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The Music Wars from 30,000 feet: Meet Chris Castle

'Don't expect another Bob Dylan'

By Andrew Orlowski, 27 Nov 2008

Interview Ebullient lawyer Chris Castle has a unique perspective on the Music Wars. A former Sony and A&M executive who "switched sides" to Silicon Valley, then found himself defending the original Napster, which he called one of the greatest inventions of the 20th Century. His clients range from technology companies to major recording artists.

So to introduce the first of some regular specials from Chris, here are his views on the music business' biggest errors - and whether there's any cause for optimism. He's never dull, it's mostly Chris in his own words...

"Last to Market"

I'll tell you why I moved to Silicon Valley: In 1997 I was in private practice in LA and a guy came into my office one day, he lived in Silicon Valley and he wanted to create a hosted retail store that was essentially like iTunes. And so he wanted download licenses from the major labels.

I gave it a shot at the major labels - and one of the guys I called said to me: "You know what? We're going to take our time getting into this space. We've decided we're going to be last to market."

I said: "Did you really say that? I've never heard anyone say they want to be last to market before." He replied: "Yeah, we'll see what everyone else does. We don't think it's much of a business." And at that moment I put down the phone and an hour later Hank Barry called me and asked me if I wanted to come to Wilson Sonsini. I thought: I can't take this any more! I went to Wilson.

While I was at A&M in the early 90s, I pointed out to a guy at the RIAA that there was this thing called "newsgroups", and they were posting files. I said to him that there's a very short step between that and something we don't like. I was told: "Oh no, we've got the net covered! Don't worry about it: those pirates selling CDs online - we've got them cold!"

I said that was going to pale into insignificance beside what was coming next.

Tell me about trying to take Napster legal, back in 2000 and 2001...

Bertelsmann invested in Napster because they thought it would eventually result in a paying service, which was the intention. There was a version of Napster that I worked on that was a subscription service that never launched. It wasn't that different to what you'd see now - it was something like what you'd call now a walled-garden P2P. It had file identification, a registry of sorts where the system could look up what was licensed. It would have opportunities for copyright owners to claim versions and tracks that were out there they'd forgotten about or didn’t know about - like live recordings - and get paid for them. There were a lot of features that were appealing.

Napster had deals with the Harry Fox Agency, AIM and some other indie labels: there were early believers. Frankly, Napster got pretty close but couldn't quite get close enough to sign deals with the majors.

Was it major label pressure that killed it?

That was certainly one significant factor. Eventually even cats run out of lives. For whatever reason, I really don't think the decision makers on the label side understood just how pervasive [file sharing] really was. Label people would say at that time that "we're losing a generation of consumers". I'd say: "I wouldn't worry about that - that's already happened."

Then P2P went decentralized and really took off. You represent artists but you're not a fan of the RIAA's litigation policy.

I like to say that the day they invented fire, the first arsonist was born. But that wasn't a reason not to use fire.

“Control of content in a strategic way was how the music business worked. That's gone now.”

The record industry has always had a market-clearing level of piracy, and we've lived with that. We're way beyond that now. But you have to have both the stick and the carrot, and unfortunately, it's been too heavy on the stick for quite a while. Going down the stick path was a decision made by Hilary Rosen [former RIAA chief executive] that was a huge mistake, particularly in the absence of much carrot. It set the stage for many of the problems we have now.

It's become a cause. Did the music industry ever think it could shut it down? I still hear this from old label types: "Can you turn the internet off please? Just find the off-switch, so nobody shares music any more?"

“The day they invented fire, the first arsonist was born. But that wasn't a reason not to use fire...”

What was underestimated was the willingness on the part of some companies to oppose them and challenge them. We'd not encountered this before in the music business. I mean the Kazaa attitude: screw you, we're going to take your stuff - and we'll find lawyers who find 18 different ways to dance on the head of a pin. The music business was used to being able to restrict access to things. That's they way it had worked for years. So, for example: the only way you can buy three newly discovered tracks by an artist who has been dead 20 years is via a new double album. That control of content in a strategic way was how the music business worked. That's gone, now.

So what they didn't anticipate is that there'd be people who would be very defiant and very hard to catch - and who would drink the Kool Aid.

The downloaders love to say how much the music sucks "...and I'm going to steal it all". They remind me of the old Catskills joke: "The food's terrible ... and in such small portions!" It just doesn't make sense.

Some downloaders justify themselves by saying: "It's OK to download because record companies screw the artists all the time.” And record companies have been known to that. But historically, record companies are the only people who invested in the content, for better or worse. So all these people feel justified in taking the chance on downloading, because there's very little chance of getting caught. There's a Congress that doesn't know what to do, and historically there were record companies who completely misunderstood what the new reality was. That's a hell of a Molotov cocktail.

“Downloaders remind me of the old Catskills joke: the food's terrible and in such small portions!”

A lot of people in the Valley thought they could rush to Congress and essentially repeal copyright. But how could it possibly be the law that "sharing" someone's property with 60 million of your friends could be fair use? If that was happening in the physical world, they'd send in the Army. The courts have largely ruled in favor of copyright owners in a string of cases, but the cavalry is not coming to the rescue. And that’s really frustrating if you believe that there can be a market online because a fundamental ingredient of a market is property rights.

The biggest mistakes: DRM and licensing

The real problem that we still have to get over today is the ability of people who want to be running legitimate businesses to get licenses they need, at prices they can afford, with transaction costs that they can afford too - in a format people want. Until recently, if your name wasn't Steve Jobs you had to use Windows Media DRM if you wanted a major label license - a format that has had very low uptake compared to Apple’s Fairplay. When the labels complain about how powerful Apple is, they need to look in their own house first. I say be thankful for Apple, because if there were no Apple imagine where we would be?

Chris Castle

People have made it pretty clear they don't want DRM. Most consumers don't seem to care about DRM until they bump up against it - and with Apple that takes a while. With Windows Media, it happens immediately - everyone has an iPod, and WMA won’t play on an iPod. You have had some of biggest brands in the world wanting to sell digital music - Yahoo, AOL, Tower, Tesco in the UK - and these legitimate companies trying to create a legitimate market were forced to sell in this format that nobody wanted. So their services were hobbled right from the beginning. The new Napster alone must have spent $200m at least trying to relaunch that brand—using WMA. Imposing WMA DRM on these services has arguably been the key reason that kept the digital pie from growing.

Amazon quite rightly waited on the sidelines for a long time and is now getting in with MP3 and only MP3. That should have happened 5 years ago. Some of the major labels are so wedded to DRM it drives you crazy.

I have had these conversations until I'm blue in the face. I became a convert to selling in mp3 in 2005 when I co-produced an album for a videogame on Nile Rogers’ label. I said: "Let's put it up on MusicNet and iTunes." Nile said, "No, I don't want DRM!" He said the kids won't buy DRM — it’s not cool. I wish I could say I didn’t argue with him, but after a couple of conversations I realized he was right. There's no reason you can't sell an MP3 - high quality and no DRM. Better late than never, I guess.

I can understand why a label won't license to some joker with a widget who's never going to make money. There's that phrase "pre-revenue" - well they go from pre-revenue to post-revenue without ever seeing a cent. There's no business there.

Here's the other thing: look at it from the revenue side. iTunes has 80 per cent or so of the player market, and many people translate player market share into revenue market share. But iTunes is more like 95 per cent of the digital revenue, at least for major labels. From a revenue perspective, all those other companies - everybody except Apple - are getting a piece of that delta. They're spending millions in marketing to be in the 'other' category. The only way to compete with iTunes is to make the pie larger – and I think the only way to do that is if you're selling an MP3.

Instead major labels often demand millions in advances on a short term deal with DRM restrictions, and says if you’re unrecouped at the end of the term we're going to pocket what’s left.

I understand they need to protect themselves against defaulters, but the advances have gotten really far out of whack.

So after Napster, Shawn Fanning started Snocap, anticipating a licensed P2P world. Why weren't the P2P guys interested in Snocap?

Snocap would have powered P2P retailers - so all the content would come from Snocap direct to the user. It was originally designed to encourage P2Ps to get into legitimate businesses. Snocap offered a number of solutions to a variety of problems in the P2P space, starting with an opt-in registry.

So it was just too early?

Yeah, it was a little ahead of its time. One thing that nobody counted on is that none of the unauthorized P2Ps would want to go legit - with the exception of Limewire’s recent deals. I thought there would be at least one.

Like Playlouder MSP?

I love those guys and wish them well. Playlouder is actually a brilliant idea and is not the kind of model that would have needed a Snocap service. Playlouder is designed by music people and is intended to result in accountings and payments. No, I mean Grokster or eDonkey - somebody like that. They were never designed to be a per-unit per-play kind of vehicle. They would have had to rearchitect their systems to be a licensed vehicle. I guess they would rather “shut down” than go through all that, and almost all of them did. Of course unlike the old Napster, some of the “distributed” p2ps keep running like ghost ships so “shut down” is a relative concept.

The Future of Music: and how to get there

There is no silver bullet. There's a multiplicity of things to do starting with making it easier for legitimate businesses to license content - followed closely by pricing models with ISPs that will create financial disincentives to do a substantial amount of downloading. The biggest culprit is actually the ISP's flat fee for unlimited bandwidth.

If you created a charge for downloading material, I think you'd start seeing a lot of dropoff in illegal downloading. If it cost more to download, then you'd at least have the incentives set up correctly. There'd be an argument about how the profits would be split - but at least you’ve got the financial incentives going the right way.

Oh, the ISPs hate the hardcore freetards. They'd love to be able to cut them off - or at least the 24x7 downloaders - no matter what they say in public. Because a few people create all the traffic costs.

That'll happen. They have to find a way that doesn't turn it into China. If you look at people's traffic too much - or threaten to turn customers names over for prosecution - I can see how that has a certain appeal but that's not way to do it. It's a complicated question. And [any action] leaves you open to some charges of nastiness.

So don't sue the average user and don't totally disconnect them - downgrade their service features and make it inconvenient and costly to download unauthorized material. There will be people who'll say that there will always be hacks around whatever you do, but if you listen to that kind of thinking you'd never do anything.

I think the BPI has handled this well. By working cooperatively with ISPs, the BPI (and MPA) are dealing with people who have a stake in society, and who have to operate above ground. That's always good - find an ally who cares. Most ISPs don't want to be seen as bad guys. And it's persuasive – cooperation is good messaging for both sides.

One thing I like about Arts+Labs is that they foster a dialog between creators and technology companies that doesn't question fundamental rights. That's encouraging and is a real step toward extending the legitimate market.

Have you any reason to be optimistic about music in five years time?

In five years' time I think it’s going to be an even smaller business at the major label level. I really hope I’m wrong, I would love to be wrong, but I don’t think I am. Both major label and independent artists are going to be making more of their money from venue sales of records and merch. They'll be making some from digital, but there's a phenomenal amount of online clutter out there and getting heard above that clutter gets harder each year. I can't imagine what it's like to be the music supervisor for say Grey's Anatomy - the level of submissions must be overwhelming.

“Recorded music is something you give away in the hope of getting famous so you can get a big corporate sponsorship deal”

But I wouldn't say I'm optimistic. I'm optimistic there will be a business, and optimistic that part of it will not be dependent on digital distribution, which is a low margin business for everybody. Digital distribution is a Onesies and Twosies business and not album sales - and that's hard for the artist and for the retailer - you've got make it all happen out of about 20 cents on the dollar unless you can wrap lifestyle items around it or sell hardware. Artists dependent on digital sales are going to have a rough time. But what I'm really worried about is the influx of dependency on advertising and sponsorship.

When all music is deodorant advertising...

The corporatizing of music is starting to happen. I can't see this new music business producing another Bob Dylan - or anyone like that who openly defies corporatization. When I talk to artists who are young - 17 or 18 – many of them seem to have given up the idea of making money off recorded music. Recorded music is something you give away in the hope of getting famous so you can get a big corporate sponsorship deal. You'll have extreme commercialization on one hand, and the very indie-oriented artist on the other who rejects taking the king’s shilling. There’s not much in between.

It's hard to tour these days - getting significant guarantees is hard in a recession. Getting a per-show guarantee that's over $700 is a major accomplishment for an independent artist, and it's hard to cover gas, hotels and food with low guarantees. You have to sell merchandise and your CDs at the shows in order to survive, and you have to be good at it.

I really don't think there's any evidence the major label business is going to turn around in any meaningful way. And now we've got a global recession.

Nettwerk boss Terry McBride recommends Doritos

People are talking about the "middle-class musician" – that’s about the best anyone can hope for because the depression in the music business has taken away the home run record with very few multiplatinum-selling records any more. If you're a new artist you just don't have a realistic shot at that, and less of a shot with every passing day. Until the market stabilizes - if it ever does - and some order comes back, record companies are either going to severely downsize even further than they already have, or someone’s going to go out of business. ®

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