Knopper appetite for self destruction; the spectacular crash of the record industry in the digital age (2009)

FREE PRESS A Division of Simon & Schuster, Inc 1230 Avenue of the Americas New York, NY 10020 Copyright © 2009 by Steve Knopper All rights reserved, including the right to reproduce this book or portions thereof in any form whatsoever For information address Free Press Subsidiary Rights Department, 1230 Avenue of the Americas, New York, NY 10020 FREE PRESS and colophon are trademarks of Simon & Schuster, Inc Library of Congress Cataloging-in-Publication Data Knopper, Steve Appetite for self-destruction: the spectacular crash of the record industry in the digital age / Steve Knopper p cm Includes bibliographical references Music trade—History Sound recording industry—History Compact disc industry—History I Title ML3790.K57 2009 384—dc22 2008038739 ISBN-13: 978-1-4165-9455-0 ISBN-10: 1-4165-9455-8 Visit us on the World Wide Web: http://www.SimonSays.com For Melissa and Rose “A strategic inflection point is a time in the life of a business when its fundamentals are about to change… Strategic inflection points can be caused by technological change but they are more than technological change…A strategic inflection point can be deadly when unattended to Companies that begin a decline as a result of its changes rarely recover their previous greatness But strategic inflection points not always lead to disaster When the way business is being conducted changes, it creates opportunities for players who are adept at operating in the new way.” —Andrew S Grove, Only the Paranoid Survive “Look out, honey, 'cause I’m using technology Ain’t got time to make no apology.” —Iggy Pop and James Williamson, “Search and Destroy” Contents Cast of Characters Prologue 1979–1982 Disco Crashes the Record Business, Michael Jackson Saves the Day, and MTV Really Saves the Day Chapter 1983–1986 Jerry Shulman’s Frisbee: How the Compact Disc Rebuilt the Record Business • Big Music’s Big Mistakes, Part 1: The CD Longbox Chapter 1984–1999 How Big Spenders Got Rich in the Post-CD Boom • Big Music’s Big Mistakes, Part 2: Independent Radio Promotion • Big Music’s Big Mistakes, Part 3: Digital Audio Tape Chapter 1998–2001 The Teen Pop Bubble: Boy Bands and Britney Make the Business Bigger Than Ever—But Not for Long • Big Music’s Big Mistakes, Part 4: Killing the Single • Big Music’s Big Mistakes, Part 5: Pumping Up the Big Boxes Chapter 1998–2001 A Nineteen-Year-Old Takes Down the Industry—with the Help of Tiny Music, and a Few Questionable Big Music Decisions • Big Music’s Big Mistakes, Part 6: The Secure Digital Music Initiative Chapter 2002–2003 How Steve Jobs Built the iPod, Revived His Company, and Took Over the Music Business • Big Music’s Big Mistakes, Part 7: The RIAA Lawsuits Chapter 2003–2007 Beating Up on Peer-to-Peer Services Like Kazaa and Grokster Fails to Save the Industry, Sales Plunge, and Tommy Mottola Abandons Ship • Big Music’s Big Mistakes, Part 8: Sony BMG’s Rootkit Chapter The Future How Can the Record Labels Return to the Boom Times? Hint: Not by Stonewalling New Hightech Models and Locking Up the Content Notes Acknowledgments Cast of Characters CBS Records Walter Yetnikoff, president, 1975–1987 Tommy Mottola, president, 1988 William Paley, CBS Inc., CEO, 1986–1995; died 2003 Laurence Tisch, CBS Inc., president, director, chairman of the board, 1988–1990; died 2003 Dick Asher, deputy president, 1979–1983 Frank Dileo, promotion director, Epic Records, 1979–1984; manager, Michael Jackson, 1984–1990 George Vradenburg, senior VP, general counsel, 1980–1991 Jerry Shulman, market researcher, VP of marketing, Legacy founder, general manager, 1973–1999 Bob Sherwood, Columbia Records president, 1988–1990 Sony Music Entertainment, purchased CBS Records, 1988 Walter Yetnikoff, chairman, 1987–1990 Michael “Mickey” Schulhof, chairman, 1991–1995 Tommy Mottola, president, 1989–1998; chairman and CEO, 1995–2003 Don Ienner, president, Columbia Records, 1989–2003; president, US division, 2003–2006; chairman, 2006 Michele Anthony, senior vice president, executive vice president, chief operating officer, 1990– 2004; president and chief operating officer, 2004–2006 Al Smith, senior vice president, 1992–2004 Fred Ehrlich, Columbia Records, vice president, general manager, 1988–1994; VP, general manager, president, new technology and business development, 1994–2003 David W Stebbings, technology director, also for CBS Records, mid–1980s–1995 Jeff Ayeroff, copresident, WORK Group, 1994–1998 Jordan Harris, copresident, WORK Group, 1994–1999 John Grady, Sony Music Nashville, president, 2002–2006 Phil Wiser, chief technology officer, 2001–2005 Mark Ghuneim, Columbia Records, VP, 1993–2003; senior VP of online and emerging technologies, 2003–2004 Sony Corp Akio Morita, cofounder, as Tokyo Telecommunications Engineering Corporation, 1946; died 1999 Norio Ohga, various positions, including president, chairman, CEO, 1958–2003; served as chairman, Sony Music Entertainment, 1990–1991 Michael “Mickey” Schulhof, joined mid-1970s; president, CEO, 1993–1996 * Davis and his reported $10-million-a-year salary finally succumbed to stark music business reality in May 2008, when Sony BMG removed him from the BMG chairmanship and shifted him to “chief creative officer.” Davis’s allies in the business, including Rod Stewart’s manager, Arnold Stiefel, insisted the move was Davis’s idea and that he’d be working as closely with artists as ever Other sources, however, said more germane factors were Davis’s large salary at a time of cost cutting and his refusal, at age seventy-six, to name a successor Sony BMG’s replacement for Davis was Barry Weiss, forty-nine, who had taken over as president of Zomba after Clive Calder left the company, and continued to break hit CDs from the likes of Chris Brown and T-Pain despite the industry’s ongoing sales problems * In August 2008, Bertelsmann bailed out of the Sony-BMG merger, selling its 50 percent stake to Sony in a deal valued at $900 million * On June 3, 2003, the FCC did, in fact, relax media-ownership rules The commission lifted a twenty-eight-year rule disallowing a newspaper from owning a TV or radio station in the same market and allowed other broadcast companies to own more stations in general This decision benefited Clear Channel, along with other large media companies * Not every Warner executive was enamored of the CD In his memoir Exploding, then–Warner Music creative director Stan Cornyn writes, “At first, in ’82, most folks in the American record business had figured that the CD was some kind of foreign trick.” Robert Heiblim, president of the electronics company Denon at the time, recalls Cornyn, who had a reputation as a new-technology buff, being surprisingly skeptical Heiblim also encountered especially harsh resistance from Atlantic’s Ahmet Ertegun and executives at Arista (run by Clive Davis at the time) and A&M Responds Cornyn: “I have been in the record industry known as a sassy speaker So I may have sassed at one point onstage.” Early on, Cornyn viewed the CD as one of an endless line of technologies pitched to labels as the next big thing Later, David Horowitz called several Warner executives around his big blue conference table in New York to emphasize the CD He deputized Cornyn to push it “Therefore, I was slightly less sassy,” Cornyn says * In the October 2008 Blender, Oasis’s Noel Gallagher talked trash on this subject: “Can I just point out that [1997’s] Be Here Now did sell 9.5 million copies? If any band sells 9.5 million albums this year, I’ll fucking shit in my trousers.” * In early 2008, a story landed in the Financial Times, citing unnamed sources, speculating that Jobs had come around to the idea of subscription sales Apple refused to comment, and several sources interviewed for this book speculated that the Times article was a trial balloon floated by record executives Regardless, as of mid-2008, Apple had yet to act on the subscription idea * The 360-degree deal isn’t exactly new—indies from Motown to Zomba to Wind-Up have participated in a range of revenue streams beyond records for decades But they’ve never been standard practice at the biggest record labels, which until recently didn’t really need new revenue streams, given the strength of CD and LP sales * As of mid-2008, Hands has made more news for hiring than firing, appointing high-tech experts like ex–Google executive Douglas Merrill and Second Life online-community pioneer Cory Ondrejka to top EMI posts * One interesting but radical vision for the music business’ future comes from McGill University visiting scholar Sandy Pearlman, once a prominent producer for Blue Oyster Cult, the Clash, the Dictators, and others He talks about the “paradise of infinite storage.” As computer data storage continues to grow in capacity and shrink in size, he believes, every music fan will simply carry a tiny chip filled with every song ever recorded Once that happens, the record business as we know it is over But he believes it will be possible for artists and labels to levy some kind of tax on the devices and generate a new business model Unsurprisingly, today’s label employees consider Pearlman a bit of a wacko “I’ve brought this up,” he says in an interview, “and it’s always very disturbing to people who work in music.” * To research this chapter, I visited former label executive Joe Smith, the good-natured raconteur, 1950s disc jockey, and should-have-been stand-up comic (At one industry function, he reportedly made the following inspired introduction of the great Seymour Stein of Sire Records, who turned the Ramones, Blondie, Talking Heads, and Madonna into stars: “He is to the record industry what surfing is to the state of Kansas.”) For an hour, I listened to Smith on a luxurious couch in front of the largest flat-screen television set I’ve ever seen in my life Afterward, I stood in the large foyer of his beautiful home in Beverly Hills, preparing to leave The retired, seventy-eight-year-old head of Warner, Elektra, and EMI shook my hand and said, “The business ain’t full of Martin Luther Kings.” * Albert Brooks’s character in 1991’s Defending Your Life memorably meets his demise attempting to tear open longboxes while driving * Mariah Carey’s eight-octave range is something of a canard Media reports have placed her between four and eight octaves over the years, and I once made the mistake in a Rocky Mountain News concert review of repeating this information, leading to a flurry of emails between the managing editor and the entertainment editor Snopes.com, the urban-myth-debunking website, believes eight octaves are impossible and Carey’s range is probably closer to four I guess it’s just better to say, “She’s a good singer.” * Morgado did not respond to an interview request for this book; when he left in 1995, he touted the company’s “strong growth trajectory” in a Time Warner press release, from $1 billion in revenues in 1985 to almost $4 billion * Whether Levy knew about the Seagram sale during his meeting with Bronfman is in dispute among various sources Cook believes he didn’t, while Bronfman thinks he did Levy did not respond to several interview requests * DiSipio quickly disappeared Isgro was sentenced in 2000 to 50 months in prison for loan-sharking; when he got out, the Hoffa producer secured the movie rights to the story of 1920s mobster Lucky Luciano ... Library of Congress Cataloging -in- Publication Data Knopper, Steve Appetite for self- destruction: the spectacular crash of the record industry in the digital age / Steve Knopper p cm Includes... storm the field, climbing down the foul poles and turning the record explosion in center field into a raging bonfire Sox officials hesitated to call in the cops for fear of stirring things up... deadline for introducing the disc and a joint Sony-Philips player to the consumer market The deadline meant the team had to solve all kinds of tricky technical problems at the last minute, but they