The music industry's extortion scheme.

Arts, entertainment, and more.
April 25 2008 7:03 AM

The Music Industry's Extortion Scheme

The record labels want you to pay a tax on music. It's not as horrible as it sounds.

Illustration by Rob Donnelly. Click image to expand.

What would you do if a bully—let's call him "Joey Giggles"—kept snatching your ice-cream cone? OK, now what if Joey Giggles then told you, "If you pay me five bucks a month, I'll stop snatching your ice cream." Depending on how much you hate getting beaten up, and how much you love ice-cream cones, you might decide that caving in is the way to go. This is what's called a protection racket. It's also potentially the new model for how we'll buy and listen to music.

Let's back up for a second. Four companies (Universal Music Group, Warner Music Group, Sony BMG, and EMI) control a staggering 90 percent of all record sales in the United States, and they're hopping mad. CD sales are in free fall, and the recording industry's revenues have shrunk from $15 billion to $10 billion in less than a decade. Instead of blaming themselves for failing to embrace the Internet soon enough, Big Music has pointed the finger at piracy, shaking down scofflaw MP3 downloaders with capricious, multimillion-dollar lawsuits. This has not strengthened the record companies' position—at this point, they're losing money and everybody hates them.

Now Big Music is mulling the Joey Giggles approach. Warner Music Group is trying to rally the rest of the industry behind a plan to charge Internet service providers $5 per customer per month, an amount that would be added to your Internet bill. In exchange, music lovers would get all the online tunes they want, meaning that anyone who spends more than $60 a year on music will come out way ahead. Download whatever you want and pay nothing! No more DRM! Swap files to your heart's content—we promise, we won't sue you (or snatch your ice-cream cone)!

Michael Arrington of TechCrunch has condemned this idea as a "music tax" and "the music industry's extortion scheme." Though the proposal is not technically a tax—rather, it's a call for "voluntary blanket licensing agreements"—it will certainly feel like one. And instead of paying for roads, schools, and bombs, you would be helping to keep record executives in cigars and the finest silks. As Arrington argues, there is good reason to believe that this huge pot of money will turn the music industry into a lazy near-monopoly that lives off of fat royalty checks. Once the majors get this guaranteed revenue stream, won't they just spend all their time scheming to increase the fee from $5 per customer per month to $7.50? There's also the small matter that not all Internet users listen to or download popular music. If this plan somehow goes through, millions of moms and dads who pay for Net access so junior can browse Britannica Online will find that they are subsidizing the hedonistic lifestyles of America's most-tattooed singing sensations.

Despite all the downsides, something like the music tax simply has to happen. Most of us don't want to steal music. But it takes a saintly person (like me) to jump through hoops to pay for something you can get for free. I use eMusic and Amazon.com, which both offer DRM-free MP3 downloads. Yet cheapskates galore still have their Limewire and BitTorrent and whatever future file-sharing tools savvy Web guerrillas haven't even dreamed up yet.

That's why piracy can't be stopped. Meanwhile, artists aren't being compensated in a sensible way. Sure, some musicians will make a living by playing live shows and selling T-shirts. A massively popular band like Radiohead can give away its music and still make millions. But plenty of other artists will no longer be able to make a living in the music business as royalties dry up, which will leave our culture a little less vital and a little less fun. What we need is a reward system, one that could eliminate middlemen and encourage a massive upsurge in creativity.

Which leads us back to the music industry's extortion scheme. It's not clear that the major labels will line up behind Warner's big idea. Universal Music Group, the biggest of the big, has pushed for a subscription plan called Total Music that is similar in some respects, so they might be receptive. The one thing that all of the major labels agree on is that they have to put iTunes in its place. Apple's online store just surpassed Wal-Mart as America's No. 1 music retailer. The record industry fears that if iTunes further extends its dominance, it will start dictating terms to the major labels—calling for, among other things, lower prices. For the major labels, things like subscription plans and music taxes are enticing because they're opportunities to cut iTunes out of the loop: If you're coughing up $5 a month to Big Music, you'll never pay 99 cents for a song again.

Of course, Apple has its own plan for world domination. Last month, the Financial Times reported that Steve Jobs was pushing the major labels to make a deal that would let them peddle an unlimited music bundle. Apple reportedly wants to pay the majors $20 per iPod or iPhone to access all the songs in their catalogs. The majors want Apple to cough up closer to $80. In practice, this all-you-can-eat plan could mean a few different things. By paying an extra, say, $100 when you buy an iPod, you could have access to everything sold on iTunes. (Or, perhaps iPhone users could pay a subscription fee for the same deal.) While the details are still hazy, the upshot is that owning an Apple product would become even more appealing. The nice thing about this deal for the majors is that the labels earn less than $20 per iPod in download sales now, so anything above that would be gravy. The not-so-nice thing is that it would further entrench iTunes as a musical monolith. Are the major labels sure they want to become Steve Jobs' lackeys? Right now, iTunes controls more than one-fifth of all music sales in the United States. If Jobs gets his way on all-you-can-eat, that share will grow and grow until the labels will never be able to say no to him again. Cue maniacal cackling! The scrappy folks at eMusic have already cried foul, pointing out that the rumored deal smacks of a Microsoft-style antitrust violation. The major labels would be wise to take eMusic's lead.

All-you-can-eat iTunes works for Apple. Voluntary blanket licensing works for Big Music. The problem is that both of these grand plans cut out the little guy. Apple wants to ensure that the iPod will crush all other music-playing devices for 1,000 years by building an overwhelmingly dominant music retail platform. Big Music sells 90 percent of records; if they manage to squeeze money out of the ISPs, one suspects they'd be more than happy to screw the independent labels that make up the other 10 percent.

What plan will work best for music lovers and artists? Instead of a fake music tax, the best solution might be—sorry, libertarians—for the government to step in with a real music tax. In the book Promises To Keep: Technology, Law, and the Future of Entertainment, Harvard Law School professor William Fisher devised an ingenious reward system that levels the playing field for artists. At first glance, it looks a lot like the music biz extortion scheme. The feds would levy a small tax on all broadband subscribers. Musicians, signed and unsigned, would register their creations with the U.S. Copyright Office, who would then set up a massive Nielsen-style sample of music listeners to track the popularity of different songs. The more your song is played, the more you get paid. The revenue from the tax would be parceled out to the copyright holders.

The beauty of this approach is that it has the potential to cut out middlemen like Steve Jobs and the fat-cat record execs. My a cappella version of "Chocolate Rain" would have as much chance of making it as "Purple Rain," at least in theory. When the costs of discovering new music are zero and artists are paid on the basis of how often songs are played, listeners are more adventurous and bands with dedicated followers can make as much scratch as bands that record big hits. Bands get paid, music lovers can listen to their hearts' delight, and the record companies will slowly turn to dust. What's not to like?

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