The Vindication of Andy Lack

 

The iPod: A license to print money

(Or How Doug Morris Gave Away The Record Industry)

 

Walter Isaacson’s terrific biography of Steve Jobs is full of interesting little gems. Of interest to most of my readers is, of course, the section dealing with iTunes and Jobs’ negotiations with the record industry.

As Isaacson describes it, Jobs launched a massive charm assault to win over the heads of the major labels. He started with Roger Ames, then of Warner Music, and quickly moved on to Doug Morris, then CEO of Universal Music. The two execs quickly fell under Jobs’ spell, impressed with the iTunes end to end solution.

After dazzling these two knuckleheads, Jobs ran into a road bump in the person of Andy Lack, then the new CEO of Sony Music. Andy learned from the great Jack Welch who taught him “not to fall in love”. Andy is a smart, affable, good humored guy, but Jobs thought he “could be a dick”. And why is that? Because Andy saw through Jobs’ modus operandi and realized, unlike Morris and Ames, that by licensing their music to Apple, they would drive the sale of millions of iPods which in turn would drive the sales of millions of Macs. And that’s exactly what happened. Like Gillette with razor blades and Hewlett Packard with printer ink, the music industry’s content would sell a whole bunch of hardware. While the other guys had stars in their eyes, Andy connected the dots and pushed Jobs for a royalty on the sale of each iPod.

I remember during that time I was talking to a very high level executive at one of those labels (still in the same position today, in fact) who told me there was “no way I am going to let Andy Lack be the savior of the record industry”. Jobs, Morris and Ames made sure of that. Morris and Ames refused to go along with Lack’s strategy to get a royalty from ipod sales and thus isolated him in the industry. As a result, Morris and Ames gave Steve Jobs and Apple the keys to the shop and there’s been no turning back. Apple, in effect, controls the music industry today.

A couple of years later Morris woke up from his coma, demanded and got a one dollar royalty from Microsoft for the sale of every Zune music player. Good call, Doug. You were right on top of that one. He probably made Universal Music an extra $276 on that deal.

The music industry hates outsiders, and they considered Andy Lack an outsider just like Eric Nicoli, Jim Fifield, Elio Leoni- Sceti and Guy Hands. But unlike those guys, Andy was a genuine media mogul. He may not have come from the music industry but he is very savvy and understood how major media companies run and the value of their content. I remember when Andy was catching a lot of grief about giving Bruce Springsteen a big check for re-signing with Sony, especially from the BMG half of Sony BMG. He said “If they’re pissed off about how much I’m giving Springsteen to stay here, how pissed do you think they’ll be if he signs with Universal instead?” Good point. Springsteen renewed with Sony and it’s not been talked about since.

Andy Lack is a decent man. He was always fair and honest in his dealings with me and I always appreciated that. He never went back on his word. Steve Jobs didn’t like the fact that Lack was doing what was right for Sony and the music industry. If Doug Morris had been smart enough to take Andy Lack seriously the record industry would not be in the anemic state that it’s in today. The Steve Jobs book proves that Andy Lack was right all along.

So what happens? Andy Lack now heads new media for Bloomberg and Sony ends up hiring bedazzled septuagenarian Doug Morris in Andy’s old job. These guys will never learn. No wonder Lucien Grainge is thrilled he’s at Sony.

© 2011, Wayne Rosso. All rights reserved.

13 comments for “The Vindication of Andy Lack

  1. Peter
    February 14, 2012 at 3:39 PM

    I just came across this article and your reasoning about Andy Lack and the positions that he took.
    Today is Valentines Day and looking back at relationships of all kinds has led me to respond.
    Lack was not a music man ,as you have stated he’s from the Jack Welch school of economics which is similar to the record business a lot of hype and very little substance. I believe you may be giving him to much credit,though I have not read the book to fully appreciate your point of view.
    This feud has more to do with corporate infighting that had been taking place within Sony then anything Lack was responsible for. It only now appears that his position may had been the correct move. Doug Morris and others within the industry were only doing there jobs and being under fire they were unable to see the whole picture.

  2. richard
    November 14, 2011 at 12:09 AM

    You make two amazing points in your piece. The obvious Andy Lack theory which blows your mind especially if you know the players. The music industry hates outsiders especially a manager from the Jack Welsh school of business. The music business executives are not MBA’s trained to read balance sheets and budget, they where hit men trained to pounded the streets trying to break a act. The majors have not had a great executive since Steve Ross.He was the last Emperor to buy companies that truly made sense. His purchase of Ashely Famous talent agency and putting Ted in charge brought a string of great movies and allowed the company to grow into a media giant. No one had that vision when Napster went live. Napster did put a dagger in the heart of the music business.However the music business gave Shawn Fanning the dagger and even sharpened it for him. Fans loved there groups and would not steal from artists. The music business made fortunes on bands that hated big brother yet the music business used those same tactics against they own customer. My last point is instead of using all this energy and money fighting Napster and all file sharing in general they should have been buying young video game companies or any other company that made sense to help them diversify into the digital age.

  3. paul banes
    November 3, 2011 at 12:49 PM

    It is interesting that the andy Lack article co-incides with Pete Townshend’s outburst in the U.K. press…against Apple-I Tunes etc…In France and several other European countries we have had a blank tape levy since 1985! In the days of cassettes Philips owned the box and had a copyright on such to the same extent I think they had on the CD…they did sell Chappells the greatest publishing company in the world at that time to finance the invention of the CD/Machine etc which we should not forget reproduced the exact sound compared to a cassette copy…if the readers of this article think the artists are getting paid they should translate that into screwed as well as the writer/publishers who receive less from the downloads of a song than the credit card company who merely offers a service for the payment of..effectively Morris was only interested in dumping the Universal catalogue on the net to the extent that he did not ask the owners of the masters whether they agreed or not. Equally Jobs was a brilliant inventor and knew he could sell his fabulous toys to the youth of today via the music so Morris & al sold the record industry down the drain…
    Paul Banes
    One of those little bastards from Immediate who still lives to tell the tale

    • November 4, 2011 at 9:44 AM

      Thanks for your comment. Paul. The Townshend comments were totally coincidental to the publishing of this post. My point was to show that here was a brief moment in time ( a second chance really, since the industry blew their first chance by going after Napster) when the record labels could have had some leverage and created a new model. Curiously only one guy, the outsider, saw the obvious and was shut out by the rest of the industry BECAUSE he was an outsider. It was nothing but petty rivalry.

      • paul banes
        November 4, 2011 at 2:06 PM

        and vice versa..I have a running battle with Universal that goes back years and it was intriguing to read your article..this whole sue us to get paid routine is scandalous and I am glad that the Spitzer report helped right some of these wrongs…The Sonny Bono extension of copyright in the masters could give the U.S. artists a means of re-negotiating all that is currently wrong if they have the strength to say either we getter a better break or we take our tapes back The EMINEM decision seems to have sparked off more artists to take Universal to task over these dreadful royalty breaks. In France Universal is Vivendi which is the T.V. station Canal+ which is SFR telephones so thay win all ways…Why the record industry that used to own all the hardware SONY TOSHIBA PANASONIC etc decided to announce the death of the CD without thinking of the consequences beggars belief. In one fell swoop they told a generation that they should bin their JBL’s & al as it was obselete. One can only assume that they would no longer have the distribution costs etc to bear. Not for one minute did anyone think that there were lots of people who actually like buying CD’s and that they could take back control of the market place by selling CD’s for less than the $9.99 charged by I Tunes. Now we have vinyl appearing all over the place because punters are discovering that the digital sound compressed to death is lousy…in reply we are accused of being out of touch but I can understand Pete’s frustration of seeing Tommy butchered…and the sound of Keith’s drums compressed into a squeak
        Roll over Beethoven

  4. November 1, 2011 at 2:34 PM

    Wayne, why should music labels get royalties on hardware? Did they get royalties on every phonograph? On Walkman knock-offs? On radios? I think not.

    They had a good ride (monopoly rents) when the recording infrastructure (technology) was expensive (as was distribution via radio before that ownership consolidation). But free market forces (competition, a la Adam Smith not contemporary soundbites) are the antithesis of monopoly rents. With the iPod, Apple created a market of exchange ($) that did not exist — just like the VCR (and its progeny the DVD et al) created a market of exchange ($) that did not exist. In that second case, Sony was a player because it developed the hardware, ie the distribution channel. It’s not entitled to royalties simply because it missed the innovation boat.

    • November 1, 2011 at 3:30 PM

      These are good points, but what you’re not addressing is the fact that iTunes totally flipped the record industry business model around–from album sales to single sales–and the industry was not prepared for the adjustment. In the examples you cite, the content owners welcomed the new technologies, were readily able to accommodate them and thus reaped windfall profits. Unfortunately that model became the standard for way too long. Also remember, when Disney, our another major studio, releases a box office blockbuster they also profit from many additional revenue streams attached to that content. They license the content or characters to merchandisers and various other partners and , yes, that sometimes includes hardware.

      Don’t forget that Universal subsequently did get a cut of Zune hardware sales, however it didn’t take a rocket scientist to realize that it would be a bomb. At the time of the iTunes negotiations the record industry had the leverage. In cutting the deals that they did, they permanently ceded that leverage to Apple.

      When Sony was king of the Walkman they were, indeed, profiting from their own content even if it was a less direct relationship than Andy Lack and others would have preferred. Lack was extremely frustrated with Sony’s inability to get their various divisions to “row together” . Consequently they definitely missed the boat in digital media. That is why Apple succeeded–they took an end-to-end approach and instead of having competing divisions, every division worked on every new product in parallel. That’s what make Apple so unique in the corporate world.

      • November 1, 2011 at 5:30 PM

        Hi, Wayne – I don’t think that taking a case all the way to the US Supreme Court translates to “welcoming new technologies.” Brought by Sony, naturally: http://w2.eff.org/legal/cases/betamax/

        Yes, Disney (wow – what a loaded example that is) licenses the hell out of its content. But the last time I checked Disney wasn’t asking for a royalty on every DVR or every VCR/DVD/BluRay player. If they’ve succeeded in doing this (remember, this is the crux of your argument) please share a link.

        There were lots of Sony Walkman knockoffs. Many folks weren’t playing bought-from-the-record-store tapes but mix-tapes of their own albums and records. Ditto iPods (we ripped our CDs). Why should the record labels get royalties when I transition my CD content to my computer or iPod or Android? And why would there be a royalty for an iPod but not for a laptop?

        This argument is akin to saying Goodyear should be able to extort a royalty for every car sold by Ford – whether or not there are Goodyear tires on the vehicle. After all, cars have no value without tires!

        Look, incumbent organizations are routinely caught by the shorts when it comes to disruptive innovation. They should not be rewarded to their being blind to change by having folks argue that they should use their market power to force companies that take risks to cough up hard-earned earnings.

        And Microsoft will do lots of things to buy access. Having two monopolists decide how they are going to share monopoly rents isn’t a persuasive argument in my book. :-)

        Finally, to your argument about atomization, the record industry fabricated the LP as a way to sell more songs — songs that many customers had no desire to buy. It’s the nature of digital content — not Apple, Apple just figured out a way for musicians to get paid in this new environment — that has returned music to the “song” unit.

        I can’t speak to how Apple’s internal management structure operates. The process you describe doesn’t match my memory of how the Macintosh was developed, but that was Jobs v 1. I think what makes Apple unique in the corporate world is its focus on user experience and excellent design (aesthetics and function). How Steve Jobs achieved that, I don’t know.

        • November 2, 2011 at 9:06 AM

          Kathy

          You make very good points, many of which I agree with. I can’t tell you how refreshing it is to have a reader who is intelligent and articulate posting comments.

          And you are correct about Jobs and the Macintosh. You are also right about Steve Jobs v.1. Jobs v.2 did operate his divisions in parallel. You should really read the book and I’m sure you’ll see how I arrive at many of my conclusions. It’s really a great read.

          However none of this is about fairness. It’s about a point in time when no one save Andy Lack saw the obvious opportunity to flip the model. At that time the music industry had some leverage and could have prevailed if it weren’t for pettiness on the parts of Morris and Ames. By purposely undermining Lack, Morris and the industry lost that leverage forever.

          • November 3, 2011 at 6:19 PM

            Hi, Wayne! Thanks. :-)

            I have the book — it arrived while I was in Florida last week, thanks to Amazon pre-order. It’s now in my “to read” list– but I did not buy a digital edition (is there one?) so I’ll probably be reading it at home. I don’t lug books around anymore (even tho I prefer to read ink on paper).

          • November 4, 2011 at 9:40 AM

            Yes. There is a digital version available. You’ll enjoy it.

  5. Mr. Reality
    November 1, 2011 at 2:19 PM

    hindsight is always 20 20. Even a broken clock is right twice a day. Andy Lack was also head of SONY during the root kit fiasco? SONY would have survived Springsteen going to Universal. In fact if SONY had let Universal sign Bruce for a big advance that never recouped, it would have made SONY look smarter.

    • November 1, 2011 at 3:21 PM

      The truth is that Andy had nothing to do with root kit. That was 100% Thomas Hesse. But Andy stepped up and took the bullet for Thomas. He admitted that Sony was wrong, had made a mistake, and would correct the issue–which they did.

      In the case of Springsteen, the point was that the Germans would not have been pleased is he signed with Universal (or any other label), no matter what the cost.

      That’s the, pardon the pun, reality.

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