For years about 7 to be exact – I have entertained the argument that Hip-Hop sales have declined primarily because of the Internet. While that is true today, I have maintained that the blame for the cause of the sales drought belongs somewhere other than file sharing, mp3s and ipods. As the Fourth-Quarter of 2009 ends and with it the Christmas sales that became the life blood of the industry, I thought it would be good to devote this weeks AllHipHop.com Hip-Hoppreneur commentary the last of 2009 – to the full story of what really happened beginning in 2002.
I think getting to the bottom of exactly why first-week sales have fallen off of a cliff and why they will not return, is a case study and business lesson for all entrepreneurs, artists, managers, and professionals who are trying to find a way to navigate the changing music industry landscape of the next decade.
The reason why I think my perspective is unique is because I am one of a small group of individuals who have seen the business from virtually every angle concert promotion, radio, artist management, journalism, and perhaps most importantly retail. Those perspectives are enhanced by my worldview as an economist and political strategist.
From 2003 to 2006 I managed or consulted with record stores in the Northeast region who operated at the height and heart of the mixtape phenomenon. In that capacity I rang the cash register, heard what the consumer liked and didnt like, advised record labels on what artists were selling (or werent) and was a first-hand eye witness to the tactics of the Recording Industry Association of America (RIAA) and the war that they and the major retail chains waged on the independent record stores (who represented approximately 30 to 40% of all sales in rap music). I even brokered a meeting between Members of Congress and these independents in an order to save them (or help them save themselves). I dealt with the business of selling music at an industry and street level.
To me it is the most important, yet untold story of the last decade (watch how many top 10 lists leave it off) but filled with lessons that must be mastered if the culture and industry are to undergo a resurrection this coming decade.
Ill tell the story from two reference points. The first is an excerpt of a January 2003 interview I conducted with Russell Simmons, Co-Founder of Def Jam Records and Chairman of the Hip-Hop Summit Action Network, published at BlackElectorate.com (http://blackelectorate.com/). The second is an excerpt from Volume II of my new book series, The Entrepreneurial Secret To Starting A Business Without A Bank Loan, Revenue, and Collateral (http://theEsecret.com/)
From my 2003 BlackElectorate.com interview (http://www.blackelectorate.com/articles.asp?ID=791) we read:
Cedric Muhammad: Lets close out with a last couple of questions. Ok, Russell, we do a lot of work with record stores. I dont buy this argument that file-sharing, CD-burning, and MP3-ing is what hurt us last year
Russell Simmons: No?!
Cedric Muhammad: This is what I think. Nothing came out until May with Camron and Eminem right after. It was like nobody put out anything in last year. I addressed this with the LA Times (http://www.blackelectorate.com/articles.asp?ID=641)
Russell Simmons: In Hip-Hop. Yeah right! It wasnt that many good records
Cedric Muhammad: Naw, it was like nothing came out. It was Styles P. in July, Camron in May and then you had to wait for LL, Jay-Z, and then Ja Rule and Nas
Russell Simmons: That is very, very important point, what you are saying. But I can tell you that it really is affecting us in a dramatic way. There is so much file-sharing. And I just bought a piece of a company, Brilliant Digital, and they have something called Altnet that identifies whats clean and what can be traded and you pay 50 cents for the service. If you got 2 million Nat King Cole Records going over the counter in one year and you would have had 200 thousand and if 50% of those people pay you some money per file, or everytime they shared a file, on millions of records that would have never have been sold or traded under any circumstances in stores; and now it is being traded; and we could actually make the majority of them pay some fee for this; I think that we should pursue a real dialogue with these online companies and big file-sharers like Napster or now, Morpheus -the big file sharer, on how this can be done profitably.
Cedric Muhammad: But I have a problem when the RIAA (Recording Industry Association of America) comes in. You know how people are making money in their stores in this drought Russell? They are selling 10 different Best of 50Cent mixtapes
Russell Simmons: Right.
Cedric Muhammad: The mixtapes are keeping the Mom and Pop record stores going. And you have Hillary Rosen (who just resigned last Thursday as head of the RIAA), who I know you are friends with and the RIAA shutting stores down and it is the labels who are facilitating the release of the music to mixtape DJs
Russell Simmons: They arent making enough money on records that cost a fortune (to consumers) that cost nothing to make – they pay a lot in the actual recording but the manufacturing of these records costs nothing. They charge a lot of money for a huge overhead and the artists arent making any money either. No one is making money. They have to figure out how to go with the culture. The culture is going with the file-sharing and trading so they have to figure out how to monetize the new industry. They cannot keep fighting it. No legal issue can help. The legal approach can slow down the momentum of the cultural process but it cannot save the industry. You can threaten and you can arrest some kid and you can threaten everybody all you want but the business has to change, to go with it. Fighting the world is not going to be the industrys solution. So they have to make some decisions now. There will be a dramatic drop-off this year and next year in sales. And I never agreed with their approach. I always thought that the exposure was the best thing for the record in the first place. MTV was supposed to kill the industry – it tripled it. Radio was supposed to destroy the industry at one point. It helped it. But this is really a more serious problem than any of that because the culture is going away from buying. When the culture goes that way they have to figure out a way to monetize it. And I was actually on a panel at Harvard about this on Saturday. They were talking about a lot of legal remedies they have. And I know a lot about the legal remedies. I think that is OK to slow it down while you make a decision but the industry has to make some serious decisions now.
Cedric Muhammad: But I think the legal remedies are disproportionately affecting us man, because we are the ones that made 50Cent on the street. And He worked with the street. Eminem signs him and Shady/Aftermath/Universal provides Eminem to mixtape DJs like Kay-Slay and then, stores are getting shut down by the RIAA for selling the stuff
Russell Simmons: Right, right
Cedric Muhammad: It is like the crack cocaine vs. powder cocaine sentencing discrepancy where the low-level guy gets killed for something that the big dealers and money-laundering banks go free on. I hope that you will fight for us at the bottom of the process
Russell Simmons: You are right. At the bottom they are deserted. I mean the record and exposure is still the best promotion for the record and we still deal with the mixtapes. And we know that the culture is something that we have to move with. You cant fight the culture. You cannot. If music becomes more popular because people have more access to more music, then we should figure out a way to make money off of that and not overcharge. Because that is what they do – they overcharge for the albums too. And then they dont pay the artists because the artists spend the money it is just a big wasteful system. They have to learn to manage the business of music and they are not doing a good enough job of it. They are not changing quick enough.
Now, for more context and the responsibility that the stores themselves had in their own demise, we read the following from The Entrepreneurial Secret.
By the early 2000s with record sales declining, it was not uncommon to find independent record stores making more money on mixtape sales of rap music alone, than all of their other album sales combined.
The mixtape, which the major national retail stores did not sell, (eventually though, even they got in on the act) gave the smaller community based stores a lifeline and even a comparative advantage over their larger competitors.
Eventually, the major retail stores pushed back, and through effective business and political lobbying, the Recording Industry Association of America (RIAA) began to issue cease and desist orders to record stores that were selling mixtapes, even though record labels (who were also members of the RIAA) were endorsing, and assisting with the creation and promotion of mixtapes, and had direct relationships with these same record stores (by some measures these independent record stores were responsible for at least 30% of all sales in Hip-Hop in the late 1990s and early 2000s and the industry was dependent upon them to push certain records).
When the cease and desist orders failed to stop the mixtape phenomenon, the RIAA, and its lawyers, influenced local police departments and the FBI to conduct raids on these record stores. They even began to work with state legislatures to pass stiffer laws aimed at shutting the mixtape down.
Virtually all of the street DJs, artists, and independent or smaller record labels (out of fear of losing access and business relationships with the major labels) who all benefited from the sale of mixtapes, remained silent, allowing these stores to go out of business.
The Mom and Pop record stores were unable or unwilling to organize themselves into an effective political lobby to counter what the RIAA was doing.
As a result, hundreds of stores went out of business in the 2003-2006 period due to these raids. And there was one more important and related factor at work: another local institution was under attack – the independent community based bookstore.
At around the same time major retailers like Wal-Mart, Best Buys, and Target were working together with the RIAA to shut down the mixtape market, these outlets and the major book chains like Barnes and Nobles and Borders, began selling books that one usually could only find at Black-owned book stores or independents that specialized in small but profitable niche categories like urban fiction.
But these stores were not just selling books and music to make money on them, they were using books and music to attract new customers into their locations in order to sell them more expensive items like televisions, computers, entertainment systems, and household appliances. In fact, these stores were able to get the music industry to approve suggested retail prices for new music at cost or even a slight loss, in order to increase the volume of new album sales and traffic in their stores. In some cases, the major record labels were providing CDs to these stores in large amounts for free (the motivation for this was to cause a boost in first week sales if an album sold enough records in its first week out, it usually earned extensive media coverage, which further promoted album sales at a normal or higher price, in the following weeks).
In the case of the major book stores, the larger retailers were not just selling books, they now offered food, coffee, wireless internet, and convenient reading areas, allowing their customers to read books (even spilling beverages on them!) without purchasing them and get the benefits of a library experience and atmosphere.
The final nail in the coffin of the small independent community-based music store arrived with the emergence of the Internet, file compression software, and file-sharing websites allowed people to download music, or convert it from CD format into mp3, and share it without cost.
Why werent the small book stores and music stores able to adapt?
In short, in addition to their inability to identify their self-enlightened interest and organize themselves politically to pursue it, they did not know what business they were in.
They thought they were in the book and music recording business when in reality they were in more than just that. Their customers patronized them for reasons they did not pay attention to, and were leaving them for real reasons they did not understand.
In the case of the book stores – the major retailers competed with the smaller stores not just on the basis of the price of a book, but also on the basis of convenience (students and professionals can have a meeting for free at a table) and atmosphere (finger food, coffee and tea in a quiet setting).
In the case of music stores the major retailers sold more than just music – they offered efficiency as one did not have to travel to several stores to get music, electronic devices, clothes, and household items.
Many of these major retail stores sold a wide variety of products making a day of shopping more convenient, and they were often located in or near large shopping malls that these customers planned to visit anyway.
The smaller book and music stores that survived longer than the rest (or still exist today), were the ones who were able to compete in areas that the majors couldnt, like inventory (many smaller stores had more titles in specific music categories), expertise in specialties (many smaller stores offered music genres like Gospel that majors couldnt and book titles in subject matter that the majors knew little about, like Afro-centric history.)
And in a strange way, while the RIAAs aggressive reaction to the mixtape ended up bringing about the demise of many of the Mom & Pop record stores, it also showed these same stores what business they really were in and where they had a comparative advantage over the major stores.
The mixtape phenomenon exposed that many music consumers were not satisfied with the album format where a customer has to wait long periods of time to purchase 10 to15 songs from a single artist, with a good chance that they may not like more than three of these songs.
The mixtape allowed a consumer to get quality and variety all in one, and the best new music first. This is also a major factor in what made downloading music from the Internet attractive. The consumer could become the producer selecting the song titles they wanted, compiling them on one album, if they liked; when they liked; and as soon as the music was released, anywhere in the world.
If the small music stores had been able to organize themselves, leveraging their buying power and scale to cut a deal directly with a company that made money and sold music in downloadable format like say Apple Computers – they might have survived. They could have worked out an arrangement with Apple to have its computers placed in the store where people could make their own albums, and then possibly buy an ipod or Apple device on which to play it (which is where Apple has a higher profit margin).
With this point of sale and technology leading to huge sales that could be quantified, a group of smaller retailers could have pressured the music industry to give them favorable terms on new music and perhaps, even backed the RIAA up a bit.
And while their lack of location space may have been an issue, if the smaller bookstores had placed greater emphasis on atmosphere and maybe became licensed to sell food, their business model would have been closer in line with what business they really were in.
A final option would have been for these music and bookstores to merge (many of these smaller music stores did finally begin to sell books, but for most, the transition was too late).
In conclusion, I cant state enough how important it is for consumers, fans, artists, entrepreneurs and industry professionals to understand why sales in Hip-Hop have declined so dramatically. Blaming technology is too easy, and inaccurate. There were cultural, political, and business tactics that just cant be ignored. While there is more to the story (like how hyped, bloated and artificially high sales were due to fraudulent Sound Scan transactions and record label promotional arrangements) the center piece of understanding where the business has gone, to where it is headed must include the rise and fall of the Mom and Pop record store and why it happened so quickly.
If we dont heed the lessons of history we are doomed to repeat them.
Cedric Muhammad is a business consultant, political strategist, and monetary economist. He is author of the book, The Entrepreneurial Secret: To Starting a Business Without A Bank Loan, Collateral Or Revenue (http://theEsecret.com/). He is a former GM of Wu-Tang Management and currently a Member of the African Unions First Congress of African Economists. He can be contacted via e-mail at: cedric(at)cmcap.com