• The Problem: RIAA wants to invade your privacy, while performers complain that music companies don't pay them the royalties to which they are entitled.
• The Cure: business models that will allow performers and customers to bypass the music companies entirely.
• Direct sale of music by download: similar to RebelArtist, Gnutella, Napster business model (customers pay by song)
• Custom-production of music CDs to order
• Music Sites that have adopted similar business models: where to buy music online and bypass RIAA and retail markups. "New Ways to Pay 99 Cents for Music," Wall Street Journal, 9 October 2003, page D1 shows these business models are becoming reality

Congressman Wants to Let Entertainment Industry Get Into Your Computer

(26 July 2002, Associated Press, on Foxnews.com) WASHINGTON — A proposal by a California congressman would give the entertainment industry broad new powers to try to stop people from downloading pirated music and movies off the Internet.

Rep. Howard L. Berman, D-Calif., formally proposed legislation that would give the industry unprecedented new authority to secretly hack into consumers' computers or knock them off-line entirely if they are caught downloading copyrighted material.

...The head of the Recording Industry Association of America, Hilary Rosen, called the Berman bill an "innovative approach to combating the serious problem of Internet piracy."

"Rockers vs. Bean Counters," by Jennifer Ordonez. Wall Street Journal, 24 September 2002, B1

"Musicians say music companies unfairly cut into their royalties, which are a percentage of their album sales, by improperly accounting for some expenses."
"Musicians say there is no incentive for record companies to report royalties correctly the first time because there are no penalties for underreporting."

The article points out that the Recording Industriy Association of America (RIAA) is "the record companies' lobbying arm."

The queen did not like it much. Not that she felt any personal interest in the matter, but she thought it disrespectful to Sir Breuse Sance Pite. However, I assured her that if he found he couldn't stand it I would fix him so that he could.

Mark Twain, A Connecticut Yankee in King Arthur's Court

One of the following three alternative systems for distributing recorded music could easily become a very profitable business. Since the existing recording and entertainment industry has seen fit to threaten the privacy of individual Americans, I am providing the following information as a public service. If someone wants to catch this ball and run with it, I would appreciate credit for the original idea (and my letter to the editor in the Wall Street Journal in early 2002 will back me up on this), but otherwise this information may be used freely.

Meanwhile, remember that used music CDs (and videocassettes) can be bought and sold on E-bay without infringing on anyone's copyright.

Supply chain legend:
Industrious ant: a value-adding activity, one for which the customer should be willing to pay
Useless parasite: a non-value-adding activity that provides no value to the customer. Note that each one that is eliminated means more value for the customer and more profit for each "industrious ant" in the supply chain.
Some non-value-adding activities, like shipping, are necessary.
Elimination of a non-value-adding entity from the supply chain
Note that, in each of the three alternative business models,

1. The recording industry no longer acts as a gatekeeper to determine whose music gets published. This will benefit less-well-known artists.
• Furthermore, the musicians will make more money.
2. The customer picks the songs or soundtracks that he/she wants. The ability to customize the order will result in more sales.

Existing system (recording and entertainment industry) Musicians create a recording, includes a fair royalty or profit for the music artists "Burning" and packaging the CD (or cassette tape), including a fair profit for this value-adding activity only Recording industry overhead and profit Distributor's overhead and profits Retailer's overhead (store rent), inventory carrying costs, and profits

E-Commerce Model, direct download (e.g. RebelArtist) Musicians create a recording E-commerce hosting ("electronic storefront") Recording industry overhead and profit Distributor's overhead and profits Retailer's overhead (store rent), inventory carrying costs, and profits

E-Commerce Model, produce and ship on demand* (iUniverse.com model) Musicians create a recording "Burning" and packaging the CD (or cassette tape) Shipping Recording industry overhead and profit Distributor's overhead and profits Retailer's overhead (store rent), inventory carrying costs, and profits

Retail outlet produce-on-demand model* Musicians create a recording "Burning" and packaging the CD (or cassette tape) Since the "factory" is located on the retailer's premises, the retailer's overhead (at least the part assignable to this activity) can be considered necessary to the value-adding activity. Recording industry overhead and profit Distributor's overhead and profits Retailer's inventory carrying costs

Existing E-commerce Model: RebelArtist.com

RebelArtist.com allows artists to sell clip art and photographs through a Web site. The Web site displays a thumbnail sketch and a larger but watermarked preview image. To download the actual image, you must pay the price that the artist sets for the image. The artist receives a very large share of the sale price.

At present, the recording industry can act as a gatekeeper to musicians. The recording industry decides whose music gets published and whose doesn't. The recording industry (and the distribution chain) takes a huge share of the music CD's bloated sale price. Why should people have to pay $17 or $18 for a music CD that costs perhaps a couple of dollars (including labor and capital) to "burn?" They shouldn't, but the solution has nothing to do with piracy. It has everything to do with lean enterprise: the principle that, to use Henry Ford's terms, must either produce or get out. If it doesn't add value it's waste.

The RebelArtist business model can be extended to music very easily. The musicians put their soundtracks online, and a Web site allows customers to listen to short excerpts (or a full track of noticibly lower quality than the actual music). Customers could then buy individual soundtracks, download them, and "burn" them onto CDs for further listening. They could also download a CD label image, and a jacket image for insertion into a jewel case.

Note the additional advantage: the customer could buy the soundtracks that he/she wanted, instead of having to take an entire CD that might include material that he/she doesn't want. The ability to customize the order would doubtlessly increase sales.

This does not defeat the piracy problem but, at perhaps half a dollar per song, the incentive to commit piracy would be much lower. Suppose that a typical music CD contains ten songs of five minutes each. It would cost $5.00 to download all of them. The artists might get $3.00 and the E-commerce site $2.00. I don't know how much the artists get in the way of royalties from the recording industry, but $3.00 on a $15.00 (retail) CD would be 20 percent.

Next we have the Ford economic driving model. Elimination of waste-- in this case, the recording companies, distributors, and retailers-- from the supply chain lowers the price (as shown above) and increases the sales volume. The artists not only make at least as much money from each sale as they did under the old model, they sell far more material. This is exactly what Ford did with the Model T. The artists can go through an E-commerce intermediary as described above, or even sell soundtracks off their own Web sites.

There are still plenty of people who can't or don't want to "burn" their own CDs. Note that modem connections are not convenient for downloading the equivalent of a music CD, and these two business models deal with this consideration.

1. Order by Internet (iUniverse.com model, prints books when they're ordered instead of doing long print runs)
• The customer orders the music (specifying, as above, the songs or soundtracks). The manufacturer "burns" a CD, labels it, and packages it in a jewel case with appropriate labeling. Example: 50 cents per song plus $3.00 to make and package the CD. The final price is half what you'd pay in a retail store.
2. In-store produce-on-demand
• Here's one for BestBuy and Circuit City. You can't stock every possible selection a customer might want-- but you could set up a make-to-order CD burner as shown above. Set up a few kiosks in which customers can listen to selections (as described above) and enter orders. This also lets you clear a lot of inventory out of your store; you don't have to carry the inventory, and you can use the floor space for something else.

• Musicmactch Downloads
• iTunes Music Store
• BuyMusic.com
• Napster (legitimate)
• MusicNet
• Rhapsody