U2 Manager Paul McGuinness

Music industry veteran calls on Chinese telcos to help curb piracy

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The Music Matters conference earlier this month in Hong Kong kicked off with a hard-hitting and wide-ranging keynote address, called "Time to embrace the future," by music industry veteran Paul McGuinness. He has been manager of U2 since the Irish rock band was founded.

Mr. McGuinness concedes that the music industry must accept the inevitable power and influence of digital media, but argued that telecom companies and internet service providers need to embrace change, too. That includes China, the world's largest mobile phone and internet market. Companies in those industries allow the illegal sale and sharing of music at the expense of artists and record labels, but should instead become legal partners to the legitimate music business.

Although he was greeted with applause, delegates blogging from the conference took the discussion online, giving Mr. McGuinness mixed reviews on sites like China Music Radar, where Archie Hamilton, managing director of Split Works, a Shanghai-based promotion company, called his speech "a prehistoric rant about the 'new' music model. He seemed to want internet service providers to levy charges on consumers, but in practice was encouraging the internet to be policed."

"I don’t want to be threatened by fat cats worth hundreds of millions of dollars [and] I don’t want to hear about the future from any[one] who has not spent more time surfing the internet than flying on a private jet," said another Music Matters speaker, Bob Lefsetz, author of "The Lefsetz Letter." But, added the music industry expert on his own blog, lefsetz.com, his "heart is certainly in the right place."

To find out what the controversy is all about, read this edited version of the keynote speech Mr. McGuinness delivered in Hong Kong:

I don’t get up on stage like this that often and I don’t usually live my life in the limelight, even though I manage people who do. It is a good rule of thumb that when it is the manager and not the artist getting the headlines, then something is out of kilter.

Well, there is certainly something out of kilter in the music business today.

Record companies are reinventing themselves for a much more complicated world. Their star-building function has taken a battering, but I can’t see the need for the record company ever going away. They bring to the mix unique and invaluable skills of A&R, marketing, financial management and career-building.

What is the challenge facing the future of our business? Let me start with great news. Music consumption is soaring. At the same time as more people are listening to and enjoying music than ever before, more people are making it, playing and recording it. Almost anyone with talent can now record, market and distribute their songs for next to nothing. It is fantastic how the digital world has democratized the relationship between artist and audience in this way.

More good news is that, although the recorded music business is far from thriving, it is helping to drive a much larger group of businesses which are. The International Federation of the Phonographic Industry (IFPI) did some interesting math. They worked out that if you combine the total economic activity of the music sector and the businesses that it drives you have a sector worth around $155 billion.

That’s nearly eight times the size of the recorded music business. And most of that business grew healthily last year. Live music was up 9%, music publishing up 5%, sales of portable devices up 16%, music revenues from public performance up 13%, musical instrument sales up 9%.

The recorded music business is itself, however, in a crisis. Growth of digital sales is not offsetting the decline of physical CDs. Sales of the blockbuster artists that have traditionally funded investment in large rosters have sunk dramatically. There has been real pain right across our business, thousands of livelihoods put at risk and jobs lost.

Amid this gloom, there are also great reasons to be optimistic. The digital music business today is vibrant and full of experimentation and innovation. Record companies are full of the people with the right expertise to face the opportunities and challenges of the revolution we are going through. In the past I always felt they were over-inclined to rely for staff on poorly paid enthusiasts rather than developing the kind of enterprise culture of Silicon Valley where nearly every employee is a shareholder.

The record business is redefining its role in relation to virtually everything and everyone--its consumers and its partners, the live industry, management companies and artists.

But record companies have to look at themselves too. Fairness, transparency, morality and efficiency have never been more precious qualities for them to prove than now. In a fast-declining market, we are being asked by the recorded music companies to accept that they will distribute fairly their new income streams from advertising or from subscription services bundled into telephone devices. The recorded music companies must earn the trust they are asking for from artists.

Record companies are repositioning themselves. The 360 degree deal is a popular concept, but it’s still fairly experimental and personally I dislike it. As Allen Grubman, the well-known New York attorney so eloquently said: “God forbid that one of these acts in a 360 deal has success. The next thing that will happen is the manager gets fired and the lawyer gets sued for malpractice.”

The biggest challenge of all though, without any doubt, is monetizing the future of recorded music at a time when money is being sucked out it by other parties. There is enormous interest in the idea of monetizing “access” to music and not just selling individual tracks and albums. What that will look like isn’t clear: maybe an iPod or a phone with all the music available through it? Maybe a beautiful, non-clunky, subscription service that is compatible with mass market portable players and bundled into a phone or ISP bill?

In a world where people are not paying for content, but where the money has to come from somewhere, ad-supported services have a potentially huge role to play. I have to confess I am not a huge fan of the concept. But the business model may work.

The recently-announced MySpace Music service will offer a mix of free streaming of songs and videos, supported by advertising, as well as paid-for downloads.

Some of the best brains in the business are working on all these services. But there is a sad, unalterable fact and it has been around for some time. The market is rigged against them. You cannot monetize a business in an environment awash with unauthorized free content. And this is a crisis that is not just affecting music and record companies. It is affecting the whole world of cultural and creative content.

The devaluation of music by the internet in recent years has been anything but inexorable. A “free music culture” is undoubtedly percolating upwards from the teenagers and college students and establishing the mindset for future generations of music consumers. But they are the symptom, not the cause. To find the cause, you just ask this: Where has all the money gone?

The answer is that it has gone to corporations--cable operators, internet service providers, device manufacturers, peer-to-peer software companies-- companies that have used music to drive vast revenues from broadband subscriptions and from advertising. They would argue they have been neutral bystanders to the spectacular devaluation of music and the consequent turmoil in the music business; I don’t believe that is true – they turned their heads the other way, watched their subscriptions grow, and profited handsomely.

Researchers estimated at the end of last year that up to 80% of ISP traffic is accounted for by P2P networks like BitTorrent and Limewire, and we know that the large majority of that traffic is unauthorized music and movies.

ISP revenues from growing broadband subscriptions have soared during exactly the same period that has seen recorded music sales collapse. From 2004 to 2007, broadband subscription sales rose from $60 billion to $113 billion, while the music market fell by about 20% in the same period.

Today, encouragingly, there is definitely a change in the air. First, the gold rush of broadband expansion, in most developed markets at least, is over. ISPs are looking at a future where their added value is going to come not just from pipes and cables but from tiered packages of commercial content.

Another big change is happening, as network capacity increases and technology allows the distribution of bigger and bigger files. Movies, broadcasting, music videos and live sports are all online now.

From being in a position where they simply couldn’t get enough unauthorized free content, ISPs suddenly have reason to feel dangerously deluged by it. In the U.K., they have even had the audacity to demand funding for investment in new capacity from the BBC to meet the increased demand from the iPlayer.

This is truly outrageous. It’s like helping a shoplifter carry stolen goods from someone else’s store and charging him and the store for the service. Life must be good as an ISP. When there is a deluge of illegal content over your networks, you have no responsibility for getting rid of it. When the pendulum swings the other way and your pipes cannot cope with the traffic, you ask the content creators (and the license fee payers in the case of the BBC) to help bail you out!

One way or another, ISPs and mobile operators are the business partners of the future for the recorded music business. But they are going to have to share the money in a way that reflects what music is doing for their business.

That’s true nowhere more than in China. China Mobile makes hundreds of millions of dollars each year from sales of ringtones and ringback tones, yet pays a miniscule fraction of that to performers, producers and composers. That to me is not a fair business partnership.
The real problem here, I believe, is a lack of willingness by ISPs to act. That is why legislation could well have to be the answer.

This issue is really all about recognizing the value of music and fairly rewarding those who create and produce it. Value of music is an issue for other partners too, not just ISPs. Music is driving the profits of radio broadcasters and is being used as never before in a host of third party businesses. Music is ubiquitous in modern life, in stores, airplanes, gyms, hair salons, everywhere. This is a big issue internationally today, and especially in China.

You would think that the existence of basic rights to ensure that the performers and producers get a share in these profits would be taken for granted. Certainly you would be right to expect that in any country which values its musical culture, nurtures its repertoire and values its international reputation.

Yet the absence of such rights in China is a missed chord. China’s commercial radio sector is worth hundreds of millions of dollars in advertising revenue. I think it is important for China’s music community and for its international reputation that that money is shared.

The same principle applies to China’s huge internet companies such as Baidu, Yahoo China and Sohu.. Baidu, listed on the New York Stock Exchange, reports ever larger profits each financial quarter. To the artists and record companies whose tens of thousands of copyrighted tracks are being distributed in order to help generate those revenues, it seems very wrong and very unfair.

The legal action record companies are involved in now against [Chinese portals] Baidu and Sohu is a sad necessity. I hope they will help shape a better landscape for music and other industries in China which depend on real respect of intellectual property rights. We have a long way to go: Yahoo China has a service that has already been ruled illegal by the Chinese court but refuses to respect the judgement. What kind of respect for the law is that?

This goes far wider than just the internet companies. I would like to think that the organizers of the Olympic Games, so protective of their 95-year old logo and of their brand, would know a thing or two about doing the right thing for the respect of intellectual property. They have certainly not hesitated to enforce their rights over their own brand, as they did against the French group Carrefour.

Yet when the record companies protested repeatedly to the Beijing Olympic Committee that Sohu, the official ISP of the Olympic Games, is running a massively copyright-abusing download service, they met with stony silence. I hope that will change. If music and the creative industries are to survive in the digital world, turning blind eyes to big-time copyright abuse is not acceptable. This is bad for the reputation of modern China where IP protection will become increasingly important for their own economy.

We need new business models, yes. We have to reach the consumer in a way the consumer wants. To a very large extent that is happening already. But we also need a fair partnership between the makers and creators of the content, and those who distribute it. That partnership is about fair rewards to creators, and it is also about using the ability that ISPs so plainly have to help protect content.

The real challenge for our industry is to monetize music and avoid going out of business. The task for the ISP industry is this: to pay for content fairly and ensure that there will still be content in the future. Building and expanding the internet only makes sense if there's going to be new content in the future. The ISPs, if they carry on the way they are, will have to explain to future generations why there’s nothing new to listen to but bad demos and nothing new to watch but reality TV shows.
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