Internet Entrepreneurs: Blame it on the Rio

The popular condensation of Darwin's theory of evolution is "adapt or die." The phrase could certainly have been addressed to the music-industry establishment by any one of four Internet entrepreneurs in a public discussion last week at San Francisco's Commonwealth Club. The four---Gerry Kearby of Liquid Audio, Gene Hoffman of GoodNoise, Arnold Brown of AudioExplosion, and Andrew Keen of at the public affairs forum Tuesday evening, February 22, for a spirited discussion of "The Future of Music Distribution."

An audience of several hundred, including online (and offline) music retailers, musicians, engineers, producers, media people, and assorted trendwatchers, attended the affair. The Internet is unquestionably where the action is for new music, the panelists agreed, all of them pointing to the exploding popularity of MP3 and the little solid-state Rio player from Diamond Multimedia as evidence. Diamond is now selling 100,000 of the players each month, according to Gene Hoffman, who admitted that the lo-rez limitation---he called it a "two-bit format"---hasn't hindered its growth.

For consumers, the driving forces in the new market are convenience, portability, low cost, and easy access to a wide variety of artists and genres. For artists, the motivation is the ability to reach a wide base of potential fans without the necessity of Faustian contracts with mammoth record companies. The whole phenomenon is "grinding through the skin of the music industry," said Hoffman. Keen agreed, characterizing the industry as "a deer staring in a panic into the headlights of an onrushing locomotive."

Record-industry deals are now stacked against new artists, who often find themselves in deep financial waters if they cannot win hordes of fans or generate tons of sales. Internet distribution, which bypasses all the middlemen and promotional personnel of the traditional distribution scheme, may allow artists "to be supported by their fans so that they can make music, instead of having to work at McDonald's," observed Gerry Kearby.

Unlike the major labels, Internet music distributors aren't in the "banking business," Kearby said. He described the typical cost run-ups involved in producing a major release from a major act, including hundreds of thousands of dollars in studio time while musicians noodle around looking for ideas. "With the equipment now on the market, bands can produce their own master tapes for less than $10,000---and the entry fee drops every month. Soon all the basic equipment will cost half that much."

The widespread availability of quality recording gear and inexpensive distribution over the Net is making commercial viability a possibility for more musicians than ever---leading to more risk-taking on the part of artists and more niche marketing on the part of promoters. ("We all get more submissions every day than we can handle," Hoffman said.) The trend may even have a long-term democratizing effect on the whole industry---one desperately in need of an overhaul, according to the panelists. "Fifty years of Byzantine structure needs to be dismantled," said Kearby.

Internet distribution deals typically provide a 50-50 split of revenue between the artists and the distributors, the panelists noted, as compared to the few cents per disc most artists receive from the majors. "We expect to be able to sell single songs for a dollar apiece," said Brown, who outlined what he called "dynamic pricing"---a system in which music fans pay only for what they want. "No longer will you have to pay $15 to $20 for a whole disc just to get one or two songs you want," he contended. "Expect $9 album prices," Hoffman added.

"The industry has woken up too late to the grass-roots Internet music movement," said Brown, "and there's nothing it can do to stop it." The recently announced Secure Digital Music Initiative, which was initiated at the insistence of the Recording Industry Association of America, won't do much to change the fact that the industry's hegemony over the distribution of music has been irrevocably weakened by the rise of the Internet.

Even so, the record companies "won't go away," said Kearby. "They'll adapt to the Net, and refugees from big labels will exercise their marketing skills." Inevitably, observed Andrew Keen, it is "the best-promoted music that wins out."

Recorded music is a $12-billion-per-year business, of which more than $10 billion is controlled by five top-heavy multinational conglomerates. Within five years, according to Forrester Research, 15% of all music sales will take place over the Net. "The Internet makes it all so easy," said Kearby. "Last week I went into one of the big record stores looking for something by Leon Russell. There was a kid behind the counter with a bolt in his nose, and he had never heard of Leon Russell. I found the disc on the Internet in two minutes."