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Loose Integration in the Popular Music Industry Patrick Burkart

The Big Four music oligopoly practices cultural gate-keeping for global markets. However, in spite of consolidation in the sector, the music industry is more loosely integrated vis-a`-vis the rest of the entertainment industry than it was under the Big Five. As the sector concentrated, it also differentiated into two ownership classes. The Big Four are evenly split, two with affiliations with entertainment conglomerates and two without such affiliations. However, the majors as a group continue to share strong market power as a cartel. In the future, the interaction of the two affiliated and unaffiliated dyads in online music markets may divulge coordinated rules for CD pricing and controlling over access to digital catalogs. This paper considers Internet distribution of music as a technology practice contributing to, and perhaps reinforcing, loose integration.

Introduction: The Ownership and Control of Music Distribution Channels

Being the gatekeeper was the most profitable place to be, but now we’re in a world half without gates. The Internet allows artists to communicate directly with their audiences; we don’t have to depend solely on an inefficient system where the record company promotes our records to radio, press or retail and then sits back and

Downloaded by [DePaul University] at 15:03 07 January 2012 hopes fans find out about our music. (Courtney Love) Courtney Love and the Dixie Chicks have played an activist role among popular music artists who publicly and privately challenge their contractual relationships with the major labels as exploitative (Philips, ‘‘Judge’’, ‘‘Dixie Chicks’’). Love’s dictum— that the Internet shall disintermediate the majors—was very nearly a manifesto for artists to throw off the yoke of the industry and join online in solidarity. The revolutionary moment never arrived for the music industry; the accumulated advantages of an industry with more than a century of gate-keeping predictably held sway over the potentially destabilizing effects of Internet distribution (McCourt and Burkart). Moreover, the Napster era chilled many artists’ initial zeal for bypassing the labels with direct Internet distribution to fans.

ISSN 0300-7766 (print)/ISSN 1740-1712 (online) # 2005 Taylor & Francis Group Ltd DOI: 10.1080/03007760500159013 490 P. Burkart The transformation of the music industry into a service industry, or a disposable goods industry, is well under way, but it is the major labels that are leading it—not the artists. Digital distribution of music is a trend reinforced by industry consolidation, technological changes, the legal adjustments to the Digital Millennium Copyright Act and Napster case, and the economic recession of 2001–02. The industry adoption of an e-business model is not an example of innovation in the sector; indeed, the major labels were dragged reluctantly into Internet distribution. Rather, the Celestial Jukebox model (or the ‘‘heavenly jukebox’’ model) (Burkart and McCourt; Mann) is instead a coping strategy for a fan-led migration to online services, initially through unauthorized Internet channels. The Jukebox model consolidates the advantages of the Big Four record labels’ distribution bottleneck, as it projects control into the Internet through oligopoly market power, the use of digital rights management, and withholding of catalog access. Technologically, the Celestial Jukebox contributes to a reorganization of ‘‘network power’’ on the Internet that gives the record industry new bottleneck controls on licensing and distribution, while strengthening a lopsided power relationship with musicians and fans. The Jukebox is also a lock-box, insofar as it provides both a revenue model and a technological design for protecting online content as valuable Web ‘‘assets.’’ For the Big Four labels (UMG, Sony-BMG, EMI, and Warner), online music distribution’s advantages over traditional channels for distribution include extremely low or negligible marginal costs of copying and distributing digital music files, the elimination of overstocked or obsolescent inventories, and no losses from product returns or ‘‘shrink’’ due to damage. The Jukebox also offers an industrial-age business some information-age controls over business processes, including just-in-time production of streaming programming, real-time sales information, and the ability to automate push marketing. These unique advantages are especially important in an environment of slowing sales growth, shrinking payrolls, and other uncertainties. These music service providers remove music from the consumer’s reach as a tangible, collectible asset, even while they advertise their offerings as a highly intimate and personal way of consuming and experiencing music (Burkart and McCourt). The practices of producing, distributing, and consuming music are in flux. In what follows, I shall discuss the Celestial Jukebox model in the context of its Downloaded by [DePaul University] at 15:03 07 January 2012 operation with the rest of the global entertainment industry. First, I describe the dynamics of the contemporary market as experiencing a simultaneous contraction and incomplete differentiation from vertically integrated media conglomerates. The restructuring has created an affiliated–unaffiliated distinction between cartel members: those affiliated with integrated media conglomerates and those without such affiliations. Notwithstanding this distinction, the industry operates as a rent- seeking cartel with political legitimation derived in the US from legislative and judicial branches. Then, I describe the rapid emergence of paid music downloads and streams as a revenue source for the majors, and the majors’ rapid divestment from the constituent sites for the Celestial Jukebox as a further loosening of a tightly integrated industry. As music fans increasingly go online to download music, the Popular Music and Society 491 music business further rationalizes and economizes by outsourcing digital distribution. The entry of the Big Four into e-commerce permits them to accumulate and centralize music ‘‘assets’’ in clearing houses, and mete out access to authorized resellers. In the absence of regulation or legislation providing for compulsory licensing, the formation of centralized music clearing houses demonstrates how the culture industries are following the financial industry into the mobilization of ‘‘network power’’ (Sassen) as a business strategy. The mobilization of network power for competitive advantages began with the creation of the online music stores that filled the vacuum left by Napster’s demise. In the last ten years of the 20th century, the music industry became more differentiated from the fully integrated media conglomerates, created and then sold and outsourced its digital distribution outlets, and began distributing disposable goods (having long ago perfected their production). The Celestial Jukebox model adopted by the industry is actually a double outsourcing: the cartel buys out of the music service providers, which were entities created to exploit the vacuum left by Napster. Meanwhile, the digital rights management systems used by the Jukebox, which can force music files to ‘‘expire,’’ restrict fans’ access to music in ways that force these consumers to buy disposable music or lease ongoing access to music services, rather than benefit from the purchase of hard copies of encoded music. The migration of distribution and consumption of music to the Internet marks a period in musical history in which digital networks take a prominent role in mediating musical culture. The US-centricity of the global music industry and global popular culture contribute to a musical monoculture.

Music’s Loose Integration with the Entertainment Industry Mega-mergers in the music business have the same justification today as they did in the past. Improved economies of scope make it possible for mergers and acquisitions to improve efficiencies and profitability forecasts in a firm, reducing overheads by sharing resources and eliminating redundancies within a combined enterprise. Losses in media and telecommunications sectors introduced a new volatility into the recording industry’s business cycles, such that cost-cutting executives got even hungrier and Downloaded by [DePaul University] at 15:03 07 January 2012 the music business became an increasingly difficult place to survive, no matter where in the value chain one happened to work and reside. Mergers created waves of reorganizations, lay-offs, and executive pay-offs; in the contraction, the industry cut about 20% of its workforce between 2000 and 2002 (Goldsmith et al. A1). Music as a product category has faced declining sales and increasing competition from other media, especially video games and DVDs, at a time when consumer spending was declining and the record labels were cutting back their offerings (Goldsmith, ‘‘Global’’ B2; DeLuca). In a general effort to shore up lagging sales while pursuing new expenditure cutbacks, music industry consolidation has pursued all varieties of integration strategy—horizontal, but also vertical and diagonal. Music companies are consolidating through mergers and acquisitions; however, at the same 492 P. Burkart time, half of the Big Four (Warner and EMI) are also detached from integrated media conglomerates. The maturation of markets for recorded music has a history of three phases, each dominated by a ‘‘different kind of organization’’ (Garofalo 319).

1. Music publishing houses, which occupied the power center of the industry when sheet music was the primary vehicle for disseminating popular music; 2. Record companies, which ascended to power as recorded music achieved dominance; and 3. Transnational entertainment corporations, which promote music as an ever- expanding series of ‘‘revenue streams’’—record sales, advertising revenue, movie tie-ins, streaming audio on the Internet—no longer tied to a particular sound carrier. (Garofalo 319)

In the third and current phase, Garofalo argues, music releases have developed into components of larger media franchises, used for cross-promotion and branding across corporate divisions. Garofalo’s final phase finds historical support in the mergers of Vivendi-Universal, AOL-Time Warner, and Sony-BMG. With the Sony- BMG merger completed, the record industry’s market structure is now formally oligopolistic, with fewer than five firms and more than two firms sharing a market (Doyle). As Table 1 illustrates, before the Sony-BMG merger in 2004, the market was formally competitive, with five major players sharing more than 70% of the market. Each of the major labels owns music publishing, recording, marketing, and distribution businesses under a network of subsidiaries. A culturally and historically significant independent music industry also flourishes worldwide; in Europe, the Impala group in Europe lobbies the EC and trade groups on behalf of the indies. Indie music constitutes about 23% of total music sales globally, but only about 14% of US music sales. The rest of the total commercial market for recordings is served by the Big Four.

Table 1 Total Market Share for Music Recordings (%) Downloaded by [DePaul University] at 15:03 07 January 2012 Global US 1999 2002 1999 2002 Universal 21.8 25.9 28.1 28.9 Sony Music 19.0 14.1 19.5 15.6 EMI (Unaffiliated) 12.9 12.0 11.4 8.0 Warner Music (Unaffiliated) 11.9 11.9 12.8 15.9 BMG 11.9 11.1 15.2 15.0 All others 22.5 25.0 13.0 16.0 Totals 100 100 100 99.4

Sources: Goldsmith et al. A25; Goldsmith, ‘‘As Music Sector’s’’ A1; Ordonez A8 Popular Music and Society 493 The growing market concentration in the music industry predisposes the Big Four to collusion, although the legal apparatuses in the US and Europe that have been charged with detecting collusion have been inconsistent in their assessments in this regard. The MAP (minimum advertised price) dispute and investigations into price fixing and advertising limits are contemporary examples of ‘‘inter- dependent behavior’’ (Thompson 1) and ‘‘collective dominance’’ (European Commission). The Warner Music spin-off from Time Warner introduced a countervailing dynamic to the fully integrated industry structure that does not align with Garofalo’s history. This divestiture created an affiliated-unaffiliated oligopoly market structure for recorded music. The affiliated members, Sony-BMG and UMG, are integrated into media conglomerates, and compete with stand-alone music companies EMI and Warner, which do not have entertainment conglomerates as parent companies. The presence of two unaffiliated majors among the Big Four suggests that, barring new mergers, Garofalo’s history of the sector may require updating in time. Table 2 presents the levels of product diversification exhibited by four of the Big Five, prior to the Vivendi-Universal and Sony-BMG mergers. Thorn EMI’s spin-off of EMI Group in 1996 de-diversified Thorn’s holdings, and created a focused music-only company which now competes independently with the other major labels. This event initiated the contemporary decoupling of music from integrated media conglomerates. EMI and Warner Music are the ‘‘little giants’’ among the Big Four oligopolists. The Warner Music spin-off belies the importance AOL-Time Warner had initially placed on integrating all Warner catalog content with new AOL distribution channels. Promoted by its executives as a foolproof strategy for combining, on the media convergence model, a rich catalog of media content with cable broadcast TV and Internet distribution channels, the results of AOL-Time Warner’s 2000 merger disappointed, beginning with the very first financial quarter; by mid-2002 its stock price had declined by 70% since the merger, and the company experienced turmoil in top management. Time Warner (so renamed by dropping ‘‘AOL’’ in 2003) settled securities fraud charges with the US Justice Department in 2004 for $210 million, in a case involving payments from Bertelsmann (Media Watch). In a cost-cutting move, Downloaded by [DePaul University] at 15:03 07 January 2012 Time Warner sold Warner Music to an investment group led by Edgar Bronfman Jr.

Table 2 Conglomerates’ Content Revenues by Type, 2001 (%)

Music Film Publishing Sony 32 31 – Time Warner 11 21 13 Universal 29 16 14 Bertelsmann 19 5 28

Source: Chan-Olmstead and Chang 222 494 P. Burkart in 2003. Failed merger attempts between EMI and BMG, between Warner and BMG, and between EMI and Warner between 2000 and 2003 left both EMI and Warner still unaffiliated by 2005. The consequences of a looser integration between the music industry and integrated media conglomerates may be difficult to detect. The interdependence of the affiliated and unaffiliated firms is not likely to be disrupted, because the oligopoly players remain the same, and because the unaffiliated firms do not weaken the bottleneck controls on distribution shared by the cartel. Rather than staying in-house for musical content for a media franchise, Time Warner will have to go to the market for A&R, promotion, and distribution. The market choices for these services include Warner Music along with the other majors. After Sony-BMG and Universal Music Group, Warner Music and EMI are third and fourth largest of the Big Four, respectively. Warner Music’s sales growth decline of 25% in 2004—far more precipitous than Universal Music Group’s 5% decline during the same period—reflects poorly on the prospects for continued independence. EMI’s nearly ten years’ experience as a vertically integrated, stand- alone music company provides it with a mesh of partnerships among unaffiliated technology, media, and marketing firms. The failed merger attempt suggests that, while there may be strong financial incentives for Warner and EMI to combine organizations, the merger would produce a result that is still decoupled from the highly integrated media conglomerates.

Competition in Markets for Digital Distribution of Music Online music service providers provide a domain for investigating and evaluating the effects of oligopoly on online music choices and pricing. The ranks of online music stores are growing, but with less ownership and control directly by the major labels. The Internet emerged as a distribution platform for the Big Five after the victory over Napster, but the early growth in legal online music distribution occurred during a period of intense uncertainty about the viability of the music industry as a legitimate business. Their business model shaken by Napster, their product quality Downloaded by [DePaul University] at 15:03 07 January 2012 softening, and their sales slumping, the Big Five ventured slowly and cautiously into digital music distribution—streaming and ‘‘burns.’’ The majors launched a duopoly, MusicNet and eMusic, soon joined by Rhapsody, MusicMatch, iTunes, and Napster2. MusicNet, eMusic, and Napster2 all had equity participation by the major labels until 2004, when majors divested from Napster2 and eMusic. The loosening of direct ownership and control of the music stores by the Big Five through divestitures leaves the bulk of music distribution through the Internet to independent operators, even as it concentrates copyright controls and ‘‘network power’’ with the majors. The online music stores owe their success to music catalog cross-licensing arrangements between the Big Four. However, these sharing arrangements do not Popular Music and Society 495 extend outside the music cartel, and in the US there is no public provision for compulsory licensing of Big Four catalogs to would-be start-ups and other new entrants to the online music distribution market. The migration of the distribution business from goods-based to services-based introduces the possibility of an additional anti-competitive dynamic—rent-seeking behavior among music labels offering access to music through a telecommunications-based service. The Big Four’s bottleneck access to the majority of the world’s commercial music catalogs also imposes scarcity by managing online access using digital rights management (Burkart and McCourt), and by forever lobbying for stronger international property rights (IPR) controls than they enjoy already under the Digital Millennium Copyright Act (DMCA). A highly publicized litigation campaign against file-sharing networks and their users has had mixed results in an attempt to convert the suspiciousness of the customer base into a fear of litigation or a newfound respect for the authority of the music business. Above and beyond the industry’s established status as an abuser of its tremendous market power, the music cartel is also a rent-seeker, because its exclusive controls over access to databases of digitized culture persist at the pleasure of the state. State action and state inaction both serve to illustrate how the music industry has won the legal right to play the role of cultural landlord. The US Congress’s failure to pass compulsory licensing legislation for music comports with its high levels of cooperation with lobbying interests on behalf of the entertainment and pharmaceu- tical industries, both of which have opposed compulsory licensing and other intellectual property rights reforms. In the judiciary, antitrust concerns with the music services emerged upon their roll-out. A 2001 US Department of Justice (DoJ) investigation into collusive behaviors between MusicNet and PressPlay focused on the interaction of the music service providers’ (MSPs’) bottleneck controls on music licenses and control of royalty distribution (Pruitt). The DoJ wanted to discover if the licensing practices of the online music stores’ parent companies were denying competitors access to their recordings. The US decided against taking action against the start-ups, partly because of low consumer demand and partly because (in the words of the deciding judge) ‘‘several different entities now offer, or have announced plans to offer, a broad Downloaded by [DePaul University] at 15:03 07 January 2012 selection of major label content that can be downloaded on an a la carte basis and transferred to portable devices or burned to CDs’’ (Pate 2). The ‘‘ailing industry’’ rationale, as well as the majors’ divestiture from MSPs, was invoked when the DoJ dropped its investigation of collusion between MusicNet and PressPlay (Pruitt; Wigfield B4). Ownership concentration triggered judicial scrutiny, but, in the end, the agency’s ruling was in line with a ‘‘general principle’’ that ‘‘the Agencies do not presume that intellectual property creates market power in the antitrust context’’ (DoJ and FTC). The Sony-BMG merger passed muster with both European and US regulators in 2004, and afforded an opportunity for the European Commission to decline to investigate online music distribution due to ‘‘the absence of serious competition problems’’ (European Commission). 496 P. Burkart Adoption of the Celestial Jukebox The majors stand to benefit from revenue growth from online music distribution. Despite an initially slow take-up by consumers of music services, revenue growth from iTunes, MusicNet, Rhapsody, and similar online music stores represents a rapidly expanding market share. Digital media downloads grew from 0% to 2% of total US sales between 2002 and 2004, and are projected to expand to 16% by 2007. Global figures are less dramatic, but significant: from 0% in 2002 to a projected 7% of total global music sales by 2007 (‘‘Metrics’’; ‘‘Reports Predict’’; ‘‘RIAA Cites’’; ‘‘Entertainment Revenue’’; ‘‘UMG Choice’’). Expensive per-song pricing for licensing by online music service providers delayed the roll-out of the first MSPs, eMusic and MusicNet, and the cost still remains high, given the 79 to 99 cent price spread among the contemporary commercial services, including WalMart and iTunes. A continuing price squeeze on margins for digital music distribution threatens the online stores. ‘‘Analysts…estimate that 60 to 65 cents of every 99-cent single goes to the record label. An additional three to eight cents is forwarded to the song’s publisher’’ (Hellweg). Speculation is rife that WalMart and iTunes use the online music services as loss leaders, and to promote more profitable sales. The cost savings to the majors of Internet distribution over traditional distribution is difficult to calculate. The financial accounting methods for services (such as subscriptions) differ from those for businesses that trade in goods, even intangible ones like music files; moreover, the consolidated financial statements of the parent companies of the music service providers did not break out financials for online music divisions. However, it is relatively safe to assume that the majors have vetted these new distribution channels for music as legal, profitable, and structurally safe alternatives to traditional retail distribution. Except for one remaining original online venture (MusicNet, owned by Real Networks, Warner Music, BMG, and EMI), the major labels have outsourced digital music distribution. MusicNet no longer serves retail customers, but acts as a clearing house for other online stores, such as Virgin Digital (‘‘MusicNet Dances’’). The beginning three MSPs—MusicNet, eMusic, and Pressplay—were cooperative arrangements between the Big Five conducted before the Sony-BMG merger. After

Downloaded by [DePaul University] at 15:03 07 January 2012 divestitures by Sony Music and Universal Music Group from Pressplay/Napster and Universal from eMusic, MusicNet became the lone affiliated MSP. MusicNet faces the former MSPs along with the online music clearing houses, such as iTunes and the Microsoft music store, which perform the same distribution function for the major labels, but which also operate independently of the majors and share no ownership linkages back to the majors. In markets for digital music distribution, therefore, a dynamic similar to the affiliated-unaffiliated oligopoly has emerged, suggesting a further loosening between layers of ownership and control of music distribution by media conglomerates. Although the majors may not operate the telecommunications bottlenecks to online music access directly, preferring instead to outsource the task, the majors Popular Music and Society 497 nevertheless control the supply and terms of licensable content to the music service providers. MusicNet’s market position as a wholesale clearing-house service operated by three of the Big Four gives that firm the power to raise the access fees to 47% of the global market for commercial music, for any new or existing music service provider, or deny catalog access altogether. Of the constellation of music service providers comprising the Celestial Jukebox, only MusicNet enjoys the advantage of a media conglomerate affiliation, with Sony-BMG serving as the linkage to a conglomerate parent company. MusicNet’s affiliation to the RealNetworks standards (for media creation, servers, players, codecs, and digital rights management) provides a technology partnership independent of Microsoft, which may offer inherent technology benefits and find favor in global markets such as the EU.

The Music Industry’s New Network Power Although her research on electronic networking stresses the democratic potentials of information and communication technologies, Saskia Sassen writes of varieties of ‘‘network power’’ that can recreate hierarchical social relationships within the architectures of cyberspace, and can also transform existing power relationships. The power that digital networks exert in society derives from the ‘‘speed, simultaneity, and interconnectivity’’ that they provide social agents in communication (Sassen 54). Sassen argues that the Internet’s instrumental uses by private, for-profit corporations create a new political economy of e-commerce that features a power asymmetry between networked citizen-consumers and corporations. Before 1991, when online commercial activity was legalized, the Internet’s studied and deliberate design had rendered it a non-commercial, decentralized, public, non- hierarchical information-sharing platform that dispersed network power. Its openness of access and data sharing coexisted with an anti-commercialism that governed cyberspace. Sassen makes a civil society identification with the main characteristics of the original Internet, power dispersal and network openness. Deregulation and privatization of the Internet’s infrastructure and policy-making prepared a new commercial sector, e-business, for commodification, and legitimated Downloaded by [DePaul University] at 15:03 07 January 2012 the corporate use of the Internet for private utility. Over the course of the dot-com boom-and-bust cycle, global capitalism has tested the basic business models for e-commerce, including data services (‘‘business-to-business’’ or ‘‘B2B’’), retail (‘‘business-to-consumer’’ or ‘‘B2C’’), and auctions (‘‘consumer-to-consumer’’ or ‘‘C2C’’). Experimentally and with much creative destruction, start-up ventures retooled the Internet to facilitate ‘‘global alliances among firms and massive concentrations of capital and corporate power’’ (Sassen 53). Network power reinforces power hierarchies; for example, the adoption of the Internet by institutions of international finance ‘‘produces a vast concentration of capital and of profits and the capacity to mobilize this capital around the globe, often instantaneously’’ (Sassen 55). 498 P. Burkart Other industries besides finance that were previously non-technological or anti- technological—and, especially, the recording industry—suddenly and meaningfully adapted their business models to the use of the Internet after the mid-1990s. The technology practice of file sharing on the Internet, which had enjoyed social and legal status until the record industry’s discovery of e-commerce, has been banned as a consequence of the exertion of network power by the major labels. The Celestial Jukebox model for the new media business promotes corporate adaptations of network power, to the detriment of civil society and non-commercial social life. Network power can help the Big Four compensate for the potentially destabilizing effects of looser integration with the larger complex of culture industries. Network power can mobilize resources—digital assets, business intelligence, capital, work products—in a common digital domain that is now shared by music and print publishers, video and film producers, broadcasters, multi-channel TV programmers, portal operators, advertisers, and so on. The instant connectivity of databases and work spaces permits a flexible and adaptable web of business relationships managed online.

Conclusion: Extending Industry Controls outside Ownership This paper has argued that, in the process of the music industry’s decoupling from the integrated media conglomerates, the Big Four will have to rely on maintaining cultural rents by restricting access to online music distribution. The new oligopoly in the music business continues to exert anti-competitiveness throughout its traditional distribution bottlenecks. The affiliated-unaffiliated division of the Big Four in traditional markets for music marketing and distribution may be transitory, but suggests a loosening of integration of the music business with the global media conglomerates through ownership. The transition to the Celestial Jukebox and online music distribution may also disclose Big Four ‘‘parallelisms,’’ ‘‘interdependent behaviors,’’ and other indications of collusive behavior in online markets. In the meantime, the Big Four determine online music stores’ catalog costs and many other terms and conditions of catalog access. Although their shared interests in maintaining the legitimacy of their global dominance in media markets trump in-group divisions, Downloaded by [DePaul University] at 15:03 07 January 2012 the affiliated-unaffiliated groups among the cartel may come to utilize network power in distinct ways to vie for competitive advantages. The special case of MusicNet aligns the market power of affiliated Big Four catalog owners in a coruscation of network power. The consequences of these developments mean that cultural renters (consumers or ‘‘fans’’) will add another utility bill from a music service provider or clearing house to their monthly budget, and record labels will continue ‘‘to extract modest amounts of money from vast numbers of people’’ (Lovering 41) in a rent-seeking activity approved by the state. 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