Web 2.0 Podcast: Disruption Opportunity - The Pirate and the Suit

by Daniel H. Steinberg

Web 2.0 Summit program chair John Battelle talked about the business of remixing music with David Munns, vice chairman of EMI Music worldwide, and Eric Kleptone creator of "A Night at the Hip-Hopera."

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Transcript created by Casting Words.

Announcer: Web 2.0 Summit Program Chair John Battelle talked about the business of remixing music with David Munns, Vice Chairman of EMI Music and Eric Kleptone, creator of "A Night at the Hip Hopera". Here are the "Pirate and the Suit" at Web 2.0 Summit Program chair John Battelle.
John Battelle: This conversation is what we've billed as the "Pirate and the Suit", although David Munns who is a vice chairman of EMI music isn't wearing a suit but he can come up anyway. David is the Vice Chairman of EMI and he's been in the big music business a very long time. I'll get more into what you are doing but please have a seat. And Eric Kleptone, who is officially the pirate but isn't wearing the hat, even though we tried.
Eric Kleptone: I'm wearing a suit.
John: He's got the suit on. You guys are screwing me up. Have a seat.

So it was a late September as you reminded me, late September of last year, 2005. I was sitting in front of my computer, as I'm wont to do, preparing for this conference actually last year. And I get an email from a friend of mine, Cory Doctorow, who is one of the editors of "bOING bOING" and he says, "You've got to check this out." and he sent me a link, which was to a "Night at the Hip Hopera".

So I go and I download it, and I have crappy DSL and it took a long time, it was a hundred megabyte file, thank you very much. And everyone was hitting it. It was clear that this thing had done what Michael Tanney had called the grass fire, it had just phffft, right? And so the servers were being hit and I couldn't download it so waxy, another site had mirrored it and I downloaded it over there because everyone was raving about it in the blogesphere and I finally got it onto my computer and I played the file and this is what I heard:
Echoing Voice: "This digital recording is brought to you courtesy of EMI records, the world's greatest music company."
John: That's kind of an F.U. Little bit, little bit. Because basically what you had done, Eric, is mashed up Queen and a bunch of other stuff and made the equivalent of another expression of music.

I listened to the whole thing straight through and then posted on my site about how amazing it was even though I don't really cover music. I cover search. But I just couldn't help myself. So I have a question before I ask you Eric, I want to ask you, David. What happened the first time you heard that recording?
David Munns: Well we broke out the rifles, formed a posse, and went hunting. No seriously the first question was what's it like? Everybody was very curious to hear it.

We love creativity and creative employees and creative people and creative artists. That's kind of our game. Just as a piece of work we wanted to know what it was like. People thought it was pretty good actually. It was around that time that we had been through the DangerMouse thing, who we subsequently hired to make a record for us, a Gorillas album. And we were learning to deal with this, learning to think through how we were going to deal with this kind of concept, realizing that it was pretty great, it was very interesting. The consumers liked it.

So after we got over the "What have we done to our beautiful Queen record?" The question is what's going to happen now. Should we get paid for this content and what circumstances should we get paid for it and how are we going to get paid for it? We're still in that process, basically.

We have an open mind to licensing our content for these kinds of things. In fact we're putting out a newly recorded mash-up album in February of a whole bunch of different EMI material. In fact the Beatles' "Love" album you could consider a mash-up in that sense in that it's a change of all the Beatles music presented in a way we haven't heard before. So this is becoming part of our business. We will deal with the rights issues.
John: There was a bit of gnashing of teeth though.
David: Oh, there was a bit of gnashing of teeth.
John: And the lawyers were starting to fibrillate, weren't they? Just getting a little excited by it.
David: Totally. Oh yes. That's their job.
John: On the other end of it you had done this before with Yoshimi and others. What was different about this one and how did you find out that all of the sudden you kind of had a hit on your hands so to speak.
Eric Kleptone: As you said, it's like a forest fire. It just suddenly, I have a regular DJ set in a bar. I left the house, played a DJ set and came home to an overflowing inbox. Immediately went straight to the site, looked at the stats, got the calculator out, typed out the bandwidth and just went ugh.
John: Now this was a very different experience, an artist with a hit who has to take out his checkbook because of it. So how do you square that?
Eric Kleptone: You just swallow it. It's part and parcel really of putting it out if you put something out for free it's a gift really.
John: You wrote, and I think this is one of your blog posts:

"In an ideal world, we would be able to at least legally give away our work for free, if not sell it and allow all the sample participants to profit from it. But archaic copyright law and yards of major record label red tape mean this is very unlikely to happen."

So can you guys work it out right here please?

Eric Kleptone: To release "Hip Hopera"?
John: It's certainly wonderful if you would release "Hip Hopera". But I'm just curious can you define both of you, lets set aside reality for a second, which is always fun late on the third day of a conference anyway. Give me the perfect kind of world that would allow you to do this. How should it work, as opposed to how does it work?
David: For me it would be a platform where people can make mashups, can make remixes, and they have access to whether they pay a subscription or whether there are deals with record labels where they are allowed to use the content. It's restricted to that site.
John: So basically all the music that you might want to sample, you figure out a payment scheme where you're in the garden now and you can play at will.
David: Absolutely.
Eric Kleptone: I can see an environment like that coming through creative commons and ideas like that.
John: Creative commons isn't about money.
Eric Kleptone: It could be.
John: Actually there is a commercial commons effort going on right now but why won't EMI take it's vast resources put it available in some kind of scheme where you kind of open up to letting everybody play and when someone starts to make money or maybe they pay a little bit to come in and play, and then let it go? See what happens.
David: First of all, some of that might happen in the future. We're certainly looking at releasing some material into those platforms in a licensing sense. But our artists have a lot to say with it, about it. A lot of artists don't like that going on as you saw with the DangerMouse thing, we responded to the Beatles objecting to that. This is copyrighted material and there's a number of constituents involved in it.

There's no ambiguity about copyrighted material, it's either owned or not owned by somebody. If it is, red tape isn't an excuse to use it at will, otherwise people won't pay their income taxes, the government has plenty of red tape. This was a fairly new concept to us, just letting this go at will. But we're now faced with user-generated content in video and all that kind of thing. So when I process dealing with this I can see an environment where we allow some material to go onto those platforms.
John: Now that sounds a little wishy washy: "Some material into those platforms." Again, let's stay in the perfect world for a second. Could it be that an artist you sign there's a clause in their contract that says you're also going to be part of this, it's just another revenue stream basically. You agree that your music is going to be in this distribution scheme, which is the universal with a small u, the universal mash-up remix commons, and anybody who is in there, whatever percentage of it is used in a remix, you get royalties based on that based on the pool of people who pay to come into the commons. Is it too hard to do because to get all the people in the music business to agree to that would be like peace in the Middle East?
David: You won't get all the people in the music industry to agree to one thing like that. I think that's in the real world. But I can see going to some existing artists and getting some tracks cleared and I can see it being built into new artist's contracts. They'll get a time to work through the system. Artist's contracts are living organisms in that sense. You'll constantly change and add things to deal with new market realities. I can see us doing that.
John: Right. Given that you give your stuff away for free, because you really don't have a choice, it's either that or hire some really good lawyers, and it may even be hire some really good lawyers even if you do give it away for free , is, that the case, are you a little concerned?
Eric Kleptone: Yeah, no, very much so. There's reassurance from the amount of stuff that's already been put out on line. Also, we weren't really expecting an audience as large as we got. So, likewise with The Grey Album, people weren't really expecting - I think Danger Mouse maybe pressed up about 3,000 of those. Somebody put it on line to maybe share with a few people. Again, it snowballs. So, you don't really know where it's going to go until it's got there.
John: But how do you make a living then?
Eric Kleptone: I DJ. I freelance. I have a day job as well.
John: When "Hip-hop" broke did your rates go up?
Eric Kleptone: They don't actually know. I have a kind of Clark Kent/Superman kind of dual existence.

John: Please, tell me more.
Eric Kleptone: No, no, I can't. Otherwise it wouldn't be a Clark Kent/Superman existence.
John: You're right, but I had to ask. Let's talk about "The Grey Album" actually, because I think that was really a seminal moment, an axis that things turned on. How many of you are familiar with the story behind "The Grey Album", so I know if I'm redoing? So, sorry for those of you who know, but "The Grey Album" came out in '04, right? Early '04, mid '04, something like that. It's Danger Mouse, who's now very well known, and did the Gorillasz album and worked with you guys afterward. What he did was match up "The White Album" from the Beatles, with "The Black Album", Jay-Z's "The Black Album", and made just a kick-ass piece of music in my opinion.

I called Danger up through his Waxploitation, which is a great name, his manager, He came to WEB 2.0 in 2004 and we had a conversation about how cool this was. He actually was in London working on the Gorillaz album and came out here just for that, which was really cool.

Now, what did EMI do once you found out about "The Grey Album"? Just pick up the story.
David: We put out "Take Down" notices to all the sites carrying it, and tried to stop it.
John: Tried to stop it?
David: Yes.
John: I'm not trying to make you out to be the bad guy, but that's how you were very much seen in 2004.
David: Yes.
John: The bad guy. So then there was the response by the Web, which was Grey Tuesday, where a ton of websites turned their pages grey to support Danger Mouse, and the genie was out of the bottle. People had put up mirrors everywhere and pretty much your lawyers would have been busy for a decade with "Take Down" notices across the Web. What did you take away from that? Are you still angry about it?
David: First of all, I don't want to sound like the bad guy, but we're not here particularly to win a popularity contest. We're running a business and The Beatles Catalogue is pretty much the most valuable catalogue in the music business' history. We didn't particularly like and the Beatles certainly didn't like it being messed around with without them knowing what was going on and being involved in it. So, this was a fairly new concept and we decided that we did not really want that to happen.

We were less concerned on Eric's records, in fact, didn't do anything about it.
John: Is this because the Beatles are better than Queen?
David: Not particularly, no. First of all they objected. When our artists object, we respond. They have a right to object; it's their work. We thought there was some commercial element involved there. I can't remember exactly what happened in the end with that. So we decided that we were going to make a point. You can't just do this and we're going to sit around and do nothing about it on every occasion.
John: What's the damage? Why did the Beatles object? Did they object as a knee jerk reflex it's my music, I own it or did they object because they were afraid someone was going to change the meaning of what they intended? What was the damage that was being done? Because it was free.
David: It's not so much just a question of damage. It's a question of right. You don't have the right to us that material without permission.
John: Does that mean I can't sing a song in front of this group? I don't have that right to modify a song and interpret it?
David: Yes you do.
John: Unless it's "Happy Birthday" of course.
David: But in this group, since this is a paying audience, you are supposed to pay a public performance fee to do it. If you sing a published, copyrighted song in a public audience, you're supposed to have a public performance fee. This hotel will have a public performance license for playing Muzak in the hall. This is not a new concept of ownership and paying for use.
Eric Kleptone: This kind of falls back to what we were talking about before about actually paying a subscription fee for the rights to be able to do that. For example, Saturday night, I'm going to DJ in a club downtown. I can play "Hip-Hop" in its entirety, and it will be legal. The artists will get remunerated for that.
David: They would, there's a public performance fee.
Eric Kleptone: So, why could there not be a similar system for stuff on line?
David: There could, come and ask me. If you want to use copyrighted material and you say I want to use it for this use, and put in a subscription and charge 50 cents for a stream, we would look at that very openly.
John: Isn't that a little stifling and backwards? People just want to express themselves and they don't want to have to hire a lawyer and negotiate with a big company.
David: You don't need to hire a lawyer.
John: Well, if they don't I would be worried for them, because they're not going to win in the negotiation.
David: All those people who put user content up on YouTube haven't hired a lawyer.
John: No, and what do you make of those people?
David: All of them, there are 125 million of them?

John: No. There was a question asked earlier actually, that I thought was a very interesting question. Someone said, "Do you think a big media company", and maybe this also applies to your business, "could legally create a YouTube?" Eric Schmidt of Google was asked this question. Because to create such a phenomenon under the constraints of a legal system most people don't understand would be to kill that phenomenon and not allow such an innovation to ever exist.

Do you agree with that?
David: I don't know. I haven't thought about it. YouTube existed and was basically created by the consumers.
John: Wasn't it created based on remixes and postings of a lot of copyrighted material?
David: Yes, and it's today's new conundrum isn't it? How do you deal with that from a copyright owner's point of view?
John: Are you guys having robust conversations with the folks at Mountainview?
David: Of course we do.
John: Is there going to be a check big enough to make you happy?
David: I don't know. I'm not going to answer that sitting up here!
John: If you guys have questions, there are mikes on either side. We're going to run out of time soon, so I want to make sure you guys get a chance to ask both these guys questions.

So, Eric, do you think the music industry has changed over the last three or four years?
Eric Kleptone: Yes, completely.
John: And how has it changed, from the artist's point of view, from your point of view as someone who has been on the periphery of it?
Eric Kleptone: Well, everybody I have spoken to, I think, universally, who is a musician of any kind over the past year or so, all agree that it's never been better. It is so good at the moment. There are so many opportunities. It's wide open. The restrictions and limitations of the standard record business have been broken up. There are a lot more options for people to get music out. There are a lot more options for people to generate revenue in their own way and to develop a fan base. If people have got the get up and go, there is now somewhere to do it. The future has arrived for a hell of a lot of musicians.
John: Are you finding the same thing? For example, you pretty much harvested DangerMouse, right? First he did something that set you off, but then you're like, "Hey, there's talent here, we're going to figure out a way to..?"
David: Yeah, there was never any doubt that that guy was a very talented guy. There was no argument with that. And yes, the music industry is changing out of sight, including my company.
John: Yeah, you've been responsible for that for two decades now?
David: Yeah.
John: Yeah, yeah, thank you. And thank you for coming on stage. I want to turn it over to some questions from the audience. First on this side.
Zappy: I'm Zappy. I'm from One of the companies I co-founded is I've got some partners out in Los Angeles, and I wanted to ask David, it seems to me there's so much opportunity to take what the labels are good at which is finding great artists and attracting an audience, and make the money there. And come up with some creative ways to bring together those elements and make music make money in a different way than it's been done in the past with worrying about the royalties and things like that. I was wondering if you had any comment as far as what you guys are doing in that respect.

I noticed Interscope Records is helping Coca-Cola to roll out artists and things like that. Isn't there a better way to make money and accommodate the artists?
David: The what of the artists?
John: Accommodate I think.
David: Accommodate? There are a lot of questions in that question. Accommodating artists and dealing with artists and signing artists and helping create artist's careers are the core of EMI's business. We have no other forms of income. We don't have a film company, a hardware company, a water company. We sell music or we don't sell music and if we don't sell music, we don't survive and our artists don't survive. That's the fundamental base that EMI's built on.

If you sit in my shoes, what we're seeing every day is that five years ago the Internet was basically, from our point of view, about piracy. Three years ago we knew there was an opportunity, and a very exciting opportunity. Our income was zero. In this year, our income from all things, the digital platform, will be 10, 11, 12 percent. In another three years time it could be 25 percent of our business. This is an enormous amount of change in our business and our company and it's affecting small labels and big labels, and major labels like ours.

We've just talked about some of them - all these different ways of the consumer accessing music. Our motto if you like is "consumers getting music when they want, where they want and how they want". That is changing every day of our life and people accuse us of being slow sometimes. I don't really think we're slow; we are dealing with this huge pace of change. That means that people in our company have got to change, our artists have got to change, all the constituents in the music industry have got to change.

Eric's got to change. In the end he will license music for his mash-up albums. And we'll find a way to do that. So, it's not just about selling flat things with a hole in the middle anymore. We've changed the name of EMI Records to EMI Music. It's about selling music in a broad set of platforms and a whole bunch more business models that we don't know about, people in this room are going to invent and come and say we want to use your content. We will have to find a way to make a deal with you. That's the challenge right now. It's very exciting and you need to be very aggressive. But you also need to remember that the tone that you set and the business rules that you set are going to last a long time and you'd better get them right so that we can all have a fair shake out of this.
John: Great. One more question.
Ian: My name is Ian. I haven't actually heard this "Hip-Hopper" song. I've got my wallet out and I'm just curious how much it would cost me to hear it right now.
David: $10. No.
Ian: No shot? OK.
John: It's relatively easy to find on line.
Eric Kleptone: I have some copies on me actually. Find me later on. No charge.

John: Mark?
Mark: Speaking of the world's most valuable music catalogue, is there any update on the status of the Beatles download? They were going to keep the bits of their hard drives; what's the status of getting Beatles on line?
David: Soon coming.
Mark: All right!
John: Ah, excellent, Beatles soon coming. Actually we have a little treat for you right after this final question.
Eric Telenius: Hi, I'm Eric Telenius. I'm wondering what can be done to reduce the transaction costs, because it seems to me that that's the real problem here. If you want a license, if you want to do anything, the negotiation, the complexity, not knowing whom to talk to, that's what's killing the innovation.

If I have a radio station, I just play whatever I want, there's a standard format, if I'm doing a live performance, and I can do whatever I want. It seems to me like there needs to be more of a way to get very simple, get the transaction cost and not have to get lawyers involved. I know, John you asked about that but I'm wondering if we can talk about that a little more.
Eric Kleptone: I know I completely agree. I don't see why it should be any different. As you said, radio musicians want to get played on the radio. Club's musicians want to get played in clubs. There are systems to allow people to get money back from that.

As remix culture becomes more and more embedded in people's life and people get hold of content on line, they want to be able to customize that content. More and more people are going to want to do this. It's becoming second nature for a lot of people. I feel that the artists should benefit from it but there should be systems set up to allow it to happen.
David: Yeah, and you're absolutely right. I totally accept that we're going toward a world of huge changes in the number of transactions and micropayments. Dealing with that from a practical sense isn't as easy as it sounds. I'll give you a quick example.

A few months ago we had, just from the subscription business in America, $1 million income in one accounting period, a month or something like that. In that $1 million, there were 57 million individual transactions. Think about that. I have to unpick each one of those micropayments, credit the producer, the artist, and the engineer if they want a royalty, the publisher. You're not going to do that on a card index system or an Excel spreadsheet.
John: These guys will figure it out for you.
David: These guys will figure it out for me. Those systems don't exist today. We have to build them and we have to change our business to cope with this enormous explosion in the simple number of transactions that we expect to happen in the coming years.

Also, we used to put out four or five products. You know, have an album, maybe a cassette, maybe a bit of vinyl, a tour edition or a holiday issue. Now, it's nothing for us to put out an album and that one album will generate a hundred or more products just within EMI. Every mobile company wants a different ring tune; a different bit sampling range, a different length, each track is a separate product. They are all tracked and monitored individually so that we can receive the income from it and pay the rights holders that are our partners. It's a very difficult logistic exercise.
John: Well Mersa Meyer backstage is going to help with that. Now, I want to thank both of you very much for coming. Thanks to David we have a little treat as we walk them off the stage. Dave, there's a new album of Beatles' music coming up, which you mentioned "Love". We're going to play the first track as they leave. Thank you very much for clearing the rights so we could do this.


Announcer: David Munns and Eric Kleptone at the WEB 2.0 summit 2007.

Daniel H. Steinberg is the editor for the new series of Mac Developer titles for the Pragmatic Programmers. He writes feature articles for Apple's ADC web site and is a regular contributor to Mac Devcenter. He has presented at Apple's Worldwide Developer Conference, MacWorld, MacHack and other Mac developer conferences.