LET’S SELL RECORDED MUSIC PART1. HERE WE ARE NOW - ENTERTAIN US. UK MUSIC INDUSTRY

Let’s Sell Recorded Music! Part1: Here We Are Now, Entertain Us

This series of think tanks will focus on effective legitimate P2P alternatives and over the course of four events will review what people want, where technology is heading, what the most plausible new models are and how they might be licensed.

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Transcript

“LET’S SELL RECORDED MUSIC!” Pt 1: ‘Here We Are Now, Entertain Us’

1. Keynote 1: FEARGAL SHARKEY, CEO, UK Music (Summary)

On October 27th, the formation of UK Music will be announced, bringing together all four major labels, all the big distributors, most of the indies, and AIM, among others, or as one person put it, “all the talent and all the money” (!).

Earlier this year, at British Music Rights, we thought it was about time to make an effort to find out what 14-24 year olds want from and feel about music.

Surveys showed that 95 per cent of this group were copying music in some form.  But much of what was found showed cause for optimism.  Asked what the one thing was that they could not live without, on a proverbial desert island, 80 per cent said music, beating sport, cinema and computer games into a distant second.

63 per cent of the group downloaded music illegally; one respondent claimed to possess 72,000 songs.  Only 50 per cent of the tracks held on the nation’s iPods were paid for.  Alarmingly, 58 per cent of those young people surveyed were sharing hard drives with their friends.

Currently, you can buy a 3-terabyte hard drive for $300.  Soon there will be 10-terabyte drives available.  These would be able to hold the entire iTunes store: more or less all the recorded music available to humankind.

Despite all these worrying statistics, 80 per cent of young people questioned said they would be willing to subscribe to a legal P2P service if one were available.  There is clearly a disconnect between how young people want to use and interact with music and how it is currently available.

If we think the music industry is in trouble, however, maybe we should spare a thought for the ISPs.  There are 25 million households in the UK, of which 17.5 million have internet access, 15 million of these being broadband: the ISPs have sold an internet connection to pretty much everyone who is ever going to buy one.  Now they must compete for market share, by cutting their prices and improving their services.  And they must find ways to make more money through premium services, which people will be willing to pay extra for.

Three studies carried out by three of the largest ISPs in the UK all found that the one thing that people would be most willing to pay extra for is music.

We are in difficult times.  In the past two years, four of the biggest indie labels have disappeared along with some of the biggest distributors.

One ISP is advertising that their service is so fast that you can download 900 albums a month.  If you were to pay for these legally, you would likely be spending in the region of £8’000 a month.

Together, the ISPs and the music business must develop new business models that give the customer what they want, and that make sure that the artists get paid.

But here’s the thing: will people stop being creative, will they stop picking up a guitar and wanting to write songs and express themselves?  And will people stop wanting to listen to music and make it a part of their life?  No.  I can’t think of any other industry that has total certainty and confidence at both ends of the supply chain.  It’s just the bit in the middle – the industry – which needs fixing.

So we should be optimistic.  The music industry can, must and will find new ways to make money and deliver music from the artists to the consumers.

2. Keynote 2: KEITH JOPLING, STRATEGY CONSULTANT (Summary)

The digital industry’s troubled birth has been partly due to an expensive and stubborn licensing approach from the majors.

Over the 10-12 years that the digital music industry has existed, a great many services have  come and gone.  In 2003, the IFPI announced that there were 50 legal digital music service providers, with a turnover of just $20 million.  Last year  there were some 500 services, turning over over $3 billion.  This represents only 15 per cent of the total music industry, and Apple’s iTunes store makes up 80 per cent of this sector, so there is in fact quite a small slice of revenue going to the smaller services; many do not make a profit.

After 10 years we have a troubled niche shared by over 500 players.  We know why this has taken so long at least. The key reasons being:

·         A stubborn, expensive licensing policy by record companies;

·         The sheer complexity of global digital licensing – for recording & publishing;

·         A bungled DRM policy;

·         High market entry costs (licensing, technology architecture etc. but also marketing);

·         Slow consumer adoption (price, availability of free)

From a consumer point of view, digital services have not yet offered anything new or improved compared to CDs.  CDs are still better: they are better quality, they can be transferred between different devices easily, they are more permanent, and their packaging gives them added value and user experience.

However, after a long hard slog digital music has, it seems, finally begun to arrive.  We know this because of a number of key tipping points this year and due early in 2009.

1st, Sales: In 2008 IFPI estimates music as 20% digital (that still doesn’t quite meet my definition of critical mass which is one third, but at a linear rate of growth, this is now only 2 years away at most).

2nd, New Market Entry Brands: Nokia, Amazon, MySpace are the established global big hitters to enter a market previously dominated by Apple, pirate services and more recently, the streaming based social networks Last.fm, Imeem, Qtrax etc.  This is serious stuff.  And in the UK, they may be joined by The BBC and Sky.

3rd, Service developments – seem to have come on in leaps and bounds: 7Digital offers the entire catalogue of majors & indies in MP3 format; Spotify soon to go full launch in Europe offers the simplest, slickest streaming user interface on the market; Nokia’s CWM makes (almost) everything available within the device price – TOTAL music has arrived (Sony Ericsson cleverly puts music pre-loaded on the device so it’s right there out of the box).  If Sky gets its service launched that’s the first music service for the entire family.

Last but not least, new niche platforms continue to evolve: Pitchfork, Muzu.tv, Joost, SliceThePie – a new service with a new angle every week, some of them quite promising because they set out to be different.

So have all the service gaps been filled, all the audiences targeted?  The answer to this is a firm “No”, which leaves plenty of opportunities.

On price, we see Nokia charging you $100 for unlimited music as long as you have your phone.

Firstly, product.  It’s silly that we are still having debates about albums vs. single songs in a market where the value of both is being steadily commoditised.  A service provider that can offer a wider range of music products from one artist or in certain genres, in more interesting bundle packages, will attract interest from paying music audiences as well as file-sharers looking to upgrade a bit on what they can get for their favourite bands.

There are plenty of product elements in the mix to play with other than songs and albums.  Video, session tracks, live footage, tickets, merchandise, games, information and editorial offer a plethora of ways a music service can be packaged, presented and sold to consumers, particularly if exclusivity, artist engagement and higher quality thresholds can be achieved as well.  There’s no way around it – for a service provider to move the needle with something really special, it will need to get into the content development business – licensing exclusive windows and possibly commissioning content directly from artists.  This is very common in TV & film.  Comcast, HBO, Channel 4 and the BBC all integrate backwards into production.  It takes investment and risk and is expensive, but it’s done with a deeper knowledge of what consumers want than ‘pure-play’ producers, as Comcast demonstrated with its drive to create free VoD services.

Finally, customer experience.  It’s no secret there are major gaps here. Legal music services are still predominantly search based, song-album based and music stores are push marketed.  iTunes has dragged its heals a little on service developments like Cover Flow, Mini Store, Complete My Album and now finally a recommendation tool, Genious.  Nonetheless, Apple shows how customer experience is based on learning by doing, and doing well. Meanwhile eMusic has had some success through focus on editorial and DRM-free.

So Digital now has real momentum, but it still has fragilities.  Look at Pandora’s cutbacks, look at Universal’s threat to withdraw from YouTube.  It’s still possible to ignore digital completely and be successful, just ask AC/DC.

TOP FIVE PROBLEMS STILL TO OVERCOME:

1.       Recommendation technologies aren’t good enough – more emphasis on editorial and programming expertise;

2.       Service relationships still need to improve – license then SERVICE the relationship;

3.       Content development & product innovation need to overtake payment models as a major issue;

4.       Business models – yes we need to find models that build on multiple payment models and equity stakes but don’t make it too complicated with unnecessary joint venture vehicles;

5.       Measurement, reporting & payment to creators – beyond the digital black box;

Finally, here are my top five challengers to iTunes over the coming year:  In reverse order…

5.       7Digital……..because of its unique partnerships

4.       Amazon…….because of the shopping basket, plain and simple

3.       Omniphone..because mobile is the long play here, and so are cars and home hi-fis which Music Station is branching into.

2.       Spotify……..because of its ease of use

1.       Nokia Comes With Music/Sony PlayNow+…….joint-first because they offer “total music”

Total music is going to completely change the game.

3 . PANEL RESPONSE

Philippe Steinmetz:  Orange in France has recently launched a convergent music store, offering 500 tracks per month, in exchange for a fixed subscription cost.  This is effectively an “unlimited” service for most users.  The tracks, regrettably, have DRM, but they are still a permanent download, as the user can retain them, even if they cancel their subscription.  This is very different to a tethered download which only allows users access to the tracks for as long as they subscribe to the service.  This rental model is what is currently being offered by Sony.  It is confusing for consumers, and is essentially the same as streaming.

Musique Max, the service offered by Orange exclusively in France, is a legal offer that can compare with P2P in terms of the number of tracks downloadable per month.  This represents a big step forward for consumers and the industry alike.  So far Musique Max has sold over a million tracks, and significantly, there has been no decrease in à la carte sales from Orange’s parallel service.  Musique Max has DRM, if fact it has two types of DRM, for compatibility with phones and Windows.  This is regrettable, but is a necessary part of their deal with the labels and distributors.

Sam Shemtob (chair):  Your service would effectively be charging 2p per track, assuming users downloaded their full quota of 500 tracks per month.  Was that an easy deal to negotiate?

Philippe Steinmetz:  No it was not easy.  Orange has taken a considerable risk in making this deal.  We must pay the labels up front as well as paying for the use of each track.  For us to make a profit, we must hope that users do not use up all of their quota each month: that is the gamble we have taken.

Russell Hart:  Are these services going to be enough?  There is an assumption that what the consumer wants is unlimited downloads, but is it true? Consumer research has shown that the ratio between ‘love’ for an artist and purchase intention is 0.7, and that people on average ‘love’ only three artists.

70 per cent of people questioned in one survey had an opinion about DRM, with six in ten saying they thought that DRM invades privacy and restricts freedom.  Asked what constituted a “reasonable price” to pay for an album, people generally felt that £5-£9 was reasonable for a CD, £4-£6 for a computer download, and £3 on a mobile.

Personally, I think there’s a danger in focusing on the volume of music of bundled models, and rather, the industry should be focusing on the quality of the offering.  The industry is at risk of losing focus on genuinely good content that people are prepared to pay for

Ben Drury:  The UK buys the most CDs per head of any country in the world (but this is still only 2-4 per year).  There is no correlation between real demand and the number of P2P downloads we hear about – people downloading tracks by the hundreds are simply hoarding them like football cards.

Our service, 7Digital, is leading the way with 320K highest-quality MP3s and is moving towards the CD-quality FLAC format in the future.

Andrew Orlowski:  None of the services currently available give people the experience they get with file sharing.

All this – talking of ways to defeat P2P – was being discussed 8 years ago.  But now Google is trying to establish legislation in Brussels to implement a regulatory framework on the ISPs.  Google’s strategy has always been that wherever they can’t compete in a market, they ensure that others can’t make money; life is going to get very hard for the ISPs.

Legal file sharing is the one thing that will save the music business.

Paul Hitchman:  I can’t say much about my new [PlayLouder] service, but we have been trying to get together ISPs and rights holders.

I think that it’s no longer about the acquisition of music.  Paying for acquisition is voluntary.  It’s now about adding value to the raw material.  It’s about a relationship between the fans and the music, about finding ways to optimise their experience, about things like integrating social networking, and so on.

It’s frustrating and sad that when telcos cross their side of the chasm, that they do so under the yoke of DRM – that the rights holders will not come across to meet them in the same way.

Innovation is good, but it should start with where the consumer is, and give that in a way that incentivises all interested parties.

Russell Hart:  One in four over 25’s illegally download music.  However, seven in ten of them say they do so because they are able to find content through P2P that they cannot find elsewhere, and many of them would happily pay for it if it were available legally.

4. QUESTIONS FROM THE FLOOR

Paul Hitchman:  From the technology point of view, P2P has become the elephant in the room.  But we can’t ignore it.  There is not enough understanding of the technical issues.

The “problem” (if we choose to call it that) of people downloading for free via P2P has to be addressed at a technical, that is ISP, level.   This will require ISPs to have a commercial incentive to partner with music providers.  We cannot force the consumer by simply banning P2P activity as it would be too easy to encrypt.

AUDIENCE: I’m getting pissed-off with this discussion.  People know what they want and they’re getting it already: P2P.  It offers more and better content than legal services and it’s free.  Surely the only question is: how can this be licensed?

Paul Hitchman: We have to go to the source and work with ISPs – only they have the ability to make some kind of viable system.  Now, would you pay for an optimised P2P service?

In theory, I suppose.  [Cries of ‘how much?’]  I really don’t know how much.

Feargal Sharkey:  If people want legal P2P then someone will develop a business model to provide it.

Russell Hart:  Seven in ten say they use P2P because they want the things it provides that they can’t get elsewhere – like cover versions and live bootlegs. There is a whole lot of material around that isn’t actually licensed at the moment.

Paul Hitchman:  No one believes that à la carte can provide growth for the industry.  Subscriptions are clearly the answer.

Feargal Sharkey:  I think there are lots of possible models, many of which could work.

Keith Jopling:  It’s about giving people what they want – when we can do that the payment model will follow.

Andrew Orlowski:  But you’re not giving people what they want if they can’t fileshare.

AUDIENCE:  It’s a bit like Spy vs. Spy here, when so many of you can’t tell us about your confidential business plans…I’d like to know if you would pay for a car that ran for an unlimited distance without refuelling, or pay for unlimited water from the tap.

Sam Shemtob (chair): How much would you pay?

I would pay £10 a month.

AUDIENCE:   I’d like to ask about displacement.  Are people going to lose out on sales because of these new buffet services?

Paul Hitchman:  What will the impact be of an all-you-can-eat service on other spending?  The hypothetical options are a 100 per cent effect – i.e. people would stop buying other music – or at the other end of the spectrum, that people would buy more music, because they would be discovering more.  Digital pay-per-download already seems to have plateau-ed…

AUDIENCE:  Alright, at £10 per month, what would be the impact on net revenues?  I think album sales would go down significantly.

Paul Hitchman:  Well, if one in four people spend £120 a year, that’s £200 million net…

Keith Jopling:  Even if all those people [the over-24’s who currently fileshare] signed up to such a service, which is unlikely, it wouldn’t be worth the effort chasing that money.  Companies would be better investing in finding new talent.

AUDIENCE:  I used to spend £40 a year on my landline.  Now I spend £200 a year on my mobile.  I spend more because it’s convenient.  In other words, if the service is improved, people will use it more.

AUDIENCE:  I disagree.  If you add £10 to monthly bills people will switch off.  The bills will be too big.

Paul Hitchman: People said that about Sky.  But Sky bills are now huge and people accept them and pay them.  It all depends on the service.

AUDIENCE:  Someone will always figure out how to get it for free.  Lots of people have Sky or Cable that they steal from their neighbours.  You will never eradicate some amount of this kind of behaviour.

AUDIENCE:  Will the advent of 100Mb  broadband make a difference to the filesharing landscape?

Feargal Sharkey: I don’t think it will make a difference.  The speed threshold has already been reached for downloading music.  There could be issues arising in the movie and games industries though as speeds increase.

AUDIENCE:  These subscription services… do you get to keep the tracks when you quit?

Philippe Steinmetz:  With our service, Musique Max, they are yours to keep.  There is a similar service in France from SFR, where you can also keep them.  With some services though, the files will expire when you leave the service.  Sony’s service is in between: you can keep your 300 favourite, most-listened-to tracks when you leave.

Keith Jopling:  With P2P, two-thirds of all downloads are never even listened to – people simply desire the ability to hear them, and they don’t want to keep them all.  They want access and they want to keep their favourite tracks.

Ben Drury:  We have to be careful with what we mean by “permanent”.  With DRM in place, this still means you can’t transfer the music to a new PC, you can’t play it on any Mac, nor on a Blackberry, nor on an iPod.

Feargal Sharkey:  Let’s not get bogged down with restrictions.  There are different options.

Sam Shemtob (chair):  There seems to be a real disconnect on the panel between those who wish to somehow licence people’s P2P activity and those who don’t feel that step is necessary.

Feargal Sharkey:  Let’s just try to give people services in whatever form they want it.

Q: Why don’t we add a tax to laptop sales or something, and feed this back into the music industry?

Feargal Sharkey:The government are in fact very keen to get involved in finding solutions.

AUDIENCE:  Is there a way to monitor how much people listen to the tracks they have?  Could we then distribute takings proportionally to artists?

Keith Jopling:  I don’t know… is it worth totting it all up?  Can the artist actually make a living from the revenues that might or might not be developed from a licensed form of P2P?  Finding a commercial model that will make money for artists is crucial, and is just as important as developing new technology.