To All The Musicians Out There Part I: Backstory and The Record Industry

I decided to go back to school last fall for one specific reason: because the music business education I got was obsolete and biased, I needed to know how other industries developed, operated, and turned a profit. I have almost completed the first year of my studies. What I intend to do with this masters education is apply (hopefully) these concepts to the entertainment industry and help reshape, reform, and revitalize it.

Many music business articles have been written about why the music industry is in a state of collapse. The same word keeps coming up over and over again: downloading.

That's an oversimplification of the issue. In economic terms, when there was one way to obtain a record (by purchasing a LP, cassette, or CD), demand for music was inelastic. In order to purchase the record, you could only get it at one location: a record store. So demand for record store sales was also inelastic.

A brief definition of terms here: inelastic means that the demand for a good or service is unresponsive to change in price. Basically, you can charge whatever you want, and the demand will not be impacted significantly.

Elastic is the opposite--very responsive to change in price.

Back in the glory days of the record industry, record labels could charge sellers whatever they wanted for the price of the record and the sellers, in turn, charged whatever they wanted to consumers. There simply wasn't another substitute for a CD or cassette back then. One of the basics of economics is that the less number of substitute, the greater the inelasticity.

Then came the internet, which will eventually get rid of the record stores, and wireless technology, which will eventually get rid of the record industry altogether. Because now that there are multiple substitutes for a CD and multiple substitutes for a way to obtain a record or a single. The demand for music is now elastic. One could say, almost perfectly elastic, which means the consumer gets to set the price (mostly free), not the seller or the producer.

The record labels failed to realize this shift in economics as well as the record stores. Technology will almost always shift the price and demand elasticities, and those who ignore it are doomed to failure. Anyone been to a Sam Goody's lately?

Okay that's basic, especially for anyone who's a business person. So what does this mean for the future of the industry? First of all, I think there needs to be a clear distinction between the record industry and the music industry. To me, those are two separate entities.

The record industry is finished. Wave it goodbye. It will go the way of GM, probably quicker because they won't get a government bailout. I predict that two generations from now, the very concept of an Album will be obsolete. And not just the existence of albums. The way that the record industry made money (sold a record, collected royalties, sold a single, collected royalties) will be completely non-existent as well. Which means, bon voyage, song publishing industry. Get lost, A&R men and women.

So to anyone who is a Music Business Major...good luck! And congratulations! You'll be unemployed by the time you're close to retirement age. Because there is no way to save the record industry. There are too many variables to work with and/or change. The only way to save it is to adapt to the elastic demand (which we still haven't done) or find a way to lower the number of substitutes. In this case, the substitutes are offered by internet and wireless technology. Just like Ted Haggard, you cannot put technology back in the closet, so lowering the number of substitutes for a record is impossible. The RIAA wasted valuable time and money suing college kids for using Napster. As if that would stop anyone with a rudimentary education from locating or starting another Napster-equivalent.

This is why the record industry is doomed.

Now before all my musician friends commit suicide, my next post will be about the music industry and it will be a lot more hopeful.