Who put down music’s Top Dog?

This week say the inevitable with several more high street firms winding up zipped into the growing pile of body bags of the Great Recession (a review of High Street casualties and their status on the Beeb). One notable casualty was HMV, the last remaining high street music store chain.

While one can certainly blame the recession and poor trading conditions for bringing down many firms (let’s face it, those Tory cuts are hardly helping matters), and it certainly would have hit HMV where it hurt. But there are many other factors in play for HMV.

Ultimately the demise of HMV, Virgin Megastore’s (I would blame this failure on changing the name to something nobody can pronounce nor spell!), Game (which seems to have emerged from its earlier woes, tho for how long we’ll have to see), Blockbuster and many other firms can, ironically be traced back to their greatest success – The sale of CD’s and later DVD’s.

Both of these products proved to be enormously profitable. In part because of their mass market appeal, but also because of the fact that in the early days of CD/DVD sales they were sold at something of a price premium (i.e. a bit more for a CD version of something than a cassette or vinyl copy). This made sense at the time, as it represented more of a “premium” product and the production costs of the disks back then where much higher than those for tapes and Vinyl’s. However rapid improvements in manufacturing technology along with something of a price war between the firms manufacturing CD’s led to glut and the cost of the disks plummeting in the late 1990’s…but the media industry was very slow to reduce the sales price of disks to match this drop in production costs.

This, led to stellar profits margins for the music industry, as Philip Beeching (an advertising exec at the time who worked with HMV) notes in his blog. Consequently the media firms, notably the retail arm, were raking it in.

And like any cartel in the position of commanding a defacto monopoly, the media industry became increasingly greedy, bloated and corrupt. Executives awarded themselves massive bonuses, the stars of the industry (hardly poorly paid even before!) saw their income skyrocket, the industry forked out massive amounts on advertising/celebrity endorsements, comp trips for hanger’s on with 5-star hotels, champagne on ice and all the coke you can snort included! And of course the media industry also established a chain of massive and hugely expensive high street stores.

They also built up something of a monopoly in terms of shutting out foreign competition. One of the reasons the UK tends to do badly in the Eurovision, isn’t so much “anti-British” feeling in Europe, but more anti-Brit record industry. Many struggling artists in Europe, and their fans (who make up a large portion of the Eurovision audience), are peeved at their inability too make an international breakthrough, something they blame on the UK records industry.

All this spending however, built up the media industries fixed operating costs (i.e. the costs of staying in business and operating) and of course it comes on top of the existing “below the line” costs of running a media company. That being the cost of hiring the army of (generally low paid) workers to perform a host of important roles within the media (secretaries, editors, song writers, key grips, roadies, store staff, the guy who makes the tea, etc.). What the media industry, notably HMV, failed to realise is that they were basically making the rope that would be used to hang them.

“Downloads are just a fad”
Many in the media industry have been quick to point the finger (as they do when any media company gets into trouble) and blame file-sharing for the demise of HMV. While certainly, it hardly helped their financial situation, I would argue it was more a symptom of the fatal illness, rather than the root cause, as I will explain in a minute.

Again, Philip Beeching recalls, as part of his advise to HMV, pointing out the retailer’s vulnerability to both discount sellers such as Tesco’s (who were going for a “stack’em high & sell cheap” approach) and of course file sharing. The response from management was to angrily dismiss his (entirely accurate) analysis and state that “downloadable music is just a fad”. This has got to go down in history as one of those “famous last words” quotes.

Initially the reaction of the media industry to mp3’s and Peer-to-Peer was to firstly ignore it and deny that it was a threat, then completely misinterpret the problem and then over-react to it. As the many in the RIAA will frequently lament “how can we compete with free?”….obviously they’ve not visited I-Tunes recently! However the question they should have been asking is “how can ridiculously overpriced compete with anything?”.

The attitude of the industry was to assume that anyone using the internet or mp3’s was some sort of thief with the words SWAG written across his hard drive…ignoring the fact that the mp3 format had been developed, not by socialist hackers, but by a bunch of German academics of the Fraunhofer institute. Who, in the early 1990’s, where looking for a way of compacting down large media files. Allegedly, the first ever mp3 file was “Tom’s diner” by Susanne Vega…perhaps a telling peek into the music tastes of Germans!

While I accept that P2P has had some impact on music sales, I would dispute that its been as bad as they claim. Take my example, I was never a huge purchaser of media or disks (and most of my CD’s are classical music!) to begin with. But of the stuff I’ve downloaded P2P it has mostly fallen into one of the following categories:

1) Stuff I never had any intention of buying to begin with (heard half of a track on the radio, wanted to hear the other half (nothing better to do!), probably decided it was crap and deleted soon there after, you-tube has of course rendered such downloads largely obsolete)
2) Replacement for content I’d already purchased (after the supposedly “indestructible” CD died after just a few plays!)
3) Rare stuff that I couldn’t get in any store (out of print books, 1950’s films or 80’s TV series, specialist online retailers or pay-per-view sites now cover this area pretty well…indeed speaking of which Santa forgot to bring me some Judge Dredd so I’d best order some tomorrow!)
4) TV shows I’d missed (catch up TV sites such as BBC iplayer have again largely made such downloads obsolete)
5) “Pre-viewing” stuff I planned to buy anyway, for example a few years ago I bought the entire 4th and 3rd series of Star Trek Enterprise, largely because I’d downloaded a few episodes and decided that it didn’t look as bad as many fan sites had claimed, ditto for many of my classical CD’s….I have yet to receive a letter from Mozart’s lawyers! :)) ).

So adding all of the above up, about the only revenue my use of P2P, seems to have denied HMV is the fact that without P2P I MAY have bought something in one of their stores which turned out to be sh*te and never listened to it again….of course that ignores the fact that I know I’d have gotten the stuff much cheaper online anyway and there is this thing called “e-bay” where one can sell stuff you don’t want any more. And indeed if you’re a technophobe, there’s this place called “Cash Converters”.

The RIAA backlash
Either way, the reaction of the media industry was, rather than go with the flow and try and find a way to make money out of the internet, was instead to start suing anything that moved. They went after the manufacturers of mp3 players (that’s sort of like suing BMW because at least one or two of their drivers are complete pri&k’s!). They began suing those who ran sites or who downloaded they’re content, often relying on a trail of evidence that would be considered illegal in any other context (i.e. hacking into someone network to trace/disrupt a download is still “unauthorised access”, a violation of civil liberties and about a dozen other laws) and highly dubious (my favourite, they tried suing a dead person and then a granny for distributing Gangsta rap!)

In another example, lawyers for the media industry would sent people letters saying that their IP address had been used to download copyrighted content…ignoring the fact that IP addresses can be easily faked and wireless internet networks can be hacked into (even if you enable password encryption! This is why I would recommend switching you’re router off when not in use!).

This is the equivalent of you being arrested by the cops for a robbery, even though the only evidence they have of the crime is that they broke into you’re house (without a warrant!) and found you had a pair of shoes (and they knew that the guy who committed the robbery was also wearing a pair of shoes).

Inevitably while the industry has succeeded in frightening some into paying massive fines, unfortunately, more often than not, once such dubious evidence has reached a court of law, its been thrown out. The downfall of ACS:Law or MediaDefender are good examples of these sort of sordid practice.

The media industry also got their minions within government’s to pass increasingly draconian and unconstitutional laws to claim down on peer to peer. Indeed theses days you could get a harsher sentence for a few clicks with the mouse, than beating up an old lady for her pension money.

Naturally this draconian approach provoked a backlash from fans. I know some serious music fans who on point of principle had avoided the temptation of P2P, but who now began using it purely to punish the media industry for supporting such brutal and undemocratic policies. This link gives a taste for such unrest within the ranks.

If there is a quicker way to destroy an industry than suing you’re own customers I am unfamiliar with it. This is exactly the same approach taken by the hobbyist war-gaming firm TSR in the 1990’s and the consequence of it was, they alienated their fan base, who stopped buying their products and the company went bust.

How the internet killed the video store star
Of course, these serious music fans didn’t have long to wait for a “legit” alternative to P2P to emerge. Apple very wisely did what the retail arm of the music industry (that would be HMV’s department!) failed to do years earlier – find a way to exploit this new market and make money out of it. Many contemporaries soon followed. Indeed, even Napster, once the bane of the RIAA, has since been reincarnated as a legal and profit making site.

And as far as physical content goes, i.e. you want the actual disk (possibly to give to someone as a present) there are, as noted above, a host of online retailers now available who will sell it too you, often boasting a much better selection than any high street store and offering substantially lower prices.

Now while it seems that HMV did eventually (in 2006!) work out that this much fangled “internet” thinky was sort of a big deal and began to look at putting up their own retail site. But, as Philip Beeching article points out this was a dismal failure.

I would in fact describe it as not so much a case of shutting the stable door after the horse had bolted (they should have been in there before I-tunes came along!), more a case of them denying the horse had bolted (even when presented with an empty barn), burning down the barn to prove that the horse was still inside and when the horse came back, shooting it to stop it running away again! :no:

Ultimately HMV, Zav…whatever the hell! and other recently bankrupt firms were unable to do the one thing they needed to do. That would be lower their prices! Largely because, as noted earlier, they had built up massive fixed costs during the CD/DVD sales explosion in the 1990’s and 2000’s. While companies like Amazon and Tesco‘s drove a hard bargain when negotiating with suppliers, the likes of HMV, were too close to the industry, and seemed to have just rolled over at every turn. The final death throes of these stores has indeed largely thus been inevitable.

Lessons learned?
The collapse of HMV has sent rather more than a few shudders through the media industry. And not least because increasingly artists are using the internet to by-pass the media mogul monopolies altogether and go direct to their fans. The UK band Arctic Monkeys were one of the early pioneers of this. Many others have followed the same route. More recently that tacky South Korean song that was doing the rounds before Christmas.

So what lesson can one take away from all this? Well certainly, ignoring you’re customer’s changing tastes, then suing them (when they show reluctance too being overcharged) is hardly up there with how to win friends and influence people. And in a free market, its always the customer who should be setting the price, not the supplier fixing an artificially high price. Such suppliers need to realise they are merely digging their own grave in the long term by doing this. Sooner or later someone will come along and offer a way (legal or otherwise) by which people can by-pass you’re monopoly.

Also, trying to defend a monopoly using lawsuits is a losing strategy, as inevitably, like the dinosaurs in “Jurassic Park” life will find a way around such barriers (every time the industry made one means of downloading illegal, another method would emerge, indeed there’s nothing to stop people burning stuff onto a CD and giving it too their friends). Also failing to appreciate technological advances and the effects they will have on you’re business is up there with King Canute.

But what worries me about the media industry, as they prepare for the glitz of the Oscars, is that they don’t seem to be getting the message. Consequently I suspect the business failures of the retail wing of the media industry will now carry over to the media companies themselves. Obviously the smaller firms (many of whom are likely to loose a lot of business through the collapse of HMV anyway) will be the first to go, but inevitably, unless the industry urgently changes tactics, this process will work its way up stream until the media giants themselves begin to tumble.

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