A WORD FROM OUR SPONSOR...CAN AD MONEY MEND THE RECORD BUSINESS. UK MUSIC INDUSTRY

A Word From Our Sponsor…Can Ad Money Mend The Record Business?

MusicTank presents the second of two Think Tank debates looking into the effects of fragmentation of media in a post-YouTube world. Part 2 explores the ongoing transfer of ad revenues from TV to online and the future potential of ad-funded download models.

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Transcript

1. Keynote (Summary) – Michael Bornhäusser

By way of an introduction, I run a company out of Switzerland specialising in DRM solutions, mainly for mobile.  Recently we pioneered the idea of ad-based music download services for mobile, and presented a service prototype at MIDEM earlier this year.  Our first confirmed carrier is Australia’s largest mobile service provider, it is envisaged they will test every aspect of the service.

Ad money is great – BUT IT WILL NOT SAVE THE RECORD INDUSTRY.

This is true not only of the PC, but also for mobile – not the definitive ‘solution’.  Big questions are: will the consumer accept advertising? How will it be set up? 1st analysis performed was thus CONSUMER NEEDS.  Europe-wide analysis of T-mobile customers, also data from US and Australia produced a clear statement – CONSUMER DOES NOT WANT AUDIO ADVERTISING, too close to terrestrial radio.  2nd question related to non-obtrusive, on-screen ads.  CONSUMERS WERE GENERALLY MUCH LESS AVERSE TO THIS.  Interactive ad-info displayed on the device is fine – less obtrusive.

Thus interactive on-screen ads are the way forward.  Then we talked to the brands themselves: Coca Cola, BMW etc. – largely uninterested in conventional advertising via a music service – they wanted direct response.  Google’s ‘pay-per-click’ philosophy is now completely ingrained, companies only want to pay for advertising that actually elicits some kind of response.  Advertisers would much rather work in this way now.

Digital service providers (DSPs) were thus the next port of call.  Their major concern was obtaining better content prices for customers.  Then it was a case of contacting the labels themselves, who, it turns out, have no particular demands – just looking to save the industry!  Warners however, did say they’re particularly keen on using ad-based services for promotional content.  All labels (even EMI) wanted to continue with DRM (in order to track consumption/usage) on any such ad-funded subscription service.  This is borne out of a desire to profile customers on the basis of their music libraries, how many times a track is played etc.  THIS IS POTENTIALLY VERY USEFUL INFORMATION e.g. Harley Davidson targeting those listening to rock/metal, Lancôme targeting J-Lo listeners etc.  Providing this info to the advertisers enables them to massively improve their conversion rates, providing further incentive for them to fund such a programme.  Spamming a user with loads of advertising they have no interest in is not the way forward – it MUST be targeted.  It’s all about getting a high matching rate for low-quality ads.

We now have two subscription service models: £9.99 standard fee, with a reduction to £6.99 for those who accept ads.  Truly ‘free’ ad-funded services unfortunately died a death with SpiralFrog, although it could still work on a limited basis for promotional material e.g. giving people tracks and related ads for defined period.

In summary – there is a way to match consumer, advertiser, DSP and label needs – and this is the model we have at SDC.  Ad money may not be able to save the music industry, but it can certainly aid its recovery.

2 . PANEL RESPONSE

Rupert Vereker:  Very interesting debate, although I certainly wouldn’t want to be put in charge of Michael’s sales team!  Throughout the industry, there’s an enormous belief in some fantastic ‘pot of gold’ – advertising money (however much there may be) is no magic wand!  Labels will really have to come good on the uptake if this is ever to work.  I for one don’t think the industry is ready to take such commercial pressure on an already shaky infrastructure.

The independent sector will certainly need to band together (like this).  Many channels will be involved.  Advertising is a multi-disciplinary sector, and there is a lot of work to be gone.

Shannon Ferguson:  There is a belief in the viability of an ad-funded model, but it’s also important to recognise there are varying grades of ‘funding’.  Ads in music television and radio have been around for ages, brands will always want to associate themselves with popular music.  Ad money will not make up declining revenues on their own – we are still competing with ‘free’ after all.  These people are hard to convince, and with them audio ads simply won’t fly.

DRM will play a role; we believe the subscription model holds the most promise and offers the best value to consumers.  There are problems of portability etc however.  The whole thing needs to grow quite substantially, many more subscribers needed.  If we get to the same level of subscription as pay TV, people will (if the model is right), stop thinking about how much money is being paid for the service.  Should be like water bill etc.  People don’t, for example, think about how much they’re paying when they’re sitting down to watch TV.  If this is to become reality, much greater penetration is required.

Steve Purdham:  I’m in an enviable position – only a matter of weeks ago I had nothing to do with the music industry whatsoever.  This affords me the luxury of a fresh perspective.  Have a feeling however, it’s going to be pistols at dawn for Michael and I!

At heart I’m a technologist – things have moved very quickly, I was building technology businesses in the 90s when many of the big brands (IBM, Microsoft) were struggling.  All too often the current problems are being looked at from the industry side – we need to focus on what the consumer wants.  In many ways the horse has already bolted regarding consumers being coerced back into paying for music.  Many of the people in this room even are firmly in the ‘can’t pay won’t pay’ category.

You can’t force a business model on consumers.  Different things in combination is what’s required – different models to suit different situations, you can’t go either way completely.  Subscription models work for big artists, labels – but is there enough revenue to go round everyone?  Frightening when you think about it.  The ad world is in a different phase now compared to the future.

Another major misconception is that the mobile and online spheres are somehow different – ONLINE AND MOBILE ARE THE SAME, THEY ARE NOT DISSOCIABLE MARKETS.  There is thus no point differentiating in terms of business models, because as soon as the technological ‘phasing’ is over and done with, the communicative experience will be largely the same whether mobile or online.

Another misconception (or at least seems like a misconception to a non-advertising person like myself), is that brands want to be associated with a particular band, artist etc. NO – THEY WANT TO BE ASSOCIATED WITH THE CONSUMER.  The association with the music is just a marriage of convenience.  Brands are paying for the privilege of whispering in the ear of individuals (those deemed as receptive because of their affinity for particular types of music).

In the end, multiple models will fail, succeed – there is no ‘right’ answer.  There is however, a wealth of possibilities as to how we can make it work.

Daniel Ayers:  Buying time with the user is what this is all about, and it’s also advantageous for the advertisers to buy time with users of SPECIFIC PROFILES rather than with artists in particular.  The artists themselves have a problem – now album sales are declining and sales of individual tracks, ringtones etc the norm – there are many more transactions to have to deal with.  Working out royalties is becoming progressively harder and harder.

A study in this weeks marketing mag – named the top 10 or 20 ‘most-loved’ and ‘most-hated’ brands.  There was a massive overlap in the two lists i.e. the biggest brands are universally loved and loathed.  Thus if Harley Davidson do target the dad-rockers, they’re likely to find just as many loathers as lovers on the basis of profiling.  Still, it’s a better guide than none at all.

Sony and Qtrax deal (Qtrax being a device which sits on top of P2P Gnutella client).  They still can’t be burned to CD, transferred to portable however – DRM still effective. Good enough system can and will work for everybody.

Michael Bornhäusser:  I can remember the days when I had the CEO of SonyBMG telling me there would never be music tracks downloaded to PCs via the internet.  In terms of our model, the deals have already been done.  Deals have already been signed to run the service by the major mobile operators.  Major labels need proof of concept before they sign away their content – you can’t leave it to them, you must show them that it’s possible and prove to them it will work.

Keith Harris:  I get the impression there is unanimous agreement on the panel that physical sales are over, and that the future now is subscription ‘paid-for’ vs. ad-based models?  Is this the case?

Steve Purdham:  It’s not necessarily dead, but it will continue only as a niche product rather than mass-market, in the same way that vinyl has never died.

Shannon Ferguson:  Single/individual downloads will also continue, wont be completely usurped by subscription services.

Steve Purdham:  It’s not really a question of either/or – this is why Dan Ayres’ point about complexity rings true. All models mentioned may well be valid, and things will no doubt get more complicated before they get straightforward.

Keith Harris:  Will the object identifier component of DRM continue to be universal?

Steve Purdham:  Object tracking isn’t the problem with DRM – it’s the restrictive, non-interoperability which causes the anti-DRM backlash.  Unprotected mp3s play on 100% of devices without exception – that’s the advantage.  If the interoperability is there, no-one will mind about the tracking/object identifiers.

Rupert Vereker:  The distribution question is now coming to the fore – how will it be done?  We7, for example, won’t be able to muster the global reach of someone like iTunes without major funding.  Plus what with options for ‘premium vs. ad-subsidised’, ‘subscription vs. single purchase’, different formats etc – so many purchasing options at the retail end.  Could be too chaotic.  The question, as always, is whether the pot is big enough to cover all the costs.  If We7 launches tomorrow, will there be enough money around so that everyone gets paid?

3. QUESTIONS FROM THE FLOOR

  • This morning I read that CD sales (in German market) are 50% what they were in 2000.  Labels must thus be worried, not sitting pretty by any stretch of imagination.


Daniel Ayers:  360 degree deals are at least part of the answer for the labels, taking revenue not just conventional music sales channels.

  • Revenue splits – how much is this new relationship about driving sales (through the possibility of cheaper sales because of advertising) and how much is it about a separate revenue stream from the advertisers?

Michael Bornhäusser:  No-one knows – if, for instance, subscription fees are halved, must see what revenue shares come out on top of that.  Given that people like us are just at the trialling stage, no-one can say for sure at this point.

  • What about Joost?

Shannon Ferguson:  Joost is certainly going to be one of the players in this future marketplace – although as with everyone else they will need to build up scale and quickly if they are to get the required ad revenue.

Rupert Vereker:  The model in question is all about CONTENT.  Content owner takes content to brand and says ‘we can associate your brand with this’, then use trackers to see how much content has been accessed and thus work out how much the content-owners should get paid.  Then they get presented with a cheque.  BUT this is now more complicated than ever, is only going to get more complicated and PEOPLE WILL WANT TO GET PAID AND QUICKLY.

Daniel Ayers:  Nice to see some acknowledgement that content holders getting paid is important.  Joost is certainly a very interesting case.

Michael Bornhäusser:  That’s sponsoring – what we are talking about isn’t linked to particular artists, particular channels.  In a subscription model money is split by play counting, and ad money is distributed in the same way.  Play counts are key.  Done on the basis of consumption.

Steve Purdham:  With We7, consumers have a choice to pay or take music for free.  If free, then ad is attached.  This is audio at the moment, although the technology works for visual as well.  With ad revenue, some taken to cover publishing costs and the rest is split.  Right model?  Who knows – consumer will ultimately decide.

  • I was at a mobile entertainment forum the other day – having spoken to advertising people, they don’t seem overly-enamoured with these ideas – ‘interested but not massively’.  They want reach, audience and verification.  At the moment mobile doesn’t provide the same stats and metrics as online.

Rupert Vereker:  Would seem we are singing from the same hymn sheet.  There also aren’t really enough savvy, skilled people on the ad/media side to cope with all this.  Time and education are a must, even the large agencies aren’t really ready to cope yet.

Michael Bornhäusser:  Ultimately it’s a case of ‘get educated or lose your job’ though, surely?

Steve Purdham:  Back to this principle of ‘technological phasing’ again – there is a gap between OPPORTUNITY and ACCEPTANCE.  One agency I know still spend 98% of their budget on conventional TV.  The more people get Sky+ boxes etc, the less effective this will be.  Just because there aren’t enough people to make things happen at the moment, the increase can be part of the evolutionary process.

Rupert Vereker:  The interesting thing about these new technologies is that the ADVERTISERS ARE GUARANTEED ATTENTION.  Not like TV, radio etc – people may not be watching, listening, could be in another room.  A click guarantees engagement.  Reach becomes quantifiable in terms of individual users who are actively clicking.

Daniel Ayers:  You have to wonder why people are still talking about reach then.  Do people realise what makes a good online campaign?  It’s all about ENGAGEMENT now.

  • How do the panel feel about the suggestion that ad-funded models are just reinforcing the perception that music is free?

Steve Purdham:  It’s over – the horse really has bolted on that one.  ‘Free’ doesn’t however mean ‘no value’, thus it’s not about the product becoming worthless.

Shannon Ferguson:  I really don’t think ad services are the main culprit or problem in promoting this perception.

  • Can ad money mend the record industry – NO! Myspace, YouTube etc are the apotheosis of an ad-funded model – they don’t just host all that content out of the kindness of their hearts.  It brings cultural kudos and value to them.  The question is… IN A WORLD WHERE EVERY TRANSACTION IS LOW VALUE AND HIGH VOLUME, HOW WILL ANYONE MAKE ANY MONEY?

Shannon Ferguson:  The reason MySpace and YouTube have such high volume is that they HOST LOADS OF ILLEGAL CONTENT.  Will be interesting to see how they fare once playcounts and metadata is enforced.  They’re really not making that much at the moment anyway.

Michael Bornhäusser:  If an ecosystem can be established whereby music industry can spend money on marketing and make it back through a combo of ad revenues and sales than maybe it will survive.  And if everyone gets a fair share then ad-funded music sales will make money.

Shannon Ferguson has a point about ‘tap water’ – if we’re talking about one-off payments then that simplifies the mess of many individual transactions.  Subscriptions – truly the basis of ‘on-demand’.

  • Size of pie (online and offline as same pie here) – what’s the first thing that gets cut when margins are squeezed?  MARKETING BUDGET IS ALWAYS FIRST TO SUFFER.  Conventional advertising is a shift, but when that shift happens there won’t be so many big players (e.g. ITV, Channel 4) and will thus be much greater competition for the existing ad revenue.  The size of the pie going forward is thus being overestimated.

Rupert Vereker:  Shift from conventional to new will also mean advertisers will demand proof of bang for their buck, as is allowed through trackability, play counts etc.  If they get this proof then things will accelerate.

Steve Purdham:  The size of the pie IS the same.  Digital market is growing, but at the expense of the conventional market.  Economics surely says it will be no bigger/smaller than before.  The beauty of the shift is in terms of accountability – i.e. can prove the ads work. Just have to be patient.

Michael Bornhäusser:  To advertisers at least, the shift will mean value for money – rather than just hope as before.

Daniel Ayers:  As a label we’ve historically done very little advertising as we were unsure that it would actually work.  The google philosophy proves the efficacy of the ads.

  • At Orange we’re developing a new business where consumers are actually paying for music.  We found out when customers are and aren’t willing to pay.  Conventional channels where content is used – radio etc.  It’s free then as long as we’re ok sitting through ads, listening to the DJ spout drivel etc.  If we have existing ‘free’ models where artists get paid, how do these differ from the models under discussion?

Shannon Ferguson:  No difference.

Steve Purdham:  The difference is ‘ownership’ vs ‘streaming’, although as technology improves, this difference will also start to disappear, if we imagine some central repository where all content ever is available to consumers who stream everything with same effectiveness as ownership.

Daniel Ayres:  As SP says, it’s currently a very different type of consumption.  One day when all iPods are wireless capable, with networks running nationwide – then there will truly be no difference.

Rupert Vereker:  Plus, radio is prescriptive – and that is why it will continue to decline.  The MySpace generation wants just what they want, when they want it.

Keith Harris:  So how will the MySpace generation ever find out about music?

Daniel Ayres:  Word of mouth!  Now more powerful than ever – social networking etc.

Keith Harris:  Surely predominantly used by the youth market though – why this fixation when there are so many other people out there?

Daniel Ayres:  Isn’t it the assumption that brand decisions are taken early in life and then people stick with them?  BUT if this doesn’t hold true anymore, then the Internet really does throw a spanner in the works – enforces a meritocracy.

Michael Bornhäusser:  I think the youth are mainly targeted for purposes of indoctrination.