LET’S SELL RECORDED MUSIC! PART 2. WE HAVE THE TECHNOLOGY- WHAT'S THE SOLUTION. UK MUSIC INDUSTRY

Let’s Sell Recorded Music! Part 2: We Have The Technology, What’s The Solution?

The second in a four-part series, this panel will look at what is becoming technically feasible and what might be the best blue-sky model for the UK, while considering the needs and perspective of ISPs and mobile platforms.

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Transcript

“LET’S SELL RECORDED MUSIC!” Pt 2: ‘We Have The Technology, What’s The Solution?’

1. Keynote: JIM GELCER, VP Content Acquisition & Business Development, Noank Media INc.

First, let me tell you a little bit about my background: I come from a music background.  I’m content-owner, as we would call it North America – here you would say I’m a rights-holder; the two terms are interchangeable.

As a musician, I’ve played at the Reading Festival, and have shared a stage with Motörhead.  Later I moved into composing music for film and TV, and I’m currently working on an album.  At Noank our CEO is also a musician, so we’re approaching this from the perspective of rights-holders.  But, I’m also involved in the software industry.

As far as the digital music industry is concerned, we can see that the current system is not working.  The reasons being:

•    iPods hold 40,000 songs but nobody is paying $40,000 dollars to fill them;

•    Users are filesharing and not feeling guilty;

•    DRM is generally unpopular, due to file restrictions, orphaning and trade restraint on a B2B level;

•    Users don’t like to be forced into using any particular format;

•    Content owners are losing revenue;

•    Content owners are unable to track how content is being consumed;

•    ISPs want to monetise bandwidth use;

•    They are facing government intervention due to infringement, primarily caching;

•    ISPs are spending money as users go out to the cloud for downloads.

So, how can we monetise existing user behaviour, rather than policing it or expecting it to change?  That is, how can we monetise reality?

What if we could design an ‘open’ system, with open access – a blanket licence, all-you-can-eat access – that didn’t care about software or format, that didn’t care what you play the file on, that could run with or without DRM, and that had an open API, which would allow social networking recommendation applications to be developed?

How do we measure usage?  Current systems count downloads only, but is this enough?  I could download Billy Ray Cyrus’s ‘Achy Breaky Heart’, and listen to thirty seconds of it once, or I could download Led Zepplin’s ‘Kashmir’ and listen to it a thousand times, and both would show as one download.  So what if we had a system that could count those plays, and then also count partial plays, copies, burns etc.?

What if we could monetise previously downloaded material in this way, even if it was downloaded illegally? How do we respect user privacy?  Could we have a system that could tell content owners what’s being consumed, and where – so that a band could plan a tour to the cities where their music is most listened-to – but not reveal the individual details of by whom it is being consumed?

What about reporting to content owners?  What if there was a web-based interface that would allow content owners to track how their material is being consumed?

Such a system could equitably divide revenue by aggregating usage data.  Could it appeal to ISPs as well?  What ISPs are after is:

•    They want inoculation against litigation;

•    Cost-saving by redirecting traffic from the cloud back into the local loop and caching;

•    They want an aligning of their financial interests with content owners by revenue sharing.

What if a system like this already existed?  It does.  Its name is Noank.

We are a team that came together at a Harvard think tank.   We have a functional system up and running at Cyberport in Hong Kong.  We are currently developing business opportunities in China, Hong Kong, Russia, Brazil, Canada, the US and the UK.

2 . PANEL RESPONSE

Andrew Heaney (Executive Director or Strategy and Regulation, Carphone Warehouse): Of all the ISPs, we [Talk Talk / Carphone Warehouse] are the least interested in supplying content.  We have little interest, for example, in providing a TV service (which is unviable, given the existence of Sky & DTT).  We don’t believe we should police filesharing on behalf of rights-holders.

It’s in our interests for people to use the internet and get as much value as they can.  We’ve been asked by the government and the BPI to cut off people’s service if they are found to be file sharing.  It’s a non-starter as far as we’re concerned.  Cutting people’s connection off violates their human rights. We think there are models out there such as Noank which allow the industry to help itself first, without resorting to this kind of approach.

Whatever you do that is legal and legitimate, there will always be an amount of illegal, illicit or illegitimate activity.  At the moment a customer has a free service in P2P which has plenty of advantages.  And you also have a pay service that is significantly worse: you can’t migrate your files to other devices, and you can’t get the full range of tracks that you might want.

So we need to work on the carrot of better legal services, but there is also the stick, and to that end we would advocate greater education about how filesharing is theft.  The legal option has to at least match the illegal in terms of service.  There are also sticks, including prosecution, but also educating people about the moral situation.

We want to work to solve these problems.  We would want a packaged mass-market service.  We are actively looking at the possibilities of creating or investing in music services, but not perhaps as avidly as Virgin or BSkyB.

Tom McLennan (Head of Music – Mobile Internet and Content Services, Vodafone UK): We currently have a number of music services at Vodafone.  They aren’t currently DRM-free, but they have still been very successful.  We tooka gamble and last year launched a subscription service recently using Omnifone, and this has been particularly  successful.

Customers are already subscribing to a service to get their calls, so it’s not a great leap to get them to subscribe to a music service too.

Users like the unlimited model.  It gives them a chance to try music, and it is this kind of user experience that really matters.

Frank Taubert (Co-founder and CEO, 24-7 Entertainment): We do the back-end of Vodafone’s service.  We also do the back-end of DATZ, that has just launched, and we do TDC in Denmark, which is an unlimited subscription service.

I’m concerned about the P2P scenario?  But, how is the user-experience?  P2P has been around a long time, including with Napster in the early days.  The user experience has never been that appealing.  How is your service different, Jim?

Jim Gelcer:  With our system, you don’t download any kind of interface.  Counting of usage is done at the end user level.  So music can be downloaded from ours or another service, including P2P, and stuff that was already on users’ computers.

We use caching servers internally on the ISP network to speed up the download times, but we are not fundamentally changing any existing user experience.  We use fingerprinting of tracks so there is no need for DRM.

Frank Taubert:  Tell me: do you have a live service?  Is it successful?

Jim Gelcer:  We have a system set up, running at Cyberport in Hong Kong.  At the moment we are running a test, trial system to check how the technology works.  We’re not yet at a revenue phase, though we have a number of promising opportunities coming up.

Jonathan Friend (Founder and Technical Director, Friend MTS [Fortify Media]): There have been various services that have attempted to refine P2P, but all of them thus far have failed.

It is presently very difficult to understand traffic remotely, to analyse it – particularly with people using encryption – but it is possible to tell if someone has kept a track, if they have played it or deleted it.  With the growth of video traffic, which has increased greatly without decreasing the amount of music traffic, people will delete material they don’t want or use.

There are a number of academic papers around at the moment that extol the virtues of super-distribution of some form.  Infact P2P is not the best model, because most broadband connections are asymmetric.  A lot of content owners who have experimented with legitimate P2P have moved away from it because it doesn’t offer a good enough customer experience.

Packet inspection technology is currently very expensive, and is only used by law enforcement officials .  It isn’t worthwhile in a commercial environment.

Jim Gelcer:  Noank doesn’t use packet inspection.  The internet should be open.  Anything should be allowed to flow through the network.

We do the counting on the end-user’s computer via an application that they download for free.  That data is silently uploaded to the counting server.  The ISP pays us per user per month.  85 per cent of that income goes back to the content owners, and is divided according to the popularity of their content.

Tom McLennan:  The key thing is monetising usage – that enough mouths are being fed up the value chain.  A subscription-based model allows that to happen.  It takes the same amount of space on a mobile phone to sell one track as to run a subscription service, and costs me the same amount of money to sell it.  We charge £1.99 a week – £100 a year.  There are 85 million handsets in Europe, of which around 30 per cent are 3G-enabled.  That gives you a huge billing platform, and a potentially winning model.

We’ve spent some money on the service but we haven’t been able to break through the threshold.

We’ve got to grow the digital/mobile music industry to the point where it is worth making the kinds of investments that are needed to market and develop new services.

Frank Taubert:  These are very interesting times for the record companies.  They are opening up to a variety of business models.

DATZ doesn’t yet have a full catalogue, which it will need to be successful.  (It currently has only Warner and EMI, but they’re working on it…)  Also, you cannot download whole albums, only the individual tracks.  This reduces the download volume for the provider but it’s not great for users.

There is also a new wave of subscription services, such as that from Vodafone, offering all-you-can-eat services.  On TDC in Denmark, there are now 180,000 people using the service, and once those people are on the service, they have an incentive to stay with that ISP, and the churn rate goes down massively.

P2P in any form leaves room for uncontrolled activity.  The record labels want a controlled environment.  For example, TDC sponsors a concert hall in Copenhagen, meaning they can tie in their service with the live industry, with sponsorship and advertising and the attendant possibilities for generating content.

The bandwidth is not so great an issue any more.  It’s the smallest cost now.  Also, re P2P, I wouldn’t download anything I couldn’t listen to a preview of first.

Jim Gelcer:  Terms like ‘controlling the network’ and ‘packet inspection’ are things we really don’t agree with.  We’ve found a way to monetise content without doing any of that.  (And our service does support preview.)

Andrew Heaney:  At the end of the day there is too much customer choice for ‘controlled’ options to succeed if their only raison d’être is to serve the provider, and not the customer.  Our customers use a vast array of services, and we would not try to stop them.  If we can’t add something then there is little point in us getting in the way, forcing ourselves into the value chain.

Sam Shemtob (chair):  Would the mobile networks ever embrace a kind of open internet?

Tom McLennan:  It is too soon to talk about an ‘open internet’ approach on mobiles.  We are currently interested  in harnessing current customers by giving them a great service that also generates revenue for us.

We have 2.2 million tracks available on our service.  Only 600,000 have ever been downloaded.  Being able to offer playlists and recommendations is a big part of our service.

In a walled garden, you have robust monetisation.  On a mobile we need that, otherwise there would be anarchy.

Jonathan Friend:  Open internet is kind of scary because you literally have no control.  By not having any control you open up a very dangerous environment.  I’m not an advocate of DRM.  Most people who buy music do play by the rules.  A walled garden may not be popular, but if there is enough content on there, then it gives people the best possible user experience without the risks of all the other nasties – malware, viruses, child pornography etc.

Frank Taubert:  There is a need and a will to go after the illegal services by the record companies.  They are going after them with things like DATZ.

In the future, there may be services which operate like movies where music is released first on one service and then, later, released on others even on MP3, a little while after the DRM version.

We see a lot of content that is owned and licensed but is now only available on YouTube or through PSP – rarities and live recordings, and radio sessions.  The BBC owns a lot of this kind of archive content and could this could be harnessed through new services.

Jim Gelcer:  Rights-holders have been very receptive to Noank.  We have a non-exclusive agreement so they can still do à la carte and walled garden approaches.  Noank could exist without displacing iTunes or other such walled gardens.

The issue is convenience.  You could buy Coke at a wholesaler for 25p a can.  You could buy it in a shop for a bit more. You could buy the same drink in a restaurant for a few pounds, or for double this again at a hotel mini-bar.  You make a choice based on both cost and convenience.

Tom McLennan:  We all think the industry is mature, but it’s not.  There is space for many applications at different levels throughout the industry.  There is space for something like Noank.  While the retail is declining, but there is a positive uplift in the digital environment.  We’ll move away from a situation where there is little monetisation to one where customers have a choice.

We will slowly but surely move away from the position where technology got away from the industry into one where the industry and technology start playing a greater role together in monetising the service.  If you can’t make money from it, it’s not going to survive.

3. Questions from the floor

Q: A question for Jim – do you have licences?  How do you stop people cheating?

Jim Gelcer:  Firstly, yes we do.  Our first territory is China, where no one is making any money.  We have partnered with SURNET  which provides internet for all the universities in China, a total of over 30million students.  We’ve found they are more interested in indie and educational content, and of course Chinese content.  We provide video as well as music, and we have CBC (Canada) and PBS (USA) as well as major North American indie labels, such as Nettwerk and Ropeadope.

If our customers download a track they can give it to someone else on the network and that’s no problem.  Of course, they can also give it to someone not on the network; we call this ‘leakage’.  We have no way of stopping this, but when you consider that 80 to 90 per cent of conventional internet use consists of leakage, our service still represents a considerable step up.

Q: But what if I’m an artist.  Can’t I just play my own song over and over and make a fortune?

Jim Gelcer:  No.  The amount of revenue that you can send to any one artist is capped at $2.

Q: Jim, can you just explain to us… how does it work exactly?

Jim Gelcer:  What happens is we sign with an ISP; they are our customers.  We make it optional to download and install our software.  But we tell our users, if you don’t use our software, then you don’t cast your vote to support the music you love.

Q: What about content that you haven’t licensed?

Jim Gelcer:  It doesn’t get counted.  We can only report on content that we have fingerprinting data on.  Our goal is to have agreements with all the indies and majors.  Eventually we want to include user-generated content too.  And the major labels are interested…

Q: Do you sell on the user info?
Jim Gelcer:  [Joking,] I hadn’t thought of that!  No.  The data is for the content-owners themselves to analyse, and for us, to help us divide revenue equitably.

Q: In a recession, is new technology a good investment opportunity?
Frank Taubert:  In bad times, people want to party more.  We have seen a lift in our volumes.  People want to bury their sorrows in a good song.

Tom McLennan:  We see opportunities for innovation.  It is only strong propositions that will survive.  We’re looking for things that will drive revenue and drive change.

Jim Gelcer:  Music is recession-proof.  People, when they don’t have money, still turn to music. But we are a start-up, and we need cash, and yes, it is proving harder to get investment.

Q: Jim, is it going to be hard to come to Europe where Universal etc. will be asking for large advances on licensing deals and asking for 4c minimums per track?
Jim Gelcer:  So far no one has asked us for money up front.  We don’t think downloads are important (we prefer to deal in the number of plays), so we don’t see why there should be a minimum charge per track for downloads.

Frank Taubert:  I think it’s important to have those minimums.  It’s hard, if you’re a label or rights-holder, to give away music with an unproven business model.  It’s obvious that when you launch something seriously, you have to make commitments. You have to give those advances and guarantees because you can’t expect the labels to take on the risk for you.

Q: Is Jim doing the industry a disservice by offering all the world’s music for £12 per year?

Jim Gelcer:  It’s not necessarily £12 a year, although this is what we have set it at in China.  The value would be negotiated separately, depending on the standard of living and customer expectations.  It’s a blanket model, and so we’re working with an economy of scale.

Q: Would Carphone Warehouse be a potential customer of Noank?
Andrew Heaney:  This is the first I’ve heard of Noank, so I haven’t mulled it over, but in theory, yes.  It offers a similar system to P2P, but improves on it significantly.  In this respect it is more attractive than other systems.  For us it would be important that it was comprehensive, and had all the labels on board.

Q: What would be the incentive for an ISP?
Andrew Heaney:  It would have to be purely commercial.

Q: What would be the incentive for a user?
Jim Gelcer:  If someone is paying the fee on their behalf, then they should install the software as a voting mechanism, so that they can reward their favourite artists.

Yes, they can still use Limewire, but our system is faster (thanks to local caching) and safer (with less risk of malware and viruses).

Q: What commercial gain would there be for the ISP?
Andrew Heaney: There could be a reduction in “churn” [migration of customers].  We could also take a fraction of the fee – say it’s £2 a month, the ISP might take 50p of that.

Q: About Vodafone, the shop experience really sucks compared to other stores that exist.  I suppose this is because of a lack of investment in it.  Do you think it could be improved by opening up the format to other developers?

Tom McLennan:  Thanks for that (!)  All I can say is you’ll be impressed by what we’re about to do.  We’re bringing out new services to improve the music store.

Q: Why must you all focus on charging the customer for music?  Can’t you charge labels for the research your services can do for them?  Can’t you charge them for the marketing you do by giving their music away?  Surely paying for music is just something that will exist only for a stubborn rump of people who refuse to move into the digital age?

Tom McLennan:  Well, what would be your long term plan for making money?

Q: From live ticket sales and from merchandising.

Frank Taubert:  There are very few artists who can make enough money from live music alone.  We need recorded music, we need to monetise it.  And we are moving towards services that feel free, for those that want that.

Jim Gelcer:  If my ISP sent me a letter, saying they were raising their fees, sure I’d be annoyed, but if they said that the reason was in part to pay for unlimited legal downloading, then that would seem like quite a decent kind of compensation.

Jonathan Friend:  You can’t make a lot of money from giving things away for free.  You have to pay for something if you want to have it, it’s the same with any commodity.

Q: No, you have to pay for a scarce resource.
Jonathan Friend:
  But music is a scarce resource, because the artists are finite in their ability to produce music, and it requires time and effort.

Q: Do sound recordings have a monetary value equivalent to what the industry places on them?
Tom McLennan:
  As a mobile operator, if you can sell a subscription around a good experience, then yes, you can positively put a monetary value on providing that experience.

Jim Gelcer:  It’s a choice of how the ISP pays for it.  They can subsidise the costs of our service themselves or they can pass it on to the customer.  With 30 million students in China, focus groups felt it was fair to pay $20 per annum for the service.  This would result in billions of dollars in revenue.

Jonathan Friend:  Music requires time and effort to produce and so those people should be rewarded for that.

Andrew Heaney:  Theft is not socially responsible.  There is a proportion of the population who will respond to that idea.

Tom McLennan:  I don’t think we should use a stick approach.  I think we should give people a service they actually value.

Q There is a fetishistic value in things like 7” records or box sets, and these things are still selling, but that’s not the same as charging for the music itself.

Sam Shemtob (chair):  What proportion of people are likely to be enticed by the moral argument, or by the idea of casting their vote?

Andrew Heaney:  Certainly it’s greater than 30 per cent.  The BPI would know…

Q [from a BPI representative]:  In our Jupiter survey, 70 per cent of those who received a letter about file sharing said they would not file share again, so that gives you some idea.

Sam Shemtob (chair): If we do license P2P, what happens if someone gets a virus?

Andrew Heaney:  Our general principle is that we are just a conduit, and we have no responsibility for what passes over our networks.  We would help by providing anti-virus software, but we would not be legally liable if anyone did catch a virus.

Jim Gelcer:  If people use our download service, and catch a virus, then we would be liable, but if they downloaded the files from elsewhere (as they can with our system), then any virus would be their own problem.