5 years ago... Electronic distribution to transform music industry

05.11.98: The ivory tower of the music industry is about to collapse, according to the founder and MD of Arts Alliance, a UK venture capitalist firm.

Thomas Hoegh spoke exclusively to silicon.com yesterday from the WebNoize '98 conference in Los Angeles. "There's a feeling that the whole industry is rotten to the core and that it is about to collapse," he said.

Hoegh added that electronic distribution is forcing record labels and distributors to change their pricing structure and completely turn around their relationship with musicians.

"The music industry used to work as a bank," he explained. "They would lend money to new bands and then reap huge profits if the bands were a hit. This is turning into a service-based model where the artist is the focus. It's all about cultivating a direct relationship with the fan base."

Hoegh cited one artist - rock guitarist, Todd Rundgren - as a pioneer of future music distribution. "His fans subscribe to him for one year and they get everything: copies of anything he's working on, merchandise - whatever they want." But Hoegh could not name a single record label or distributor that has embraced electronic distribution.

"The pricing structure is going to be transformed," he continued. "CDs in shops are all priced pretty much the same now - and distributors get away with it because the public think it's because of the packaging. But online retailers won't have that excuse: music sold online will be priced on value alone. We can expect to see a sliding scale of prices."

Senior executives from Polygram and Warner Bros attended the three-day conference, which was billed as the first event to examine the music industry's rapidly evolving new media strategies. Other speakers included Jason Olim, CEO of CDNow; Larry Rosen, CEO of N2K; Rob Glaser, CEO of RealNetworks; and Gerry Kearby, CEO of Liquid Audio.

05.11.2003: The key line is the above story is the one which reads: 'But Hoegh could not name a single record label or distributor that has embraced electronic distribution.'

And therein lay the revolution waiting to happen. The music industry was a dinosaur in 1998 and it still is today. 'Innovation' was not a word you'd hear muttered within the corridors of power at any major label - whether it is musical innovation beyond formulaic pop or innovation in their delivery model.

Into this void stepped Napster and it's difficult to work out what hurt the music industry more - seeing somebody exposing their weaknesses and producing something innovative and popular or somebody stealing revenues from their artists. The latter has largely been debunked as a myth - so it must have just been good old fashioned spite that saw the labels hound Napster through the courts.

But the demise of Napster brought about the birth of dozens of similar services and file-sharing has now reached epidemic proportions. The crackdown has been well-publicised and legitimate services - such as the all-conquering iTunes - are springing up to claw back some revenues for the labels. But back in 1998 it is hard to think anybody could have predicted quite to what extent electronic distribution would transform the music industry.