Fallen Entrepreneur: “It’s Actually Impossible to Run a Fully Legal Music Service

It’s quite a statement, but one backed by reality.

Because underneath the ‘legitimate’ iTunes success story, there lie billions of stolen MP3s and otherwise unpaid collections that powered the success of the iPod – not to mention the growth of iCloud.  Even Spotify, arguably the most promising legitimate service in years, looks more like a subprime mortgage variant than a defensible business model.  In fact, there doesn’t seem to be one completely legitimate, major-licensed model that is secure, reliably profitable, and consistently innovative.

And that’s one of the biggest points of a hard-hitting, rigorous research report just released by Rutgers School of Law professor Michael Carrier.  The 63-page, post-Napster investigation involves interviews with former CEOs of some of industry’s most epic failures, including Imeemmp3.comSeeqpodAudio Galaxy, and Scour, as well as conveniently-reformed RIAA ex-CEO Hilary Rosen.  In total, 31 high-ranking music and media entrepreneurs agreed to participate in the study.

 Michael A. Carrier: Copyright and Innovation: The Untold Story (full report)

This pops out immediately: A major problem lies in cloudy copyright law, which produces an overhang of legal threats and actionable gray areas.  Everything is subject to interpretation, and litigation.

One innovator likened the uncertainty to ‘a protection racket’ or ‘the way that I imagine politics work in corrupt countries’ where ‘everything is OK until it’s not OK.’  In those settings, ‘you do what you want until one day you can’t and they come and your tail light’s broken.’  That situation, in which ‘there isn’t a strong rule of law,’ is similar to ‘the current copyright system’ in which it’s ‘actually impossible to run a fully legal music service.’

This report isn’t for the weak-stomached, and some brutish and harrowing details quickly surface.  The post-Napster decade has been an exercise in utter brutality for digital innovators, thanks to extremely aggressive litigation, attacks on personal finances, psychological intimidation, and sometimes direct violence at the hands of the major labels.  These entrepreneurs sound more like cowering Mafia victims than failure-embracing innovators, and Carrier’s report offers ‘witness protection’ by anonymizing all of the comments.  The fear isn’t just palpable, it’s flatly admitted by entrepreneurs who’ve had their doors beaten down by process servers, been hung outside of windows, and faced the spector of personal bankruptcy and community college for their kids.

But the bigger issue is what this ‘lost decade of innovation’ means for the broader industry and music.  Because the stunning reality – in 2002 and 2012 alike – is that launching a clean, legitimate, and profitable digital music business that involves licensed content may simply be impossible.  Entrepreneurs described a parasitic game played by the majors, one that involves bleeding investor funding, while keeping the patient alive until its usefulness has been exhausted.  Or, as one entrepreneur frames it…

The labels ‘don’t want you to become unfundable’ but treat you ‘like a good parasite’ by ‘bleed[ing] you slowly.’

But there’s another problem: general brain-drain, across the entire music space.  Sources noted that major label executives are often fired and replaced, but the attorneys have largely remained – and still run the show.  The impact has been to chase away smart and seasoned investors, not to mention highly-creative, experienced and truly innovative entrepreneurs.

Lawsuits against technology companies ‘ma[d]e it harder to raise capital’ since VCs were less likely to provide funding ‘if you’re just going to have to pay attorneys, or even worse, lose.’  As a result, ‘It’s harder to find experienced entrepreneurs as opposed to young and naïve people who are willing to start a company in this space…’

23 Responses

  1. bollocks

    Didn’t even read this. Can’t be arsed with negative stories like that. I run a music start up and we are BBBOOOOOOOOMING!

  2. REMatwork

    There is a lot of “stinking thinking” when it comes to copyright law.

    But the bad thinking dissolves if you focus on stopping counterfeits rather than stopping every act of copying.

    Because copies are made a million times a day with cache copies, ephemeral copies, and, yes, backup copies made by the lawful owner … but the point is that none of those copies are counterfeits. They’re not meant to substitute for the original.

    So what we call “copyright” is really a Right to Interdict* Counterfeits.

    Bottom line, if a service or app is not helping a person play counterfeit music, it should be legal. Everything else is legal buffoonery based on an almost stream-of-consciousness extrapolation on what the word “copy” might mean.

    Copyright Law is a government plan to promote science and learning. It was never meant to tie people up in knots. There is surely a special rung in Hell for people who have gotten rich interpreting copyright law that way.

    This article rings true in my experience as an entertainment lawyer and a tech lawyer. And is maybe Step Two on the road to a music industry 12-step program that was started with step one, Emily White’s NPR blogpost. (-:

    http://bit.ly/DigitalContentExchangeFightsCounterfeits

    * stop, punish, seek damages from, block from use, etc.

  3. Jimmy

    Wow, what a ridiculous article. It even mentions Spotify then fails to mention how it’s not legal. Throw Rdio in there as well. And before you reply with something about business models, music industry execs not getting enough $ per play, etc… that has nothing to do with the service being legal.

    The title of the article claims “It’s Actually Impossible to Run a Fully Legal Music Service…” Bull****. Spotify and Rdio are both legal, end of story. Stop writing sensationalistic headlines with nothing to back them up.

    • lifer

      I think the point is that even Spotify and Rdio, as glittering beacons of hope in the midst of a chaotic transformation, are not yet the proud owners of a profitable business model. This article introduces us to a study by a Rutger’s professor. The title of this article is a quote of something someone else said. This is hardly end of the story.

      • Jimmy

        I’m sure we could argue for hours about the business models of both of those services, but that has nothing to do with the legality of either of them. Regardless of your personal feelings, the services themselves are completely legal and the article wrongly tries to suggest otherwise.

    • REMatwork

      It is legal because you say it’s legal? I think you missed the point of the article. Music services exist in just enough of a gray area that any rights holder with the will, and a bank load of attorneys fees, can make your life miserable and scare enough investors away to ruin you.

      It’s not hard to think of ways in which Spotify could be thought of as illegal.

      1) Just Google “stream-ripping spotify” and you get 137,000 results. So Spotify has 137,000 reasons to suspect that its customers are making permanent copies of their songs. Is that so far away from the contributory infringement of Napster, LimeWire, etc. that no lawyer could launch a lawsuit on that? Napster actually had less knowledge/control of their content than does Spotify.

      2) Do artist or mechanical licensing contracts really give record labels the right to license an artist’s or publishers’s songs to a service like that? Even contracts that date back to the 60s and 70s?? Especially when the amount of money that flows through to artists is a pittance from Spotify. Is this not arguably a violation of the record labels’ contractual or special duties to its artists whose careers are in its hands?

      • REMatwork

        No, it’s legal because it doesn’t break any laws. Neither you nor the article have provided any proof that Rdio or Spotify are illegal services.

        Your 1st example provides weak proof that others have found ways to do something illegal with Spotify, but that doesn’t make the service itself illegal. If it did then cars would be illegal because you can use one to commit a crime. A pencil would be illegal because you could stab someone with it. I could go on and on with examples of how ridiculous that argument is.

        Your 2nd example questions the contract between labels and artists/publishers. Again, that has nothing to do with Rdio or Spotify being legal. If a label violated a contract then the label broke the law, not the music service.

        Both of your examples make it pretty clear that you’re just another music industry person who is clinging to the past rather than accepting that the old business model doesn’t work any more and it’s time to find a new solution. Maybe Rdio/Spotify is that solution or maybe they’re just the first step in finding it, but the music industry has got to stop fighting the inevitable.

    • paul

      I think the title and article have been misinterpreted, which means I could have probably done a better job conveying the concept. I was aiming to convey the thought that creating a legitimate, profitable, and growing startup within the music – specifically involving major label licenses – is impossible. That was directly expressed by one executive, and implied by many others and indeed, the broader paper.

      So, it’s not that Spotify is illegal (though some proper debate on that has been stirred below); it’s that Spotify is nowhere near being profitable, is extremely leveraged, and predicated on recurring and extremely expensive rights licenses and ownership grants involving major labels. And, extreme leverage in anticipation of a gigantic liquidity event, with payouts to top beneficiaries like Daniel Ek.

      Spotify, a legal, ‘legitimate’ service, with extremely speculative plans for profitability, and huge vulnerabilities related to content. This is a company that waited to jump into markets – unlike others like Grooveshark – and therefore avoided litigation but paid handsomely through licenses. And, will have to pay handsomely again.

      Is this a game anyone can win? That is the question this report raises.

      /paul

      • wallow-T

        Michael Robertson made the same point some number of years ago (two? three? how time flies when we are having fun), that there was no longer any hope of a successful retail-to-consumer business involving major-label content. All this paper does is add lots of supporting anecdotal evidence, and bring an academic imprimatur.

        I speculate that the labels have been paralyzed by two thoughts. One, that “Content is King.” Actually, it was Distribution that was King, and in the LP/CD world the majors excelled at it. The second is the obsession that MTV built a successful business out of music, and the labels would be damned if anyone else would ever again make a profit out of THEIR music. (The point that the labels made a ton of money in record/CD sales due to the free marketing provided by MTV appears to have gone over the label’s pointy-haired boss heads.)

  4. LeeM

    the Pirates are to blame. Sure the labels are bullish and litigation has always been a revenue stream but the reality is labels are in financial turmoil as a result of ubiquitous free music.

  5. Seeqpod?!

    Asking a Seeqpod executive about the problems of copyright and the music industry is like asking a troubled but talented basketball player about his experiences in professional sports. Gee, think you’re going to get a biased answer? Why not ask a player who actually played a few productive seasons in the NBA, played by the rules (nobody likes rules, but some people play by them and excel) and didn’t get kicked out for failing a bunch of drug tests? In other words, Michael Jordan and Roy Tarpley will tell you very different things about the NBA.

  6. Google

    You should have pointed out the paper was funded in part by Google.

  7. wallow-T

    Tyler Crowley says much the same thing, with less anecdote and more metaphor, in his review of how tech developers and tech venture capitalists now view the music business.

    After reviewing the pleasant profits to be made on “Apple Island,” “Facebook Island” and “Microsoft Island,” the essay turns to “Music Biz Island”

    “…which is where the natives start firing cannons as you approach, and if not sunk at sea, one must negotiate with the chiefs for 9 months before given permission to dock. Those who do go ashore are slowly eaten alive by the native cannibals. As a result, all the tugboats and lighthouses (investors, advisors) warn to stay far away from Music Biz Island, as nobody has ever gotten off alive.”

    http://steepdecline.posterous.com/islands-of-opportunity

  8. david c lowery.

    Fallen Entrepreneur: “It’s Actually Impossible To Run A Legal Human Trafficking Service…”

    ah now it makes sense. It must be a google funded parody.

  9. Visitor

    Paul,

    You are such a muckraker. Would it kill you to add an ounce of nuance to one of your articles? Perhaps it would interfere with your ability to create such fetching headlines, but it just might boost your credibility if you would pause for a moment and consider one, just one counterargument. Then again, that would be a big responsibility because you’d be entering the realm of a thing called ‘journalism.’

  10. Faza (TCM)

    So let me get this straight: the impossibility isn’t in operating a legal music service, but one that’s also profitable and growing? And this is due to the labels wanting too much money for the product that will form the service’s main value proposition?

    Perhaps the would-be sart up founders should… what was that phrase?… Oh, yes: “get a better business model”.

    For illustration, please consider:

    THE SORRY TALE OF “FERRARI RENTALS”

    Picture, if you will, the following exchange between an would-be entrepreneur and a Ferrari sales representative.

    E: “Hi, I have an excellent business proposition for your company. I want to open a different kind of car rental service in Oshkosh, WI: one that provides only the best automobiles. Which is why I have come to you…”

    F: “Yes. How many cars would you like to purchase?”

    E: “No. You see, the way I imagine it will work is that your company provides the cars and we simply rent them out…”

    F: “I’ll have to run it by management, but I suppose it might be possible. I estmiate our fees would be in the region…”

    E: “Sorry to interrupt, but I was thinking more along the lines of us passing a percentage of revenues back to you. We’ll be generous: 70% – that’s practically taking food away from our kids!”

    F (bemused): “And how much revenue do you expect to have?”

    E: “We want to be competitive – you understand – so we don’t want to go any higher than Hertz. Now… renting a Kia for 24 hours from them would cost you around $139 – we want to be able to match that – so over the year I estimate…”

    And now for a pop quiz, boys and girls:

    1. Based on the following exchange, what is the most likely result of the negotiations:
    A. The entrepreneur gets the deal he wants,
    B. The entrepreneur gets a very different deal and starts complaining about how Ferrari is stifling business innovation and depriving hard-working residents of Oshkosh of their right to lugging their bottoms around in top-class sports cars for an affordable price,
    C. The entrepreneur is told, ever so politely, to piss off.

    2. (a) If the Ferrari 458 Spider starts at $257,000 – how many days will it take for “Ferrari Rentals” to make the same amount of money for Ferrari as they would receive from a sale?

    (b) If the average customer rents a car for a week during the course of a year, what is the minimum number of customers “Ferrari Rentals” will need to have in order to generate the sale-equivalent amount of revenue for Ferrari for a single car, over the period calculated for question 2(a)?

    (Note: rental price taken from Hertz website, Ferrari price found on the internet.)

    The only problem such “entrepreneurs” have is that the market’s borked – not by the businesses that depend on copyright, but those that disregard it.

  11. @joetaylorjr

    When has ANYTHING in music been *fully* legal?