How Music Got Free (24 page)

His growing familiarity with these attractive economics were what led Morris to propose the music video syndication service known as Vevo. Many years earlier, at the dawn of the MTV era, the decision had been made to use music videos as promotional devices for album sales. Morris had always decried this decision, and now he saw a chance to reverse it. Throughout 2008 and 2009, he oversaw the creation of a centralized repository for more than 45,000 videos, stretching back forty years. With the birth of Vevo, music videos were repurposed as economic assets of their own, in some cases earning far more than the albums they were intended to promote.

The service launched in December 2009 with a gala bash in New York City. Morris generally shied from publicity, but when it came to Vevo he pushed for as much press attention as he could get. It was a good party. Google CEO Eric Schmidt and U2 front man Bono both spoke. Lady Gaga and Adam Lambert performed. Rihanna wore a banging V-cut sport coat open to her navel. Justin Timberlake wore an ivy cap and horn-rimmed black glasses and looked like a newsboy. Young Jeezy wore sunglasses and diamond earrings, and turned his baseball cap 135 degrees to the right. A stunning 19-year-old Taylor
Swift was seen canoodling with a rumpled 32-year-old John Mayer. At 15, Justin Bieber required a chaperone. At 77, so did Clive Davis. And Doug Morris—hair flecked gray, clad in pinstripes, arm around Mariah Carey’s waist—lorded over it all. Vevo’s video-sharing website was ceremonially activated at the party, and it crashed almost immediately, the victim of overwhelming demand. But order was soon restored (at the website, not the party) and the venture quickly turned a profit.

The aggregate earnings potential was
yooge
. Auctioned off by Vevo’s syndication service, thirty-second “pre-roll” ads in front of Justin Bieber’s “Baby” would, over the next few years, be watched more than a billion separate times, grossing more than thirty million dollars. Advertisers also invested in sophisticated tracking services that embedded themselves in viewers’ Web browsers and tracked their subsequent purchasing habits. If the viewer of one of these so-called “call to action” advertisements eventually bought, say, a pair of Beats by Dre headphones, or a branded Hot Topic #YOLO shirt, Vevo then earned an additional reward. Forty years earlier, scouting the order-taker had meant hanging around a clerk in a windowless office. Now it was seamless, conducted by automated Web trackers connected to a giant electronic brain.

Finally, at the age of 70, Morris had innovated. Vevo took over thirty years of creative output from more than 10,000 artists that had been written off as promotional cost and transformed it into a high-growth profit center. It became YouTube’s most popular channel, and the criticism of Morris began to die down.

The growth of syndicated advertising revenues mirrored other changes within the music industry. Economists had long theorized that the entertainment budget of the average consumer was relatively stable, so that as one source of entertainment spending declined, another grew. Trends in the market for live music seemed to confirm this hypothesis. Even as they abandoned the album, fans started arriving in droves to large-scale integrated music festivals. Headlined
by a diverse variety of popular acts, Bonnaroo, Coachella, and the rest of the festival circuit presaged a kind of permanent Woodstock, and from 1999 to 2009 concert ticket sales in North America more than tripled. Many musicians began to earn more from touring than recording.

At the same time, increased demand from advertisers and sample-driven music producers led to a period of spectacular growth in the music publishing business. This licensing business had historically been kept separate from album sales, as the income went to songwriters and copyright-holders rather than performers specifically. For a long time publishing had been regarded as a “boring” business, but a dramatic shift in power had occurred over the previous two decades, one highlighted after the death of Michael
Jackson in 2009. Twenty-five years earlier, fresh and gleaming off the success of
Thriller
, Jackson had famously snatched the publishing rights to the majority of the Beatles catalog away from Paul McCartney with an unprecedented $47 million bid. He’d paid a steep premium—McCartney was hardly hurting for money, and the Beatles were hardly lacking in popularity—but it turned out to be a terrific investment. Over the next 25 years the asset value of the Beatles catalog would appreciate more than twenty times, even as it paid out enormous sums in unrestricted cash. The catalog outpaced returns of the U.S. stock market by a 3-to-1 margin, while during the same period the purchasing power of a dollar decreased by more than 60 percent. Shortly after Jackson’s death, his share of the Beatles catalog was estimated to be worth more than a billion dollars.

In response to these shifts, music executives began pushing artists to sign “360” deals that guaranteed labels not just a portion of album sales but live music and publishing rights as well. These deals brought pushback from artists and their managers, who complained about labels going after revenues that had not, historically speaking, been theirs. While 360 deals were controversial, artists still seemed
to need labels, even in the digital era, and many, sometimes against their better judgment, signed on.

And that was the state of the industry in mid-2010, when, after a 47-year career in the music industry, Morris finally prepared to step aside. Privately he grumbled about the mandated transfer of power, but in public Morris did the best he could to put a good face on things. His decade at Vivendi had been tumultuous, perhaps from some perspectives even catastrophic, but he could say this much: in ten years of declining revenues and massive layoffs and economic upheaval, not once had Universal ever had a losing year. In fact, Morris’ aggregate return on invested capital during the first decade of the 2000s was splendid, and when you added it all up, B still looked a lot better than A. No one at the other major labels could say the same.

Perhaps it was for this reason that, as word began to spread of his upcoming force-out, Steve Jobs began to call more frequently. Soon there was an offer on the table. Leave Vivendi, said Jobs. Come to Apple. We’ll start our own iTunes imprint. We’ll go after artists aggressively, and you’ll run the greatest music label the world has ever seen.

Jobs was looking to rewrite the economics of the business from a blank slate. Historically, recording industry deals were determined by major labels bidding against one another for the right to represent the artists. They did this by offering advances against future album royalties, and the label to offer the highest advance usually retained the artist. After the album was recorded and sold, the initial advance was then “recouped” from future royalties, and over time the money was paid back. Under this system, artists earned surprisingly low percentages of their overall album sales—for a first-time artist, this number could be as little as 8 percent. At this rate, it would often take artists years to recoup their advances, and most musicians never earned them back at all.

This was the reason that musicians sometimes complained about
“never seeing a cent” in royalty payments. From the labels’ perspective, though, it looked like the artists had been advanced massive royalty checks on albums that had flopped. The advances market encouraged risk taking, and that was the secret reason for the small cut of royalties most artists got paid. Because the biggest cost at any label wasn’t pressing, or distribution, or marketing—in fact, the biggest cost didn’t appear anywhere in artists’ contracts at all. It was the cost of failure: the cost the winners bore to support the larger group of artists the labels went after who would never succeed. For the labels, the advances were a way to pool risk at the artists’ expense.

But to Jobs this approach looked obsolete. He didn’t think the labels had to invest so much money in risky music ventures, and he believed the artists wanted a greater stake in the overall pie. His proposed iTunes music label would offer artists nothing—no advance—in exchange for a royalty split of 50 percent that would start paying out from the first day. The economics would be transparent, and totally fair, and no one would be asked to subsidize anyone else.

It was a daring proposal, and for Morris, one that was the ultimate rebuff to his critics. If he was such a clueless technophobe, why did the most celebrated innovator of his time keep trying to hire him? But at the same time Morris knew it was a proposal he couldn’t accept. For one thing, he disagreed with Jobs. He thought that for a lot of artists—particularly artists at the beginning of their careers—a large advance check was a rite of passage, and a signal of confidence, and that without this carrot to dangle Apple would be unable to meaningfully compete for new acts. Despite their occasional complaining, he suspected that the musicians were just as happy with the current arrangement of high advances and low royalty percentages as the labels.

This strategic disagreement was overshadowed by a more pressing concern: Jobs was dying. His face had grown gaunt; his voice had gone raspy; his body was unbearably thin. After a long period of
remission, his pancreatic cancer had returned, and metastasized. As tempting as the Apple offer sounded, Morris didn’t dare sign on. While he liked Jobs as a person, he feared that enthusiasm for an in-house music label at Apple was unlikely to survive the passing of the company’s charismatic founder. After some discussion, he politely rejected the offer.

But Jobs wasn’t the only one looking to upend traditional music business economics. Around this time, Shawn Carter—Jay-Z—showed up at Morris’ offices in New York looking to get out of his own advance. Morris had long ago signed a multi-album deal with Carter that gave him an exclusive option on all of his future work. Now Carter was proposing to buy his way out of this deal and retain 100 percent of his royalties for his next album,
The Blueprint 3
.

Morris was amenable to the deal, as he was bearish on Carter’s career. The rapper’s last two albums hadn’t sold that well, and he was approaching a certain age where the commercial viability of all musicians seemed, irrevocably, to decline. Morris had experience with this—he’d pursued a lot of big artists on the declining side of fame. One of his first big signings, way back in 1980, had been Pete Townshend at Atlantic Records. Responsible for the Who’s
Tommy
and
Quadrophenia
, Townshend was one of the greatest songwriters in the history of rock, but in the late 1980s, after he had turned 40, the magic had dried up. When, in a frank discussion about the state of his career, Morris had asked him what was going on, Townshend had responded that he now saw the world through different eyes. Townshend explained that, when he was young, all he had wanted to do was go out and drink, party, and chase girls. Now when he thought about sex, his first thought was, “God, I hope my daughter doesn’t get AIDS.”

Morris was worried the same phenomenon was beginning to affect Carter, who in 2008 had retired his lucrative pimping persona after marrying the pop superstar Beyoncé. Music had always been a young person’s game, and the newly housebroken Carter would turn
40 soon as well. Although he normally held artists to the terms of their contracts and guarded his options on future albums jealously, Morris was, in this case, willing to make an exception.

The discussion soon turned to figures. Morris wanted six million for his stake in
The Blueprint 3
. Carter was only willing to offer five. The typical negotiation would have ended somewhere in the middle, but these weren’t typical men. Soon the two came to a compromise decision: to settle the dispute
over the remaining million dollars, they would flip a coin.

Even for Morris this was cavalier. Then again, he was playing with Universal’s money. Carter was paying out of his own pocket, but he had always been a gambler. And while a million dollars was for most people a life-changing amount of money, for both Carter and Morris it was a meaningless asset milestone they had long since blown by. Why not flip a coin? Despite nearly fifty years in the game, Morris had no idea what
The Blueprint 3
was really worth.

Life was unpredictable, and the best projections of his accountants had never panned out. He had watched the dark horse win and seen the sure thing fail. His business had been saved by one digital technology, ruined by the next, then potentially saved again by the third. He had been the custodian, several times, for radical upheavals in American culture. More than anyone, he had a sense of what was really possible in life, and it was this boundless sense of potential that kept him eternally young.

With a million bucks at stake, Morris put his hand out, flicked his thumb, and the coin flew high into the air.

S
hortly after his arrest, Her Majesty’s Government announced its intention to prosecute Alan Ellis for conspiracy to defraud. The prosecutors contended that the bank accounts full of cash and the limited-invitation user base were all evidence that Oink was a scheme for Ellis’ personal enrichment. Ellis’ arrest came just two months after Glover’s bust in the parking lot, but there was no link between the two. They were the product of two separate investigations—Operation Fastlink in the U.S. and Operation Ark Royal in the UK.

The charges provoked a backlash. Was Ellis really a fraudster? If so, he was perhaps the most honest fraudster alive. The money laundering charges against his father were the result of investigative confusion, and had quickly been dropped. Ellis’ own paper trail showed that, although it had taken in over £200,000 in donations over three years, Oink had barely broken even, and by the end of its life had been running hosting bills of £6,000 a month. Any excess cash was stored in a “war chest,” where Ellis was budgeting it to purchase even larger dedicated servers. Although the large number of bank accounts looked suspicious, there was no evidence to show that Ellis ever spent any of the money on himself.

He was an amateur in the purest sense. He just really loved music, and technology. The users of his site matched this profile; these were fanboys, not criminals. Within 48 hours of the raid that shut down Oink, two new sites had appeared: Waffles.fm and What.cd, both run by former Oink administrators. The sites were explicitly patterned after Oink, and their Web domains resolved to the Federated States of
Micronesia and the Democratic Republic of the Congo, respectively, although of course the sites weren’t actually hosted in these far-flung locations. Further Web traces led to shell corporations in Panama, and who was behind those was anyone’s guess. In the wake of raids on both Oink and the Pirate Bay, anonymity was critical, and the new operators were determined not to repeat Ellis’ mistakes.

Within a few years
What.cd’s music archive grew to surpass even Oink’s at its peak. Among the torrents it hosted were more than 45 different versions of
Pink Moon
, as well as a 15-gigabyte torrent of the 154-hour, 103-CD set of Stephen Fry reading all 4,224 pages of the Harry Potter series in its entirety. Torrent traffic was cresting worldwide, and by some estimates represented as much as one-third of all prime-time Internet traffic. Whatever the Crown’s goals were in prosecuting Ellis, one thing was clear: the prosecution had no deterrent effect. To the contrary, it seemed to act like advertising for torrent technology, as a similar prosecution had for the Pirate Bay.

But for the copyright defenders this was a question of justice. After seizing the server in Holland, investigators had run it through the standard battery of forensic analysis techniques. This had led to the outing of a large number of Oink uploaders, with a particular focus on those who had managed to source prerelease material. The Crown presented this as a triumph, and the tabloids, taking officials at their word, incorrectly began to refer to Oink as “the leading source of prerelease music in the world.” (Meanwhile, the
real
leading source of prerelease music in the world was sitting at home in North Carolina, awaiting arraignment. His investigation still ongoing, Vu hadn’t alerted the reporters to the bust, and the only media attention Glover ever got was a single mention at the bottom of an overlooked FBI press release.)

In a handful of scattered interviews with the press before the trial, Ellis maintained his innocence. He continued to insist that running a torrent tracker did not break the law, as Oink had only provided links to pirated material and did not actually host the music itself.
Even his own barrister, Alex Stein, a specialist in intellectual property cases, disagreed with this legal interpretation, and would have advised his client to plead guilty to a charge of copyright infringement. But Ellis was never charged with that crime. Instead, the prosecutors had seized upon the bank accounts as evidence that Oink was a racketeering operation, a crime that carried a prison sentence of up to ten years. Here Stein prepared a robust defense.

The proceedings opened on January 5, 2010. Making the case for Her Majesty’s Government was prosecutor Peter Makepeace, a blustery model of bewigged British pomposity whose primary legal tactic was to haul Ellis into the witness box and repeatedly call him a liar. Even as he did so, though, he betrayed his own limited understanding of the facts of the case, and at times seemed almost proud of his cluelessness. While discussing the material hosted on the site, he referred multiple times to “a band called 50 Cents,” and, after being informed that the site had migrated to Linux, he engaged in the following exchange:

Makepeace:
Whereabouts were they based?

Ellis:
I think they were in Canada. I don’t know where.

Makepeace:
A place called Linux?

Ellis:
I don’t know.

After ten days of this, the trial concluded. Stein, giving his closing argument, noticed the jury nodding their heads in agreement and felt confident about his client’s chances. Makepeace, giving his closing argument, said that “Oink was like the robot in
Terminator 2
.” His theatrics were ineffective—the Crown’s portrayal of Oink as an unstoppable cyborg run by a pathological liar determined to rip off the honest members of 50 Cents from its headquarters in the town of Linux, Canada, did not mesh very well with the existing facts. When
the jury retired on January 15, 2010, it took them less than two hours to reach the “not guilty” verdict.

Standing outside the courtroom in victory, Stein advised his client that, in his professional legal opinion, Ellis was a very lucky young man. Ellis agreed with this assessment. Stein told Ellis that he now had two choices: he could go outside to meet with the waiting scrum of journalists from the British tabloid press and attempt to explain to those assembled dignitaries why he had done what he did. Or he could leave through the back entrance, duck the press entirely, and make a graceful exit from public life. Ellis chose the latter. He returned to Middlesbrough by bus, and set about deleting all traces of his identity from the Internet.

The founders of the Pirate Bay were not so lucky. Their aggressive courting of controversy made them less sympathetic figures, and the Swedish prosecutors had done their homework. In November 2010 three of the site’s founders were given prison sentences ranging from four to ten months. Svartholm Warg, the author of the love letter to DreamWorks, fled to Cambodia in an attempt to avoid extradition. (
He later served a two-year sentence.) But despite the jailing and exile of its original leadership, the site thrived, and would remain the leading piracy portal on the Web for years to come.

This resiliency was no accident. The torrenters organized themselves into complex groups with well-defined hierarchies. They hid their identities behind pseudonyms and facilitated the distribution of online contraband. They understood that what they were doing was illegal, and did it anyway, with no obvious benefits to themselves. To law enforcement that made them criminals, but to a growing number of people they were starting to look like political dissidents.

In early 2006 a new political party had formed in Sweden: the Pirate Party. Not aligned along the traditional left–right axis, its platform called for a rollback of copyright laws and total amnesty for Internet file-sharers. The Pirates had seen how, when it came to the Internet, the concept of scarcity didn’t exist, and a university student
like Ellis could create the world’s greatest music archive from his bedroom. The only recourse for copyright holders, therefore, was to re-create those conditions of scarcity by artificially limiting the supply. And, as Alan Greenspan had observed so many years earlier, such conditions could be secured only by pressure from the state.

This troubled the Pirates, who could see the lengths that governments and corporations would go, in concert, to survive in the digital world. The Pirates pointed to the judgments against Jammie Thomas and the raids on the Pirate Bay. They pointed to the RIAA lawsuits, and how for a time the music industry had been granted de facto subpoena power by the courts. They pointed to invasive corporate tracking software, to clandestine government mass-surveillance programs, to growing restrictions from data providers over the kind of traffic permitted over their pipes. They pointed to how the rights-holders wanted—actually
needed
—to turn the Internet into a police state.

In campaign literature, the Pirates made their point in stark terms: “
It is impossible to enforce the ban against non-commercial file sharing without infringing on fundamental human rights.” People—especially younger people—listened. In early 2009, Sweden held its elections for the European Parliament, and the Swedish Pirate Party garnered over 200,000 votes, enough for a 7 percent share. For the next five years,
two Pirates would take seats at the table of the European Union.

Of course, the EU parliament had 751 seats, so the amount of power they actually held was microscopic. Nevertheless, it represented the first serious challenge to the theoretical and moral bases of intellectual property law in centuries. Lobbying from media industries had pushed commercial copyright statutes from
their original 14-year terms to
protections that could last for hundreds of years. This had diminished the public domain and left the majority of cultural products in the hands of just a few multinational corporations. The two Pirate parliamentarians, lonely though they were, sought to reverse this, pushing to reduce the length of copyright to just five
years and to eliminate all patents on software and biotechnology. The idea was that these changes would lead to a thriving public domain, universally accessible in the Internet era.

It wasn’t as crazy as it sounded. The trade in pirated mp3s had undeniably spurred innovation in the mobile device market, and the development of the smartphone could be traced directly back to Napster. The Pirates believed this episode was broadly applicable, and that the artificial conditions of scarcity imposed by the state were hampering innovation across a number of fields. They had noticed something else too, something even more radical: that the difficulties music executives like Doug Morris had experienced deploying capital over the past decade were shared in an increasing number of industries. In a world of digital abundance, it was getting harder to earn a profit.

This point was later made succinctly by Izabella Kaminska, a blogger for the
Financial Times
, who translated the Pirates’ arguments into macroeconomic terms. Discussing the inability of the world’s central bankers to engineer growth, Kaminska outlined the precise factors that had led Morris to slash his own operating budgets by more than 50 percent:

Negative rates are a function of global abundance (brought on by technological advances), and a trend that cannot be stopped even by the strongest central bank . . . For rates to stay positive we have to hoard almost everything in the world from the people that need it, if it is to have value. The artificial scarcity tactics that have been used through the ages to achieve this are getting harder to execute because of technological liberation—which is enabling the emergence of collaborative economy which bypasses rates of return.

Perhaps another world was possible. But organizing it proved difficult, and
only in one other country besides Sweden did the Pirate Party gain a foothold: Germany. There, it registered 30,000 members
in the course of a couple of years, polling in the high single digits, winning representation in several state-level elections in 2011, and threatening to put members in the Bundestag.

From his landed peerage at Fraunhofer, Karlheinz Brandenburg watched the rise of the German Pirate Party with disapproval. So, too, did Bernhard Grill. Though separated, the two engineers still thought along similar lines, and they both believed that the Pirate Party’s platform was economic cyanide. The Pirates’ ideas, if adopted, would radically reconfigure existing relationships of investment and profit. In this hypothetical world, companies like Microsoft and Adobe would see their revenues cut in half. Companies like Universal and Warner Music Group would go bankrupt almost immediately. Musicians, writers, and creative professionals of all kinds would be forced out of the marketplace and into relationships of patronage. And the next generation of inventors would probably become consultants.

Brandenburg and Grill were in some ways the fathers of the Pirate Party. Their decision to release the mp3 encoder for free on the Web had catalyzed a golden age of copyright infringement that had decimated the music industry even as it made them wealthy. But that decision had also catalyzed a political movement that now threatened their own livelihoods. No software revenues meant no mp3 licensing income. No mp3 licensing income meant the German state would be out hundreds of millions, and Brandenburg’s white-on-white Ilmenau campus would still be a cow pasture.

Both Brandenburg and Grill knew that, without the incentives of software patent revenue on the horizon, they never would have spent the better part of a decade conducting those listening tests. Brandenburg would likely have stayed in academia and sought a professorship. Grill might still be playing the trumpet. Listening to “Tom’s Diner” 2,000 times in a row was
work
, and the mp3 team would not have done that work without the incentive of future payoff. And that was their ultimate rebuke to the Pirates: without patent protection on software, the mp3 would never have
existed.