” He points out that 90% of all music is bought in the completely DRM-free CD format, and those files are easily placed on the P2P networks, as well as iPods. DRM-infected files from iTunes account for 3% of songs on the average iPod.

As far as Apple’s invovement, Jobs sees three ways to go:

1. Keep with the current, all-Apple model that keeps the DRM secure
2. License Apple’s FairPlay DRM to other manufacturers, potentially drawing labels to revoke their music licenses if the DRM is compromised
3. Convince the labels to go DRM-free: “Imagine a world where every online store sells DRM-free music encoded in open licensable formats. In such a world, any player can play music purchased from any store, and any store can sell music which is playable on all players. This is clearly the best alternative for consumers, and Apple would embrace it in a heartbeat.”

Now it’s pretty clear that this is a strategic move to sway European governments to redirect DRM-related heat to the music labels. But here is the CEO of the world’s largest vendor of files with DRM saying that it is in the consumer’s best interest to abolish the technology, and that should mean something.