The Apple Matters Interview: George Howard

I first met George Howard when I was working as a designer at Rykodisc records. Unfortunately that job only lasted a year. The label was acquired by Palm Pictures who consolidated many departments, including the art department. And we were all laid off. My year there was a fascinating experience and one of the many people I had the pleasure to meet was George Howard. Readers of Apple Matters can appreciate that, outside of the art department, he was the only person with a Powerbook. Like fellow Mac users, George and I would exchange Mac talk and, given the environment we were in, music talk.

George is first and foremost a musician. And he is also a seasoned music industry veteran. While I was with him at Rykodisc he was the president of Slow River Records, a label he founded while in graduate school. There, he signed artists like Sparklehorse, Charlie Chesterman, and Future Bible Heroes. During that period of time he also co-ventured with Rykodisc, working with artists like Josh Rouse, Chuck E. Weiss, and Jess Klein.

In 1999 George became the President of Rykodisc, continuing to work with a variety of artists and catalogs, including Robert Cray, Frank Zappa, Medeski Martin and Wood, Morphine, Nick Drake, Kelly Willis, Kelly Joe Phelps (this was one of the package designs I did while at Rykodisc), and others.

He has written two books on the music business for Berklee Press, recently contributed to the start-up of TuneCore.com, and is currently the Vice President of Artists House Music Foundation and Editor/Writer for ArtistsHouseMusic.com. He is also a Professor/Executive in Residence College of Business Administration, Loyola University, New Orleans. You can read his blog here.

George was kind enough to share his thoughts about the impact that Apple has had on the music industry. I remember one staff meeting at Rykodisc when the then-president, Don Rose, addressed a new product called Napster. Some of us were just starting to discover this amazing place where you could get any music…for free! (If memory serves me correctly the Mac version was called Macster?). Don stated that the industry would simply go after the downloaders. Those of us who had already dabbled with Napster knew it could never be that simple. Apart from the freeness of it all the convenience of downloading was too enticing. Add into that equation the fact that you could get the song you wanted without the album and you had a powerful combination.

Years later, and with a little hindsight, it still isn’t clear where the music industry is headed. Napster got whacked, and iTunes and other outlets still only make up a small percentage of music sales. And then there is bittorrent, the 900-pound gorilla in the background, feeding terabytes of illicit music, movies, and applications to the masses.

Through all these changes George has been involved in the business of discovering, signing, producing, and selling music. Let’s hear what he has to say about Apple and the music industry, and why Apple still matters.

Hadley Stern: Has iTunes changed the music business in any significant way?

George Howard: Yeah, it’s changed it in many ways. The obvious one of course is the way people acquire songs legally. However, there are many more subtle changes that have occurred because of iTunes. The biggest change, and (surprisingly) least talked about, is the fact that iTunes has shown just how incredibly wrong-headed most commercial radio has been. The diversity of music in most people’s iTunes library is pretty amazing. This contradicts years and years of “marketing strategy,” in which labels, radio stations, talent buyers, etc., have all tried to lump listeners into neat little packages (demographics/geographics) in order to more efficiently market to them. iTunes (and, too an extent, Amazon) has shown us how definitively we’ve moved into an age of (and I hate this word) “psychographics.” It’s now a matter of attempting to discern what leads to what. The Long Tail sort of points to this, but it’s more complex than just an ever-extending demand curve.

In essence, iTunes has given rise (and justification) to ventures like Pandora and last.fm and others who attempt to tie in to these (here’s that annoying word again) psychographics.

The cool thing is that ultimately this leads to communities based on—duh—shared interests. This allows us to sort of move back to what the record industry always should have been (but so often has not been): a service of introducing art into the world and allowing it to find its constituency (this is more of what the Long Tail is really about).

So, iTunes I think—in addition to its tangible changes—has had a larger impact actually on the way people approach music.

Of course, these tangible changes are pretty significant. From a financial point of view the labels/content holders are really getting a good deal. Basically, after iTunes takes their cut (c. $.30), the label is left with about $.70 per song. From this they have to pay a mechanical royalty to the songwriter ($.091), an artist royalty (if the artist has recouped), which would be between 12 and 15% of the list price ($.99). so, about .15 on the high side. These expenses add up to about $.24. This leaves about $.46 in gross revenue per track to the labels.

Contrast this to a system in which the label must pay manufacturing costs (hard to calculate on a single, but call it $.1), distribution fee ($.2), co-op (the cost of actually getting your CD visibly on a shelf in a store) (.2), provision for returns of unsold CDs ($.1). This adds up to $.6. You have to tack this on to the royalties listed above ($.24), which adds up to .84. So the label’s margin on a (theoretically sold) $.99 song sold the traditional way is .15, while their margin on a $.99 song sold via iTunes is $.46. Also, via iTunes they have no warehousing or obsolescence costs. By the way, while I calculated it out based on a single, it’s proportionate for an album.

This is why I don’t get how the labels are pushing for variable (read: higher) prices at iTunes. It’s pretty understandable why Jobs describes this as greedy.

Hadley Stern: Will iTunes, and the selling of music through other online outlets eventually change the way the music business works now?

George Howard: Yes. Ultimately, we’re moving to a frictionless distribution mechanism. Ideally this will mean that content creators will sell directly to their constituents, and get rid of any middlemen. This, of course, raises all sorts of issues regarding marketing. I.e. do these content creators have the wherewithal ($ or knowledge) to make people aware of their work?  The answer is, maybe. Some will, some won’t. For those who won’t there will be enterprises that step into the void (call them labels, if you must) who will (for a cut) do some of this marketing.

And while this may seem like no improvement from today, it actually is. Today, for the most part (and historically), in order to get access to the $ and expertise (and systems) that labels had to make people aware of your music, you had to give up your copyright to your work…forever. What I talk about above is more of a service. I.e. you keep your copyright, but pay for the services provided. This is a pretty important shift. Essentially, in all business/economics, it is those who control the property who amass the wealth/power. So, we’re moving towards an inversion where the content creators will control their property (in this case, IP), and the “labels”/service providers sort of work for them.

Here’s an example: http://music.for-robots.com/archives/001792.html

Hadley Stern: Does the function of A&R need to continue? Couldn’t listeners rank music through some sort of social networking mechanism to filter the good stuff up?

George Howard: Sure, I suppose. This is what the first iteration of mp3.com and others tried to do. It’s basically American Idol, I guess. But you’re mapping out two competing epistemes. A&R implies a filter (Simon Cowell, if you will), and a point of view. The great labels have this point of view, and sort of inform their constituency of what logically follows next. If you strip this away, you have to have the direct connection from content creator to constituency. So, while you no longer need Aa&R, you need—again, as above—to make people aware of your existence.

MySpace is the ultimate example of the paradox that occurs when barriers of entry are lowered. Everyone gets in, but it makes it that much harder to get noticed. Those who are getting noticed on MySpace, not only have music that is appealing to a constituency, they’ve also found a way to leverage the technology to accelerate some sound marketing principles. Ultimately, in so doing, they’re performing a pretty essential (though not talked about) function of A&R: being an evangelist.

Hadley Stern: Is iTunes simply just another distribution vehicle?

George Howard: No. at best, it’ll be a discovery/preference engine. If anyone can do this (and most can’t) Apple can. Right now, it’s basically a distribution vehicle, but I gotta believe (and some of their efforts point this way), that they’d like to make it more of a community tool. They’re in a weird spot, however, because they can’t “go indie”; they have to serve the majors. And this will keep them from innovating the way they should to make it less of just a distro network. Unless, of course, Steve just starts buying labels…which—if they weren’t such bad investments—I guess he would.

Hadley Stern: Do you think illegal downloading still has an impact on the music industry?

George Howard: It has an impact on a specific market. I wrestle with this all the time. Ultimately, most downloaders are what Gladwell would call “mavens.”  That is, they’re people that are really passionate about music, and willing to deal with the vagaries of downloading to get their greedy little mitts on the songs. Frankly, content creators and owners should want these people to have the music. They’re tastemakers, often, and will inform those who are not early adopters (and thus not illegal downloaders) of music these people might otherwise not be aware of. Some percentage of these people will then buy records, go see shows, etc.

Remember, labels give away a lot of CDs as promos in the hopes of getting them in the hands of tastemakers (press, radio, etc.), so that these people might expose the non-early adopters. Illegal downloading is just a more efficient, less organized version of that.

The less sanguine view is that these are copyrights and have to be protected.

I’m encouraged by people like Lawrence Lessig (Creative Commons) and John Snyder (Artists House Music), who are actively and intellectually trying to skin this cat without resorting to draconian methods of protection at the exclusion of progress or innovation.

Hadley Stern: Has the iPod led to the demise of the album and the resurrection of the song?

George Howard: Maybe. Certainly the prima facie evidence would point to this. However, the anecdotal evidence that I get from talking to people is that they really miss the experience of listening to a collection of songs that has some conceptual continuity. I don’t think we’ve seen the last of the “album.”  It may not be called an album, but we’ll see more conceptually tethered recordings (mixes/playlists).  They, like all things in this wacky web2.whatever world we live in, will be customized by the constituency rather than by the man.

Hadley Stern: Does Apple Matter?

George Howard: Good question. I assume you’re talking about them mattering apropos of music. Certainly currently they matter. And, obviously, the impact of iTunes is completely undeniable, and—at the very least—accelerated the inevitable changes. 

I think one of the reasons Apple will continue to matter—albeit perhaps in a legacy type way—is that they really disabused people (radio, retail, labels, etc.) of the idea that people categorized via genres.  Not to get all web 2.0 about it, but the playlists people create show that it’s more about tags on some level than genres. That is, you see Jay-Z next to Janis Joplin next to Scott Joplin in a playlist. How you would categorize these from a genre perspective is pretty impossible. However, you could stick some tags on them that would relate more to psychographics than to demographics or genre.

For instance, they could all be tagged “driving songs,” or whatever, so they relate more to your mental state than any more rigid and traditional categorization. I don’t think people have spent enough time on the impact of this. It really tells us that the way we grouped (and therefore, thought) about music in the past was sort of wrong. People have caught on, obviously, and I think services like pandora and last.fm and others are a direct result of it. This is progress, and I think Apple had an awful lot to do with it. 

The challenge for Apple in the music business is now one of going from a reseller to a facilitator, I believe. As wonderful as the iTunes store is, it’s still just a store. The future of the music business isn’t customers going to a store. It’s customers connecting directly with either the content creators or with some trusted source that is more of a specialist.

I thought the iTunes store was heading this way with the playlists you can create and post, but until Apple (or someone else) finds a way to give those playlist creators an economic incentive (i.e. a piece of the revenue), it will always sort of resemble the “employee recommends” section at a record store. The issue is really a rights issue, and it’s a big hurdle to overcome. 

The larger labels are necessarily protective, and they make up the lion’s share of Apple’s revenue on the iTunes store; I hope that this protectionism doesn’t slow (or stop) innovation. Historically it has. My model, that of the content creators empowering their fans to become compensated evangelists for their music (not in some kind of Amway pyramid scam way either—and, yes, I know there’s someone in the music space doing this, I prefer not to name them, because I don’t think they’re doing it in an honorable way) has to start at the indie level. I just think Apple is really well positioned to facilitate it. If they did that, they’d matter in a big way. If they get held hostage by the majors…well, I worry. 

Of course, Apple could also start a “label,” or buy a label. If Apple had equity in some artists or catalogs it might throw the delicate balance off, but it would depend on how they did it. They could take a similar approach that google has with books, and go out and actively resuscitate masters that have fallen out of print, and have an equity stake in those titles (even if only as a licenser). 

At the end of the day, I would never underestimate Jobs or Apple. They did the impossible by getting all the majors on board with their store, and that’s like herding cats. So, yeah, Apple still matters.