Resnikoff’s Parting Shot: Why Major Labels Just Lost

The RIAA scored a quick victory on Thursday, and cooled future challenges in the process.

Predictably, Cary Sherman underscored the illegalities of file-sharing, and the penalties that violators face.  But that message has failed to resonate with music fans – young and old – no matter how resounding the ruling.

In fact, if the RIAA had lost this challenge, major labels would be better off.  Why?  In the face of a negative precedent, majors would be forced to craft more consumer-friendly approaches, accelerate their shift away from content protection, and adopt radically different access and pricing models.  And they would stop committing valuable financial and legal resources towards an incredibly unsuccessful product preservation strategy.

Of course, deeper changes are happening in this market, and file-sharing is only one symptom.  The underlying problem is that labels are simply having trouble selling recording assets – whether CDs, paid downloads, or even ringtones.  Part of the problem is piracy, but a much larger issue surrounds increased competition for entertainment dollars, antiquated pricing strategies, and an incredibly hostile stance towards consumers.

Sure, everyone is a critic, especially when it comes to major labels.  And to their credit, the big four are beefing new media departments and investing more heavily in digital initiatives.  But RIAA-driven lawsuits are dragging progress, and generating serious consumer problems in the process.  And labels are paying for this, despite the obvious and recurring problems.

If suing file-swappers curbed illegal sharing, propped CD sales, and directed traffic towards paid digital channels, then the strategy would make sense.  But the exact opposite is happening.  For starters, file-sharing volumes have been multiplying for years.  And morality trips have had little effect on music fans – in fact, many consumers are hostile towards major labels as a result.  Meanwhile, CD sales are dropping precipitously – more than 18 percent this year in the United States alone.

And paid channels are failing to patch the wound.  Instead, they are mostly missing the target by charging higher prices and restricting access and usage (most downloads are still DRM-protected).

Some analysts wonder whether a market for recorded music will exist in a future marketplace.  Certainly, a world of discrete, product-based recording purchases seems closer to obsolescence everyday.  The internet is incredibly friendly towards open acquisition – and incredibly unfriendly towards controlled content strategies.  The result is that music fans now have thousands of songs in their pockets, and most acquired these collections for free.

In that context, are any digital music sales strategies truly viable?  Can Rhapsody ever gain traction alongside a 160GB iPod classic?  Will OTA downloads ever compete against sideloaded content from a massive, PC-based collection of MP3s?  Music fans are already stuffed on a oversupply of ubiquitous content – do they now need to buy more?  Would you pay for a Big Mac after a gorging on a free buffet?

Most agree that if labels are to survive, it will only happen through massive transformation.  The Universal Music Group of 2012 – if there is such a thing – will not be drawing its bread-and-butter from CD sales.  Perhaps a successful transition is simply impossible, yet diversified revenue streams, mobile-based models, and broader licensing approaches offer hope.

But time is running out, and so are major label resources.  The sobering reality is that labels can only endure so many years of double-digit declines – simple mathematics dictates it.  And if labels are hoping to survive this massive market disruption, resources must flow out of money-losing, resource-draining strategies like individual infringement lawsuits.

Paul Resnikoff, Editor