August 21, 2000

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The Wilder Side:
Music Industry's Long, Strange Trip

Industries that try to fight market power shifts with lawyers are in trouble.

By Clinton Wilder

his month marks the five-year anniversary of the passing of that noted E-business visionary, Jerry Garcia of the Grateful Dead. How's that again? Counterculture icon, brilliant musician, cult figure for millions, sure. But business visionary? Has this columnist been partaking of a bit of the, uh, Jerry Garcia lifestyle?

Not at all. When the Grateful Dead's lead guitarist and spiritual guru shuffled off this mortal coil in August 1995, the band was one of the most financially successful groups of all time. It regularly grossed $50 million a year from concert tours and had three platinum and 12 gold albums.

A big reason for this financial success was a business decision that band members made a long time back--a decision to fly in the face of the music industry's conventional wisdom. That was to allow--in fact, to encourage--their fans to record their concerts and make tapes to keep, trade, and even sell. And the result? No copyright haggling, no royalty payments--and no lawsuits.

I'm not privy to the thought process behind that decision, but the members of the Grateful Dead defined a new business model in their industry. I'd lay pretty good odds that they did it without reading Tom Peters or Michael Hammer. They simply perceived that their revenue model, which depended much more heavily on concert tickets than album sales, was better served by allowing their customers to pirate their content.

And as anyone who ever traded a 1977 Passaic, N.J., concert tape for a 1980 Lewiston, Maine, cassette could tell you, the strategy worked brilliantly. Today, we'd call it a customer-acquisition strategy.

What does the Grateful Dead have to do with E-business? One word: Napster. The furor over the online music file-sharing service is the highest-profile battle so far between an established industry's traditional business model and the open technologies enabled by the Web.

Napster's foes--from the music industry's buttoned-down lawyers to longhaired Metallica drummer Lars Ulrich--won round one a month ago when federal judge Marilyn Hall Patel sided with the Recording Industry Association of America's lawsuit, ordering Napster to remove all links to copyrighted material, which would shut down the service. Napster won the right to keep operating while its appeal is heard--and, not surprisingly, its Web traffic has soared. Nothing spurs demand more effectively than the threat of cutting off supply.

There's a major power shift going on in the marketplace, and industries that try to stop it with lawyers and court rulings are in trouble. Despite the RIAA view, many artists--from the Smashing Pumpkins' Billy Corgan to Marianne Faithfull--support Napster, which is but one of many digital file-sharing services on the Net. As rapper Chuck D put it, "Stopping the process of file sharing is like trying to control the rain."

But there's more to it than that. Does the RIAA really grasp the significance of 20 million consumers choosing to download music with Napster? This isn't a small band of back-room bootleggers trying to make a buck at someone's expense. These are your customers. They're giving you the biggest free focus group in the history of marketing, and it's saying: We love your products, but we also want to redefine the supplier-customer relationship. We want to sample and obtain your products in new ways.

Most consumers accept that artists and record companies need to make money. But as the Grateful Dead showed us, there are different models for doing that. Finding the right one is called innovation. And I don't mean offering a choice of 50 songs for $2 per download, as some record labels' Web sites have done. I mean taking a long, hard look at how to serve the new wired customers of the Internet age.

In hailing Judge Patel's ruling, RIAA president Hilary Rosen said this about free downloads: "Consumer expectations should be realistic." But whose reality are we talking about? The reality of an industry that hasn't changed all that much as its medium moved from vinyl to cassette tape to CD, or a new reality in which a customer might rather listen to a digital file sent from a fellow fan in New Zealand than to her local radio station?

I'm pretty sure I know which one Jerry Garcia would choose.

Clinton Wilder is InformationWeek's editor at large, covering E-business. You can reach him at cwilder@cmp.com

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