Appetite For Self-Destruction: The Spectacular Crash of the Record Industry in the Digital Age

Even with the 20-20 vision of hindsight, the failure of the major record labels to grasp the implications of the internet seems extraordinary. As Rolling Stone contributing editor Steve Knopper explains in this pacey account of corporate greed and myopia, they certainly had enough warning.

At the heart of Knopper’s story is the record industry’s longterm tendency to view technological opportunities as threats. When the recession of 1979-1982 reversed a 20-year boom which had seen record sales steadily quadruple in value, opposition to the introduction of compact disc was rife. The tech guru at CBS demanded to know “what the hell we can expect to happen here with CD.” His boss, Walter Yetnikoff, a rambunctious mogul of the old school, rejected it as an invitation to make pirated copies of albums on cassette tape, and refused to invest in new manufacturing plants. “I have no idea what they’re talking about,” Yetnikoff told his underlings.

A decade later, with profits soaring again thanks mainly to CD, deaf ears still prevailed. When the inventors of computer software which allowed digital music to be converted into infinitely transferable sound files - MP3s or MPEGs – showed them to the record companies, they were treated like dreamy geeks. Even after the advent of public access to Netscape’s World Wide Web in 1994 meant that these files could be sent anywhere in seconds - for free or, with some input from the copywright holders, for a fee – Big Music declined to license their content for online trading.

One record company bigwig who met several dot-com pioneers described the encounters as “tiresome”. The head of Liquid Audio, a company that specialised in the transmission of encrypted MP3s, was told in 1999 by a Sony honcho, “My job is to keep you down, we don’t ever want you to succeed.” As CD sales climbed to an all-time peak of 932 million in 2000, nothing seriously disturbed the received wisdom within the record business that selling shiny and expensive pieces of plastic was the way forward.

By then the genie of digital music was out of the bottle. Radiohead, among others, were giving away new tracks on their website. More significantly, 20 million fans had registered with an online service called Napster, the creation of a 19-year-old student from Massachusetts, Shaun Fanning, and his mercurial uncle John. Napster made it simple for users to “share” music files, an innovation which John Fanning rashly described as a bid “to take down the record industry and give away free stuff!”

In 2001, with nearly 27million filesharers now signed up to Napster, some more far-sighted label executives woke up to what was fast becoming an underground cultural phenomenon and tried to cut commercial deals. Thomas Middelhof, CEO of the Bertelsmann Music Group (BMG) offered a $60 million buy-out of the company, a move which saw him swiftly fired. Other licensing arrangements proposing a 90/10 per cent profit split in favour of the labels foundered. The preferred industry approach was to sue Napster for soliciting infringement of copyright. It was duly shut down in 2002.

Knopper does some impressive maths showing that had a more equitable deal been struck offering legal downloads via Napster for a $1 a track, the record industry could have benefited to the tune of $16 billion a year. What he doesn’t explain is just how unlikely this was in a business increasingly run by lawyers, or former lawyers, with a narrow fixation on control and ownership. It was their preoccupation with bashing the sons of Napster – so-called "peer-to-peer" services such as Kazaa which operated without an easily identifiable central server and were thus harder to sue – that led to the record industry losing the battle for the digital music market.

The unlikely winner was Steve Jobs of the Apple computer company. Jobs had two aces up his sleeve. One was a cutely designed MP3 player, the iPod, which Apple launched in 2001 and which soon became a must-have gadget for music fans. The other was his charm and persuasiveness in convincing label bosses to let him sell their music legally for 99 cents a track through Apple’s online iTunes store.

This deal, agreed in 2002, seemed reasonable at the time, granting the record companies a two-thirds share of the pie; but it meant that pricing was now out of their hands. A Madonna song sold for the same as a tune by an unknown indie band. Soon senior execs were grumbling about being cheated. “Steve dealt from the bottom of the pack,” was an oft-heard complaint.

Nobody who doesn’t work for a label is likely to have much sympathy. With its persistent appetite for suing Facebook or wrangling with YouTube, the record business still seems to be chronically behind the beat in addressing the evolving desires of its tech-savvy consumers. As recording revenues dwindle, Knopper argues that cash-rich computer companies will soon “start running major record labels as high-tech content houses.” It’s hard not to agree with him.

Appetite For Self-Destruction: The Spectacular Crash of the Record Industry in the Digital Age, by Steve Knopper (Simon & Schuster £10.99). Buy this online