Thursday, August 28, 2008

The Death of the Album, or the Hegemony of iTunes?

I wasn't sure what headline was more appropriate for a summary of the Wall Street Journal article at the link below. So this post is about 3 topics: the control iTunes' distribution gives it, digital merchandizing (aka "albums"), and whether iTunes actually harms music sales.

More Artists Steer Clear of iTunes
Apple's Online Music Store Sells Lots of Singles, But Labels Seek Higher Profits of Full Album Sales

First let's look at these snippets that address how iTunes' uses its distribution to get what it wants. Exclusives are as old as the music industry, but Apple's ability to dictate both the a la carte singles business and fixed low pricing is enviable as a distributor, but frightening as an album merchandizer.

"iTunes, with few exceptions, requires that songs be made available separately."

"Apple isn't willing to sell songs for more than 99 cents."

"[Apple] often asks for exclusive sales rights for songs in exchange for prominent placement on its home page."

"Apple has said it makes little profit from iTunes because of the costs of running the online store."

That last point is important! Apple iself admits (or claims) that it only breaks even on the thin margin business labels' impose on the download business. Apple makes money on its player hardware business, not the music. But its insistence on the 99 cent retail price point defines the market for any other competitor. This keeps Apple's competitors out of the market, further harming the labels' strategic business of distributor diversification.

Next let's look at some of the very intersting data from the article on how the album as merchandizing is faring.

Merchandizing online has always been more difficult than in the physical world. In the real world, we can walk down aisles packed with goods and quickly filter what we want visually, but sometimes find new stuff by mere serendipity, or by seeing distant end-caps or hangers. Shopping online allows us to get directly to a product we're searching for without walking past a single other product. There's no opportunity for peripheral vision, minimal real estate to merchandize related products, and minimal attention spans to intersperse much merchandizing into a goal-driven acquisition flow (like purchase). So the album remains an important merchandizing tool, even online.

"Katy Perry has sold 2.2 million downloads of her hit song "I Kissed a Girl" in the U.S., nearly 10 times the 282,000 copies she has sold of her "One of the Boys" album."

"Rapper M.I.A. has sold 888,000 downloads of her surprise hit "Paper Planes," compared with 272,000 copies of the album "Kala."

"Last year, U.S. consumers downloaded 844 million individual songs from digital-download stores, according to Nielsen SoundScan. By contrast, they bought only 50 million digital albums."

Finally, let's look at how iTunes' insistence on a la carte singles downloads may be directly hurting the music business, perhaps even as much as illegal downloading.

"In so many ways it's turned our business back into a singles business," says Ken Levitan, Kid Rock's manager. Mr. Levitan says the rise of iTunes is far from being a boon to the industry; instead, he calls it "part of the death knell of the music business."

"...many of [Kid Rock's] 1.6 million U.S. album sales [which is not available on iTunes] to date would instead have shown up as 99-cent downloads...

"AC/DC has never licensed its music to iTunes. The Australian hard rockers sold an estimated 2.7 million CDs world-wide last year, up from 2.55 million in 2003... [Meanwhile] Overall U.S. album sales -- of both CDs and digital downloads -- declined 21% to 500 million copies in 2007 from 2003"

Since the beginning of 2006, only the Beatles have sold more "catalog" albums in the U.S. than AC/DC -- also without licensing their music to iTunes.

"...the act that sold the most individual songs digitally -- the Rolling Stones -- sold the fewest albums..."

Wednesday, August 27, 2008

Common Licensing Authority

Movie Labels (sic) To Launch New "Open Market" Play Anywhere Scheme As Last Ditch Effort To Save DRM

Here's a link to an idea Sony is pitching to help simplify delivery of DRM-protected rights. It's a media delivery concept that's been kicked around for a while: common licensing authority. The idea is that some transparent, neutral third party is authorized by content owners to supply rights (i.e. DRM licenses) to retailers' customers. The third party would ensure rights are delivered properly, and report to retailers and content owners on the number of licenses delivered. Content owners can then reconcile those numbers with reports from the retailers.

It's a fun idea in theory and similar schemes have been pitched to the music labels with no results, but it will never work for several reasons:

1. DRM is inherently customer unfriendly. Microsoft's disasterous marketing of its DRM and logo program (WM DRM, Janus, "Plays-for-Sure") shows that too much choice is actually a bad thing for the user experience. Unless you implement a seamless vertical like Apple/iTunes/iPod/Fairplay has, DRM ultimately gets in the way. DRM is not easy - not for customers, and not even for distributors. Content owners will continue use DRM as a crutch to remain lazy, anti-consumer, and kill innovative new distribution models.

2. A common licensing authority must be seen as a neutral player. It could be set up as a disinterested industry consortium, but if Sony is seen to be controlling it, distribution will be limited.

3. Licenses must work across platforms or consumer messaging will be prohibitively complex. This is not as easy as it sounds. The DRM must work the same on anything: Windows PCs, Mac PCs, Linux PCs, cable set-top boxes, DVRs, auotomotive entertainment systems, mobile phones and PDAs, portable devices, etc. The complexity matrix is daunting.

4. The DRM market is fractured. Microsoft won't license its DRM for Linux desktops. Apple won't license its DRM to anyone. 3rd party DRMs (like Macrovision's) have some support from the studios, but the market is too fractured. Macrovision is currently the only company positioned to offer a common DRM. Content owners are afraid of Microsoft, and would shy away from declaring its DRM as the standard.

5. Common rights will commoditize distributors who will reject the inability to leverage brand advantage. The alternatives, like charging more for additional rights or granting exclusive rights, will only increase the complexity of consumer messaging.

Thursday, August 21, 2008

Yahoo! Opens up Buzz

Yahoo's Buzz social bookmarking service was built as a competitor to Digg, and even Yahoo's own social bookmarking services. For the first 6 months of its life, Buzz only worked with links from top publishers Yahoo! allowed into its system. Just this week, Yahoo! opened Buzz up to the whole internet. Now you can submit links from any web site.

If you want to add a Buzz link to your site, Yahoo! offers simple JavaScript badges you can embed on your page to let your visitors Buzz the page for you.

Though Yahoo! doesn't document how to build your own Buzz links, here's how it can be done using an URL. The basic syntax of the URL is:

Each of the values is described here:

  • submitUrl - The page URL your want to submit (with special characters escaped)

  • submitHeadline - The title of the page you're submitting (with spaces converted to + or %20)

  • submitSummary - The description of the page (with spaces converted to + or %20)

  • submitCategory - The category you want Yahoo! Buzz to list your page in. Possible categories are: business, entertainment, health, images, lifestyle, politics, science, sports, travel, usnews, video, or world_news

  • submitAssetType - The media type of your link. Possible types are: article (which they display as "Text"), image, or video.

Here's an example link to Buzz up this blog entry.

Monday, August 18, 2008

Labels kill distribution

Pandora can't make money, may pull the plug

Here's another story about the music labels and publishers pricing a popular service out of business. Pandora is the most loved personalized radio service on the internet (in the US anyway - the British publisher association blocked them from the UK market some time ago). Due to increases in compulsory radio rates, and differences in prices between terrestrial, satellite and internet rates, Pandora can no longer survive paying 70% of their gross margin for content.

The article attempts to lay some of blame on Pandora for extending onto devices without support for their current method of monetizing stations. But it's not for a lack of trying creative solutions. Pandora has tried various ways to monetize their service, including subscriptions paid by the listeners (failed even with free trials), a la carte song upsell via Amazon Associates (that pays only 10% of any MP3 purchase back to the referring site), advertising (their current model), and others. All of which don't work given the too-high cost of the content.

So rather thanfinding a way to make the most popular music discovery service work for all parties, content owners will force Pandora's shutdown over lack of net income.

Investors will only buy music for others for so long. The labels today are betting the farm on "stupid VC" advances that will never be recouped. That's no long term music strategy - offering yet more proof for this blog's thesis that the labels will put themselves out of business and the industry will be reborn without them.

Friday, August 8, 2008

Hubris from Warner

Warner Threatens To Pull Music from Guitar Hero, Rock Band

This is rich! Warner Music Group CEO Bronfman is complaining that companies are finding ways to successfully monetize his music. He complains that MTV in the '80s, Apple in the 2000s and now Activision are ripping him off - even though his company signed voluntary deals with all three.

Bronfman should be jumping for joy that these companies have found successful ways to promote his artists' material. The labels did not create any of those three companies and would never have been able to. The digital distribution companies the labels helped create have all struggled with anti-consumer restrictions on the content customers avidy want, but go elsewhere to find.

As for Bronfman's assumption that video games will also eat his lunch, I can't think he's more wrong. Guitar Hero and Rock Band are both great games that engage the player with music, but they don't presage an era where all video games are music upsell vehicles. In fact, sales of music-based games are falling fast. Game manufacturers for years have tried to figure out how to include advertising and upsell within their games and none have succeeded until now. But this does not mean that all video games will now succeed as either. Those two games are music-focused. You still aren't going to sell music through shoot 'em up games, or Ms. Pac Man.

The labels need to get out of the way and let visionaries like MTV, Apple, and Activision create distribution channels that consumers actually want to engage with, rather than crushing every new idea because it doesn't fit the labels' failed business model.

Tuesday, August 5, 2008

Control vs. Scale

Music industry 'should embrace illegal websites'

Here's an article that agrees with my position that the increase in availability by several orders of magnitude offers an unprecedented revenue opportunity for music - just as the increased distribution of shareware created an entirely new market for software.

Record companies should ask themselves: "What are the costs and benefits of control versus the costs and benefits of scale?" said Mr Page [MCPS-PRS publishing society chief economist].

I don't agree with the article's first-blush interpretation of embracing illegality, but read further to see that there's got to be some way content owners can participate in the increased distribution users demand. I propose an industry standard for marking MP3s as legit per user, and users can either purchase a per-MP3 right, or subscribe to an all-you-can-eat service. Regardless of where you get the MP3 file, the service checks an encrypted header to see if the file's yours. If not, it helps you legitimize the file through your own choice of service provider.