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Subject: digital mogul: hard talk: beyond napster: an interview with hilary
HardTalk Extra: Beyond Napster: An Interview with Hilary Rosen
by Lisa Voldeng, chief analyst, digital mogul, voldengATuberbabe.com
Hilary Rosen. RIAA President. Label Angel. Legal Bugle. Napster's Demon
Nightmare. No matter how you define or describe her (or what epithets
you use in the process), whether friend or foe, papal or agnostic, really,
only three words suffice. Sharp. Armored. Strategic.
Recently, I spoke to Rosen with the intent of moving her public dialogue
beyond the rote stance the RIAA has adopted in the media, and in the
courts, these last contentious years; with the intent of moving that
dialogue to where I think the real issues lie - not in the surface battles
of the record industry versus [insert infringing company name du jour
here], not in the rhetoric regarding digital distribution and the evolving
definition of copyright and the law that protects it (regardless of which
side is doing the rhetorical spouting) - but in the massive shifts in
consumption that digital technologies are enabling, and the impact that
they are having on the relationship between fan and artist, artist and
label, and, in turn, on the RIAA.
But our Hilary would have none of it. Embattled by her myriad battles,
Rosen chose to take the path of most deflection (and in some cases, most
aggression). She did her job, and did it well.
Alas, my questions remain unanswered, unaccounted for, unaccountable.
Rosen: So what do you want to talk about? Napster, I guessS
Voldeng: No, I'm actually not that interested in talking about Napster.
It's pretty much been covered everywhere under the sunS Mostly what I'm
interested in is getting beyond rote positions.
Perhaps to give you some perspective on what I mean, my own personal
opinion on Napster is that the battle isn't really the David versus Goliath
sort of thing that it's been portrayed to be. I look at it as being more of
a Goliath versus Goliath thing. Napster is a commercial enterprise. They
are sort of holding up the proverbial fig-leaf, and taking the "information
wants to be free" stance. But it's all in terms of their commercial
interests, and I don't see that as being anything different than the
Now that I've got that out clear, what is RIAA's long-range strategy?
Rosen: Well, I think everything that we have been doing over the last two
years has been geared towards trying to support the development and
establishment of a legitimate marketplace in the online and digital space.
Obviously the companies make the business deals themselves, and are
responsible for their own business strategies. But what we decided a long
time ago was that collectively the things we needed to work on were issues
like enforcement, so that when companies are out there with legitimate
product - not just the majors, but, you know, entrepreneurs - that they're
not competing unfairly with unlicensed or pirated stuff. And when the
companies sign licenses, that those licensees actually have an opportunity
to grow, free from unfair competitionS
Voldeng: Now, who do you think should be determining standards? Do you
think that standards should be determined by companies with proprietary
Rosen: Well I think that's been the problem. That choosing standards in the
IT space would have meant, in several instances, choosing proprietary
technologies. And that's not acceptable, obviously. Either from a
competition side, or from an innovation sideS
Voldeng: The irony of course is that MP3 is an open standard, and no
particular company has a lock on it. It's not based on a proprietary
Rosen: Right, but the technology has moved so far beyond MP3 that that
really has to be viewed as the lowest common denominator. Particularly, the
audio quality. We can do much much better today. There is space in the MPEG
standard for thing like business use rules and others, but most of the
readers don't get there. So we have definitely viewed the opportunity as
being greater than MP3.
Voldeng: SThere is a lot of discussion about the viability of the current
legal framework. And there's a lot of talk and general acceptance that
technology developments move faster than the law. And that the law is not
currently structured in such a way as to be mindful of those developments.
That said, I know you are spending time lobbying CongressS
Rosen: SI am spending a lot of time lobbying Congress to encourage them to
take a "wait and see" approach to the marketplace. I don't think we need
legislative intervention in any area right now. I think that, from my
perspective, the courts are supporting a principled system of intellectual
property. There are clearly enforcing issues that are problematic, but I
don't see Congress being able to address those. If anything, that's more
technology-oriented than coming up with the ideal law. [It's about finding
a] balance of user and consumer access with intellectual property rights.
Voldeng: I agree. However, intellectual property and copyright law were
established when we looked at the sale of intellectual property more as
units of product rather than as serviceS
But let's talk about artists. I think we can both agree that in this
environment, with all of its limitations and gray areas, to say the least,
we're evolving to a world where artists and fans can interact more directly.
Voldeng: Communications technologies exist to allow that. There are a
number of artists who are beginning to do that more, setting up their own
websites, and that sort of thingS During a time where there is increasingly
more direct artist-fan contact, where do you see the RIAA fitting in to
Rosen: Well, I don't think we fit in anywhereS I think that the fabulous
thing about all this innovation is that there's a model for everybody. So
an artist who either has a different kind of ambition, where they don't
necessarily care about selling millions and millions of units, they want an
established fan-base and they want to be able to provide them with music
regularly, perhaps on a subscription service or something like that, for
their income, can do that. Right now the majority of major artists websites
are subsidized by the record companies, you know, just because they're
expensive to keep up and to establish. But I think that there is a lot of
discussion between artists and the record companies about how those various
opportunities can be maximized into revenue streams. And I think that's
really going to depend on an artist-by-artist basis. I think you'll see
joint ventures between artists and record companies, where record
companies, for instance, will invest more in an artist's other activities
in exchange for a piece of those revenues, and not just the record deal.
And then you'll see others where the artists really have a fine sense of
their own business strategy with a management team behind it that really
just wants the record company to be a sales partner. So I think that it's
really going to be on an artist-by-artist basis. There's not going to be a
general rule. I am fully confident, and virtually every manager and artist
I talk to agree with me, that there's a very important role for record
companies in here, if only because the amount of investment and team savvy
and marketing skills and all of that, that's required to create the demand
for music, is not going away. If anything, it only increases in this sort
of environment, where there's so much more information flung at a consumer.
Voldeng: SNow my next question is in relation to a conversation I had with
Ron Sobel in our last music report [Hard Talk, digital mogul 4-1, January,
2001].We talked at length about licensing and rights. And he stated that he
wanted to work towards an environment where the labels are compensated
based on marketing and promotion; where instead of the artists getting,
say, a 15% royalty, and the labels owning the masters and taking an 85%
chunk, that you would see a reverse of that; where artists own the masters
and give the labels, say, a 15% cut, a la the traditional Hollywood
percenteries, like agencies and management companies, in essence, for
services rendered. Do you think that's something the record industry, the
labels, would fight vehemently?
Rosen: SYou just mixed up two concepts. You know, because when you look at
an actor, the film studio owns the master of the film. They pay a fee for
service, but then, it's go away.
Voldeng: No, I am thinking of like with CAA, whereS
Rosen: So I do think that some people are trying [to create ] a new model,
but they confuse both issues. Artists can own their masters right now.
Voldeng: I am talking about labels becoming percenteries, like agencies,
like UMG becoming like a CAA, where they are hired by the artist.
Rosen: SWell, you know, CAA doesn't invest any money in creating the
product. So. I don't think that works as a strategy. SI think everything is
on the table when there is recognition of the risk. And that's how it works
today. Everything is on the table when there is recognition of the risk.
There are artists who own their labels, uh, uh, who own their masters. But
the reason they do is because they didn't require multi-million dollars of
advances in addition. You sort of can't have it both ways. You can't have
the record company take all the risk, and then get none of the back-end
Voldeng: Agreed. But to clarify, I never look at blacks and whites, because
I just don't think the world, or the markets operate like that. I think
there certainly will be specific instances where the label fronts most of
the money, like a venture capitalist, and is taking a larger risk and is
therefore entitled to a larger cut of royalties. In general, obviously,
that is more typical in the industry now, and I am looking at how we can
evolve these contractual relationships to be more reflective of the market
today, and where it's going.
So there will be some cases where labels take a bigger cut, there will be
some cases where a label is hired to perform marketing and promotion
services and get a cut more reflective of that, where perhaps the artist is
paying for the bulk of producing and distribution costs, which of course
are less expensive from the production side than they used to beS
What I am talking about is an environment where rather than being the
exception, it's the norm that the role of the labels is more like a
Rosen: Well then who's gonna pay for the creation? I mean, somebody's got
to pay for the creation.
Voldeng: As I said, I am speaking of when the artist is paying for creation.
Voldeng: And the label being hired to do marketing and promotion. A radical
Rosen: SRight now, what tends to work is the artist actually wants the
label because they don't want to spend their own money, if they have money.
Or they don't have any money so they need someone to take a risk on themS
This is purely a function of risk-reward. There's a lot of speculation
about new models, but what has consistently happened over the last two
years is that managers and artists have come to labels wanting traditional
deals and not spending their own risk.
Voldeng: Well, we've been seeing another undercurrent that's starting to
make more and more of a ripple. We've had conversations with artists who
are beginning to talk about things such as [increased] unionization, the
possibility of recision of contracts and the like. What would the RIAA's
response be to unionization of artists, on a broader scale? I'm talking
like on par with the Screen Actors Guild. Suppose in two weeks, say, and
this is obviously theoretical, that an announcement was made of a larger
union being established?
Rosen: I don't think it would really have an impact. The artistsS They do
have a union comparable to SAG, in AFTRA and AFM, where there are, just
like SAG, base recording rates for studio sessions and things like that.
That, just like with SAG, the real money has nothing to do with the base,
the minimum fees. The real money has to do with individual contracts and
individual participation. I mean, Tom Cruise doesn't depend on SAG to
negotiate his deals. And the existence of SAG has nothing to do with his
career. So, I think it is actually relatively similar already, and I don't
know that it would make that much of a difference. The issue of whether
people could get together and rescind contracts I think is just moot.
Record contracts are signed willingly and that there are constant
renegotiations, and abilities to change terms. But again, it all doesn't
come as a gift; it comes at the price of the risk.
Voldeng: Sure, but I am thinking more in the context of how the record
industry functions as more on par with how the studios used to function in
the '40s, before the de Havilland case. When she sued her studio and broke
out of her contract, it began the collapse of the larger studio system.
Rosen: Well actually there have been multiple suits in the record industry
on just those bases. And what they have found consistently is that there's
not comparable servitude, that there are willing partner agreements.
Willing buyers and willing sellers.
It hasn't changed because nobody's had the guts to be Olivia de Havilland.
That's not the case. With that, people are entering into contracts that
they perceive to be to their own benefit. And if, at some point in their
career, they don't like them, you know, sometimes situations change. And
you know, their options may be more limited, but the courts I think have
consistently found that those contracts are valid and appropriate.
Rosen: I think the issue here is really that it used to be pretty cool when
the record company would hand an artist $10 million and the artist would
the next day, say, go to Rolling Stone and say, you know, "I hate the man,
I hate the record company." And you know, nobody ever really cared,
because, you know, that's sort of what you do to promote rock 'n roll, and
rock is anti-establishment and that was in everybody's best interest. It
was a game everybody played. I think what has happened over the last couple
of years is a growing misperception that because of artists' rhetoric, that
somehow the contracts become more one-sided or things like that. And I
think most established artists have done very well in their careers. You
know, in the modern record industry. There's no question that people were
screwed in the old days, but actually mostly I've found that its business
managers and personal managers who they signed their life away to.
Voldeng: Well I think among artists in the last few years, there's really
been a trend to leveraging your assets. There are a lot of people taking
more control of their business strategiesS
Rosen: Right, and they've essentially done it based upon the popularization
of their music. And I think that the issue that's more important here to
new artists, or to what I call middle-range artists, is less about the
record company relationship and more about their ability to penetrate the
Voldeng: Well then let me ask you another question, and it stems from this,
but is accounting-related. Something that, in all of the rhetoric, from
both sides, whomever those sides are now doesn't matter - it's all so
irrelevant - traditional label and digital people, and again, in their rote
stances, talking about the impact of direct distribution. Something that I
haven't seen discussed generally, but have heard in private and closed
circles, relates to label concern of how direct pay-out of artist royalties
would impact their accounting practices. What I am talking about
specifically, that is sort of left alone and
not-often-discussed-in-public-places, is the cash float that amasses, based
on unpaid artist royalties that are trickled out over weeks, months,
quarters. That many of the labels are using that float to cover their
operating expenses. And so obviously in that case, direct payout of
royalties equals no cash float equals lack of funds to cover operating
expenses. Would you speak to that?
Rosen: No, because I don't know of any instance where that is the case. So
I don't really have any knowledge about that.
Voldeng: OkayS Then let me ask you if there are any things you'd like to
speak to in terms of your overall strategy, or how you view the recent
Napster decision, or where we are in the industry.
Rosen: Well, I think from our perspective, there is an enormous amount of
music online that people haven't been paying attention to because of
Napster. I hope that begins to change.
Voldeng: There's also been an enormous amount of music online that people
have paid attention to. What I am thinking of specifically there is
Metallica. In my opinion Metallica, and I say this somewhat facetiously,
almost single-handedly made Napster. When they handed over all of those
names, you know, less than 400,000 of their fans, Napster traffic spiked
like hell that weekend and basically continued. We never saw a decline
since then. So.
Rosen: Well, we could argue the history of what made Napster famous forever.
Voldeng: Let's switch gears then and talk about the larger impact of
open-source file-sharing. There has been so much talk about the need to
protect copyright and intellectual property - and obviously I create
intellectual property and want to be compensated for my effort, so I come
from that perspective. But by the same token, there is this massive shift
in consumptive power going on, where traditional media industries have
controlled the flow of entertainment and information, and there's been a
one-way flow, moving from producer desire to consumer and these various
communications technologies are enabling a radical reconfiguration of that,
where at the World Economic Forum a couple of weeks ago, you had people
like the chairman of Sony talk about how consumers now have more power than
producers. I'd love to hear your thoughts on that shift. And how you see
the industry addressing it.
Rosen: Well I think the key issue is how the industry monetizes it, not how
they address it. This is not about trying to stop it or shut it down, I
think it's about trying to find the right balance between a new way of
doing business. Because I think that even the most die-hard consumer
recognizes that it may be free to take, but it wasn't free to make.
Voldeng: I think there's an important distinction between "free" and "feels
Rosen: Not always.
Voldeng: And if you can have a system that feels freeS
Rosen: Or, I should say, that has yet to be tested.
Voldeng: Sure, but it needs to be tested.
Rosen: Well, then. I think that's the open question.
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