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119 C H A P T E R 6 Is the Music Industry Its Own Worst Enemy? I 1896, the British House of Lords adjudicated Trego vs. Hunt, a suit involving two business partners who had parted ways, Hunt selling his share to Trego. After pocketing Trego’s money, Hunt hired a clerk to copy down all the names and addresses of the firm’s clients, so he could start a new business and poach them. Ultimately, Hunt was found to be in the wrong, the reason being that when he sold his share of the company, he had also given up his rights to the “goodwill”—the business reputation and customer relations—that went along with it. As Lord MacNaghten, one of the adjudicators, reasoned: “Often it happens that Goodwill is the very sap and life of the business, without which it would yield little or no fruit. It is the whole advantage, whatever it may be, of the reputation and connection of the firm, which may have been built up by years of honest work, or gained by lavish expenditure of money.”1 Much in culture, law, and finance has changed since the late nineteenth century, but goodwill remains the “very sap and life” of business, and, if anything, has become only more vital in our brand-driven, mediasaturated information economy. Today, goodwill is a standard element of business accounting and formally refers to the intangible reputational factors that increase a company’s value above the “book value of its identifiable or physical assets.”2 Although there are established methods for valuing goodwill (and its loss, or “impairment”), this process is still considered by many finance professionals to be “more art than science.”3 Because of its heavy reliance on marketing and promotion (“lavish expenditure of money”), as well as its extensive business-to-business dealings (“years of honest work”), goodwill is even more important in music than in most other fields. The authors of the industry bible, This Business 120 CHAPTER 6 of Music, declared, “One cannot overemphasize the value of names in the music industry, [and] the goodwill attached to names in the music business is even more important in music industry circles [than among consumers ].”4 Naturally, then, any impairment or tarnishing of the major labels’ brands and reputations is a serious threat to their market value and to their ability to do business (according to recent analysis by Echo Research, the average company can attribute 26 percent of its market cap to its reputation).5 Has the music industry lost goodwill in recent years? It’s an interesting question, and even the major labels themselves don’t seem sure of the answer. Warner Music Group, which was a publicly traded company from 2004 to 2011, was required to disclose any goodwill impairment in its public financial filings during that time period. According to its annual reports (form 10-K), the results of its own tests showed that “no impairment occurred” in 2008, 2009, or 2010. Yet when the IFPI—of which Warner is a constituent member—sued The Pirate Bay torrent tracker in 2009, it specifically claimed that “the damages sought should cover not only record sales lost to the Pirate Bay, but the loss of goodwill and other harm caused by file sharing.”6 In other words, the major labels were suing for the damage done to their goodwill by P2P despite claiming no such damage in their official accounting records. A clue that the recording industry has, in fact, suffered from some goodwill impairment came in 2007, when the RIAA was voted the “worst company in America” by readers of popular blog The Consumerist, consigning the previous year’s winner, Halliburton, to second place.7 Thus, I tend to agree with the IFPI that there has been substantial damage to the industry’s brands and business reputation, but differ when it comes to the cause. Far from blaming file sharing services or their users, I believe the industry itself is largely the engineer of its own reputational misfortunes . To the extent that P2P or digital technology in general have played a role in the process, it is only by (a) providing consumers, artists, and innovators with an alternative to the industry’s historically cartelized distribution practices and therefore bringing the fundamental unfairness of those practices into sharp relief, and (b) providing a target for the music industry’s ruinous piracy crusade, which has engendered an unyielding torrent of public...

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