WALTER ISAACSON: It’s the middle of a Swedish winter in 2005, but two young tech entrepreneurs, Daniel Ek and Martin Lorentzon are sweating. With all the servers they’ve got running, the temperature is around 80 degrees in Ek’s suburban Stockholm apartment. The idea they’ve been working on is a big one, big enough to turn the entire music industry on its head.
Throughout the fall of that year, they spent a lot of time in Ek’s apartment, tossing around ideas for a new company that they could start together. Their discussion focused in on media, and how cumbersome it was to access music from Ek’s home theater PC. People had been downloading music since at least the year 2000, first from Napster, and then other file sharing sites. But those songs took a long time to download. You had to worry about viruses. And, oh, yes, much of what you were doing was illegal. There had to be a better way. What if you could make millions of songs legally available, and it would download so quickly, it would seem as if they were right there, waiting for you, on your hard drive?
So they got a bunch of highly skilled coders together and started working on finding that better way. In four months, they had a working prototype that could stream a song in 200 milliseconds. But first, they needed a name for their new company. The name they registered– Spotify.
In October 2008, Spotify officially launched in Europe. Three years later, it came to the United States. And the rest is history. Music was now something you could listen to without owning. And you weren’t stealing from the record companies or ripping off artists by doing it. I’m Walter Isaacson, and you’re listening to “Trailblazers,” an original podcast from Dell Technologies.
Every kind of music for every kind of tape.
ANNOUNCER: What you’re going to hear about today is nothing short of a miracle.
ANNOUNCER: The online music provider Napster—
ANNOUNCER: This disc is the grandfather of the records to come later.
ANNOUNCER: The laser audio player compact of this machine—
ANNOUNCER: For purposes of making copies of copyrighted works—
ANNOUNCER: By allowing users to share music—
WALTER ISAACSON: It’s safe to say that people have been making music for as long as there have been people. But what hasn’t been possible for most of that time is the ability to hear music when you’re not in close proximity to whoever’s making it, in other words, to record it and play it back later. It’s something we take for granted today, but it took one of the world’s greatest inventors, Thomas Edison, to turn it into reality.
The year was 1877, the place, Camden, New Jersey, the invention, something called the talking machine. Robert Harris is a music writer and broadcaster.
ROBERT HARRIS: Edison said that this was his one true invention. And by that he meant nobody was looking for a talking machine. Nobody was asking for a machine that did this. All of Edison’s other inventions were improvements on existing technology. There was no technology that the talking machine displaced. So in some odd ways, the disruption that the talking machine represented didn’t happen right away because there was nothing to disrupt.
WALTER ISAACSON: So Edison set out to try to figure out what to do with this invention, this device that had the ability to capture sound and record it onto a wax cylinder. His first idea was to use the talking machine to record messages off another brand new invention, the telephone. But when that proved too complicated, he went to plan B, which was to use it as a way for the boss to dictate letters to his secretary. Years later, of course, this became known as the Dictaphone. But in the 1870s, it was not quite ready for prime time.
So Edison then moved on to plan C, a talking doll. The problem with that was that kids like to throw their dolls on the floor, and Edison’s cylinder wasn’t sturdy enough to survive the fall. They were getting desperate.
ROBERT HARRIS: They went 20 years without any idea what to do with this. And then, out of desperation, they sold the licenses to the talking machine to a bunch of coin operators because at the same time that in American history, the Nickelodeons, the thing where you’d look at a movie for 30 seconds, were becoming very popular. And so people decided to create the audio equivalent. And you recall penny in the slot machines, and you’d put a nickel in a machine, and you could hear with ear buds that are exactly like iPhone ear buds, you would hear 30 seconds of somebody singing. And they were making $20,000 a month on nickels, so that’s 100,000 plays a month.
And so, all of a sudden, Edison, because he was an entrepreneur, realized, OK, he thought the business was the machines. Now he realized the business was the software. The recording is where the money was, not the recording machines. And all of a sudden, you had a new business that had never existed before in prerecorded sound.
WALTER ISAACSON: By the 1890s, Edison’s talking machine had become a music machine. Almost accidentally, he had created one of the largest and most important industries the world has ever seen.
But not everyone thought it was a great idea. In 1909, the world renowned American composer John Philip Sousa appeared in front of a congressional committee, and argued that prerecorded music was a bad idea because people would now stop singing. His fears were not widely shared.
ROBERT HARRIS: Music moved from a real time live business to a commodity business. For the first time in history, music was a commodity. And it entered the world of commodities. It was marketed that way. It was sold that way. And the reason that there weren’t any losers in this is that, up until this, the music business, probably, in America, could have been measured in them maybe hundreds of thousands of dollars, you know, for the entire country– maybe $1 million. Maybe there was $1 million in music in all of the United States. And within 20 years, it wasn’t in the tens of millions of dollars or the hundreds of millions of dollars, it was in the billions of dollars, eventually, $40 billion a year in worldwide sales of recorded music. $40 billion a year. Now I figured that out. That is the equivalent of selling $100 million worth of records every day. Every day.
WALTER ISAACSON: By the 1970s, the music business was in full flight. The golden goose came in the form of a 12 inch circle of shiny black vinyl. And it was making everyone rich. But there was trouble on the horizon, and it might not be what you’d expect. The digital revolution, which would so thoroughly disrupt the industry, was several years off. No, this was an analog disruption, and it came in the form of a humble audio cassette.
You might not think of the cassette as a revolutionary piece of technology. After all, in many ways, it was really only a more compact version of an 8-track. And like the 8-track, the sound quality wasn’t all that great. But it did two things that would proved to be very important. For the first time, users could easily and cheaply copy their music and share it with friends. You couldn’t make a mixtape with vinyl, but it was easy to do on a cassette. And with the arrival of Sony’s Walkman in the 1980s, consumers were now, for the first time, able to take their music with them wherever they went. Once music lovers got a taste of that kind of portability, they would not easily give it up.
All that copying and sharing began to alarm the record companies. It was a problem that didn’t exist when everything was on vinyl and couldn’t be copied. They were driven to print Do Not Copy warnings on cassette labels. But there wasn’t much they could do about it. It
Ani DiFranco remembers those days well. The legendary American singer and songwriter never played the record label game. She started her own record company when she released her first recording in 1989 at the age of 18.
ANI DIFRANCO: On the very first cassette that I released, I wrote– “unauthorized duplication, while sometimes necessary, is never as good as the real thing.” And so that was just my way of saying, I am a taper, I am a poor kid. I know what it’s like to need music more than you have the funds to pay for it. Like, you do what you have to do. I won’t try to control or judge that. And I do what I have to do. And we respect each other.
WALTER ISAACSON: The audio cassette gave consumers the ability to copy music and take it anywhere, but the price they had to pay was sound quality that was not as good as they could get on vinyl. The solution to that problem? The compact disk. Like most game changing technologies, the CD had a long gestation period, and many people claim it’s paternity. One of them is James Russell, who, in the early 1960s, was one of the first to experiment with optical digital recording and playback.
JAMES RUSSELL: What I was trying to solve was the noise– the pops and ticks and hiss and so on that a phonograph has. And the vinyl, as good as it was, would wear out.
WALTER ISAACSON: At the time, James Russell was working at the Pacific Northwest lab of the Battelle Development Corporation. When he first approached his bosses with his groundbreaking new idea, there was a predictable amount of skepticism.
JAMES RUSSELL: When I expanded on the idea of a improved phonograph using optics, there were several responses. And one of them was, it wouldn’t work. You can’t convert an analog signal, like music, to digital, and reconstruct it. Another answer was, so what’s wrong with LPs? They work. People know how to make them. Why would anyone be interested in coming up with a whole new technique?
WALTER ISAACSON: In the end, of course, James Russell was proven right. Not only was it possible to digitize sound and use optics for playback, but there was a huge appetite among music lovers for the improved sound quality that would yield. Philips and Sony licensed James Russell’s patent, and in August 1982, Philips released a recording of waltzes by Chopin on CD, the first time the technology had been used for commercial purposes.
For record companies, the CD was a gift that kept on giving. Not only were they cheaper to manufacture and ship than vinyl or cassette, but until personal computers came along in the 1990s, they couldn’t easily be copied. If you wanted to listen to a CD, you had to go to the store and buy it, which is precisely what millions of people did. They were so eager to hear their favorite music played in digital quality sound that they went out and replace all their vinyl records with CDs, paying roughly twice as much for a CD as they did for vinyl, and almost three times more than a cassette.
Bob Lefsetz is a music critic, and the author of the Lefsetz Letters, a widely read industry newsletter.
BOB LEFSETZ: The CD was an unforeseen advantage, which ultimately rained down so much coining that music executives were by Aston Martin’s, flying private, making more money than the acts . They thought this would go on forever. It wasn’t so much that they said, we’re going to use this to prevent a future disruption. They didn’t believe a disruption could ever happen.
WALTER ISAACSON: The good times were rolling, but there was danger lurking, one that few record executives at the time saw coming. If you could reduce music into a series of 0s and 1s, and put it on a compact disk, there was no reason why you couldn’t keep compressing it so you could fit an entire album in a single sound file. But despite the widespread adoption of the internet in the 1990s, understanding the underlying concepts behind file compression required a level of sophistication that most record industry executives were simply not capable of.
Jim Rondinelli has been working in the music business since the 1970s, first as a studio producer, and then later at MP3.com, an internet music pioneer.
JIM RONDINELLI: I think you’ll have to look at the people who were running those companies and making business decisions at that point in time. Many of them weren’t using the internet. Many of them were still communicating and sending contract drafts back and forth via fax, not via email. There was one label group exec who I’m not going to name, but who used to– and probably still to this day refers to email as “the email machine.” Those executives couldn’t understand the convenience and the benefit of a shared resource model, like, you know, like file sharing.
WALTER ISAACSON: For Jim Rondinelli, the realization that the industry was on the brink of a revolution came in the 1990s, when he started to compare the technology of a state of the art studio he was working in to what was now available in his own home.
JIM RONDINELLI: None of this really clicked with me until, all of a sudden, I got a DSL line in my home, which was considerably higher in speed, and offered considerably more bandwidth than what we had access to in recording studios at that point in time. And at that point, I already started to suspect that, since we were reducing recordings down to a stream of 0’s and 1’s, and that those could easily be transported via any of these internet connections, that it was only a matter of time until digital distribution of media content would prevail.
WALTER ISAACSON: In the spring of 1999, a 19-year-old Boston University student named Shawn Fanning visited a friend who was a big fan of rap music. He watched as the friend was able to access rap from around the world by joining message boards and downloading the songs. The problem was that it would take about four hours to download a 12-minute track, and several days to create a mixtape that he could share with friends
Fanning was convinced there must be an easier way. So he created a file sharing program that allowed one computer to access the files of another computer. He called it Napster.
SHAWN FANNING: I think it was August of 1999, and I was there for the demo, and we all looked at it, and we thought, oh, my god, this thing is ridiculously illegal. I mean, it’s really cool, but you guys are going to get sued into oblivion.
WALTER ISAACSON: The problem, of course, was that none of the music that was being shared on Napster actually belonged to the people who used the service. The rights to those songs were owned by the record labels and the artists, and Napster’s users were taking it without compensation or permission. Jim Rondinelli knew that was wrong. But he had a grudging admiration for what Shawn Fanning was trying to do.
JIM RONDINELLI: I recall that he had a vision, and he was focused very much on the benefit to the consumer and the coolness of the product. And I think that was unimpeachable. You know, I loved the idea that I could search for anything that I could possibly think of, and have it retrieved to my computer in seconds. I loved that. I guess, in those days I thought that was really the next format because– thinking about this, it’s 1999. The CD had been in the marketplace since, you know, the late ’80s. What, 85, 86? Everybody started replacing their catalog. It was really beneficial to the industry. So my view of digital file sharing and digital music was oh, my gosh, if we figure out a way to monetize this, this is the next format.
WALTER ISAACSON: But the record industry was not interested in finding ways to monetize what became known as peer-to-peer file sharing. Their only interest was in shutting Napster down, which, at its peak, had 80 million users. And who could blame them? The 1990s had been a spectacular decade for the music industry– Prince, Madonna, Michael Jackson, and a handful of other megastars were selling tens of millions of records. Profit margins were upwards of 20%. This was one golden goose too big to kill. So record labels tried to shut Napster down by launching high profile lawsuits against its users. Music industry analyst Bob Lefsetz.
BOB LEFSETZ: They made a tactical error. They felt that they could sue it into nonexistence. We have learned that the government is always two steps behind and doesn’t understand it. If you’re looking for a legal solution, you’re always going to fail.
WALTER ISAACSON: The record companies decision to sue illegal file sharers, some of whom were still in high school, was a public relations disaster. Basic business 101 tells you that it’s hard to run a successful company if your business model includes suing your own customers. But Jim Rondinelli believes Napster posed an existential threat to the record companies, and from that perspective, their legal strategy was not as inexplicable as it might seem.
JIM RONDINELLI: It’s one of those things where hindsight is 20/20. Remember that record companies had become increasingly consolidated, starting in 1987 with the roll up of PolyGram, and A&M, and Island. Now, the business was part of companies that reported their earnings to Wall Street. They were no longer privately owned companies. The music companies were operating in the public markets. So they had a fiduciary responsibility to their shareholders to maintain the value of their assets. It’s easy to understand, given that backdrop, how they ended up suing first and developing a market later.
WALTER ISAACSON: The record companies succeeded in driving Napster out of business, but they could not stem the inevitable decline of their most profitable product, the compact disk. Sales of CDs peaked at 730 million in 2000. Only 12 years later, it was less than a third of that. Worldwide music sales went from $38 billion in 1999 to $15 billion in 2014. Over half the revenue had vanished in just 15 years.
Technology has disrupted many industries over the past few decades, but few have fallen as fast or as dramatically as the music industry. Robert Harris believes music is a cautionary tale for other industries standing on the brink of disruption.
ROBERT HARRIS: This is one of the things about disruption, which I think is the most interesting thing in my experience, is that the people in the middle of the business have no idea what business they’re in, none whatsoever. So if you would ask record executives, what business are you in? They would have said, we’re in the music business. Our job is to find musicians, record them, and present them to the public. That’s not true because they were the physical thing business. That was the business they were actually in. They didn’t realize it. And the proof of that is that, the moment that you could get music without having to buy a physical thing, their business collapsed, completely collapsed.
WALTER ISAACSON: For the first time since Edison started selling music on wax cylinders, there was no thing that music lovers needed to buy in order to hear their favorite tunes. The business model that the record companies had relied upon for decades had been destroyed. The world was changing for artists, too, and except for those at the very top, those changes were not necessarily for the better.
Jonathan Taplin is a legend in the music business. In the 1970s, he was the manager of the rock group The Band, and this year he published a book called “Move Fast and Break Things.”
JONATHAN TAPLIN: In the ’60s and ’70’s, there were a lot of artists, like The Band, that did OK. They didn’t make a huge amount of money, but they were able to continue to tour, and make records, and make money from their records. By 2000, you know, when Napster hits, it just eliminated the kind of record royalties for what would be called catalog content. Really, I saw it with– you know, Levon Helm was the drummer in The Band, who happened to get throat cancer at that exact same time. And he couldn’t make enough money to pay his health insurance, it was just incredibly unfair.
WALTER ISAACSON: In 2001, a potential savior for the music industry arrived. His name was Steve Jobs. When I was working with Steve Jobs on the biography I wrote of him, he told me he thought it was bad karma to rip off music. He loved music. And he was convinced that, if music fans were given a cheap, easy, and legal way to download their favorite songs, they would do it. He figured that he could invent a device that would allow us to play music and do it legally. He called it the iPod. And it put 1,000 songs in your pocket.
Jobs started talking to record company executives, and made them an offer. They would license their content to him, and he would sell it for $0.99 a song. At first, the record companies were resistant. But Steve Jobs was nothing if not persistent. And after a while, he got all seven of the major record labels in on the plan. The iTunes Music Store opened in April 2003, and sold a million downloads in its first week. It was a great deal for Apple. Not only did the company make money from iTunes, but sales of iPods skyrocketed. It was not such a great deal for the record companies, but it was better than nothing, which is what they were getting when their product was being downloaded illegally.
But the music industry was about to be disrupted again. Remember what was happening in that apartment in Stockholm at the same time? Daniel Ek and Martin Lorenzon had moved on past the problem of how to get people to pay for music they wanted to own. They understood that people now wanted to listen to music without actually owning it, and they wanted instant access to millions of songs delivered on whatever mobile device they happened to be holding.
But unlike Napster, Spotify and other streaming services were not interested in ripping off record companies or their artists. Today those streaming services have more than 112 million paying subscribers. 2014 turned out to be the tipping point for the transition from physical to digital distribution. That year, worldwide digital music revenue exceeded physical sales for the very first time. And last year, after many years of decline, music industry revenues actually grew by 7%, largely because of streaming.
With almost every song ever recorded available at your fingertips, the challenge becomes deciding what to listen to. And the genius of Spotify might just be taking humans out of that equation. Like a certain song by Paul Simon? Then maybe you’ll like a particular track from the new Arcade Fire album. Spotify has made music discovery a key part of its service, and it’s constantly developing more and more sophisticated artificial intelligence to help make those picks. It’s a model that’s allowing for both scalability of their product, while keeping the personalized experience intact.
For artists like Drake, who is the first to have a song streamed a billion times on Spotify, the new world order has worked out well, very well. But for other artists, the fraction of a cent they earn per stream does not come close to a living wage. And while record labels still struggle to adapt to life in a streaming music universe, the next wave of disruption may be driven by artists who’ve decided to turn the conventional system upside down, the musician as entrepreneur without any record label.
And although the roots of the DIY movement that eschews the need for a record label goes back decades, the poster child for the modern internet age version may well be Amanda Palmer. In 2012, she used Kickstarter to bypass the record label system to fund her new album. She set out to raise $100,000. She raised $1.2 million. More recently, she has been soliciting money on Patreon, an internet based platform that allows people to donate money and effectively become patrons of their favorite artists. For her, that experience has been a revelation.
AMANDA PALMER: The thing that I’m learning is how much I have to un-learn about how you make art, and then how you get paid for making that art. And only now that I have the Patreon, am I staring with this perspective into the last 20 years of my life realizing, oh, my god, every single time I made a song– pretty much from the time I started a professional career– I was having a simultaneous thought about how to market that song, and how to sell it, and how to make sure that I could actually make a living from these songs. And I don’t have anything against capitalizing on art. What I’d love to see happen is for the work to just not be dirty anymore, and to be more acceptable and easier. And patronage is the really obvious shortcut out of that.
WALTER ISAACSON: And for artists like Ani DiFranco, it means going back to a world before Edison ever recorded the first wax cylinder, when the only way to hear music was to see it being performed in front of you.
ANI DIFRANCO: I think it’s always been tricky to be an artist in this world, you know, to find your patron, and to be able to exist on solely your art. I don’t think it’s ever been an easy game, you know. if there’s one thing we know about these technologies, the Spotify, the YouTube, that you can’t– it’s, you can’t change it. You can’t stop it. It is. It’s happening. That’s what it is now. So how do we survive? Again, I don’t know any other answer except for get out there and play live, you know. Nobody can simulate a live show. And if you can really melt people’s faces live on stage, then you will always have that job.
WALTER ISAACSON: So where do we go from here. Is the future of the music industry artists like Amanda Palmer, who are bypassing record labels completely and using the internet to build a direct relationship with fans? Or will record labels find a way to reinvent themselves, perhaps just as some new technology arrives to replace streaming? It’s been almost 150 years since the first great technological disruption to the music industry, and there’s surely more to come. As always, there’ll be some artists who will embrace whatever change comes their way, and some who will be hurt by it. Jim Rondinelli.
JIM RONDINELLI: On one hand, it’s the greatest time to be making a record ever because you can get gear and do it yourself quickly, and you don’t have to answer to in an A&R person to get a recording budget. You can believe in yourself, play some gigs, gain some money, and make a recording. That doesn’t mean anybody will find it or hear it. But at least you can express yourself that way.
On the other hand, there are a lot of artists who have had a difficulty surviving in the transition from dollar denominated sales to a market that’s based, really, on attention, and fractions of pennies repeated a million times. I think the industry in general, but particularly the rights holders and collectives, were not well situated for the rapid ascension of the streaming marketplace. And as a result, a lot of money got lost in the cracks in the early stages of this business. And typically, when you see that happen, the artists are always at the bottom of the pile.
WALTER ISAACSON: What the next major technological disruption will be is anyone’s guess. But if there’s anything that we’ve learned since Edison set this whole thing in motion, it’s that there will always be a demand for music, and always be people ready to satisfy that demand. Everything else is up for grabs.
I’m Walter Isaacson, and you’ve been listening to “Trailblazers,” an original podcast from Dell Technologies. If you enjoyed the show, and want a few more of my thoughts about what we in the media and journalism industry can learn from the disruption in the music industry, visit Delltechnologies.com/trailblazers8. That’s Trailblazers, then the number 8.
Next episode, we’ll be looking at the world of money, and how crypto currencies like BitCoin are aiming to disrupt the economic engines that run our world. You can subscribe to “Trailblazers” in Apple Podcasts or wherever you get your podcasts. If you like it, please leave us a rating and a review. It helps new listeners discover the show. Thanks for listening.