Q&A with Peter Fader

Peter Fader holds up what appears to be a regular compact disc and asks, "Do you know what this is?"

Peter Fader

The Wharton marketing prof sounds off on why the music industry needs a new business model and how streaming audio may just be the answer, if the technology can catch up to consumers’ demands.

No, it's not just a CD. This shiny plastic object is actually a CD on one side and a DVD on the other—something known as a dual disc.

Has the public heard of it? Not likely. Should record companies promote this heavily? Definitely, says Fader, since it's his opinion that this little silver gadget—along with streaming audio—will save the ailing music industry.

Now, if only industry professionals will listen.

Fader, the Wharton School's Frances and Pei-Yuan Chia Professor of Marketing, is a self-described number cruncher and expert in e-commerce. He testified on Napster's behalf in 2000, when the file-sharing service was being sued by the record industry, and is now working with two colleagues to better understand how radio airplay, music television and record sales influence each other.

"In some sense, I am trying to set the stage for the 'Moneyball' of the music business, and it's been a much tougher battle than I expected," says Fader, referring to the book that recently shook up Major League Baseball. "I look at the practices in the music industry and ... I have never seen an industry so discombobulated."

Fader is also in the process of setting up a research center at Wharton on media and entertainment and wants to launch a campus streaming audio service to encourage the kinds of community-orientated features (such as shared playlists) that the original Napster did so well.

Not too bad for a kid who, Fader says, was "a teacher's nightmare" and opted for MIT over Wharton because the Management and Technology program here seemed like it would be too much work.

Peter Fader

“There is no industry more hated by its own customers than the music industry.”

"It's basically since tenure that I've grown and evolved into something different, to stand on my own two feet and lead the research parade instead of just following," he says. "I'm kind of a late bloomer in that respect, but the fact is that now I'm far more productive than I was before."

Q. What is it about music executives that makes them think they're different? Is it because the music industry is a creative one?
A. Absolutely. The same thing with the publishing industry, the same thing with the advertising industry. You have a lot of these fields where you have the creative people and the business people. Traditionally, the creative people would run the show and the business people were just there to make sure that the beans were being counted. But more and more, just due to changes in technology and competitive pressures, the business people are getting more of a say.

Q. Why aren't you a fan of downloading anymore?
A. Back in the good old days when the original Napster was doing its thing, it was one of the most wonderful moments in the history of the music industry for a couple of reasons. It wasn't a great big pirate bazaar as the evil suits claimed. It was actually a lot of people learning about new music, connecting with each other, like "Hey, let me see your playlist since I like some of the songs you have there." A lot of it was just discovery and the serendipitous learning of music. Speaking for myself, I bought so many CDs during that time.
They paint a picture that the only people using it are these horrible high school and college kids who are using it to steal. It was never the case that it was just high school and college kids. Even five, six years ago, the majority of Napster users were grownups. Now fast-forward to where we are today and you think about the predominant player being Apple. That's a much less engaging experience. You've lost that serendipitous discovery. You've lost that ability to see everybody's playlist and organically learn what's interesting and new.

Q. Do people understand the difference between legal and illegal downloading?
A. People don't understand the difference. People don't care about the difference—they just want to get their music. I'm a huge fan of the streaming subscription service, things like Rhapsody and the new Napster. I subscribe to both of those, where you pay $10 a month, and you have access to zillions of songs and you don't have to decide, "Should I buy this one or not?" and it gives you recommendations and every Billboard chart ever published. Once again, you're spending your time leaning forward, learning about music, instead of having it just force-fed like an IV drip.

Q. Don't you think people like owning their music?
A. I do and I don't. I think there's definitely something to be said about having a shiny piece of plastic stacked nicely on a shelf. Owning MP3 files on your hard drive isn't quite the same, and Steve Jobs has done a very effective but misguided job of pointing out to people you don't want to rent your music. What's really the difference? In some sense, you're renting your cable service. You're not owning the program you watch, although that's a new business model that's starting up. I don't really care where my music comes from, I don't care where it resides, as long as I can get what I want when I want it. I look at the spread of new kinds of technology, whether its having wireless everywhere, having music available throughout the cell phone network, or through the satellite radio, and I think that some of these streaming services can fulfill those needs a lot better than downloading. And then if I like it a lot I'll go out and purchase the album. That's the model that will eventually lead them out of the desperate situation that they're in now.

Q. It seems to be that the iTunes model is getting all of the attention.
A. Absolutely. When the iPod was launched, they looked to Steve Jobs as the savior—"He's going to push people toward legitimate music"—and now they're realizing, "Wait a minute, he's making a whole lot of money on it, but we're not."

Q. Any drawbacks to streaming?
A. You can only stream if you're in a place where you're somehow tethered to the Internet or some other broadband access. My view is that this is so 2005. That's just thinking inside the box and I think people need to be thinking five years ahead. And I have to believe that five or, conservatively, 10 years from now, you'll be walking around with a little device and just by pressing a few buttons on it, you can bring up any song and you won't care whether you own it and you won't care where it's coming from—you'll be paying for the access. Technology isn't there quite yet but it's right around the corner.

Q. In some ways, it seems like the music industry has criminalized its fans.
A. As a marketing professor I look at companies where the customers are just delighted to be associated with their name, companies like Nike or Nordstrom. There is no industry more hated by its own customers then the music industry. There's no industry where the people who produce and distribute the music have to hide to avoid being known. Every time an album comes out, you have no idea who produced it. Wouldn't it be smart if they said, "This album is from Island Records, the same people who brought you x, y and z?" No, they have to hide because they're afraid that if customers associate their corporate name with the artist, they would throw rocks at them or something. And that should be a telltale sign.

Originally published on December 8, 2005