Can Nettwerk save the record industry?

Terry McBride is leading a one-man crusade to fix a business in chaos amid declining sales, legal uncertainty and a refusal to embrace new technology.

The technology: the player piano. The time: a century ago. Back then, music publishers tried suing the piano-roll companies for copyright infringement. They failed, but the U.S. Congress stepped in and enacted a law requiring royalties be paid for each mechanically reproduced song. When it comes to technology and music, the player-piano story is among the earliest renditions of a familiar refrain–just substitute for the piano commercial radio, the cassette tape, the digital audiotape, satellite radio, or Internet file sharing. Whenever a new technology threatens to rearrange the musical chairs, the industry starts crying foul until someone in government hears it. Then everybody wakes up and discovers the so-called menace is the industry's saviour. “Every technological advance in the music industry has been forced upon them,” says Terry McBride, a sharp-shooting hipster who's pitting himself and Nettwerk Music Group–his independent Canadian record label and management company–against the industry he's thrived in for 22 years. “They [the industry] have fought every single technological advance, yet they've benefited tremendously once they've let it go. In a few cases, it's been forced upon them. They're following history again. They haven't learned.”

It's a rallying cry that would ring hollow from just about anyone else in the industry, but McBride is actually doing something about it. He's putting up the money to defend David Greubel, a Texan accused in August 2005 of illegally downloading 600 songs, including “Sk8er Boi” by Avril Lavigne, a chick rocker who is managed by Nettwerk. The Recording Industry Association of America has demanded Greubel pay US$9,000 as a penalty, although it will accept half that if he pays up quickly. That's not likely. Greubel is fighting back, bankrolled by Nettwerk, which has hired Chicago-based Mudd Law Offices to take the case–a case that could end up costing Nettwerk millions in legal fees. That is quite a lot, considering the company is a minnow in a multibillion-dollar global industry controlled by such big fish as Universal Music Group, EMI Group, Warner Music Group and Sony BMG Music Entertainment. Lately, though, McBride's lonely crusade has received added punch in the form of the Canadian Music Creators Coalition, a group of musicians who don't want Canada to ratify World Intellectual Property Organization (WIPO) treaties that would toughen copyright laws in this country. Not surprisingly, some of the musicians in the coalition, including the Barenaked Ladies and Sarah McLachlan, are represented by Nettwerk.

So what has Terry McBride been smoking?

With his defence of file sharers, it's tempting to conclude that McBride, 46, is some sort of open-source music hippie. Nothing could be further from the truth. Although he's against putting any encryption software on his CDs, he supports the principle of copyright. He supports copyright law. Without it, he knows it would be awfully hard for his artists–or him–to make a living. “I believe that people who create should get paid,” McBride says. “What I don't agree with is the industry's litigation, which is destroying those same creative abilities to get paid. That's a bit of a twist for the record companies.”

It's more than a bit of a twist: it's got the industry's shorts tied in a bunch. The music industry has long made a habit of suing new competitors, as well as its own artists, but in the past few years it has started suing the one group it really can't afford to alienate: music lovers. While no downloaders have been sued in Canada, more than 18,000 have in the United States.

This industry reaction to file sharing (something that has been happening for decades, albeit in less high-tech formats) makes it tempting to turn the issue into a battle of good versus evil–you know, money-grubbing record executives against consumers tired of paying high prices and musicians who want more control over the songs they create. But it's not that simple. The fact is, record sales have declined over the past seven years, neatly coinciding with the rise of Napster and similar file-sharing services. But it's also true that sales are higher today than they were 20 years ago, when the CD started to take off as a format. Since 1986, sales have increased by roughly 47%, a rate of growth well in excess of the 2% the Recording Industry Association of America (RIAA) said was “positive news” between 1995 and 1996, before the rise of Napster. Yet it's not good enough today. “People in Canada today are listening to more music than they ever have in history,” says Richard Pfohl, general counsel for the Canadian Recording Industry Association. “They're simply not paying for a lot of it, and less of what they're listening to has been purchased than it has been historically.”

Between 1999 and 2005, music sales in Canada have dropped by roughly $587 million–a 44% decrease. The CRIA claims those lost sales are responsible for a 20% cut in employment, and places the blame almost entirely on illegal file swapping. Yet while file sharing is part of the trend, it's not the whole story. A recent CRIA survey conducted by POLLARA Inc., a market researcher based in Toronto, concludes people have stopped buying music for many reasons. Price, lack of interest and lack of time all topped availability of free downloads as a primary reason for drooping sales. The boom in sales in the 1990s was partly fuelled by baby boomers' replacing vinyl and cassettes with new CDs, turning a quick if unsustainable buck for the labels. But these days, there's more competition for the entertainment dollar, from satellite radio to pay-per-view TV to MP3 players. And the demise of small retailers has meant the industry increasingly depends on mass merchants, which carry limited titles, cutting into back catalogue sales.

But one of the biggest factors in the decline, argues McBride, is that the industry has been slow to take advantage of new technologies that would have allowed it to increase sales. Napster, a San Mateo, Calif.-based service that allowed web users to share and copy MP3 files, could have been turned into a money-maker, he believes. Instead, the RIAA sued it out of existence (although it was subsequently brought back to life in a weakened state) and file sharing went further underground. What McBride figures the industry should do is stop fighting peer-to-peer distribution and other new technologies–and embrace them.

Maybe the industry should start paying attention to him. McBride is not some fly-by-night cowboy. He has an impressive track record with Nettwerk, which has been around longer than almost every other Canadian label. In the years since 1984, when McBride turned a hobby into a full-time profession by starting up Nettwerk in his Vancouver apartment (along with partners Mark Jowett and Ric Arboit), the label has grown into Canada's largest independent, with more than 400 titles selling a combined 100 million-plus albums. Nettwerk artists include Sarah McLachlan, Ron Sexsmith and Martha Wainwright, and it manages the likes of Barenaked Ladies, Sum 41 and Dido. McBride became one of the youngest inductees into the Canadian Music Hall of Fame in 2003, the same year he received a special achievement Juno from the Canadian music industry.

McBride is respected by others in the industry, even if his message isn't always well received. “I admire Terry for speaking out,” says Bernie Finkelstein, founder of Canada's oldest independent label, True North Records. “He has some courage attached to it.” Adds Michael Moskowitz, president, Americas International, at handheld company Palm Inc.: “Nettwerk has embraced technology and the digitization of content. McBride understands the value. Ultimately, I think that has opened up more doors for them as well, and a new audience.” Others are more guarded, praising his skills as an exec, but not so secretly wishing he'd shut the hell up. “Terry's been a great contributor to the music industry,” says John Kennedy, CEO and chairman of the International Federation of the Phonographic Industry, the worldwide industry association. “I don't think it's right that he should be intervening in proceedings which are there to protect other members of the creative community. But I'm not going to stop him–I'm not going to beg him not to. It's up to him to do what he wants and we'll take the consequences of it.”

But the consequences of the industry's doing nothing–except continuing to sue fans–are obvious, says McBride. “The industry has forced consumers and technology people to develop methods that aren't traceable, and thus they're killing their future. If you keep doing it, there won't be a future. You can't sue everyone because there are hundreds of millions of people who have broken the copyright law.” Who hasn't made a mixed tape for a friend, or borrowed and burned a few songs? Canadian law allows recording for personal use–except onto a hard drive–but once you pass it onto someone else, you are subject to prosecution. But savvy web surfers know they can use BitTorrent peer-to-peer, instant messaging or a variety of other software to send music, without much chance of getting caught.

That has put the industry between a rock and a hard place. The solution, says McBride, is to understand which technologies consumers are using and then get there. If kids are listening to music while playing video games, McBride wants Nettwerk involved. If people are downloading songs while text messaging, McBride wants Nettwerk music to be available. He's not particularly fussy about the medium–the content is his message. Like most good business philosophies, McBride's is short and simple: “We're going to support every platform and format that comes, and we're going to allow the fan to consume our music however they want to consume it. We're not going to tell them how to consume it.”

Take Nettwerk's deal last fall with Palm Canada. Under the agreement, Palm Treo 650 smartphone users will be able to download digital music, screen images and videos by more than 10 Nettwerk artists, including McLachlan, Barenaked Ladies and Swollen Members–all for free. Free? How can you make money doing that? “Who says you have to make money?” counters McBride. “I have a very strong saying: free is worth something.” Maybe someone will buy a concert ticket or an album, or tell someone else about an artist she just heard or saw on her Palm. That's a little concept called behavioural marketing. “What I love about this deal,” says McBride, “is it allows somebody in the middle of nowhere to get what they want if they have the technology to do it. I love it when control goes. Music should be like water: let it flow in every way possible.”

With all the talk about music as water, one might be tempted to lump McBride in with all the other nutters in the music industry. But Nettwerk appears to be doing better in the digital world than its competitors. Online sales account for 40% of Nettwerk's sales, which are in the tens of millions, compared with the 10% to 15% his competitors average.

The Nettwerk figure is surprising, since Canadians generally don't support online music sales, at least according to figures obtained from the CRIA. In Canada, sales of English-language music are about 8% of the U.S. market, but that drops to 2% for digital sales. A chief reason, says Pfohl, is that the United States has amended its laws to include WIPO treaties that bring copyright protection into the digital age. Canada has agreed to adopt the treaties, but has yet to legislate them, leaving an uncertain marketplace for anyone wanting to ply the music trade here. Pfohl argues that, in fact, Canada should have more digital sales per capita than the U.S. because of higher broadband penetration rates. On the other hand, a report by the Organisation for Economic Co-operation and Development in July 2005 also reveals that Canada has the highest level of peer-to-peer users in the developed world. “We have the tools to succeed, but unfortunately they're not being put to use,” says Pfohl. “We're leading the world in theft, and we're lagging behind everyone else in terms of developing a digital marketplace.”

Nettwerk, though, seems to be doing just fine at building its digital business, so it's clearly not impossible. The Palm deal is just one example of how McBride is tackling new media formats. Another is Nettwerk's groundbreaking deal last November with Electronic Arts Inc., which gives Nettwerk the rights to deliver the video-game manufacturer's wholly owned music to digital service providers. That same month, Nettwerk released “Barenaked on a stick,” a USB flash memory drive offering 29 Barenaked Ladies songs, videos and exclusive content.

In reality, the distance between McBride and the CRIA on the issues isn't that great. Both want to protect the artist. The question is how best to do it. Pfohl says it comes down to choice. If artists want to control their music, then they can go it alone. If they want the benefit of major label distribution, then they have to play by the rules. McBride says the sticking point is the industry's reluctance to give up control. “We [Nettwerk] had the same knee-jerk reaction the rest of the business did,” says McBride. “But once we started understanding it, getting educated on it and talking to the fans, we realized this is a whole different ball of wax and there is a way to make this work.”

Certainly, some long-established cornerstones of the music industry will take a hit: musicians' total reliance on a handful of music chains to sell songs, on a handful of major labels to get meaningful distribution, and on a handful of radio station owners to get songs heard. These are not bad developments in themselves, but they have the old guard looking for a bogeyman. That bogeyman was initially Napster and the slew of clone companies that came in its wake. Now it might be you–unless the industry starts paying attention to people like Terry McBride.