The Music Industry Winter 2002
Part I

Part II

You say you want A revolution:
A new artists' coalition puts the record industry's
billion-dollar business model at the crossroads: Shrink or perish

Greg Kot,

Chicago Tribune February 24, 2002

Tuesday, some of the heaviest hitters in popular music -- the Eagles, Billy Joel, Sheryl Crow, the Dixie Chicks,
Weezer, Beck and Pearl Jam's Eddie Vedder -- will take direct aim at reshaping the record industry that helped
make them multimillionaires.

These artists will stage three concerts in Los Angeles on the day before the Grammy Awards to raise funds for
the Recording Artists Coalition. If their campaign to create what is essentially an artists' union is successful, it
could spell the beginning of the end for business as usual in a $16 billion-a-year industry that has controlled how
music is disseminated in North America for most of the last century.

With business slumping, artists threatening to unionize and the issue of free digital music on the Internet
spiraling out of its control, the recording industry is on the verge of a crisis.

"Disaster is knocking at our gate, and if we don't figure something out, we are all going to be out of business,"
says Miles Copeland III, chairman of Ark 21 Records in Sherman Oaks, Calif., and former manager of Sting
and the Police. "Selling CDs and making big money on music is a game that's going away."

At stake is not only the fate of the multinational conglomerates who monopolize the recording industry --
Universal Music Group, Sony Music Entertainment, EMI-Virgin, BMG Entertainment and Warner Bros. -- but
the business model on which their fortunes are built. In turn, how artists create, record, distribute and are
compensated for their music, and how consumers will gain access to it, is on the cusp of the most massive
overhaul since the invention of the phonograph.

"I'm in a position of clout, but a lot of artists aren't," says Bonnie Raitt, a coalition member. "We need to have a
union that protects artists' rights. Every other industry has that, except us. It's time for us to get a seat at the
table on such issues as the length of recording contracts, digital downloading and intellectual copyright, and who
owns your work. If it's not working out between the label and the artist, the artist should have the right to go to
somebody else and make a record instead of languishing in major-label limbo."

Them's fighting words in an industry that for 15 years has been operating under an exemption to California
labor law that restricts all personal-service contracts to seven years. Artists can often be tied to a label for
more than seven years while trying to fulfill terms of a contract that requires them to produce two to seven
albums in that time. Most artists now are allowed to produce an album only once every two or three years to fit
with major-label marketing plans and budgets. The artists coalition is seeking, among other objectives, to put a
seven-year limit on such deals so that recording artists can become free agents much like major-league baseball

The concerts to raise funds for this unprecedented effort are the latest in a series of legal, ethical and economic
challenges that threaten the industry's long-established business practices. These include a lawsuit by rocker
Courtney Love against Geffen Records and the Universal Music Group, filed last year in Los Angeles,
demanding that long-term label contracts be made illegal and that label accounting practices come under
scrutiny; a bill in the California legislature sponsored by state Sen. Ken Murray that would require the recording
industry to restrict personal service contracts to seven years; an effort led by U.S. Rep. John Conyers Jr.
(D.-Mich.) to draft an artists bill of rights to be introduced in Congress this year that among, other points, would
create a federal version of Murray's contract statute.

These initiatives come at a time when the industry is still reeling from thousands of layoffs that resulted from
massive consolidation, which concentrated power in a handful of record companies, concert promoters and
radio conglomerates.

The bottom line

Record companies are under intense pressure to satisfy shareholders with quarterly profit results even as the
industry suffers its worst economic decline in decades, with record sales plunging 5 percent to 762.8 million in
2001, and ticket sales for the top 100 concerts dropping 7 percent, to 34.4 million. In addition, commercial radio,
long the primary outlet for exposing and marketing new music to consumers, has been in the doldrums; Arbitron
figures show listenership nationwide has dipped 7 percent in the last three years. Meanwhile, the downloading
of free music from the Internet continues to escalate, even after the industry shut down Napster. Much of it is
outside the realm of music-industry subscription sites thanks to user-to-user software such as Morpheus,
Gnutella and BearShare that is now being accessed by tens of millions of consumers.

"We have managed to create a business that focuses on selling records that do 5 million to 10 million sales, at
the expense of almost everything else," says Peter Koepke, former president and CEO of London-Sire
Records, which recently closed in the latest round of industry mergers. That's why, he says, "the big record
companies are complete and utter nonsense, a thing of the past. We're keeping them around because they've
always been around. But they're fast becoming relics."

Change is already under way. "We're going through a valley," Koepke says, "and it's going to be different when
we get out -- and that's great news."

As the mainstream media pipeline that runs through commercial radio and MTV narrows to accommodate only
the costliest and most heavily promoted music from the major labels, myriad grass-roots music coalitions,
artist-run labels and Internet groups of file-sharing music lovers are proliferating. The increasing popularity of
the Internet as a networking tool, the affordability of home-recording technology and a backlash against the
industry's succession of quick-buck one-hit wonders have conspired to create a vast underground that dwarfs
the one that arose in the postpunk era, circa 1980.

If Murray's Senate Bill 1246 becomes law in California, allowing major-label artists to become free agents after
seven years, it will likely be the first major step toward forcing an overhaul of record-company business
strategy. "The industry's business model is going to have to change," says Michael Nathanson, a music analyst
for Sanford C. Bernstein & Co. in New York. "They're going to have to become more efficient. They're going
to have to be more judicious in signing new artists, cut down on the expensive videos and other marketing costs,
and they're going to have to rethink signing way too many megastars."

Less is more

Their place could be taken by a growing independent network of niche artists who sell fewer records but
consistently make modest profits that allow them not only to make more records and tour the country, but buy
homes and health insurance and raise families. Once artists such as Ani DiFranco and Fugazi, who sell
hundreds of thousands of albums on self-directed labels, were the exception. Now they're godparents for a
cottage industry that is growing by hundreds of artists every month.

A recording artist pays for marketing muscle in a major-label contract. "The chief reason for signing to a major
label is exposure to the masses," says Michael Ackerman, a veteran Los Angeles entertainment lawyer. "That
said, most artists are realizing that it is possible to sell records and make more money on your own."

That's because most major-label deals pay artists a royalty rate of less than two dollars per disc sold, and then
only once they have paid back their record label for recording and marketing costs that typically range from
$250,000 to $2 million per album at a major label.

Though many rock artists in the post-Beatles era are self-contained creative entities who enter into an
agreement with a record label strictly to distribute and market their record to the widest possible audience, only
a small percentage ever get paid from their record sales.

Roger McGuinn says he never received a royalty for any of his renowned Byrds recordings for major labels in
the '60s and '70s; Jeff Tweedy, who has recorded with Uncle Tupelo, Wilco and in collaboration with Billy
Bragg, says he is still awaiting his first royalty check for any of the dozen records he has recorded for a handful
of labels since 1989.

Developing discontent

"The janitors in the music industry are the musicians," says Nine Inch Nails' mastermind Trent Reznor. "They're
the last to get paid, and the first to get ripped off. That's why an artists coalition is an idea that is long overdue.
This isn't a bunch of rich rock stars bitching about not making an extra penny on this or that. It's about updating
and reforming business practices that were established decades ago for the people who first signed recording
contracts. Record contracts are still based on the old model where record labels supplied a singer with
everything from songs and an image to a marketing plan and album cover art. But this is an era of bands that
write their own material and create their own thing, an independent entity that just needs promotion. Yet we're
still getting the same royalty treatment. It's unfair."

Even multimillion-selling pop stars may find themselves in debt to their label under the standard contract. The
latest Jennifer Lopez album, "J.Lo," sold 3 million copies, more than all but a handful of 2001 releases. Yet
industry insiders say it's unlikely Lopez will receive royalties from the sales any time soon because her label,
Sony subsidiary Epic Records, spent more than $13 million marketing the disc.

Record-label executives say the huge marketing and promotion budgets provide artists with a platform for other
income that record companies do not share in: songwriting royalties from music publishers, a percentage of
concert ticket sales, deals with T-shirt companies and merchandisers. The move to shorten the length of
contract commitments could backfire on artists, they contend.

"Our biggest artist, Diana Krall, comes to the end of her seven years on our label soon, and what if a Sony or
Warners comes in and offers her ridiculous money to sign with them?" says Ron Goldstein, president of the
Verve Music Group. "What incentive do we have to sink a lot of our own money into developing an artist
knowing that she could be gone after the next album? That's what's happening in the sports world, isn't it?"

Krall's tenure on Verve is a classic case of artist development, an example of how the record industry used to
work before the mega-bucks merger era, building artists in increments until they started turning a profit. Krall
has been with Verve six years and released five albums, which have sold in steadily increasing numbers from a
modest 200,000 to more than 1 million.

But such slow-build scenarios are becoming rare in a business increasingly dependent on blockbusters, a
business in which 97 percent of all records released fail to make money. That means a label needs to roll big
numbers on the remaining 3 percent to keep afloat. "I've put out 200 records in the last four years," says Ark
21's Copeland. "My average record cost me $30 to make and put out. I sell them to retail stores for $10, so I
lost $20 per record. I have to sell a lot of records to make a profit."

The numbers are so out of whack that EMI recently paid Mariah Carey $28 million (in addition to $21 million
she had already received under terms of a multialbum $100 million deal) to leave the label after her latest
album, "Glitter," sold 2 million copies worldwide, millions fewer than her previous releases in the '90s, when she
became one of the biggest selling artists of all time.

Ackerman says of the Carey buyout: "It's a colossal, unprecedented bust, the `Heaven's Gate' of the music
business." But the attorney says it was an inevitable byproduct of an industry that no longer can afford to
patiently wait several albums for artists to turn a profit.

While Carey shops for a deal, another artist who recently departed EMI -- David Bowie -- is symbolic of trend
among established recording artists who are going into business themselves rather than signing long-term
major-label deals. Bowie recently set up his own label, ISO. Prince has been selling records from his Web site since the mid-'90s after leaving Warner Brothers, and claims to keep nearly 100
percent of the profit from his releases. In recent years, cult artists such as Aimee Mann, the Pernice Brothers
and Gillian Welch -- who found themselves out of label deals -- put out self-released albums that outsold their
previous work.

"I make a lot more money per record," says Joe Pernice, whose recent self-released Pernice Brothers album
outsold six previous releases he had recorded for an established independent label, Sub Pop. "I stand to have
financially the best year I've ever had in music. And I own my album! That's an unbelievably good feeling. You
get cast away [by labels] if you're not what's happening at the moment. I know that I can have a certain size
audience doing the kind of work that I'm happy doing, and don't even think about major label sales levels. I'm in
a different league, I'm under the radar. But there's this land under the radar, you know?"

Forgetting the little guy

That territory occupied by small- and middle-tier artists who sell steadily if not spectacularly has been forgotten
by the major labels in the rush toward multimillion-selling gold. While the Recording Artists Coalition in Los
Angeles represents top-selling artists with a vested interest in reaching the widest audience possible under the
auspices of the major labels, most recording artists never sell enough to even warrant a glance from a major
label talent scout, let alone a megabucks deal that would tie them down for most of a decade.

It is this vast and overlooked constituency that is represented by Indianapolis-based Just Plain Folks, a coalition
founded in 1998 comprising 16,000 mostly independent artists nationwide, one of the biggest music organizations
in the world.

"The problem with the Recording Artists Coalition battle in California is that it's perceived as rich artists trying
to make even more money," says Brian Austin Whitney, a songwriter who is the president of Just Plain Folks.
"But we're representing the 99 percent of artists who sell 500 to 5,000 CDs a year. They can make a decent
living without having to sign with a major label."

Artists can now set up home-recording studios for less than $10,000, just as Alicia Keys did in her Harlem
apartment before she signed to J Records and became a star. They can reproduce their own CDs on
equipment that costs less than $200, or upload MP3 files on the Internet.

"I think the future is going to go back to more of an old-school past, where you had individual entrepreneurs like
Phil Spector who signed artists and had a recording studio and made records with a vision," says Dave Trumfio,
who took the money he made from a previous label deal with his band Pulsars and invested in a recording
studio in East Hollywood, where he is recording up-and-coming bands as well as two forthcoming albums of his
own. "It's about taking artistic risks, but not being greedy, staying true to the music and keeping the money and
the expectations reasonable."

"We've come to the point of no return for the major labels," says Just Plain Folks' Whitney. "There will always
be a mainstream business that tries to sell lots of albums, but there is so much potential for artists who can
figure out how to sell 50,000 to 100,000 albums, instead of 500,000 to a million. There will be a lot more artists,
promoted with less money in a far different way than they are now, which is primarily through commercial
radio and MTV. They can't squeeze out any more sales going in the present direction. It has to go the opposite

Copyright © 2002, Chicago Tribune

Part II

Cyberspace continues to be a bumpy ride for the record industry

Greg Kot

Chicago Tribune  March 3, 2002

According to some high-profile representatives of the record industry, MP3 file-sharing on the Internet is killing music.

"Piracy is not a private offense; it hurts everyone by diminishing the incentive to invest in the creation of music," said Hilary
Rosen, president of the Recording Industry Association of America, at a Senate hearing Feb. 12 on intellectual copyrights. "It
should not therefore be viewed as a crime only against authors, performers, composers, musicians, record companies,
distributors, wholesalers and retailers, but against each of us."

Rosen's statement represents the view of the five major record labels that dominate the $16 billion a year business; her
appearance coincided with the release of a Senate report that concludes that worldwide theft of copyrighted works, primarily
music and movies, costs American industries $8 billion a year in revenue and the government $1 billion annually in lost tax

In a record industry that finds its business model becoming rapidly obsolete, it's open season for fretting about "a generation
who expects to keep downloading songs for free" -- the warning sounded by Jay Boberg, president of MCA Records at last
year's South By Southwest Music and Media Conference. The longer the industry fumbles for a solution, he said, "the less
willing consumers will be to pay for music down the road."

Such rhetoric reflects an industry mired in recession. Last year, record sales plunged 5 percent, and by mid-February were
lagging 7 percent behind the already lackluster 2001 pace, according to Soundscan, which monitors record retail sales. But is
the rise of Internet file-sharing services such as Napster and Morpheus really killing music? Or is it merely endangering the
industry's decades-old business model?

"There has been an effect on sales because of all the free music on the Internet," says Chris Blackwell, chairman of the Palm
record label and founder of Island Records, for which Traffic and Bob Marley recorded. "But the bigger problem affecting
sales is that there is very little new and fresh in the music business.

"There was a very similar situation in 1979-80, when everybody was blaming home taping for the drop in record sales. When
something is exciting and vital, people want a piece of it, they want to hold it in their hands. I don't think I'm being too much of
dinosaur when I say that's still the case."

Even musicians download

Blackwell's position is born out by the success of Radiohead's most recent albums, "Kid A" and "Amnesiac," which were
widely accessible through free file-sharing programs months before their release dates. Yet "Kid A" debuted as the
top-selling album in North America and "Amnesiac" at No. 2 when finally released on compact disc.

"I download MP3s myself," says Radiohead guitarist Ed O'Brien. "I'd be a hypocrite if I were against it. It does our music a
lot of good, because in many ways it takes a while for people to get used to our music. People who are into a band, they'll
download the music, but they also want a copy of the album. I'd be worried if we were a straight-ahead pop band, where you
hear a song 10 times, and you don't really want to hear it again. But I've got confidence in our music, that there is enough
depth and breadth there to survive `Napstering.'"

Radiohead is one of many bands across a broad swath of genres and demographics that have learned to exploit the Internet,
flaws and all, rather than resist it. It's far from a perfect marriage, because few artists, let alone record companies, have
figured out how to turn Web sites into a consistent revenue stream. But the potential benefits -- allowing artists to
communicate with their audience and market to them on a more direct, spontaneous and sophisticated scale than ever before
-- are enormous.

For many artists it's a worthwhile tradeoff: Many of them don't make money on their record sales anyway. Whereas record
companies accrue most of their revenue from album sales, 97 percent of major-label artists don't make a penny in royalties
from those sales. If a major-label artist makes any money at all, it's usually from tours, merchandise and song publishing.

"The impulse to make music is as strong as it ever was," says singer-guitarist Jeff Tweedy, whose band Wilco played a
sold-out tour last autumn while streaming its forthcoming album, "Yankee Hotel Foxtrot," on its Web site. "It was a way of
reminding ourselves that making CDs is not our reason to exist. We're a band because we like to play together, and feel good
about playing in front of people, and we've always made our living doing that. That isn't going to change."

Tweedy says he has never received royalties from album sales, even though he has been putting out records since 1989.
"What's changing is the music industry's ability to control and profit from the music," he says. "If the industry can't bend, it will
fall apart."

"We're seeing a fundamental shift in the music industry, like the one caused by the creation of radio," says David Loundy, an
associate director at John Marshall Law School who monitors legal developments in information technology. "The music
industry has a big problem, because it can't stop this file-sharing technology well enough to really make a difference. What
they need to do is change their business model before it's too late, to find other ways of making revenue other than spending
millions in legal fees trying to put the music file-sharing genie back in the bottle."

In the previous century, the music industry resisted the introduction of new technologies from which it could not profit directly,
such as the phonograph and home-taping machines, only to see the audience for music expand after each innovation. The
current scenario is similar, with the industry initially trying to shut down digital distributors such as and Napster,
which at the height of its popularity had 60 million users sharing free music files, rather than exploit them. (Universal has
since acquired and BMG acquired Napster, and neither service has been a significant factor since being shut down
by the industry's legal maneuvering.)

Easier than ever

In the last year, a new wave of user-to-user file-sharing software has sprung up, and it presents a far more difficult target
because most of these services function without the centralized structure that made Napster vulnerable to copyright litigation.
According to the Web site, which monitors Internet activity, peer-to-peer software such as Morpheus and
Kazaa each facilitate more than 1 million free music downloads a week.

"It's easier than ever to share music files," says a 24-year-old biomedical technology student in Chicago who has 100 albums'
worth of music downloaded on his personal computer. Like most file-sharers interviewed for this report, he requested
anonymity. "I use Kazaa software as a tool to save money, to download and sample lots of MP3 files so I can decide what
CDs to buy."

Says another frequent file-sharer, a 19-year-old Northwestern University student: "If I like the band and respect the artistry --
like Wilco or the Strokes -- I will buy the album. But what's the point of spending $18 for a CD with only one or two good
songs on it?"

A high school teacher in a Toronto suburb who has 22,000 songs downloaded on her hard drive says easy access to MP3
files re-ignited her interest in music. "It's another type of radio station, an introduction," she says of the file-sharing programs.
"I was in a band for years, then had a family and got away from music. Now I'm gung-ho for music again, and I've bought 30
CDs in the last year through discovering music on the Internet."

The consumer's revenge

Though some frequent file-sharers acknowledge moral misgivings, others echo the sentiments of a 35-year-old Web designer
in Detroit who has downloaded thousands of files. "My CD buying habits the last two years have dropped to 10 percent of
what they were, and the industry has only itself to blame for that," he says. "It's an evil institution that has been screwing
consumers with high CD prices for two decades."

"The public has been fed a pack of lies," responds Miles Copeland III, chairman of Ark 21 Records. "The public thinks a CD
costs 90 cents to make, but the cost of distributing and marketing and promoting it, and paying for the studio and equipment, is
frightening. Try to start a record company today and run the numbers, and a bank will laugh at you because 97 percent of the
records we put out fail to make a profit."

Even though Copeland and other music executives agree that the road to the industry's future runs through cyberspace,
nobody has figured out how to profit from the Internet sale of music. New subscription-based file-sharing services recently
installed by the major labels aim to reach consumers who want instant access to their favorite music but don't have the time
to scour the Web for free files like younger consumers.

Pressplay and MusicNet, two services that debuted a few weeks ago, offer music fans access to thousands of music files in
major-label catalogs for as little as $10 a month.

"This is going to be a long haul -- you don't get broad consumer adoption overnight," says Alan McGlade, president and CEO
of MusicNet, which provides access to the music of the Warner Music Group, BMG Entertainment, EMI and some
independent labels. "People used to think television was free too. Now people pay for it -- it's a natural part of how we now
consume television. I don't think it's too late for the music industry to do the same thing. Most people haven't consumed music
online yet."

Yet doubts already have arisen about whether the new subscription services will benefit artists. Some managers have
petitioned to have their artists' songs removed from the subscription sites because the labels plan to pay only a fraction of a
penny per download in royalties.

"This is the growing pains any new industry will experience, and it will take time to work it out," says Andy Schuon, CEO of
Pressplay, a joint venture between Sony Music Entertainment and Universal Music Group. "But artists have got to be happier
with the Pressplay model than an illegitimate model where there is no hope for ever getting compensated."

The online advantage

For Brian Austin Whitney, president of Just Plain Folks, an Indianapolis-based coalition of 16,000 independent musicians,
singers and songwriters, the message is clear: Artists shouldn't view their personal computers as cash machines, but as
marketing and communication tools.

"It raises the question, if an independent artist builds a niche on the Internet, will he get money due him if he's part of a royalty
system controlled by the major labels?" he says. "Right now, nobody is getting paid. An artist can't sit in his basement, upload
music and wait for the money to roll in. You might as well buy lottery tickets -- your chances for success will be greater. So
you have to go back to basics: Work on live performance and use the Internet to communicate more quickly with your

John Mayer, a 23-year-old singer-songwriter who is selling out shows across the country, has done exactly that. At first,
Mayer was shocked when his fans began approaching him for autographs clutching homemade versions of his albums that
had been downloaded off the Internet. "It was a real indicator to me that fans just don't get it," Mayer says. "They don't
understand what they're doing when they take people's music off the Internet and distribute it to their friends. I don't get paid
for those records and I would take offense."

But Mayer also benefited from the Internet. When he was just starting out in the Atlanta rock clubs, he would wade into his
audiences after shows and collect e-mail addresses. He still corresponds with many of those longtime fans, even though his
latest album, "Room for Squares," is being pushed by a major label and has sold nearly 200,000 copies.

"Yesterday I got 300 e-mails," the singer says. "It's gotten to the point where I can no longer answer each of them, but have
to answer them in bulk, usually by saying something from the stage at one of my shows. Then that gets posted on a message
board, and the dialogue continues."

Living with a tradeoff

Mayer calls the Internet "the best thing in my life, and also the most frustrating." Music he fashioned as a teenager in his
bedroom has surfaced on the Web, and he's not pleased. "That's the ugly twin brother to the tall sensible one of the Internet.
But it's a tradeoff I have learned to live with. That misplaced enthusiasm has allowed me to have this career. I think it's great
that people can build their own CDs off the Net and trade them. Downloading of my music has made me -- it has absolutely
made me."