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October 18, 2002

The Economics of Elvis


Perhaps you noticed the following in the October 12 issue of the Economist:

The war over control of the digital copying of music and movies has many fronts, in Congress and the marketplace as well as the courts. It has pitted Hollywood against the technology firms of Silicon Valley and consumer advocates such as Mr. Lessig. The record industry succeeded in killing Napster this year, but file-sharing by consumers is growing; on-line swapping of films and TV shows, as well as music, is catching on. America’s frightened media behemoths are lobbying hard for new laws and new technology to stop copying and to control what customers do with their products.

While the fight over the control of digital music rages, a look at history suggests that many of struggles of today echo the battles fought in the music industry over the past century. (My account is largely based on the work of Russell and David Sanjek in "American Popular Music Business in the 20th Century" and Peter Hall's "Cities in Civilization.")

In the late 19th century, practitioners of the music “content” industry clustered in New York’s Tin Pan Alley. Songwriters primarily made money by selling their product to music publishers, who in turn sold sheet music to consumers who wanted to play the music at home. However, when in 1891 the first major revision of copyright law in one hundred years was passed, the music publishers “saw the light.” In 1895 the Music Publishers Association (MPA) of the United States was formed, and within two years had successfully lobbied Congress for additional copyright legislation, giving them the power to license (i.e., demand royalties for) public performance of their work—a right which they had never previously possessed.

The music publishers were fed up with the money (i.e., payola) that vaudeville was sucking out of them. (Musical vaudeville performances were the chief advertising medium for new songs.) Armed with their new intellectual property right, the music publishers decided to turn vaudeville from a cost center into a revenue source. In 1913 they formed ASCAP, the American Society of Composers and Publishers, and announced that ASCAP would prevent the playing of all copyrighted music at any public function unless a royalty was paid.

ASCAP chose from the beginning to pool the funds it received (that is, they weren’t divided according to the exactly calculated earnings of each song). ASCAP’s distributions deliberately favored the larger music publishers and the most popular songwriters. ASCAP’s bargaining power came from the perception that it controlled the most popular, most “mainstream” music, and it had to keep the major players on board to maintain its clout.

A big source of royalties that started to roll in (an unintended benefit of the 1897 copyright law) came from the recorded music industry. These grew healthily until 1921. However, when this total began shrinking the next year, ASCAP easily identified the culprit: free music from the nation’s infant radio industry. And ASCAP knew what to do about it. In 1922, at a conference in ASCAP’s New York office, the radio station owners were bluntly informed that ASCAP controlled copyrights for 90 percent of all music and proposed a minimum fee of five dollars a day for its use from radio stations. The infant radio industry, although not yet remotely profitable, coughed up.

The Original Internet

Meanwhile, in a whole different universe from Tin Pan Alley and ASCAP, the twenties brought the commercialization of two forms of rural Southern music: hillbilly (white) and race (black). Columbia began to issue blues and other race music on its OKeh label, which was surprisingly profitable. The cost structure of a purely phonographic record-based business model in the 1920s allowed a manufacturer to break even on sales of only 5,000 records, most were profitable, selling 7-8,000 copies. This low-overhead, low-risk model was also applied to hillbilly music (later known as “country & western”) in 1923. It was even a bigger success there: by the end of the decade, hillbilly music was accounting for as much as a quarter of all popular music sales nationwide. OKeh evolved a royalty and payment system which became standard for both hillbilly and race music. It would record only artists singing music they had written, thus avoiding music publishers altogether. All rights were assigned to OKeh for a twenty-five dollar fee per song; the composer-artist received tiny royalties

With this contract, the music “content” business had developed a second business model: a low volume approach that aimed at new or fringe market consumers. Songwriters were segmented between this and the “mainstream” model; Tin Pan Alley had no interest in allowing interlopers from hillbilly or race records who didn’t use their catalogues of music to join their club.

Kept Out of ASCAP: Jelly Roll Morton and Gene Autry

Of course, the advent of the Great Depression in 1929 had a terrible impact on the music business; along with much else, it crushed the niche race and hillbilly record markets, as their audiences no longer had money to spend on personal entertainment. ASCAP members, also hurting financially, turned a covetous eye at the growing revenues of broadcasters (who were using more recorded music.) In 1932, ASCAP negotiated an agreement with the radio industry that licensed broadcasters in exchange for 5% of advertising time sales. As radio grew through the 1930s, ASCAP revenues almost quintupled.

Hollywood’s interest in music-driven movies during the sound era led Warners and MGM to purchasing music-publishing businesses. The movie studios were now the dominant influence in music publishing and in ASCAP. Between 1936 and 1942 film songs topped the charts--because they were "pushed" the hardest. This linkage between movies and the music business reinforced the tendency of ASCAP music to be written to the taste of the largest popular markets, with the inevitable consequence of making it even more artistically conservative.

Moreover because of the studios’ heavy investments in music publishing, they pushed aggressively for higher licensing fees. In March of 1940 ASCAP announced that its contract for 1941 would double radio's licensing rates. Anticipating such a move, radio interests had already created an alternative music licensing organization, which was named Broadcast Music Inc (“BMI”). Most radio stations signed up with BMI thereby effectively blacking out ASCAP songs from the radio for much of 1941. BMI, desperate to develop a catalogue of non-ASCAP material, adopted an open-door policy, welcoming songwriters and publishers from the hillbilly and race music ghettos. In the midst of suits and counter suits, a licensing deal favorable to the networks was finally signed with ASCAP. But BMI continued to enlarge its catalogue of music, effectively providing a home for hillbilly and race music songwriters who had been kept outside the Tin Pan Alley industry for decades.

ASCAP had inadvertently opened the door to changes that would eventually overwhelm its cultural dominance of American music. Independent record label activity revived with the improved economy in the 1940s; many of these labels focused on underserved race music market. An example was Chess Records in Chicago, formed to record the new music—electrified, up-tempo blues— of black Chicago. But unlike the race/hillbilly music business model that had collapsed with the Depression, this approach could now use radio airplay to advertise its songs. In 1941 a white-owned station in Arkansas hired the black singer, Sonny Boy Williamson, to play blues music on a show advertising King Biscuit Flour—a product aimed at the black market. In 1948, WDIA Memphis created its first program aimed deliberately at the black community, which was so successful that within two years the station turned its entire airtime over to black-oriented programming. Imitators of WDIA spread across the country. At least four New York radio stations, mainly featuring R & B, were targeted at this market, and 260 more throughout the country.

By 1951, independent record labels specializing in rhythm and blues each had its own publishing company, formed to avoid paying song royalties. No one except best-selling artists received a royalty—musicians were paid by the song. R&B distributors put important local radio deejays on their payrolls, provided them with boxes of free records, or paid a royalty on each disk sold within the listening area. In short, the economic model of the 1920s was back, albeit with an aggressive use of radio airplay as free advertising that was not possible in the ‘20s.

And then a momentous shift began to occur: R&B, nurtured in the black niche market by low-overhead independent record labels and black-oriented radio, started to cross over to the mass (white) audience. This trend stupefied the Tin Pan Alley songwriters and music publishers, who continued to dominate conservative mass mediums like the network television. In November 1953, a group of 33 composers calling themselves "The Songwriters of America" rather laughably initiated a $150 million anti-trust action against BMI, NBC, CBS, ABC, RCA Victor Records, Columbia Records, and 27 individuals, claiming a conspiracy of broadcasters and manufacturers was keeping "good music" from being recorded and from being played on the air. But a funny thing happened to the music business.

Enemy of 'good music'

A Memphis teenager named Elvis Presley issued his first record on a tiny label, Sun, and started to make waves. When he transferred at the end of 1955 to RCA Victor and had access to its national distribution and marketing muscle, his sales took off like a rocket. A year later he had sold over 10 million records. His first LP racked up 300,000 sales. He was responsible for two-thirds of all RCA Victor sales. But Presley and his fellow ‘revolutionaries’ (white and black) had accomplished something even more unexpected: when the overall numbers for 1956 were tallied, sales had increased by nearly 50% over 1955’s numbers. As it turns out, the collapse of the ASCAP model, which had always sold itself as the way to maximize revenue in a mass-market, had opened the floodgates for the sales of far more records. A lesson which it would seem that today’s music business, very much run on the ASCAP top-down, control of intellectual property model, might ponder.



posted by Friedrich at October 18, 2002


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