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Will the major labels adopt VCL?

Fred Von Lohmann is an EFF lawyer extraordinaire, and recently won the Grokster case (which reaffirmed the legality of filesharing software). Last week he published a compelling and accesible article at law.com about why the record industry should adopt collective licensing (or maybe more accurately, why they’ll have to). Take a look: Is Suing Your Customers a Good Idea?

As usual, we agree with almost everything Fred has to say, and we definitely supportive collective licensing as the best way out of the filesharing war. But we are still rather skeptical that the major record labels will decide to adopt such a system any time soon, since what’s best for artists and fans has nothing to do with what’s best for major label executives.

Tens of thousands of the most successful musicians in the world are currently locked into the major label marketing and distribution monopoly. Within the current system, their music gets out, but they barely get paid. If they jump ship from the major labels, they might make a larger share from CD sales, but they will be excluded from the marketing machine and they won’t reach nearly as many people. This bind is what keeps musicians coming back to the major labels, and if it breaks, so does the entire corporate music model. Collective licensing would break the bind, freeing musicians and fans while erasing the middlemen. And the middlemen know it.

Here’s how we think it would go down. First, if a collective licensing system was adopted, CD sales would drop dramatically as the transition to digital distribution ramps up. The monthly cost of all-you-can-eat music would just be too low to pass up ($5 or $10). If you’re watching your friend fill an iPod with 10,000 songs and you know that musicians are getting paid and that she can’t get sued for it, it’ll be hard to convince yourself to keep buying $15 CDs–even if you’re an old-timer or a real music romantic (especially since the sound quality will quickly rise above what iTunes and other services offer). And even though not everyone will ditch CDs, just losing another big chunk of sales will drive a lot of the record store chains out of business and stores like Walmart will keep reducing the size and variety in their CD section. (The irony in all this is that even as fans get way more music for way less money, the incredible efficiency of the system means that musicians will actually get paid more than they do now– gives you a hint about how much is wasted in the current industry, doesn’t it?)

So anyway, CD sales spiral down and online music shoots up; lready the major label monopoly on distribution disappears. They still have marketing domination, which is their trump card and the big reason that independent labels can’t compete (how many indy labels can put up $200,000 in bribes to radio stations when they release an album?). But soon this monopoly disappears too. Already satellite radio and iPods are chipping away at the audiences of regular payola-fueled radio stations. Websites like Pitchfork Media are making music magazines like Rolling Stone and Spin (print payola) less necessary. When people start getting all their music online, they start finding out about all their music online, and the viral, word-of-mouth nature of online promotion is impossible for the major labels to control. When people get up from their computers they need something to carry their music in: iPod sales rise even faster and radios get switched off even faster. All of a sudden, payola stops working and the marketing monopoly is gone.

When marketing goes, major label sales drop. And even worse for the major labels, the superstars who stay on top even without the payola dollars will just abandon the major label system and cut out the middleman. They can make five times as much money getting music directly to fans; there’s just no reason for them to stay in a major label contract once collective licensing takes off.

So if I was a major label executive (which I’m not), I would try to hold on to CD sales as long as I could, while scaring fans with thousands of lawsuits and new criminal laws against filesharing, trying to outlaw filesharing technology completely (or at least cast a cloud over it), and trying to force electronics makers into locking down their mp3 players. Not much of a long term plan, but at least it lets me ride the gravy train for a few more years while I wait for a miracle (will it be ring tones or DVD singles??) or better yet, just plot my personal exit strategy (my multi-platinum parachute).

Of course, what I’m describing here is exactly what the major labels are doing and from their personal financial perspective, I think it’s makes a lot of sense. Probably the biggest intellectual fallacy that occurs when analysts consider the music industry is to assume that it’s a reasonably normal market with normal flows of supply and demand, production and consumption. In fact, not only does music by it’s very nature have several unusual economic features, but even more importantly, the major labels have so radically distorted the playing field that the current music business bears very little resemblance to what would exist in a truly competitive “free market”. Without this understanding, it’s logical to assume that a system which dramatically increases both the number of people paying for music and the total economic scale of the industry would naturally benefit the largest players in the industry. But that’s just not the case–right now the music business is run by monopolists. Collective licensing would level the playing field and slay the monopolists.

So if I was someone who cared about a better deal for musicians and fans and a healthier music industry (which I am), I wouldn’t rest too much on the hope that the current industry will voluntarily adopt a collective licensing plan. This conclusion is hardly surprising: we shouldn’t be waiting for the people who have consistently screwed musicians and fans to turn around and save them. A much more realistic strategy for a fairer music industry– and by “fairer” I mean a level playing field for independent labels and a musician-centered approach– is to take advantage of the incredible decentralizing forces that the internet creates.

We have the tools to take music into our own hands and that’s exactly what we should be doing. For the first time ever, fans can realistically break the major label stranglehold simply by refusing to buy their products (before filesharing networks, boycotting major labels went nowhere). And for the first time ever, people are creating thousands of serious alternatives to the major music press: blogs, review sites, recommendation lists. Sometimes you need to step back a little, and think about pre-internet music life, to see how amazing these new developments are. And once the music monopoly falls, it will be much, much easier to either create a voluntary industry standard, as Fred Von Lohmann (and many others) supports, or to create a broad tax-funded system, as proposed Terry Fischer (and many others). From our perspective, either system would be wonderful for music culture, and we could look a little more closely at the pros and cons once the political landscape is more hospitable to both. Meanwhile, we’ll continue to do everything we can to promote the idea of collective licensing (legalized filesharing) and try to work towards making it happen. (We’d love to see a good indy music pilot project happen somewhere…)

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