Written 9/1/04 by Todd B. Beals at www.creative-media-services.com, which is a privately held company providing unique and innovative solutions for the protection, management and distribution of digital content


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The Recording Industry Association of America has officially launched its RIAA Digital Award Program as an expansion of its traditional Gold and Platinum program, which has historically been based on recorded music units SHIPPED, not on actual units SOLD. This article compares two new digital music sales award programs in the industry based on actual units sold, which is a much more accurate measure of consumer preferences. Both programs are the natural evolution of an exciting new online sales channel that is quickly gaining traction and being adopted all over the globe.

According to Clive Davis, CEO of BMG North America, “even though U.S. music sales are up +9 percent so far this year, retailers are struggling to hold their ground in a market where digital sales are growing.” Also according to recent reports by SoundScan, there were 54 million legal downloads in the first half of 2004, compared to 19 million for the last half of 2003. With such an explosive market growth rate, individual legitimate song sales are well on their way to cross the 100 million threshold by the year’s end. This rapid growth could be related to the fact that many universities like Penn State and legitimate music services like the new Napster are increasingly teaming up to offer high-quality, legal online music options to students across the country. Also, more and more record labels are now licensing their entire back catalogues for online usage as copy protection techniques continue to improve.

Today’s technology makes tracking online music sales easier than ever and there is clearly a new vehicle needed to recognize and award artists who are successfully selling online music. But, there are many industry experts who think that the RIAA is going about it the wrong way by electing itself to tally total online music sales and since its members are the only ones to directly benefit from the press.

"RIAA’s Digital Download Certification Awards are an extension of a monopoly model that doesn't work," said Marc Freedman, founder and CEO of RazorPop, developer of TrustyFiles P2P file sharing software. "The group continues to act as if they are the music industry. Clearly they aren't. There's millions of songs distributed on the file sharing networks every day. More are sold over P2P, direct over the Internet, and alternative channels than RIAA's certified channels. With these new download awards, the RIAA slights not just the music fans, but they now also slight independent artists. As a result, instead of embracing the digital world, RIAA condemns itself to increasing irrelevance."

Organizations like Nielsen’s SoundScan and SoundExchange were created specifically to track music sales and help buffer the potential conflict of interest that can occur when companies in effect, judge themselves. Of course even with external accountability, it’s still quite possible to be swayed under the muscle of the RIAA. Perhaps the RIAA’s new jurisdiction is just another ploy to attract more attention to the specific artists they want to push and will have no relevance in the industry’s long run, as many feel the cartel of the major labels will be extinct soon, if not already permanently dismantled. In fact, the RIAA’s new Digital Download Certification Program is actually copying an original invention and business model process created in 1998 and therefore is not the first organization to come up with the idea.

As an expansion of its Gold and Platinum awards, the RIAA Digital Awards will recognize artists with “legitimate and certified” legal download sales beginning at 100,000 units. (This amount is understandably less than today’s 500,000 requirement to be certified as Gold because many CD singles contain more than one song as opposed to a single song download.) However, it is surprising to many that the RIAA itself will calculate the sales of music downloaded from the various legal download sites (i.e. Apple's iTunes Music Store, AOL Music, Napster and Sony Connect) instead of conducting an independent sales audit of each title by an unbiased and respected accounting firm (like the process for a regular Gold Record certification.) Also, an RIAA spokesman said, “at present the program will not include full album downloads, which are, as yet, too negligible to measure.”

Many industry insiders agree that the global music industry needs a reputable organization to certify awards for successful internet sales, but question whether the RIAA is the right one to do it, especially if they are going to exclude the independent artists/labels, which make up over a quarter of the entire market.

Today, there are several legitimate organizations like the Distributed Computing Industry Association (DCIA) with numerous member companies such as Secure Media Licensing (WEEDSHARE) and Altnet legally selling single song downloads which rightfully deserve to be counted. In fact, that’s just the tip of the iceberg when you consider all of the other legal avenues to buy music online worldwide, such as digital kiosks, cellular music stores like AT&T Wireless and eMusic.

According to the RIAA’s website, “certified sales of 100,000 single songs would earn a Gold award, while 200,000 downloaded singles would garner a Platinum award. Multi-platinum awards would start at 400,000 and increase in increments of 200,000 thereafter.” Since the traditional RIAA certification program for Cd’s, cassettes and vinyl is open to member and non-member companies, its new digital award criterion was a major change in its policy. According to the RIAA, “only downloads from a legitimate online music service with licensed content from the record companies will be recognized in the new award program.”

The music industry’s lagging sales have been coupled with a resistance to supply the demand for consumer’s voracious appetites and burning desires for a complete online catalogue. It comes as a complete surprise that the RIAA has elected itself to decide what is “legitimate” since many experts are publicly stating that the RIAA’s member labels are not the gatekeepers of musical success anymore.
As a result of the RIAA’s careful wording, the new digital awards will only apply to digital music from the online music sites supplied and supported by the Big Four record labels. That exclusionary policy decision begs the question, what about the independent artists and labels and what determines a “legitimate” service?

The global music industry totals $40 billion annually, and the U.S. recording industry accounts for fully one-third of that world market. The independent segment of the music industry comprises about 30% of all recorded music sales. So, with today’s technological ability to accurately track realtime sales via computers, why the exclusion of independent acts who are grossing roughly $4 billion in the future disbursement of these new digital awards? Is it possible that the major labels are afraid to publicly acknowledge who else beyond their control is also selling well over the internet?
From a business standpoint, it’s understandable to want to only promote successful sales stories from within the organization, but to ensure fairness and credibility, the RIAA’s new digital download awards program should be open to all online music sales that can be verified.

Today’s consumers want freedom of choice in the music they buy and listen to. They want one universal file format. But most of all they want good music. Based on the RIAA’s exclusionary policy change, one could argue that it seems that the RIAA and its member labels (who many feel are run by out-of-touch aging executives) are really not interested in recognizing successful artists gaining traction via legal downloads. Most casual observers would assume that this new digital award category recognizes any global artist for his/her successful online sales. But those more familiar with online music sales are asking why the RIAA is not including real-life legal sales from independent websites, stores and P2P networks? For example, it’s a little known fact that the incredibly successful band Heart actually outsold the legitimate iTunes the first week of their latest album release on the p2p networks, but those illegitimate sales aren’t currently being recognized by the RIAA.

However, in addition to the RIAA, there is another organization certifying digital download awards which doesn’t exclude anyone. According to Digital Electronic Music Organization’s (DEMO) founder and CEO Andre Gray, “one of our missions is to promulgate a globally accepted standard for Secured Electronic Music Sales and to actively promote music for independent artists.” Unlike the RIAA’s new awards program, DEMO provides online music sales certifications on a global scale and is not exclusionary. Gray is the recipient of numerous industry awards for inventing online music sales certifications over 6 years ago and DEMO was the very first company to recognize artists and vendors who achieve a certain sales plateau “caused” by the Internet. (In this context, the word “caused” means: downloaded, mail order fulfillment, click through advertisement, a la carte, non-a la carte, subscriptions, affiliate programs, digital kiosks, ringtones, mobile phones, PDAs, educational institutions, legitimate P2P music sales, and any other future enabling technologies, etc.)

DEMO’s website is currently experiencing 50,000 unique visitors per month, averaging 2,000 people per day and is ranked #1 in its category by ranking.com. Gray said “our primary business model is to hand out certifications on a global scale for music sold that was caused by the internet. There is nothing illegal or political by what we’re doing and in fact we were the very first to do what we do.”

DEMO granted the first Titanium + Certification Award to the Apple iTunes Music Store in July of 2004, which was enthusiastically received in California. The Award was presented to Apple to commemorate the monumental achievement of 100,000,000 digital downloads and for ushering in the legitimate online secured electronic music sales (SEMS™) era. Gray stated that “Apple is a leader in its field and has been a forerunner in a new era of music sales and the company has helped to legalize digital music on the internet.” Hip-hop artist Chuck D from Public Enemy was also recently selected by DEMO to be a recipient of the Pioneer Award and presented it to him on July 30, 2004 in New York City.

Gray admits that conducting independent audits to determine who is eligible for awards is quite difficult because many companies are not willing to share their data. “They’ll give you a round figure but not necessarily break it down into specific items like genre or how many sales per hour, per day, or per week.” The general figures most companies are willing to give are per month or per artist once sales hit a certain level. Fortunately for the public, there are forward-thinking companies out there willing to be open about statistics which will only benefit everyone in the long run.
One such company is CD Baby. Their global sales totals are updated daily on their website and many experts hope to see that trend continue with their new legal CD Baby Digital Distribution Program and with other similar companies following suit. Gray would love to see the day when every musician and every online store and every online label is willing to share the analytics with those who are in the business of doing research for digital media. He thinks that whoever comes up with a business model that can connect and track these things globally as an industry standard, like Bloomberg does in the financial markets, will stand to make billions of dollars because just like the stock market, they’ll be offering access to streaming real time data.

Unlike the RIAA awards program which only tabulates sales of the 4 major labels only, DEMO conducts an independent audit of each label submission (regardless of size or origin) and its accompanying records to quantifiably verify the secured electronic music sales (SEMS™) accuracy of any and all claims. According to Gray, “since the Internet has turned the world into a digital global village that has no geographical constraints, the sales certification criteria for each continent will be the same, regardless of the sales breakdown attributed to certain countries, regions, or hemispheres.”

Many experts agree that the music industry has been permanently altered, beginning with the emergence last year of Apple’s iTunes Music Store and that the music sales playing field has been leveled to include participants of any size who are now able to step up to the plate via the internet. As a result of the Apple store’s simple design and unobtrusive Digital Rights Management (DRM) called Fairplay, Gray also believes that “music is now the hottest selling item on the internet, which wasn’t the case just a few years ago. Part of the problem is that the music industry wants to keep spoon feeding the music public ‘corporate pop’ and their mentality is ‘let’s make the most money off of each artist as long as we can and then let’s just drop them and go for the next big thing.’ In other words, they’re just throwing things at the wall and seeing what sticks without any real artist development.”

The music industry’s primary concern is not so much about legal P2P or filesharing, but the real problem is that the distribution system is no longer centralized. It has been de-centralized and perhaps permanently splintered. Therefore, whoever controls the distribution exclusively will control the industry and in distribution, whoever gets their hands on the money first - keeps most of it. Gray doesn’t particularly like the direction the music industry is heading in because, “the industry as a whole wants to control the internet. It wants to control digital rights management, it wants to tell technologists what to do, it wants to control pricing and it wants to control digital radio and digital streaming.”

The music industry will never be able to revert back to the way it once was, especially since most musicians are now somewhat technically savvy. If they already aren’t doing so, many of them will learn how to record, mix, encode and upload their music to the internet for direct sales to millions of consumers. Once that starts happening with more and more artists, we don’t really need record labels anymore.
Gray is also very concerned with how the numbers of this industry really work, since traditional recording contracts have been so disproportionate for so long (i.e. label friendly at the artist’s expense.) “The truth of the matter is, many labels are still charging artists a $.15 packaging fee for digital files that get downloaded that have no packaging.” As another reality check, the band Extreme (remember them?) sold a few million CD’s in the early 1990’s generating roughly $15 million in revenues for their label, but the band never received a penny from royalties because they still owed the label for expenses, etc. So when the internet came along, it was the most liberating thing for musicians to be able to escape this type of unfair business practice and escape the clutches of onerous recording contracts.

Gray would like to see musicians move past the mentality that they “need” a recording contract to be successful. He professes that the real money to be made is in merchandising and touring with corporate sponsorships. However, as the labels slowly disappear, musicians will still need to find savvy representation through personal managers and publicists because the need for marketing will still be there. As the industry begrudgingly is forced to evolve, tracking FM radio will no longer be necessary because blanket licenses will compensate artists. Previously accepted, but highly inaccurate statistical sampling of playlists in geographical regions which are used to determine “equitable” royalty payments will also become irrelevant. Computers can and will soon historically track which song and which artist was streamed or downloaded all over the world. Gray adds, “it is unfortunate that many music industry organizations and trade group’s statistical analysis and reports are known only to their inner sanctum.”
Gray predicts that the next 12 months will be a great time of turmoil concerning digital broadcasting rights, DRM, reverse technology and there will be a number of precedent setting lawsuits. P2P once it becomes legitimate will replace a la carte downloads. Gray also predicts that in the next 18-24 months the industry will see a major shakeout with numerous online music stores closing up shop because there very little thought process has been put into these weak business models.

For example, the 70% average commission the record labels receive per transaction is just too high. “There’s no reason that labels should be telling online music companies how much to charge for downloads. Obviously the labels are entitled to a fixed percentage of every digital sale, but they don’t automatically get a vote in setting the selling price of the commodity. It’s no secret that the music industry has quite a long history of being very heavy handed, intimidating and quite pushy to get their way. Record companies license their music to technologists and then tell the technologists what to charge. The current business models out there for online music stores cannot and will not show a profit with these exorbitant kinds of commissions and licensing fees.”

Someday soon, the music industry will have hundreds of thousands of independent musicians collectively outselling the major labels. Even several major label artists (i.e. Madonna, Prince, Heart) are starting to release and distribute their new music on the internet, independent of record label control. “It might take some time, but when musicians become wise enough, they will finally realize that they have been liberated. Because of the internet, they don’t need a middleman anymore to collect their royalties and with the simplicity of selling digital media, they can easily sell directly to their fans and make more profits.” Perhaps the only middle man needed in the near future will be a reputable DRM vendor so that all transactions can be properly recorded and that the revenues can go directly to a secure account (i.e. PayPal) for the artist.

Gray also believes that in the very near future, “certain trade organizations will seek to have laws passed in the U.S. that will make it cost prohibitive for independent musicians to sell their music online direct without moving to an intermediary, which will prevent them from making a lot of money. After those laws are passed, these same trade organizations will then put pressure on the European Union and other organizations around the world to implement similar laws enacted in America, so what we will have is blanket global laws….And for those countries and organizations who are not willing to play ball – they will run into problems like trade tariffs and these monopolistic organizations will put pressure on those countries or individuals not willing to cooperate.”

In Gray’s opinion, “the music industry seems to have a greater interest in commerce on the internet more so than Dell computers has an interest in selling computers on the internet. The industry as a whole seems as if it wants to be the ‘gatekeeper.’ By trying to be biased gatekeepers, the major label constituents of the RIAA will be unfairly deciding who should be given certification awards for music sold through the web.”

As the online music industry matures, it’s not too late for the RIAA to rethink its position and make a change to its exclusionary policy for digital download award certifications. Most songwriters ultimately want their songs to be enjoyed and appreciated by the largest audience possible. The efficiency of viral internet distribution makes this exciting possibility a reality in ways never before thought possible and it’s only fair that everyone around the world in cyberspace should be treated equal.


Written 9/1/04 by Todd B. Beals at www.creative-media-services.com, which is a privately held company providing unique and innovative solutions for the protection, management and distribution of digital content.





AUTHOR BIO:

Todd Beals began his run in the music business as a professional musician, arranger, and songwriter in the late 1980’s, integrating computer software and hardware to write music. Performing on trumpet and keyboards, he entering the recording industry in 1991, and worked his way up the ranks through stints as an audio assistant, engineer, producer, publisher and now digital media producer, consultant and analyst. He holds a graduate degree from the University of Central Florida’s School of Business with an MBA specializing in Information Systems Management. He received his BA in Music from the world renowned University of North Florida’s American Music Program and also holds an AA in Sound Recording and Engineering from the prestigious FullSail Center for The Recording Arts. Throughout his career, he has always focused on artist right’s issues and on building synergistic relationships. Drawing on his real world education and experience, he has consistently stayed at the forefront of the entertainment, media and technology businesses working for companies like Disney, ABC Television and Boeing. He’s been nominated and chosen the winner of several industry awards, in addition to working on an Emmy award winning television series and has recorded several Grammy Award artists. Passionate about teaching and helping others, he now focuses on the encoding and monetization of digital media and enjoys sharing his knowledge and experiences at workshops, clinics and seminars. Todd is also an Orlando-based freelance writer specializing in the evolution of DRM technology and audio/video distribution via the internet. Most recently his eNewsletter was endorsed by The Berkman Center for Internet and Society at Harvard Law School and his articles have been featured online with The Music Dish Network.