Bronfman Urges Lawyers To Be Creative

Edgar Bronfman, Jr., Warner Music Group chairman/CEO, presented the keynote speech at the Grammy Foundation's seventh annual Entertainment Law Initiative luncheon and scholarship presentation Feb. 11

Edgar Bronfman, Jr., Warner Music Group chairman/CEO, presented the keynote speech at the Grammy Foundation's seventh annual Entertainment Law Initiative luncheon and scholarship presentation Feb. 11 in Beverly Hills, Calif.

The following is his presentation to over 460 industry lawyers, executives and guests.

I love music, and I love the music business. Its creativity makes it so important for so many lives. That's why I care about music and why I hope to contribute positively to the transformation the music business is now undertaking.

Our business, as you all well know, is facing numerous challenges. Technology has impacted the music industry so profoundly and so quickly, it's hard to imagine. In what seems like only the blink of any eye, it's already become impossible to think of a world without iPods or downloadable music.

I want to talk to you about some of the challenges and opportunities this transformational landscape presents and the role we will all be playing in meeting them.

First, a little perspective. For more than a decade now, the entertainment industry has been America's second largest exporter right after aerospace. American entertainment is a worldwide business, and music -- with its varied local and regional repertoire -- is, if anything, the most global of all the entertainment businesses.

At the same time, it's no coincidence that since the [Entertainment Law Initiative's] creation in 1998, that law and music has evolved from this sort of specialized subcategory into a mainstream career choice. The importance of your work in this context cannot be overestimated.

The Grokster Case

With the Supreme Court set to hear the Grokster case next month, the intersection of law and music could not be brought into sharper focus.

To those people who attempt to obfuscate the true issue by arguing that this case is really about technology vs. content, or that it is about overturning the Betamax decision, my response is one word: Nonsense.

To suggest that the law is such a blunt instrument that it cannot distinguish theft from commerce, illegal activity from legal activity, is simply wrong.

No one is advocating a law that inhibits the development of transforming technologies, but we will not permit technologies, in the name of progress or any other, to promote and engage in the desecration of the long-established principle of intellectual property rights. Anyone, even casually observing the recent progression of deals in the new media sector, can see that the music industry gets the picture.

We fully understand that our only success lies not in preventing people from getting what they want, but in providing it to them in new and different ways. In doing so, we must strike a balance, though -- one that nurtures technological innovation while at the same time protecting the very content that inspires innovation in the first place. To attempt to stifle innovation would be misguided and, as history teaches us, undoable.

But we have every reason to insist, and we will insist, that businesses predicated on the theft of property are not businesses at all; they are criminal enterprises, and they must be treated as such.

It is at least disingenuous -- if not completely cynical -- to suggest that technological innovation will somehow be starved, impeded or thwarted by the need to respect the fundamental principles of intellectual property.

Artists deserve to be paid for their work. Owners of intellectual property deserve to be paid for their investment and work. And creators of technology, which carries that work to consumers, deserve to be paid for their investment and work. But to suggest that only the latter group should be recompensed is both wrong and indefensible.

It is also shortsighted. If there were no music, there would be no iPods. To devalue the content suggests that the creators and owners of content should be forced to share their property against their will and without reward in the name of innovation is as outrageous as it is wrong.

It also means, finally, in the end, there will be no content. And where will the so-called technology innovators be then? Because what new technology can prosper without the content it carries?

Intellectual property in its many forms and permutations is the present and future backbone of the United States economy. Both content and technology have a tremendous stake at striking a balance that allows both to thrive. Neither can, nor should be, sacrificed for the sake of the other.

So long as a legal environment exists which protects and promotes the rights of intellectual property, be it the intellectual property of content owners or technology providers, technology is not a threat, but an opportunity.

The law must strike the appropriate balance between the rights of intellectual property owners and the opportunities for technology to innovate. We believe it can do that.

The Grokster case is an important opportunity for the Supreme Court to rule on this critical issue for the first time in several decades. I hope the Court will speak clearly as it ponders questions forced upon us as a result of the advances of technology which could not have been foreseen decades ago.

New Business Models

The relentless march of technology is forcing us, almost on a daily basis, to rethink our traditional approaches to the way we operate. Our initial reaction, understandably, was to defend our businesses, our copyrights, our way of doing business.

Given the onslaught that we faced, and the complete lack of comradeship on the part of our long-standing friends and partners in both the content and technology communities, we had no choice.

But what I'm so excited about now is that we're able to balance our defense of intellectual property and copyright with new business models, new products, new channels of distribution. We are evolving our relationships with artists in order to access the opportunities and meet the challenges of the 21st Century.

It requires our artists to develop a new mindset as to how they make their music. From the recording studio to the boardroom, the way this industry has done business for decades is changing right before our eyes.

These accelerating forces of change put the onus on all of us, but especially on you -- the dealmakers and attorneys -- to take more risks in charting a new course, to bring a new level of creativity to the deals you forge.

Risk is something I've learned a thing or two about in my career. When a group of investors and I decided to purchase Warner Music Group, a deal which closed less than a year ago, a large number of eyebrows in the investment community went up - in unison. "Why would you buy into a business that so many other companies were so aggressively exiting?"

Let me share with you our thinking.

For one, we believed in the inevitability of music. No other language is as powerful, or - you should excuse the expression --- as universal.

For so many people, music is an essential part of their lives. A vital music industry goes hand-in-hand with a vibrant society in a diverse world culture. While it may be in temporary decline, music and the music industry are not going away.

Second, we recognized the utterly unique quality of Warner Music's deep and diversified catalog, and its incredible roster of artists and songwriters. It is a great and irreplaceable treasure.

Third, we were confident that we could build on the extraordinary management team that was already in place, and that we could bring even more experience and depth to the task at hand.

Fourth, we believed we could amend the company's cost structure to better reflect the economic realities of the day while still preserving our ability to invest and grow.

Finally, there was a fifth reason. It's the reason which I think reflects the profound nature of the changes that technology is bringing to this world. It involves what I like to call the music industry's "inflection period." Inflection "point" is a more common term, but let me explain what I mean.

I think it's reasonable to liken the period that music is going through now to what the filmed entertainment industry experienced in the early- to mid-1980s.

Prior to that, through the "50s, "60s and "70s, the value of films and television was inherently limited by the scarcity of viable outlets. Movie theaters, network television and syndication were pretty much the only game in town, until cable networks and satellite distribution showed up. Then the videocassette became widely available, giving way later to the enormously popular DVD, and the value of filmed entertainment took giant leaps forward.

If you compare the value of film or television library in 1980 to its value today, you'll find the contrast pretty astonishing.

In my view, today's music industry is in a similar inflection period, positioned to launch into that same upward arc.

Historically our industry has sold LPs or cassettes or CDs through thousands of retail outlets. But there are many new and emerging channels for music today, and I believe the impending massive increase in distribution will trigger meaningful growth.

Not long ago I was in Italy, talking to the managing director of our affiliate there. I asked him, "Through how many retail outlets do we sell our music in Italy?" His answer was 1600. Then I asked him, "How many mobile subscribers are there in Italy?" His answer, "60 million." And that's just Italy.

Remember, tens of billions of dollars are invested in these wireless networks all over the world, and operators exact a toll for every piece of data that flows over or through them. Unlike the open architecture environment of the Internet, these wireless networks are less vulnerable to the kinds of piracy that has so debilitated our industry over the last few years.

If you factor computers into the mobile phone equation and add the explosive growth of portable music players such as iPod, you have an almost unfathomable increase in distribution platforms for music. Assuming that mobile phones will before long be music compatible, we're moving from a world with tens of thousands of retail stores to a world with an almost infinite number of devices or points of distribution. As Carl Sagan used to say, "billions and billions" of them.

And this isn't wishful thinking. The 3G phones, which the mobile carrier Vodafone is selling in Europe, will soon have the storage capacity of a mini iPod.

Of course no one can deny that critical to Apple's success has been the design and functionality of the iPod. And if phone companies want to create a serious revenue stream for music and related data, they've got to ratchet up the design and functionality of their devices. That's certainly a challenge, but given the stakes involved, I'm confident it will be overcome.

The benefits of technology innovation will not only increase the number of points of distribution, it will also greatly expand our inventory. We're moving rapidly from having a very finite number of physical goods available in a finite number of record stores, to a virtual world in which all of the music ever recorded will be available digitally in any possible combination almost anywhere.

The number and kinds of products and formats are also expanding because we're not just talking songs anymore, but ringtones, mastertones, ringbacks and other kinds of entertainment. When Verizon Wireless launched their 3G network in the United States last week, Warner Music Group was the first music company to make available music videos for download on mobile phones.

So we're excited about these opportunities for Warner Music Group and for the industry as a whole.

But we must ensure that we move aggressively to capitalize on these opportunities. We must think creatively as we experiment with new deal structures and new ways of both managing and embracing risk.

New approaches will be essential to reflect the new economic realities of our business. Albert Einstein said that imagination is more important than knowledge. And we know from human nature that the strongest force in the universe is inertia.

We must employ our creative imagination, and we must resist the temptation to conduct business as we always have, by experimenting with new approaches, new structures, new relationships so that we can more quickly and appropriately respond to the ever-changing marketplace.

At Warner, we've developed new groups and labels whose sole priority is to turn the conventional record deal and general business approach upside down. To think beyond just the recorded master album with X number of songs.

I'm not suggesting we have all - or even many - of the answers. But I am suggesting that we're willing to take chances, make mistakes and develop new approaches.

We can see the future as either being framed by threats to our industry or by opportunity. Certainly the threats to our well-being abound. But behind every threat lies a world of opportunity.

We want to work with you to attack those threats. But as importantly we want to work with you to take chances and discover that world of opportunity.

Your willingness to join with us in doing so is critical to the success of our industry.

Our future is bright if we will embrace change and see innovation as generally good and positive. Technology has long been a friend to the music industry, and I believe it will continue to be.

The past few years are ones in which technology innovation has resulted in part in the trampling in the rights of artists, creators and content providers. However, I believe this can be an anomaly and that we can and will find a way through this period. One which allows musical artists to write and record, music companies to invest and promote, and new technologies and new channels - whatever they may be - to bring the beauty and wonder of music to consumers everywhere and allow all of us to be paid for our efforts.

Is this Utopian? Perhaps. But it is an outcome that is right and just. And we at Warner Music, I hope in concert with all of you, will be fighting for that outcome every day.