CELESTIAL JUKEBOX - FREE STREAMS OR PIPE DREAMS. UK MUSIC INDUSTRY

Celestial Jukebox: Free Streams Or Pipe Dreams?

This Think Tank will consider whether on-demand streaming can fulfil the celestial jukebox fantasist’s dream to become the predominant method of mass music consumption.

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Transcript

1. Keynote (Summary)

Ryan Regan, CFO & Chief Digital Officer, Last.fm

Prefaced with a brief history of Last.fm, how it was founded in 2002, with 2 of the 3 founders coming from a label background and all looking to a future where music was accessible to everyone.

They were interested in the process of how music consumers come across acts and become fans.  So Last.fm looked at what people were actually listening to, rather than just what they bought.  Through this monitoring (Scrobbling) process, users of Last.fm build up a profile of their musical ‘personality’.  By cross-referencing all the users’ profiles, the system could then begin to recommend music based on your profile.

The plan was to create the last place you’d need for music online, a place that would include information about artists, streaming services and one that would have a social networking basis, and be all centred around your music ‘personality’.

Until January 2008, there had been no real personal streaming services on the site, just a radio and 30 second previews of tracks.  After a long process of negotiations with majors, aggregators and some unsigned acts, they launched a full on-demand service [earlier] this year (2008).

Ryan believes that there are 4 main points to sum-up Last.fm

1.    It delivers a great user experience.  Previously it had been frustrating to search for a song and not hear it.  Streaming now allows people to get involved without having to get bogged down in downloading new applications and it is great for the industry because it’s an economic framework that is sensible – any time a song is played the label earns money, differing from the historical model where the money was split throughout the whole chain;

2.    Secondly, it’s very important to be fully licensed, so everyone gets paid.  Last.fm needs to be a good alternative to illegal torrent sites and now has 2.7 million tracks available on demand;

3.    It’s a good model for unsigned artists, unlike MySpace which is good for promotion.  Here they can actually earn money when their music is played;

4.    Lastly, it’s a great opportunity for advertisers.  Last.fm has a very engaged, highly targetable audience, and is a place where advertisers want to go.

Ryan believes that it is still early days but already since begining on-demand streaming, they have seen huge results.  Paying site-users are up 67%, visits up 73%, new users up 83%, listeners up 156%.

Clickthroughs to e-commerce offerings (iTunes, Amazon, 7Digital etc) have risen by up to 120%, while on a user-by-user basis, it has risen 67%.

The next step for Last.fm is to increase scale, grow the business and get brands online.  For this they are turning to parent company CBS’s historic skills in monetising content and their established relationships with key brands.

They also intend to ramp up their e-commerce offerings with tighter integration allowing users to buy songs on demand by bringing in more partners.

Finally they are looking into and launching a subscription service to allow a greater on demand service than currently offered.

2 . PANEL RESPONSE

Alex Vlassopulos – Head of Business Development, Digital – Sony BMG
Representing Sony/BMG, Alex made clear that from their point of view, download-to-own is still their top priority as far as online distribution of music goes.  This is followed by a subscription-based model and then streaming and finally, ad-funded streaming.  So as far as Sony are concerned at least, on-demand streaming is not what they are focusing on.  That doesn’t mean that they are ignoring it, but as it stands, revenue from streaming is much less than from the other models.

They still intend to try every model out there and see streaming services as part of the puzzle.  Increased access is important, but their ultimate concern lies with the ownership of the music.  They are trying a variety of methods at the moment, and it is very much a process of learning and moving forward.

Jez Bell – Broadcast & Online Licensing Director, MCPS-PRS Alliance
Offering up a perspective from the publishers’ point of view, he made a couple of observations based on what Ryan and Alex had said, especially that one of the problems faced by publishers when trying to license new online services is that they are often viewed as an afterthought.

Collection societies have a different angle to labels, they have to treat all licensees the same, so all models Alex mentioned must be handled equally.

Everything they do is precedent-based, subject to rulings by the copyright tribunal, so not as flexible as labels.  This can be good for rights holders but can be seen as inflexible from the point of view of a new licensee.

They’ve been licensing streaming services 7,8,9 years, originally dealing with ISP offerings, now looking at web 2.0 models, YouTube, MySpace, Last.fm.

They are currently 2 years into rates set by tribunal, which end next year.  As they’ve acknowledged, some have been good, some have not been for licensees.  And they are looking for the right approach going forward – licensing schemes that balance revenue share with the need for minimum values.

As revenues models become more and more complex, they want to set some easily-manageable minimum value for music downloads and streams that can be applied across the board.

Charles Caldas – CEO, Merlin
Charles explained how Merlin is a new entity formed by the global independent sector to deal with access to online revenue models, the impetus for this being that much like publishing, independents have been considered an afterthought by many of the new web 2.0 companies.

Merlin, as a not-for-profit, members-only body, represents over 12,000 labels, and aims to monetise streams and provide access to these streams.  Merlin believes it is crucial that everyone must be at the table when these deals are hammered out.

Independent labels have innovated and driven music but have not been rewarded.  Merlin’s perspective is one of openness, there is a need to license these new streams and create value for everyone.  If everything is licensed properly it is ultimately best for the consumer, as they will have easier, cleaner access to music.

Clive Gardiner -VP, Digital Content, We7
We7 started last year with just 30 tracks and has since grown, having started out initially as a site offering ad-funded downloads.  Where users have the choice of either purchasing the download or getting it for free but with a targeted ad tagged-on, infront of the mp3 file itself.

Originally, users had just the choice between either ad-funded or paid-for downloads, and could stream a 30 sec preview.  This they found, was not enough, so a week ago launched an ad-funded streaming service and the same day, added the BMG catalogue.

All music on the site is mp3, so is completely portable.  Since launching the streaming service, traffic has gone up by 10-fold.

The biggest challenge they have faced so far is getting advertising money to fund it.  The ad industry is not rushing to embrace these models and general display ads will not produce enough revenue.  The future, they believe, lies in targeted premium advertising.

Adrian Drury – Head of Commercial Strategy and Business Development, The Cloud
Adrian stated that his company was trying to create a true celestial jukebox where all music was available wherever, whenever.

They develop broadband services for mobile platforms and are trying to get people like Last.fm, We7 etc onto mobile devices, where the prize, if successful, is huge as the multiples are just so much bigger.  If you provide your services to mobile phones you increase your audience by a factor of 10 – more ears/eyes means more ad-funds and more paid-for downloads.

Their key agenda is to reduce the cost of streaming/downloading content onto mobile devices.

They are also very interested in developing location-based downloads and streams, so they can sell adverts on a location basis.  Adverts based on location can be charged at a hefty premium making it all financially viable.

3. QUESTIONS FROM THE FLOOR

The panel then started to question one another and take questions from Keith and the audience.  The main issues that came up were:

  • How To Deal With New Models

All involved seemed keen to point out that no model would or should be left untested.  The main concern was just that people got paid.

Charles:  As I’ve said in all discussions, in forming Merlin we haven’t closed our mind to any models.  Certainly there’s never been an insistence on DRM or limitation to consumer, so we want to be paid but we have no philosophical objection.

Alex:  Likewise we have deal parameters; if we look back when iTunes launched, if we’d said “No” to individual tracks not albums it would never have worked.

Jez:  I echo both.  We are in the business of licensing so our job is to make it work.  We’ve had a very clear steer that we need to license more, no taboos, so whether that’s a new company or an old P2P one, we’ll look at all opportunities.

  • Nokia’s Subscription Service

Nokia’s plans for a subscription mobile based service came under some scrutiny…

Jez:  Our licensing discussions with Nokia are ongoing.  We have to ensure that whatever deal we do with each service is fair and equitable to the market and delivers value to rights holders. Subscription models are interesting, how will it work – can Nokia make it work?  Several have tried, maybe Apple will do it if iTunes goes that route, but subscription is a holy grail, a guaranteed revenue stream from people who may not always be buying music.

  • On The Decreasing Difference Between Downloads And Streams

Jez:  What happens when a download becomes indistinguishable from a stream?  A hierarchy of value has been set but when there’s no difference how does that affect this?  It forces us to think about how licensing models go forward.

  • The Difficulties Launching New Businesses

An area that came up several times was the difficulty for new businesses to license fully; should they start-up and not worry about licensing, hope they succeed and then go to the labels/rights holders…OR start from a fully licensed basis, using up much start-up capital?  It was pointed out that this is effectively how Last.fm started; only licensing material after they’d been bought out for millions by CBS and Ryan Regan came in for some stick…

Ryan:  Every deal we’ve struck and every deal we’re trying to strike, including the one we’re negotiating with Merlin, covers all back payment for any streaming that took place before.  I do think the dynamic in the industry has changed.  A year ago there were lots of new ideas, now not so.  We absolutely want to have a fully licensed service, but I don’t want to go into why we were valued.  Streaming is a very small part of Last fm – I don’t think its right to say that our value was based just on that.

Alex:  These are music services.  We hold the music, and we have to explain to a hell of a lot of artists why it is they don’t get as much as they think they should.  We have to persuade them it’s good for them.  We need to see commercial value in these deals.  The value is in the music, we hold the cards and we need to respect the artists and make sure they get what they deserve.

  • How Should The Industry Deal With Unlicensed Alternatives?

Keith:  Should people be policing this?

Ryan:  We hope that they are being policed and we don’t see ourselves as an unlicensed player.  That said, we are primarily focused on our users not the competition or what such-and-such a competitor is doing.  What matters to us is building the right experience for our users.

Alex:  We’d rather legalise than penalise.  It’s always a chicken-and-egg situation…do you start legit, build slowly, or go for it and get big?  We have to make it as easy as possible to legalise these services.

AUDIENCE:  What about the French approach, cutting off users? 

Adrian:  We generally applaud the French courts, want to see everyone in the value chain get a share of a legally provided service, but it’s really difficult to enforce.  If people really want to use P2P networks to file share, it’s hard to stop them.

Charles:  We’re talking of penalising people – perhaps we should incentivise them?  We should be making the consumption of music as easy as possible, and the revenue shared equitably.  We’re not interested in cutting-off people’s broadband access.  There’s a huge amount of work to be done though, to create a positive licensing situation.

AUDIENCE:  Since physical costs are so reduced, should the split between the record companies and rights holders be more equitable?

Alex:  We all have identical costs.  The rights are very complicated with lots of different rights bodies, but the issue is on the relative value, we have to look at a lifetime value.  Maybe in a future world with a more established revenue model [it might be possible], but at the moment the lion’s share of investment still comes from the record label.

This may be up for discussion in future, but investment is still skewed towards sound recording.  Look at the traditional audio market and the relative value to the rights of recording.  Record label gets a lot more from sales than MCPS, but from broadcasting it’s pretty much 50/50, similar with online use.  PPL charge roughly the same for streaming, but there’s still a disparity for downloads.  Licensees have to look at how this affects money from adverts, TV etc.

AUDIENCE:  Should artists be asking whether or not their rights have been given away rights here, with ad-funded models shouldn’t we get asked permission for each ad attached to our music?

Clive:  There are different kinds of advertising and embedding and where synching becomes relevant, with us the adverts do not cross fade into music so not considered sponsorship or endorsement.  BMG have 3 pages of rules about what adverts etc can be used around their music.

  • So How Do We Pay For All This Free Music?

Clive:  Display ad revenues are simply not enough to pay everyone.  It needs to have a premium element, and that comes from targeting.  Increase scale and then improve targeting. Get a large enough audience that you can ‘slice and dice’ and the results will still be worthwhile.

But it is hard to get people on board, advertising alongside music is still not yet appealing to sponsors.

  • So How Close Are We To A True Celestial Jukebox?

Jez:  It’s not licensing that will take time – it’s the technology.  It wont be rights holders holding it up, so hopefully, 3-5 years.

Clive:  2 years, it will be completely blurred.  How do you make free music pay?  We need this discussion now, the climate is changing but people are still signing long term deals for streams/downloads etc.  This will all be very academic soon.

Ryan:  Within 5 years

Adrian:  Today, there are Wi-Fi networks all around, how long till it’s available in my car radio, that’s when downloading and streaming become indistinguishable.  A 5-year timeframe is not unreasonable.

We’ve built business studies around PC platforms, but we’re about to go to mobile platform.  A hugely bigger market – big emerging markets, too – of people not touched by PC industry.  This is further than 5 years but will change everything.

Charles:  3-5-10 years, it depends on the technology.

Jez:  It’s happened already, we just don’t know it yet – we’re just waiting for business to move to a subscription service.  Look at services coming from Apple, Nokia, Omniphone, etc.  The idea of an all-you-can-eat subscription or ad-funded model is here.  We just need to make sure the way we deal with it in terms of licensing and consumers is fit for purpose.