Digital Music: An Industry Update
1. How Things Are
What’s happening in mobile telecoms & music?
Mobile technology as a platform to deliver music is currently the biggest hoped-for success in the mobile telcoms industry. Record labels likewise keenly anticipate such delivery.
· Monophonic mobile ring tones, were the first incarnation of mobile music. As a global market it’s worth an estimated $1bn. Collection societies around the world collected $70 million averaging 10% of retail price, equating to $700m. The grey market is a third, bringing up to $1bn. (source: Mobile Music report, publ. Informa Group).
· Polyphonic ring tones were the second incarnation that enabled a way to further personalise mobile ‘phones.
· The current expectation is that the next step would be to have real music as a ring tone, or delivered straight to you for consumption. People are prepared to pay a not inconsiderable fee for a 15 sec. ring tone – averaging £3, but up to £5 in some cases – to personalise their ring tones in this way. Although real music is more desirable than a ring tone, it would be wrong to assume there is more money to be made from real music – delivery costs will be higher (as the files are much bigger) and there are more rights holders involved (recording, composition and performance).
· The consumer is expected to adopt this delivery mechanism because it’s direct, instantaneous, and in a convenient format for listening and the record industry is excited at the prospect of music delivered through a secure distribution channel which has a natural payment mechanism built into it, thus eliminating piracy.
However, the danger is that there is an over-inflated market expectation that people will be prepared to pay a premium to receive real music in this way.
Not surprisingly, many labels are excited at this prospect, and of the financial returns such a distribution mechanism would reap. Real music in a controlled distribution environment is the holy grail of the record companies – issues surrounding piracy wouldn’t exist because of the secure nature of delivery, and such a delivery mechanism affords labels greater connectivity to their subscriber base.
However, the advent of 3G (or similar) has once again opened up gateway problems, in that if you can access anything for free online from your mobile, why are you going to subscribe to, and pay for, the downloading of music? (Reference: low uptake of 3G to-date – whilst in it’s infancy, Wi-Fi set to become the new standard in portable technology?)
2. Emerging Business Models
There are currently 4 areas of commercial potential for the mobile delivery of digital music.
1. Dedications – sending ring tones as greetings to friends, colleagues, peers, etc.
2. Karaoke opportunities – particularly in the Far East
3. PR and Promotional opportunities for a fan base/community
4. Music on demand
2 principal models that have emerged in the use of mobile telcoms for:
Record Labels using mobiles to drive marketing campaigns to customer base, via SMS. Specific targets, encouraging a preview of pre-released music.
· Distribution/Consumption of Entertainment
Given the sensitive nature as to the success or otherwise of these models, data is very hard to come by, and the effectiveness of such practices relatively unquantifiable.
By way of example Vitiminic, moved into mobile music delivery, allowing the user to send a personalised greeting with a 30 second clip of music. €230’000.00 in one territory for one quarter were posted. Is this a success, given the scale and operational costs of such an organisation?
BonJourno, Italian Mobile Marketing company has now bought them, suggesting that confidence in their use as a mode of consumption is some way off.
The success and profitability of ring tones may well be an exception. It is a simple model involving one copyright (embedded in the composition), and shouldn’t necessarily be held up as an example of potential success in things to come. The delivery of music involves many more rights, which are complicated, costly and difficult to procure.
3. The Way Forward
Nokia Flash Card, storing MP3 & CD recordings. Sony Ericsson, a partnership which controls both music content and delivery mechanisms – is this the way forward?
The Music Industry has been bleating about piracy, yet this same industry has always been behind the game. Rather than grasping the nettle, and exploit new distribution mechanisms, it has tried to kill it. Witness SDMI whose failure is in part due to the industry’s arrogance in challenging the public to crack what it though was an impenetrable code, which was subsequently cracked in 30 hours by a student…
A 4-Stage Cycle was identified, summarising the attitude and response by record companies, to the perceived threat inherent in the technical progress and development of digital music delivery by third parties. These are:
1. Ignore any new developments and assume/hope they fail – Denial
2. Sue the companies, to slow it down, or best of all, to close it down altogether – Conflict
3. Companies decide to try and do own their own thing – Copy & Imitate
4. Realisation creeps in that it’s harder than they thought – Sell your solution or Buy another’s, whose process actually works.
Example – Dataplay.
A novel format. EMI & Universal bought into it. But to make it work, they had to launch players, manufacture the storage medium, and then convince consumers they should buy into yet another music format and another hardware device. Additionally problems were experienced in manufacturing such a small unit, with resulting knock-on effects with launching to market.
20 year Cycle by which people will adopt new technology.
Compact Cassette – Phillips 1963
CD – Sony 1983
Laser discs failed, most certainly due to it’s launch being too soon after VHS in early 1980’s.
However, now, some 20 years later DVD is now making ground, and is set to make VHS redundant.
Consumer Electronics companies drive the format. Record companies are directionless.
Minidisc was launched at the same time as DCC. Companies were paid to release in these formats, in effect bribery. MD and DCC launched too close to CD. At the time of launch of Minidisc, CD penetration was only 30%, so what hope was there, for another new format?
4. Is 2003 the year that the music industry finally embraces the digital
Two recent and ground-breaking events would tend to suggest that it is –
· EMI makes catalogue available via 2 partners.
· The successful launch of Apple I-tunes
EMI – 180’000 tracks, a substantial tranche of their catalogue made available as downloads.
I-Tunes made available, for 99c per track, the 5 major record labels’ catalogues, for downloading and burning. Only available in the US to Mac users.
This represents a sea change in the position of the record labels, who 5 years ago resisted any thoughts about digital music delivery mechanisms.
5. Is the method of selling per track, threatening the artist?
The change could be potentially damaging to new artists as selling tracks individually is not as lucrative as selling albums, with single sales serving only to raise an artist’s profile.
Many artists are reluctant to give digital rights and labels were quick to use this as the main excuse not to pursue and develop secure, digital distribution – the reason being that they couldn’t get their artists to give digital rights on their music.
But hasn’t this gone full circle? Albums used to be a collection of singles. When artists had enough singles they would release an album. Currently, a certain type of consumer would appear to only want to buy individual tracks because of the lack of good songs on many albums, particularly in TV marketed acts.
In essence, it is argued this is an A’n’R problem – single sales are a great way to market a song, but a spectacularly bad way to build a band’s career.
Equally it can be attributed to being a perception problem. The fact that the internet is making single tracks available means that a generation of people think it’s not worth buying more than one song, ie an album.
6. How can we access an artist’s music?
· PressPlay (originally known as Duet by Sony & Universal), Duet also had a relationship with Microsoft.
· MusicNet (BMG, EMI and Warners) in tandem with Real Networks.
(Note: since the seminar, it appears that Real have jettisoned MusicNet and will now be launching an alternative service, RealOne Rhapsody in partnership with listen.com / Rhapsody.
Huge issues surrounding the control of the gateway to digital music, from what amounted to a duopoly controlled market, exacerbated by the tie-in with Microsoft.
iTunes Download Model
iTunes stole a march on these, and struck a deal with all 5 majors, making songs available for downloading and burning.
iTunes uses the download model, and has made it a success, albeit limited to the US Mac user only. With 1 million downloads in its 1st week and 2 million in the 2nd , Apple appear to have succeeded in making it easy, cheap and reliable.
However, Apple Mac users are more creative and music friendly, and have previously had less access to other PC-based providers, so it could be said that it’s not surprising itunes has met with such an uptake.
7. Rights Management – a key developmental role?
Digital Rights Management company, ‘The Firm’, was cited as an example of a new breed of management, which might supplant the traditional management role, which aside from administering the recording right, in the main concerns itself with the monetary advance from the label, and the management of that money.
The efficient and informed management of digital rights, in addition to all other rights, is seen as a cornerstone in the evolution of new methods of music distribution. Taking piracy fears to extreme, it could be that digital music is available for free, with income streams derived from the exploitation of associated rights, e.g. merchandising, recording, online, etc.
The enforcement of individual digital rights has made this more successful in the US than in the EU, affording greater protection of intellectual property. The record labels, trade organisations and other bodies that have championed this have been criticised, as this has had an impact on the various business models seeking to deliver music via new delivery mechanisms.
Example : The Rolling Stones use this model really well. Legal music guru Michael Cole would slice up rights in all media, in each territory. i.e. media rights split to TV / video / DVD /radio / online / streaming / downloading / merchandising and so-on.
As a business model, there is a stronger case for carving up and exploiting these rights positively, rather than seeking only a confrontational route and prosecuting.
Compulsory Licensing. The US has decided that if you want protection by law of your rights, then you must be democratic about how you make your rights available and democratise your behaviour, i.e. set a standard rate to download, and this is why for example, I-Tunes has been so successful.
Publishing is a good business model for the online environment, marketing and distribution is still evolving, due to greater technical challenges in delivery of the product, and therefore involving greater costs and challenges.
8. As an artist, what route would you take for new technology?
The traditional route – is signing to 3rd parties still the way forward?
From Creation to Distribution – some control needs to be imposed, and the record labels have traditionally done this. They have the expertise, distribution networks and the law to do this. No reason to see that it should change, but perhaps a change in psyche needed.
With few exceptions labels have never been good at engaging with the fan base/consumer. This needs to be addressed. Fans could have access to a secure site to vote on single releases, have an input on video content, do artwork and so-on. Greater interactivity could be the way forward, but there will always be a need for music heroes…
· Rather than a product, digital music distribution becomes a process and a service that you buy into.
· Technology allows for greater opportunity for feedback from fan and consumer base to artist.
· Technology will not supersede, but ideally co-exist with more traditional roles and requirements of the music industry.
· The jury is still out as to whether paid-for digital music services (e.g. iTunes) are set to grow, or whether the industry will instead adapt to the prevalence of low cost / free digital music by concentrating on the exploitation of traditionally non-core income streams such as touring monies, merchandise etc.
· Some believe the industry needs to develop the value of paid-for music, after all water is free, but millions buy bottled water every day.