Music Sales Leveling Off?

Here's a story from TechCrunch covering SoundScan news that music sales may have finally hit bottom. My favorite part is where they call out the labels that "acted like a petulant child in the face of the digital revolution".

SoundExchange reaches web royalty deal with NAB, but not webcasters

SoundExchange collects royalties under the US Government's compulsory licensing of music for radio stations. How much to charge for a web stream, and whether royalties for performance rights are included along with SoundExchange's traditional publisher royalties has been a point of contention for about a decade.

From what I can find in the press (which leave some questions unanswered), the National Association of Broadcasters (NAB, which represents terrestrial radio stations) has agreed to $1.50 per song per thousand online listeners, ramping up to $2.50 per thousand by 2015. (No news what stations pay for their airways broadcast listeners.) That deal is for radio stations that simulcast their programming over the Internet. It's also for any online-only programming those broadcasters might also provide. That $1.50 rate will more than eat up any online advertising the stations can sell, which typically sells for less than $1.50 CPM (thousand impressions) these days - and that's assuming they can sell a display ad for every song, not a single ad for every 3-5 (or more) songs typical of terrestrial audio ads inserted into broadcasts.

So it looks like the deal with pure online broadcasters got hung up on the question of programming interactivity and what appears to be an irrational insistence by SoundExchange on a percentage of a company's revenue, rather than a simple per-song fee. Some also blame RealNetworks for screwing up a deal reached in November 2008 by at least twice seeming to agree to terms, then pulling out at the last minute. (Sounds like Rob is being Rob again.)

US law grants an automatic license to play music as long as the broadcaster follows certain rules. The main rule is the music can't be played "on demand": a listener can't push a button and hear a specific song. Online services like Pandora skirt the on demand rule by allowing listeners to program their own stations by listing some artists they like. The listener is not guaranteed what song will be played, but it's likely something she or he wanted to hear. SoundExchange deems this outside the compulsory license law and wants extra money for that interactivity. They seem to forget that I can change my car radio from a country station to a rock station to a Latino station to an urban rap station whenever I want. Though I'm not selecting the music or affecting what an individual station plays, I'm still interacting with what I'm listening to.

True on-demand streaming services like Rhapsody, Napster, Zune, and others must negotiate separately with recoding owners (labels) to play music as US compulsory license law was not written for on-demand performances.

Microsoft reorgs Zune

This can't be good. Microsoft is splitting the Zune hardware team from the software and programming team.

The article also mentions Zune's device has merely cannibalized other non-iPod devices that used Microsoft's DRM under the "Plays for Sure" logo program. It's apparently made no dent in Apple's MP3 player market share.

I subscribe to Zune, but find their marketplace useless and their software client confusing. There's never anything I want to listen to on the main Zune page, and so far I haven't figured out any way to personalize it, or to automatically "recharge" my Zune with music I will like. Zune also infuriates me by showing me music in search results that they don't have. What's the point of that? To tease me, or to piss me off?

Total Music Shuts Down, Taking Ruckus With It

I'm building up quite a backlog of things to write about! Here's news that Univesal and SonyBMG's Total Music and its college music download service Ruckus have given up.

http://www.pcworld.com/article/159258/the_day_the_music_service_ruckus_died.html

http://arstechnica.com/media/news/2009/02/universal-sony-total-music-is-a-total-dud.ars

Matt Rosoff notes that not even free can compete with free:
http://news.cnet.com/8301-13526_3-10161622-27.html

Here's Total Music's VP of Product Management practically begging for a standardized set of platform APIs for accessing music legally:
http://globallistic.blogspot.com/2009/02/hey-who-tripped-over-that-cord.html

Convergence of mobile phones and MP3 players

Here's an interesting article from Wired on mobile phone and MP3 player convergence.

5 Ways the Cellphone Will Change How You Listen to Music

Why carry two devices when you can carry just one? Just as heterogeneous component hifi stereos in the '70s gave way to same-OEM systems (as OEMs integrated the benefits of competitive manufacturer's expertise into their own systems), ubiquitous electronic devices will converge into one (camera, MP3 player, telephone, datebook, messenger, etc.)

We are moving away from an era where one company's MP3 player was obviously better than a phone company's MP3 player, and a phone company's phone was much better than an MP3 player company's phone. With the introduction of the iPhone and market penetration of other smart phones, the quality of all on-board features is improving to the point where it's redundant to carry separate devices for separate purposes.

Non-DRM music can also be mixed and matched from any music service to any phone, though even that functional separation will be a niche market. Integrated verticals like iTunes Music will continue to dominate the iPhone platform, and would dominate other mobile platforms if Apple were willing to support them. The difficulty here will be building a non-Apple brand with enough penetration that you're likely to have a friend who can show you how her service works. Without friend-to-friend training, any other service will fail.

File under: I can't believe we're still talking about this

Here's an article about some discussions at this year's MIDEM.

Music industry urged to embrace the Internet

Some quotes:

"In 2008, some 95 percent of the music downloaded from the Internet, or more than 40 billion files, was illegal, leaving the overall music market down around 7 percent on 2007... Consumers will only move to legal sites from illegal ones if the proposition is better and easier to use, critics say."

Music labels still don't get it. They had an army of techies and venture capital who wanted to make music over the Internet work 8 years ago. The labels squandered this opportunity, and are still digging in their heels.

The labels failed to learn what the shareware industry learned early on: it's better to make money from 3% of a huge market then 100% from a microscopic market. Labels are losing 95% of the money and customers that they could have reached. They still reject new technologies and business models, preferring to protect their special markets business and what I call "stupid VC" money. Huge advances are much more attractive to execs who will retire in a few years than investing in the future of the business. Meanwhile, the leaks around the edges remain a flood.

Apple gets to drop DRM, goes variable pricing, and gets OTA rights

Apple finally worked out deals with all the major music labels so they could offer iTunes Music without customer-unfriendly DRM (though their files will still be encoded in Apple's flavor of the unfamiliar AAC codec). In return, Apple agreed to two new price points: 69 cents and $1.29 in addition to 99 cents. The labels have long wanted variable pricing in iTunes.

But the big news here is OTA (Over The Air) rights, which allows music to be sent over cellular networks at the same price as IP/WiFi transmission. That's huge for mobile music! The labels were salivating at the prospect of extending their overpriced ring tone business into overpriced full downloads, and for many years have priced OTA rights out of the market. Luckily for the rest of us, consumers are not that stupid. If you can buy a song on your computer for 99 cents (or steal it for free), why in the world would you buy it on your phone for $2 or $3?

Labels also finally recognized the reality of the use cases around mobile music: if I buy a song on my PC, do I also get it on my phone (or vice versa)? If I buy it on my phone, why can't I move it to my PC?

So unifying full download prices across all delivery methods finally makes some sense.

Now music publishers must recognize reality and allow multiple fulfillments of the same song to the same person. No more 30 cent mechanical license taxes for more copies of the same song delivered to the same person in a different file format, on a different device, or for upgrades from the DRM version to the non-DRM version.

DRM's missed opportunity: Digital resales

Here's a story via Digital Music News about a new service, Bopaboo*, that lets people sell their "used" MP3s.

Artists and music labels have long hated used record and CD stores because the labels don't participate in the resale revenue. Part of the DRM strategy was keeping the first sale rights, and preventing any second sale. A few services like the defunct WeedShare and PassAlong attempted to emulate digital redistribution, but weren't true second sale enablers.

But the missed opportunity for the labels and for DRM providers was allowing a service to act as a second sale clearinghouse, where the labels could have participated in a share of the resale revenue. (Though I'm sure their margin demands would have killed any market even if labels welcomed the concept.) This provides an opportunity for the service to benefit from a captive market for second sales since the service holds the secret DRM keys that are needed to revoke the license. No other service could revoke the license.

Through license revocation, DRM can guarantee that a digital track is no longer playable for a seller. A service that made a DRM first sale could revoke the license from the seller, and grant a license to the buyer. Most labels even included a set number of burns for a first sale. The selling service could keep track of how many burns were used, and issue the new license with only the remaining burns available. If no burns were left, a non-burn license could be delivered - the buyer could play the song on his computer or a portable player, but couldn't burn it to CD.

The number of burns remaining would surely affect the market value for the second sale. Imagine a DRM service with a product page similar to Amazon's physical product pages that include a price for "new" from Amazon, or "used" from any number of sellers:

The Cinematics - Race to the City
New: $0.99 (5 burns)
Used: 4 burns left, $0.80 (4 available)
Used: 3 burns left, $0.65 (1 available)
Used: 2 burns left, $0.50 (2 available)
Used: 1 burns left, $0.35 (6 available)
Used: 0 burns left, $0.25 (12 available)

Labels could still participate at some percentage of the second sale value.

The seller could have burnt a song to CD once, then rip it back to her computer to keep. But nothing, even with DRM, is preventing her from doing that now and sharing the copy freely. Why not incent her to make a little of her investment back rather than giving the file to strangers for free? If she gives it away free, she's destroyed her own opportunity to sell it.

Of course all this so far still depends on DRM being more user friendly! And any owner who had lost her download or DRM database couldn't resell the song because revocation would be impossible. But she can't resell a CD she lost either.

Even without DRM, a second sale service could guarantee the destruction of the MP3 file on the seller's computer before delivering it to the buyer. Again, the seller could have made any number of copies elsewhere. Again, nothing's preventing that today, with no option for any second sale revenue to the labels.

* Domain name scarcity is destroying natural language!

Competing Against Free

It's not hard to understand that the most difficult problem the music industry faces today is the pervasive availability of free music. Now, when I say free, I mean stolen, but that is merely a semantic difference that is immaterial to how people are finding, playing, and acquiring music today. So I will call it "free" for the rest of this post.

Many people I talk to think free music went away when Napster went legitimate, or when the RIAA started suing their customer base. But free music is still as easy if not easier to either stream or download from the internet. Some sites only let you stream music, while others let you download. Many services are run in countries far from the music industry's influence. Other services skirt the illegal sharing problem by acting as hubs that link to music on other servers.

Here are just a few sites that let you play or download free music:

SkreemR.com - An MP3 search engine. SkreemR scans the web for MP3 links and adds them to its search index. Type a song or artist name and get a list of MP3 download links. Sure they also link to places like Amazon or ThumbPlay where you can buy MP3s or ring tones, but you can also stream and download the song for free. The finally-out-of-beta Songbird player (shown below) makes it even easier to download: it integrates a SkreemR search right in the player and converts free MP3 search results into a list complete with download buttons. You get free music to download to your PC or take with you on your portable MP3 player.



Songza - An MP3 search engine. Songza only lets you stream the results in an embedded player on their site, often in the form of a video from YouTube, but sometimes from MP3 audio source. As long as you don't mind playing music from your PC, you get all the free streams you want.

SeeqPod - An MP3 search engine that also powers other music experiences. SeeqPod only lets you stream results in an elaborate embedded playlist manager on their site. Warner filed suit against SeeqPod in January 2008. EMI filed suit in February, 2009.

Blip.fm - An addictive Twitter-like micro-blogging service with free music streams. Blip.fm lets you search for songs, and play them for yourself and the site's social network. Songs are served either from a web server where the MP3 was found, or from Amazon's AWS hosting service. Blip lets its users upload music. Though they tell users to only upload original content, they serve plenty of copyrighted music from AWS. They're ripe for being shut down by Amazon.

Project Playlist - An MP3 search engine with Facebook application. Project Playlist only lets you stream results, and add songs to a playlist on the site. You can find other people's playlists and play them. The RIAA filed a lawsuit against Project Playlist in April 2008. They claim that since they don't host MP3 files, they aren't liable for theft. EMI, in what gives the appearance of blackmail, dropped its suit after Project Playlist agreed to license their catalog.

Sideload.com - Organizes links to MP3s on other people's web sites into a streaming, locker, and mobile sideloading site. EMI filed a lawsuit in January 2009.

Note that several sites play music for free legally, either because they've negotiated on-demand playback rights from the labels (e.g. CBS Last.fm, Lala.com), or they play non- or minimally-interactive radio style playlists under US compulsory license laws (e.g. Pandora).

Though some of the illegal free music sites have no business model, or have a model that would collapse if any royalties were actually paid, the preponderance of these extra-legal sites is evidence that content owners would benefit from a simple, legal way to let innovative services access streams for a reasonable price. Without such a service, music will continue to be played, but no artists or labels will be paid for the usage.

Music is the Bermuda Triangle of the Internet

How Will Owen Van Natta Turn Piracy Into Profits?

"...music has been the Bermuda Triangle of the Internet, swallowing anyone foolhardy enough to try to navigate its treacherous waters. The short reason for this seems to be that the money that record labels want to charge for the right to play their music is more than anyone can make from advertising or subscription fees."

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.

Napster and Amazon

Here are two Fortune stories on CNN about digital music that show what's wrong with the music labels' expectations, and the only way to survive under the labels' regime.

The first is about Napster's problems as a digital music pure-play trying to survive on the razor-thin margins it makes on music. Napster has never been profitable.

The second is about Amazon's MP3 store and its (and Apple's) successful big box store strategy of using music as a loss leader to get customers through the door, hopefully encouraging shoppers to attach other, higher margin, items to their purchases.

Apple doesn't care that they're not making money on music purchases. They're making tons of money on their iPods, and some more on iPod users who are switching from Microsoft to Apple PCs. Yet, the labels continue to allow Apple to define the market prices for music downloads.

The major music labels insist their content has intrinsic value. Unfortunately, the digital market disagrees - and the customer is always right.