How music got free

CHAPTER 18

By the end of 2007 compact disc sales had fallen by 50 percent from their 2000 peak, and that was with aggressive price discounting. Digital sales of legal mp3s didn’t begin to make up the difference. Both margins and profits were squeezed, and once again Morris had been forced to fire hundreds of employees across every department.

Meanwhile, Project Hubcap was rolling to a stop. The RIAA’s educational lawsuits against the file-sharing public had had no discernible effect, even though they had yet to lose a case. The vast majority of the accused had settled. A small number of cases had been dropped, but only one—out of almost 17,000—had been brought to a jury trial. On October 4, 2007, Jammie Thomas of Brainerd, Minnesota, was found liable for infringing the copyrights on 24 songs she had downloaded off Kazaa. The jury ruled that she owed the recording industry $9,250 a song—a total of $222,000. (Thomas appealed the ruling.)

For Universal’s lawyers, the finding was a vindication of the RIAA’s strategy. Average citizens with no vested interest in copyright law had found in favor of the recording companies, and awarded surprisingly heavy damages. You really could sue the average file-sharer, and you could win. Thomas’ case was a landmark judgment.

But from a financial perspective, the RIAA’s victory was a farce. Thomas, a single mother of two who lived in a small rented apartment and worked on an Ojibwe Indian reservation, would be bankrupted by the judgment. Regardless of the outcome of the appeals, it was widely understood that the RIAA would only ever receive a small fraction of the damages. It was also widely conceded, even by the RIAA’s lawyers, that Thomas herself was digitally unsophisticated, with only a limited understanding of peer-to-peer file-sharing technology and no connection whatsoever to the elite-level Scene members and torrenters who actually ran the world of music piracy. She was the music industry’s sacrificial martyr.

Contrast that with a real pirate. A month before the Thomas ruling, the FBI, after years of effort, had finally broken the Rabid Neurosis crew and picked up the Scene’s inside man: Bennie Lydell Glover. Here was a packaging line manager who on his own initiative had leaked almost 2,000 albums over the course of more than eight years—the man who destroyed the music industry to put rims on his car. Glover had pleaded guilty and was now offering to testify against his coconspirators, but the RIAA would never seek financial damages.

The problems continued: quasi-legal digital storage lockers like Megaupload began to appear; peer-to-peer file-sharing moved to torrent sites; rival leaking groups emerged to take RNS’ place. The war on piracy looked like the war on drugs: costly and probably unwinnable, even in the face of felony criminal prosecutions. Lil Wayne’s new album Tha Carter III was the first to capitalize on his post-Dedication fame, but it was leaked too—not by Glover, but by one of Wayne’s own producers. The leak came months in advance, and Wayne responded by creating a new “intermediate” album titled simply The Leak.

Between 2006 and 2008 Wayne had appeared on at least 200 tracks as a featured artist, not even counting his own mixtapes and albums. The entirety of his output during this period was impossible to catalog. This ubiquity brought mainstream attention, and when the final version of Tha Carter III arrived in stores, it was a hit—sort of. The album moved nearly three million copies and was the bestselling release of 2008. But it failed to do even half the business that Get Rich or Die Tryin’ had done just five years earlier. The same numbers in 2000 wouldn’t have put it in the top ten.

The album was dying. Doug Morris, however, was doing fine. Presiding over an industry in free fall, he was still earning almost 15 million dollars a year. He owned a waterfront mansion in Syosset with a tennis court, a boat dock, and a pool. He owned a condo on a key in Sarasota. His new apartment in Manhattan had an incredible view. He traveled by private car and private jet, and he sat on the boards of the Robin Hood Foundation and the Rock and Roll Hall of Fame. He inhabited a world of privilege, populated by celebrities and powerful CEOs. The world’s most famous musicians dropped everything to speak with him, and even Steve Jobs returned his calls.

During his time at Universal, he had so far grossed more than a hundred million dollars in aggregate, and this by a considerable margin made him the highest-paid major label CEO. His fortune began to attract attention from outside the insular recording industry world. Trade organs like Billboard and Variety had always gone easy on him, but he had a target on his back now, as Bronfman once had, and the mainstream press was after him.

In late 2007, Morris agreed to an interview with the journalist Seth Mnookin for Wired magazine. The resulting article portrayed Morris as the clueless relic of an earlier age. Morris, as always, tried to hide behind the hits, and insisted there wasn’t a thing he could have done differently. Mnookin let him hang himself.

“There’s no one in the record company that’s a technologist,” Morris explains. “That’s a misconception writers make all the time, that the record industry missed this. They didn’t. They just didn’t know what to do. It’s like if you were suddenly asked to operate on your dog to remove his kidney. What would you do?”

Personally, I would hire a vet. But to Morris, even that wasn’t an option. “We didn’t know who to hire,” he says, becoming more agitated. “I wouldn’t be able to recognize a good technology person—anyone with a good bullshit story would have gotten past me.” Morris’ almost willful cluelessness is telling. “He wasn’t prepared for a business that was going to be so totally disrupted by technology,” says a longtime industry insider who has worked with Morris. “He just doesn’t have that kind of mind.”

Morris was furious with Mnookin’s portrayal of him. He felt the article was a hatchet job meant to appeal to Wired’s technologically savvy reader base, complete with an unattributed quotation that implied he was kind of dumb. Morris felt he had a fine mind, particularly for the business he was in. The vet analogy was a poor one. A better one would be to compare the music business to Mnookin’s own: journalism, perhaps the only field that had handled the digital transition worse than music.

The quotes from the interview weren’t hypotheticals. Several people with good bullshit stories had gotten past him, and he’d watched both Vivendi and Time Warner squander tens of billions of dollars of capital. Shareholders at those companies would have been better off if management had never even heard of the Internet. Morris himself had wasted tens of millions of dollars on online ventures like Pressplay that had effectively generated zero revenue. The aggregate investment experience in technology threatened to do the unthinkable: to make A, the capital he drew, greater than B, the capital he returned. And that was the one thing Morris would never let happen.

And, really, what could he have done differently? If there was some other record industry executive who’d done better, who’d taken a different path, maybe the case could be made. But the decline of the music industry had affected every player, from the largest corporate labels to the smallest indie. Morris had once been a gatekeeper, the guy you needed to get past to get into the professional music studio, and the pressing plant, and the distribution network. But you didn’t need any of that stuff anymore. The studio was Pro Tools, the pressing plant was an mp3 encoder, and the distribution network was a torrent tracker. The entire industry could be run off a laptop.

As an arbiter of cultural trends, Morris remained unimpeachable. In the past two years, his labels had signed Rihanna, Rick Ross, Taylor Swift, Lady Gaga, and—best of all—Justin Bieber. Doug Morris didn’t understand the technology, but he did understand how to turn an unknown YouTube busker with microwaved hair into a global superstar, and his hot streak was now almost twenty years long. Universal had done everything right, everything a label was supposed to do, investing in and grooming A-list talent from around the globe and outsmarting all its competitors. And now, in addition to that, he was supposed to be some kind of tech guru? If so, was Karlheinz Brandenburg expected to sign Lil Wayne? Was Seth Mnookin expected to invent the Kindle?

Maybe. One thing was certain: the interview was a low point in Morris’ career. He was the target of satirical cartoons and a great deal of vicious Internet flaming. The website Gawker, reblogging other people’s work with characteristic restraint, called him the “World’s Stupidest Recording Executive.” The anger was shared by many of his employees, some of whom in fact were gifted technologists who had passed up jobs in Silicon Valley to work for him. “He made the company look ridiculous,” Larry Kenswil, the chief of Universal’s digital strategy at the time, would later say. “That was insulting to a lot of people inside the business.”

The chorus of criticism that Morris was too old, too out of touch, began to crescendo. He was 69. Vivendi had a mandatory retirement policy for all of its executives, effective at age 70, and the company’s management board had informed Morris that, while they were willing to stall for a couple of years, ultimately he was not exempt from this policy. Already, Morris had begun training his own successor, the British music executive Lucian Grainge. In 2010—two years—he would be done. For his critics, the deadline couldn’t come soon enough.

But for Morris, redemption was always just around the corner. Perhaps Mnookin’s public shaming of him was ultimately a net positive. Perhaps it jolted him out of his complacency. Perhaps it took this kind of widespread embarrassment to make him change direction. He denied this, of course, but in the period immediately following the Wired interview he began to innovate as never before. Whatever his motivations, the business decisions he made over the next two years laid the framework for the economic future of the recording industry.

It began with a visit to his teenage grandson. In a hands-on experiment in consumer demographics, Morris had asked the kid to show him how he got his music. Morris’ grandson explained that, while he didn’t pirate anything—promise—neither did he buy any albums nor even many digital singles. Instead, for the most part, he just watched music videos on YouTube from the computer in his room. Soon the two were seated in front of the screen.

Watching rap videos with Grandpa sounded like the premise for a comedy skit, but in Morris’ case most of the videos were ones he had green-lit and budgeted himself. After a bit of searching, the two opted on a mutual favorite: 50 Cent’s “In Da Club,” which Morris’ grandson liked because it bumped, and which Morris liked because it had moved eight million units. The video had a clever conceit. It featured 50 Cent reclining in a nightclub, surrounded by his entourage, while on the dance floor gorgeous models waved snifters of expensive cognac in the air. The camera then panned through a dummy wall to reveal that the dance floor was actually located in the “Shady/Aftermath Artist Development Center,” a secret desert laboratory where Dr. Dre and Eminem, standing with lab coats and clipboards, watched through a one-way mirror, perfecting the science of the club banger.

Had that framing device been used again, the camera would have panned from the desert to Morris’ office in New York. He was the ultimate patron of this culture, the one who signed the checks that Curtis and Andre and Marshall cashed. Now, in his grandson’s bedroom, watching this music video, he made a startling observation. Next to the video, in small embedded boxes on the YouTube website, were a series of advertisements. The ads were junky. They offered weight-loss supplements and mortgage refinancing and One Weird Tip to Shrink Your Belly, Discovered by a Mom. But their presence meant that, somewhere in Silicon Valley, an economic transaction was occurring—a slice of revenue was being sold against the creative product that he had spent 15 years developing. And he wasn’t getting paid.

The next day, Morris summoned his lieutenant Zach Horowitz to his office for a memorable conversation.

They’re selling ads, Morris said.

Who is? said Horowitz.

All of them! said Morris. The websites. They’re selling ads against our videos!

Doug, said Horowitz, those videos are promotional.

Promotional for what? Get Rich or Die Tryin’? said Morris. That album came out four years ago.

Doug, we give those videos away, said Horowitz.

Not anymore we don’t, said Morris.

He ordered Horowitz to draft an ultimatum to all the major websites: give us eight-tenths of a cent every time you play one of our videos, or we pull everything. By the end of 2007, thousands upon thousands of videos on YouTube went dark, and every artist in Universal’s roster disappeared from the major video hosting sites.

The takedowns extended not just to officially licensed music videos but to millions of amateur efforts scored with music from Universal artists. Your fan-made cage-fighting highlight reels set to Limp Bizkit; your supercut of Ross and Rachel’s most romantic moments scored to Sixpence None the Richer; the Josh Groban montage you made for Brad and Sharon’s wedding video—all of it went quiet. The outcry from the YouTube commentariat was as furious as it was predictable, and in thousands of comment threads Morris was personally attacked for his parsimony and greed.

But what made the public angry made his artists ecstatic. Soon the video hosting sites were forced to negotiate, and they gave Universal a significant portion of the advertising revenue stream. Morris, with a few threatening letters from his legal team, had created hundreds of millions of dollars in profit out of thin air. The mp3 revolution had caught him flat-footed, but it had at long last taught him something, and he was determined never to let anything like that happen again.

He began to look for similar sources of income. Advertising streaming revenue was a new front, one that offered an opportunity to correct for the mistakes of the past. In addition to the charts, Morris now began to pay attention to the Internet’s fundamental unit of exchange: the cost per thousand impressions, abbreviated as “CPM.” The metric represented the price advertisers were willing to pay for a bulk unit of 1,000 advertising views. CPM rates were determined by instantaneous electronic auctions, and prices could range from fractions of a cent to hundreds of dollars. Video CPM rates were especially good, and on average cleared about thirty bucks a unit.

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.