Hey Y'all!

One of the biggest weeks in recent memory. Everyone was happy!

Yesterday, a Senate sub-committee was assembled to look into the RIAA bringing lawsuits against consumers. They elected to feature Mike Negra, from Mike's in State College, PA as the retailer on the panel. Apparently Mr Negra is for suing and he links his downturn in business directly to file sharing. Fair enough. Mike is a great guy and I am sure he feels truthful in his testimony.

When we got wind that the committee had selected a retailer with that frame of mind to testify, we asked Steve Wiley from Hoodlums to write a testimony that we asked to be stuck into the official record of that Senate sub-committee. Steve's and his partner's viewpoint is a very different one from Mr. Negra's. See, Hoodlum's is smack dab in the middle of the student union building on the campus of Arizona State University. Just like Mr Negra's business, Hoodlum's is basically at file sharing ground zero. I will let you see what Steve Wiley had to say about file sharing and suing customers below. I will say that he does not officially speak for every CIMS retailer but I suspect many would agree with his logic:

September 28, 2003

Honorable Norm Coleman
Chairman
Permanent Subcommittee on Investigations
Senate Governmental Affairs Committee
199 Russell Senate Office Building
Washington, DC 20510

Attention: Ray Shepherd, Staff Director

Dear Senator,

My name is Steve Wiley. My partner, Kristian Luce, and I own an independent CD/DVD store in Tempe, Arizona. Hoodlums New and Used Music is located in the Student Union at Arizona State University, home to 57,000 students and an area that many would consider the epicenter of the digital music debate. Consequently, we were asked by the Coalition of Independent Music Stores (CIMS) to weigh in on the issue of downloading and file-sharing.

We sell music to file-sharers everyday, and we are here to present a different view to the committee.

We are ultimately qualified to speak on this subject. Our store opened in 1998, during the peak of Napster. Six years later, in spite of a more than ten-fold increase in file-sharing, we are having our best semester ever. September will be the biggest month in our history. Over the past two years, we have seen more than 1,250 kids fill our frequent-buyer card, which requires the purchase of twenty CDs or DVDs. When surveyed, over 95% of these music-buying customers told us that they also downloaded free music over the Internet.

We have extensive conversations with our customers (nearly all of whom engage in the practices currently being litigated by the RIAA) regarding the topic of file-sharing on a daily basis. We constantly ask them their views on each new digital development. We make it a practice to never judge or argue with our customers, regardless of their stance on the issue, trying instead to empathize with them (it is pretty easy to do since we are music fans too). Consequently, they feel comfortable to give us no-holds-barred feedback. We use that feedback to tailor our store to their needs.

While we are against the idea of people not paying for music, we are totally opposed to the notion that file-sharing is the primary cause of the woes facing the music industry. More often, we feel that it is more of a convenient scapegoat for out-of-touch label executives and record store owners, many of whom thrived in the “replace-your-LP-with-a-CD” era but are having trouble today because they are continually trying to fit a new breed of customers and technology into the old model of doing business… instead of adapting to the customer's needs.

Based on our observations and conversations; we would like to offer up the following opinions:

1. High prices are by far a bigger contributor to the drop in CD sales than file-sharing. For that matter, price is the single biggest factor in driving kids to illegally file-share in the first place. The major labels are simply asking too much money for their product. The kids are still as hungry as ever for music; they just can't afford to pay the inflated prices (which, in the face of all economic logic, have gone up as sales have decreased). As a result, most of them feel that they are justified in going on the Internet and satisfying their musical needs… or they find more affordable entertainment product, like DVDs, to purchase.

2. There still isn't a viable option to pay for digital music. In spite of the fact that millions of potential customers are going to the Internet to find new music – the industry has still not given them a truly viable way to pay for it. While a few high-profile online stores have recently gained press and popularity, the public is telling us that ninety-nine cents per song is still too expensive to deter them from going to their favorite file-sharing site and getting it for free. They also hate being restricted as to how many times they can move the music between CDs, computers, and their portable devices - a stipulation we believe is currently demanded by the majors on all legitimate Internet services.

3. The Internet helps as much as it hurts. It's hard to quantify; but while common sense tells us that some record sales have been lost to free file-sharing; we believe that the Internet has promoted more than an equal amount of sales by providing kids the last true route in which to discover new music.

Since the Federal Telecommunications Act of 1996, TV and radio stations have been swallowed up by corporate behemoths like Clear Channel (over 1,200 U.S. radio stations) - resulting in smaller play lists and less diversity nationwide. Without the Internet to pick up the slack, we feel that demand for music would have suffered and many more customers would have turned to DVD, video games, and other forms of electronic entertainment.

A huge amount of Hoodlums' current CD sales are a result of a demand for music created solely by the Internet. Our customers can't afford to pay fifteen to twenty dollars to experiment, so they go online and download music to test it out. Once they are sure they like the artist, they will come in and buy the CD (assuming the price is right).

4. Suing the end-user is a public relations nightmare that will not ultimately solve the file-sharing problem. These kids think that the RIAA and the major record labels are the enemy. This can not be understated. Not only have the RIAA's recent attacks not deterred them from file-sharing; they have seemingly made them more defiant about the issue. While most of them are smart enough to know they are breaking copyright laws – we rarely talk to a customer that truly has moral misgivings about downloading or file-sharing. It may sound harsh, but judging from what we see every day… trying to win this battle on a moral level is a joke.

When we ask them if they are worried about getting sued – they respond with one of three general answers: a) “There's plenty of websites and P2P services that protect my IP address”; b) “They can't sue everyone”; or most importantly c) “If the record companies don't like it, they should lower prices”.

How have we managed to survive, sometimes even thrive, with these realities? Better yet, do we have any solutions? It's a complex issue – but here are a couple of ideas:

Solution 1: Lower prices. Most customers do want to support the artist. They will pay for music at a fair price. Our experience indicates that a fair price is $13.99 or below (five dollars below the major label's current primary list price). By focusing on less expensive new music (featured by many independent artists and labels), and used CDs (which are under ten dollars each), Hoodlums is currently selling music to file-sharers all day long.

Solution 2: Create a subscription based Internet service similar to cable TV. For a flat and reasonable monthly fee, allow customers to download as much music as they want and allow them to transfer their digital music to as many digital devices as they want. For ten or fifteen bucks a month… the demand would be staggering.

Look at the current percentage of the U.S. homes that currently have cable TV – if even a small percentage of that total signed up for a similar music service – the resulting subscription revenue would quickly eclipse current yearly revenues of online and CD sales combined.

The artists would be able to collect royalties based on the amount their music is downloaded or sampled, allowing them get paid in an area for which they currently receive nothing. This service would also allow the labels to enjoy an entirely new revenue stream, which would help them lower the prices of their physical goods, which, as we said, is the ultimate key to the issue.

Do we worry that such a service would put record stores out of business? Hardly. We think it would increase sales by raising demand and lowering prices. Let's face it, the customer can get it for FREE on the Internet already and many are still buying CDs. When America got hip to cable TV; the networks survived. With the advent of the VCR; movie theatres survived. Likewise with a service like this; while the customer's habits would change (and let's face it – they are changing anyway), the good record stores would survive.

Solution 3: Stop prosecuting kids. Basically, it would be nice to see the major record labels and the politicians quit trying to prosecute our customers….and start figuring out a way to give them what they want. We truly believe that due to their limitless knowledge of computer technology, file-sharing on the Internet will never truly be stopped. Why not find a way to harness its power rather than continuing to focus on ultimately futile efforts to contain it.

These kids currently view our entire industry as an evil entity. Considering they are our future - and we are peddling one of the most desirable products in the world – it shouldn't be that way.

We appreciate the opportunity to allow us to voice our opinions on this matter. While we realize they may fly in the face of the testimony of many – we think they are very realistic.

Feel free to contact Kristian or Steve at 480-727-8733 with any questions or comments.

Sincerely,

Steve Wiley
President
Hoodlums New and Used Music