THE LEFSETZ LETTER: The World Is Flat

Was Napster a partner or an enemy?

CD sales were down 32% from the comparable week last year. Was this foreseeable?

The world started to change in 1995, when AOL took hold. Think back to that time. People who had previously been afraid of computers, who saw no need for them, were trooping down to big box office stores to buy machines, just to be able to PLAY! Oh, they might not have needed a spreadsheet, didn't even want to employ word processing software, but they wanted to talk to their buddies, after all, communication is human nature.

And then came broadband. Which infiltrated colleges/universities just before the turn of the millennium. File-trading started at schools of higher education because students had the pipe.


Bob Lefsetz, Santa Monica-based industry legend, is the author of the e-mail newsletter, "The Lefsetz Letter". Famous for being beholden to no one, and speaking the truth, Lefsetz addresses the issues that are at the core of the music business: downloading, copy protection, pricing and the music itself.

His intense brilliance captivates readers from Steven Tyler to Rick Nielsen to Bryan Adams to Quincy Jones to music business honchos like Michael Rapino, Randy Phillips, Don Ienner, Cliff Burnstein, Irving Azoff and Tom Freston.

Never boring, always entertaining, Mr. Lefsetz's insights are fueled by his stint as an entertainment business attorney, majordomo of Sanctuary Music's American division and consultancies to major labels.

Bob has been a weekly contributor to CelebrityAccess and Encore since 2001, and we plan many more years of partnership with him. While we here at CelebrityAccess and Encore do not necessarily agree with all of Bob's opinions, we are proud to help share them with you.

But, not long thereafter, the public wanted and got the pipe too. To the point where it is said 80% of Americans now surf the Web at high speed. And this high speed begat YouTube, for without it the service doesn't work.

Were these hidden phenomena? Was someone researching in a lab, out of the sight of the general public? No. But nobody in the music business cared to pay attention, they were riding fat on profits of expensive CDs of vapid acts sold via MTV.

And it was these lousy acts with only one good track per album that provided the true tipping point. People could now steal the music, and they felt justified in doing so.

People shouldn't steal (technically copyright infringement in this case). And music shouldn't be free. But has the landscape changed so much that a return to the old paradigm is impossible?

Suddenly, not only your next door neighbor is a friend, but everybody you go to high school with, personages in foreign countries oceans away. Look at MySpace, or Facebook. Do you think they could be held back? Do you think you can tell high school seniors that they shouldn't be able to learn about their new college classmates online? Do you think that will fly? Of course not.

These are the conditions within which we find ourselves. Does it make any difference that DVDs have region codes if Europe is right next to the United States online? And, if you build region codes into files, will they sustain? Or will a group of hackers, akin to those who built Linux and other open source software, break any protection scheme immediately? And, even if the law in one country prohibits this activity, is that the case in the rest of the world?

I was sitting in the Sherman Oaks library reading "Time" when I came across a quote from Thomas Friedman's "The World Is Flat". I'm not that big a fan. I tend to skip over Tom's editorials in the "New York Times". But this paragraph was so prescient, so insightful, that I checked out his book, and was riveted.

Oh, it's not like "The Secret". It's not small and thin, easily digestible. It verges on being a tome. But within its covers is a complete explanation of how today's world works. Not only in business, but politically, both nationally and internationally.

Napster was the best thing that ever happened to the music industry. It was not an enemy, but a savior. Sure, it had to be determined that as initially structured it was a haven of copyright infringement, but after that was established, it had to be monetized. Instead it was killed. Along with every other site/software that wanted to distribute music via the Web.

As stated previously, people had the computers. And ultimately the broadband. And now even the storage device, the iPod. This convergence of conditions created a demand for cheap, plentiful music files. But did the labels see this need and fill it? No, they tried to ignore it. Pissed off that the game had been changed without their involvement, the major label cartel behaved like terrorists. Blowing up the lives of their customers via lawsuits. Rather than admit that its customer base had moved on, and try to service that base, the labels felt humiliated, and pounced. To no real effect. Just like the 9/11 bombers didn't stop commerce, but were only a nuisance.

That's what Friedman's prescription for the Arab world is. A discussion of ideas, a building of infrastructure, a bringing of these countries into the modern world. But he believes their religious policies are holding these nations back. Just like the flawed beliefs of the major labels are holding them back.

In the new flat world, everybody's a partner, it's a horizontal structure as opposed to a vertical one. The labels should be in partnership with Silicon Valley. They certainly should be negotiating the best price, as Dell does with its suppliers, but they should also be pressing for GREATER efficiencies, and further abilities. There should be collaboration between the labels and the techies. Instead, Steve Jobs is the enemy. I ask you, what if there was no iTunes Store? Do you foresee any other digital sales? No, Steve did the labels a favor. Albeit a minor one, since it doesn't speak to a changed universe, wherein people can acquire, and DESIRE, a vast quantity of music at a low price.

Napster reached a fever pitch, both in users and press, seven years ago. I ask you, what progress has been made since? In distributing music utilizing new technologies in a way people want to consume it. Sure, Apple is delivering ownership, but with DRM and onerous prices. Who's selling unprotected tracks in quantity at low prices? That's what the public wants, that's what they're acquiring, for free now. And how many people scared away from P2P would sign on and trade, become music fans, if the RIAA ENCOURAGED this behavior as opposed to lambasting it?

You can't believe conventional wisdom, the songwriters testifying in Congress, all those in the food chain who decry innovation. The examples in Friedman's book are mind-boggling. Republicans writing more regulations to keep jobs in the U.S. so they can win elections. Going AGAINST their party charter, and COSTING their constituents more money. Yes, there's been more b.s. slung in the music battle than truth, but the truth wins in the end, people have not stopped trading files and CD sales have gone through the floor.

It's a changed world. And the world will keep changing. If the old players don't get up to speed it's not the worst problem, new entrepreneurs will find a way to create a new business. But the old players are a drag on the system, they're lumbering giants inhibiting legitimate progress.

The days of dictation are done. The labels and their MTV and terrestrial radio cohorts are no longer all-powerful. If a record sucks, people won't buy it. They know that it sucks from Web word of mouth, from hearing the tunes online, DOWNLOADING THEM BEFORE THEY'RE FOR SALE! The solution is not to try to inhibit the exchange of information, but to deliver higher quality product that the audience raves about as opposed to decries. Oh, it's tougher. Then again, it's tougher being IBM in a changed world.

We're all in it together now. A lot of the acts have learned this. Rather than play stars, they post on their Websites, they interact with fans as equals. Only when the label sees itself as equal to the consumer, only when the label sees the coder as a friend who can add to the value chain, will progress be made. The customer with tech tools has created a new, more efficient supply chain. That cuts out fat and costs. They're doing the music business a favor. They're not the enemy, but their savior. Then again, the pressure to constantly innovate, to ride the wave of change, is tough for old players inured to old systems.

Sure, at the end of the day, it's about hits, great songs. But really, have their been that many of these recently? And has the definition of a hit changed? Is it still something you can cut a snippet out of that will play well in terrestrial radio call-out research, or is it something that a listener will download off the Web and play over and over again like "Stairway To Heaven" or "Bohemian Rhapsody" that may NEVER get mainstream airplay?

Building stars is a changed business. What a star is is different. The system has changed the art. But looking at the usual suspects purveying the old mantras giving lip service to new technology, you'd think otherwise.

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