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."

UMG CEO Doug Morris Interview in Billboard

Exclusive Billboard Q&A: UMG's Chairman/CEO Doug Morris

This should be good: another interview with UMG CEO Doug Morris. Earlier, I commented on an interview Mr. Morris gave to Wired magazine in 2007. Now he's back with some more confessions. The interviewer jumps around with disjointed questions and starts the article trying to position the ego of the head of the world's largest music label as somehow modest. Here are some points from the interview that struck me as odd.

On promotional distribution, Morris says he doesn't do promotion, yet says his first experience with breaking a band was through radio promotion and a record order that included 20% promotional units.

"We don't look at anything as promotion. Take a look at MTV. It turned out to be a disaster for us. We sold some records, but they built this huge company and we gave them our [music] for nothing, and what did we get?"

What did he get?! His companies didn't just sell "some records". They sold tons of records from the free prmotion MTV gave them, and MTV built a business. If Morris wanted to own that business, why didn't he start it himself? His attitude towards digital is the same thing. If he thinks he can do digital better, why doesn't he? Because, as he admitted to Wired last year, he has no idea what digital is. So why not make and sell great music, and let someone else build your business by figuring out how to promote your product?

Morris brags how he pulled his videos from Yahoo! and might not renew Universal's YouTube agreement at the end of the year.

With YouTube, the quality isn't great; it gets low [cost per thousand]... Why would you want to be in the middle of music-generated product that doesn't demand high CPMs?

...we called [Yahoo] and I said, "You're making money off our videos and not paying us anything... we don't want the promotion, we want to get paid." And [they] said basically something like, "Over my dead body." And we took all our videos down. As soon as our videos came down their viewership went down, because we're about a third of all their videos.

Morris doesn't mention that his sales also went down, and have still been falling ever since. Most businesses want to be where their customers are. So why didn't he work out a deal with Yahoo? I imagine his demands included more than just getting paid. They probably included getting paid too much, and unrealistic technology limitations that would have shrunk Yahoo's usability anyway. Morris says videos are now a cash-positive business, which is great, but what additional value is he leaving on the table?

Regarding RIAA lawsuits and theft of music, Morris makes this ironic statement, as anyone who has tried to deal with the labels says they're the ones that are not logical:

You have a lot of people who think that things should be free. I don't know how they think we should produce it for free, but there's a lot of people who aren't logical.

Morris even obliquely refers to his disasterous comments from the Wired article about not being able to recognize a technology person by claiming he can recognize other great business people (bold added):

Whatever their education is, whether it is or isn't, it's about them having some connection with culture and the fact that they are competitive and driven and intelligent. When you get that group of people together, you win. I can recognize them a mile away.

I give Morris credit for building a label that has around a third of the music market (by having best acts around, and lots of them), but his lack of digital savvy will help bury any post-physical future major labels may have had.

DRM is Poisonous

I will admit that I used to think DRM was an enabling technology, especially for unlimited music subscriptions. Without DRM, nobody will let you download an unlimited amount of content. Without an unlimited amount of content for a fixed price, music consumption is bogged down with any number of 99 cent buying decisions. An a la carte permanent download (PDL) world is just not how music should be enjoyed.

Unfortunately, users do not want subscriptions to music. They've never really subscribed to music: radio is free (paid by advertising on a fixed and predictable compulsory license rate structure); and LPs, singles and CDs were purchased a la carte giving the customer a sense of physical ownership. Thankfully, now to the rescue of unlimited consumption comes streaming and an always-connected broadband world. Now DRM doesn't matter - services can still provide an "all you can eat" experience without too much worry that the user will walk away with your entire catalog. To limit or turn off consumption, just turn off streaming access.

So back to the thesis of my headline: DRM is poisonous. Not only was customer support for Microsot's DRM expensive, most companies who have tried a DRM music service are now feeling the pain of what it means to migrate, sell, or shut down their DRM services. MTV's Urge, Microsoft's MSN music store, Yahoo!'s Music Unlimited, and Wal-Mart's a la carte store have all had their customers revolt after attempting to shut off DRM re-licensing for PDLs they sold. This is a brand manager's nightmare.

And those are the DRM service that have already closed. What will happen when Napster is sold or shuttered? What will happen with Rhapsody decides to change its business model? What happens when Apple wants to change its delivery method? Yahoo! has announced they will be giving coupons to re-purchased music on Rhapsody to customers whose PDL licenses have been lost. Wal-Mart has decided to keep its DRM license servers up longer. In an already razor thin margin business, dealing with DRM customer service issues, and keeping servers running after a service has been shuttered turns music into a money-losing weight on distributors.

Next up is what happens to the CinemaNow and Movielink movies you have purchased? Movie studios understandably want to protect their content, and in their case, streaming is not yet an option for high resolution HD 720p or 1080p video. Netflix, Hulu and others seem to be able to stream decent video quality, but customers will soon demand higher resolution as they convert over to newer, larger flat-screen and home theater displays.

So I'm converted: DRM is evil.

YAPF - Yet another physical format

Music On microSD: I Can't Believe The Labels Fell For This

SanDisk is going to try to sell music on teeny tiny SD memory cards.

The link above says it all for me. Though I'll bet it wasn't the labels falling for it (they likely extracted healthy advances from SanDisk); it's SanDisk that I can't believe fell for it.

Physical music is dying. It doesn't matter whether it's CDs, cassette tapes, DVDs, or tiny chips with music already on them. Sony once proposed selling flyers with album download codes at stores, which customers would enter into their computer at home to download the album. That sounds like a solution for the retailer, not for the customer. People are simply not getting their music at stores as much as they used to. That trend will continue its downward spiral as more mobile phone delivery and always-on connected services come on-line.

SanDisk claims that people are already walking around with microSD players in their mobile phones. But most people with phone memory use it for their photos and contacts. To play music, you'd have to disassemble your phone, take out your contact list and photos, and plug in your music. When the album was done playing, you'd have to do it all over again. Imagine trying to switch out a microSD card in the car, on the train or bus or airplane, in a kid's messy bedroom, or even in your own living room. Your music would quickly join your pocket change in the folds of the sofa.

Even with a USB dongle attached to your computer, you'll still need to change the music far too regularly. Maybe SanDisk needs to sell a SD card changer (though it would more likely be a tiny 50-port rack that all your SDs get plugged into for both storage and playback.) If they expect you to simply upload the album from the card to your computer, then what was the point of getting the card in the first place? Your computer is already hooked up to any number of download stores.

At least SandDisk will have a lot of unused inventory they can erase and resell as mere memory.

UPDATE 2008-12-05: YAPP II

Here is news of another USB memory stick music solution. An Australian company D:Net Media is going to attempt to sell music and bonus materials (videos, remixes, interviews, biographies, photos, lyrics, etc.) on a memory stick in stores. Their product apparently includes an online service component that sends you updates when more media related to your purchase becomes available. Though the bonus materials are a nice bonus, this again sounds like a solution primarily for retailers, not for users. The web site with more info is DDA4me.

Resnikoff on DRM-Free

Resnikoff's Parting Shot: The Downer on DRM-Free

Paul Resnikoff of Digital Music News spends an amazing amount of time following the digital music business. Where does he get the time!?

In the post linked above, Paul discusses the lack of any sales bump from licensing non-DRM music to Amazon and others, and compares it to Apple's continued dominance, even though most Apple music remains locked up in Fairplay DRM. The complaint seems to be that non-DRM is not moving the needle.

I look at it the other way around: it was DRM that didn't move the needle.

This proves DRM was an unnecessary technology the music labels forced on distributors for years. DRM is inherently anti-consumer, and at the razor-thin margins the labels require (driven by Apple's refusal to budge on the 99 cent price point), no distributor can afford the customer support calls DRM creates.

Even after DRM has been proven a failure, the labels continue to make stupid mistakes even now with restrictive licensing rights and lack of margin to build a business.

MySpace Music

Why MySpace Music Is Likely to Fail

Here's a post by Om Malik on the coming-soon MySpace streaming music with upsell to Amazon MP3 downloads experiment. Om thinks it will be a failure. I hope he's wrong, but the key lines from his post are:

The record labels are still not facing the proverbial music and understanding that their business model is completely broken... They need to learn that they don't need to start a company, but instead encourage a thousand others

The music labels must get out of the way of distribution - both in terms of price and rights.

My usability opinion is that any web-based streaming service is bound to fail as the music stops playing when the web page it's playing on unloads. One way around that is to pop out a player that can be minimized to the task bar, but that defeats any display advertising. Online music will only succeed when it becomes custom radio, complete with local, regional, and national audio advertising and the occasional upsell to a favorite "now playing" song or album download.

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..."