On the Analyst’s Couch

Was it really as recently as 1999 that the global record industry recorded a record turnover of US $38.5bn?


On the Analyst’s Couch

Event Transcript:

1. KEYNOTE ? Theresa Wise

I’m going to be talking more from a major and corporate view this evening. I hope you can forgive me for that; I think the creative side is best left to genuine creatives.

It can hardly have escaped anyone’s notice that the traditional music industry right now is not a particularly compelling story. We know that the recorded music industry, whilst it used to be incredibly healthy, is actually relatively small compared to quite a lot of other media and entertainment sectors – like televison ? accounting for only about $40bn.

We also know that CD sales are falling globally by around 7% a year, and that currently, downloads have got everyone’s attention. They are obviously growing from a very small base, and according to Enders are now worth approximately $250m. Projected to grow quickly to $3.5bn by about 2010, if you include Ringtones, the current download market is around worth about $2bn. The evidence suggests that music consumers are also users of mobile and technology devices, so there’s quite a lot of congruence.

The big issue is that downloads are hard to commodotise; they are hard to brand (the only brand is the artist), and that makes them hard to price. The prices that we have at the moment are really not affording people like Apple much of a margin, who are making their money by shifting iPods. The problem is that the money from downloads isn’t really enough to make up for falling CD sales.

One of the things to do is to look holistically at where music touches consumers’ experiences. If you’re a big corporate player then you want to know how this leads to more sectors and ultimately to more money. If you look at the wider music industry you start with the recorded music industry which is a mere $40bn and can include live performance, radio, music television, merchandising and music publishing.

Some of those are very high growth areas – live performance, for example, has grown 50% over the last 2 years in the UK. Radio also started out as a small sector but has grown with deregulation of some of the radio spectrum, and digital audio broadcasting. If you count all those things together you then have a global industry of $140bn rather than just $40bn.

It isn’t quite that simple but we do know that for a music major there are opportunities out there and we’ve already seen the start of this. We saw with the Robbie Williams deal that EMI has tried to avail itself of the wider market.

The big issue there is that if you are dealing with established artists and you ask for some of the revenues from their live performance, oddly enough they are not to keen on it, so it’s not surprising that there’s resistance to music majors taking a percentage of established artists’ revenues for live performance. The only thing they can do is to try to keep them in the fold, so they are not in a strong negotiating position there.

If you are working with new artists you can look at the wider area of artist value that you can capture and try to grow areas like merchandising or live performance. Those are the kind of deals we can expect the music majors to make, in the hope that the new artists do become established and then they can benefit from their wider music involvement.

Unlike some current perception, the music companies have tremendous assets with which to address these opportunities. There’s back catalogue, the relationship with their artists, interviews, rare tracks and lots of information about bands. This is actually quite unique stuff, not only can you use it in more broad terms, but you can also use it to make your downloads commoditisable by adding more bonus material.

Another area that seems to be quite attractive is the area of broadband penetration. As this reaches critical mass, music companies need to look at the services they can offer and which have revenue-generating potential.

Historically, the issue has been that a lot of the music television services haven’t generated a lot of additional money in the same way as like movies or sport. We need to ask what is it that is on demand that can do that? Would it be a live event, because historically people have actually paid for these things. There are also subscription related services, which people might pay for, but at least they would pay for as part of a bundle such as the video jukebox concept. This could be much more media-rich material.

If you look at the numbers of music DVDs that are being sold it indicates that there is a market for that type of material. This also has a piracy advantage. We have to be cautious about this because the film industry are terrified that they are going to end up in the same position as the music industry, but because film is a richer medium it’s harder to pirate and the same goes for music and video together. There are new formats like high definition DVD coming out which will help further in this respect.

One of the issues that you come across is that the mechanism for negotiating rights for all this extra stuff is really not in place. You don’t even know who to approach in order to have some of those conversations, nor who owns the rights, nor where they reside, nor what the eventual deals might look like.

One of the things hampering the process is that people haven’t audited what they’ve got or established processes for selling it. It’s an area the film industry has got right, they already know what the revenue splits are. It’s not just the music industry that hasn’t got this sorted out, the television industry is also poor when it comes to this.

There are lots of other complications, there are multiple platforms that companies need to produce for and monetisation by each channel is very different. You make money in different ways if you go to a mobile company than if you go to a fixed broadband company. The other thing is that historically the music industry has used a lot of its collateral for promotion rather than to get revenue, but nevertheless it’s still great that there is all this promotional collateral.

The music industry has quite rightly got excited about ringtones, but perhaps that has almost been a distraction in terms of focus when they should have been looking holistically at what businesses they need to be involved in. Focusing on one niche product for one niche platform is all well and good, but it distracts from the holistic view of how the industry needs to change.

There is also the problem of standardisation. Every week there is a new download service launching with a different format. Third generation mobile is a good point in this respect because it will allow music to be transmitted to mobile at the same speeds as over the Internet.

In terms of actions, the first thing for a music company to do is to get the content in order and understand what rights they have, make the content available and establish good commercial processes to facilitate the necessary deals. The other obvious thing is basically to try things; we don’t know what works yet. Everyone knows that people like music, but the difference between liking it and paying for it is profound, at least in economic terms. People need to get things out so they can actually observe behaviour rather than doing consumer research, which is notoriously inadequate.

If you are doing deals with mobile operators or fixed-line telcos, one actually needs to understand what makes their value chain work, because basically, on-demand sounds great, but as a content provider, if you don’t have movies, or adult content which have much better margins, you basically don’t have a business. Music is a very attractive part of the portfolio, but it’s not on quite the same level, so one needs to understand where it actually fits, and what telcos are worrying about.

I think above all music companies are in the content business, and they need to recogniser that they have great content and must not give it away this time.


Phil Hardy: One of the things that Theresa highlighted was the number of opportunities, and I’d like to talk about the immediate and longer view of the future.

If you look at the immediate view and take US entertainment in 2004, concert revenue was down, video games revenue was down, recorded music sales were up, box office revenue was up, but only because ticket prices increased and DVD was booming.

Firstly you can see that in-home entertainment on the whole did quite well. Video game revenue was down because it’s the end of the trajectory for the last set of games, and there will be new games and new machines arriving in 2005, but that doesn’t really tell us that much.

It tells us that recorded music has sort of recovered which is good news, but if you try and take the long view, clearly the most important thing that has happened over the past five or ten years is the digital revolution. It’s clear that no one quite knows how it works, and if you go back historically over the last five years, record companies and music publishers have offered lots of business examples for what might work, but nobody knows.

One thing that is clear is that there has been a dramatic change in the structure for presenting recorded music to the public. I’ve got a record from the 50s with a picture on the sleeve showing all the singles spread out on the floor next to the one LP, showing that you can have them all in one place, and what’s happened with the digital revolution is that we can now also clone these songs, but the CD was just the beginning.

The digital revolution has created lots of problems, because once you can clone something you can pirate it. There’s also the fact that the US economy is not doing very well, neither are physical sales in general ? Walmart had a bad year, so there’s a whole other set of explanations for why things are happening, but they are essentially local explanations.

We need to look at what opportunities digital represents. Sometimes I go to presentations where major labels are meeting investors, and they are trying to explain that their businesses are doing well, which is quite difficult because the numbers don’t add up in the physical world. One of the things that always gets explained is that the digital world is inherently more profitable, because once you get rid of cardboard boxes and bits of shellac and vinyl, the costs come down. At the moment, though, no one has managed to turn the corner, because we are talking of a very small base.

The predictions at the moment are that by 2007/2008 15% of recorded music will be sold digitally. EMI are already claiming that by 2006 25% of their revenues will come from digital. That’s quite interesting because part of their revenues are from music publishing, and one of the areas mentioned – ringtones and ringbacktones ? is an example as to where the value of owning music content has increased.

In the physical world a record company with margins of 8% would be very happy, but a music company with margins of 25% would be relatively happy. In the digital world there’s a possibility of far greater margins and all the studies that have been done about pricing for mobile suggest that they will remain high, whereas in online it tends to be more of a concern about price. There is a lot of possibility, it hasn’t been achieved yet, but the whole problem with the long view is that you can see what might happen, but you have to get to it somehow.

In the intermediate time it does seem that there has been a significant recovery of recorded music sales in 2004, and it interesting that the recovery has been greatest in those areas where there is a significant download presence. Having said that, an iPod can hold a minimum of 10,000 tracks but the average owner has only paid to download eight tracks, so clearly most of the content on iPods comes from the owners’ CD collections, but the possibility is there and things are starting to look better.

When the Berlin wall came down it provided an enormous opportunity for broadcasters to spread into Eastern Europe and the revenues for music publishers and record companies to be gained from that have levelled off, but in the gap between that and ralising the opportunities mentioned by EMI and Jupiter research there are the opening markets in China and India for us to concentrate on in the physical world, and China is already producing significant revenues for all major record companies.

I think that what’s going to happen is that we’ve had a crisis, which has had a lot to do with competition from other entertainment sectors and poor economies as well as piracy and we’ve almost over that, then there’s the opportunities presented by China and India, and ahead we’ve got digital coming into it’s own to look forward to.

Keith Harris: I’d like to mention something about the fact that every iPod has only got eight tracks on it. I was told today that to fill a 40Gb hard drive legitimately it would cost £7,900, and that might be one of the reasons why people aren’t filling them so fast.

Keith Jopling: I agree with Theresa’s summing up, and expanding to what Phil said we need to think about how far ahead we are looking and how we are planning to get there. Looking just a few years ahead and looking at what has been done in the last couple of years, what’s happening now is a huge shake up which is to the benefit of everybody.

I know that the record companies that we work with are doing a lot, they’re digitising everything knowing that there are going to be opportunities along the line even for the deepest catalogue, they are also going back to contracts and looking at how they can persuade artists that there are a lot more opportunities to exploit the various assets and content that they have got. There’s a move towards profitability, they are doing lots of different profitable deals in the mobile arena for example. And they are getting a lot more strict about content protection, they realise that the two things they’ve got going for them as record companies are that they own the copyright and they’ve got the marketing skills, so they’re the two things they are really working on improving.

At the moment they are getting 2% – 4% of revenue from digital sources, which adds up to 1.5% of sales, so it’s really quite small. As record companies and suppliers the business models are quite complex, so if you want to do anything that involves major change there are a number of issues. You’ve got new channels, so you need to manage content across all those channels without making it over-abundant and cheap and commoditised, and how are you going to make money from it. The record companies are looking to do all of these things, but realising that it’s going to take a long, long time for it to come through. You have to build consumer demand, so we’ve got iTunes doing OK even though there haven’t been that many downloads per machine sold, but at the moment people are just grazing iTunes, some people have bought subscriptions, there are about 1.5 million subscribers so it’s going to take a while before consumers work out how to use Napster and how to use Rhapsody.

Is it good for our business that you can now basically chose buy your favourite music? You can check out all the music you want before you buy it, either on a P2P site or through a subscription and then you chose to buy your favourites.

We also need to know what’s going to happen with the core product, because for a couple of years record companies seem to have taken their eye off the CD, and now we all realise that the CD is going to be here for quite a long time as the primary revenue source, about 90% of the revenue and most of the profit. A lot of record companies have gone back and looked at how they can improve the CD. Christmas week I went into Virgin and 12 out of the top 20 titles were some form of special edition, special packaging, extra tracks, web content etc.

So we seem to be changing consumer attitude, a lot of people want to check out new online services or download from artist web sites, they are very interested in downloading, but they are not buying that many at the moment, we’ve got to wait for that and keep on doing more marketing.

If you look out further ahead then there’s no doubt that it’s all about where people are going to consume the majority of their music, if you look ten years ahead, a lot of us are going to be buying our music online. So we’ve got to sort out the whole environment now, making sure that artists have the opportunity to sell their music online and make a profit out of it. If you look further ahead, a lot of people are getting very excited by this already, we will see mobile being the main platform through which we consume the majority of our music. Right now it’s mostly younger teenagers who are obsessed with their phones so looking 15 or 20 years away that might become the right platform for consuming a lot of your music.

There’s a shake-up in the business, a lot of good things happening, a lot of good thinking going on, but we are in a transition period and at the moment it’s just a case of keeping afloat. I think right now focusing on the core product and improving the CD is what it’s all about, people are still really quite happy with CDs.

Looking ahead and being optimistic I think there’s going to be a huge viable business in online music from people like iTunes and I think subscription services will work. Napster and Rhapsody have done well, and it will be good when Rhapsody launches in Europe, everyone who’s used it thinks it’s a fantastic service, it’s a step on beyond iTunes, which is just like a digital record shop. The subscription services do far more than that. We’ve also got talks with P2P that might come out with something exciting like a legal service, and mobile further down the line.

One thing I would say as an analyst and a music fan is that there is plenty of good music around, and record companies and record sales are actually doing well as a result of that.

Mark Mulligan: There’s been a depressing amount of agreement on this panel, and I’m afraid I’m going to agree with a lot of what’s been said as well.

One thing that definitely runs through all this is that music has changed. There’s a big process going on where we are moving from being a record industry to a music industry, and Theresa touched on a lot of alternative revenue channels and they are key because of the next generation of music fans who are coming through. Young kids haven’t grown up defining themselves by music in the way that people did in previous generations, we don’t have goths and punks and new romantics in the way we used to. Now it’s much more brand association or association with lifestyles, kids are marketed to from a much earlier age, and they are buying into a much wider range items like branded clothing and interactive entertainment like DVDs and console games.

Kids have much more money to spend than they ever did, but they are spending a lower part of that directly on music. Publishing divisions end up with some of that money for the tracks that go on console games, music DVDs and adverts and TV. It’s much more difficult for record labels just to sell CDs now. It’s going to remain the bedrock, but within the context of major music markets losing sometimes up to 10% of revenues per year, so if you can get a few extra percent from alternative revenue streams that can mean the difference between being in the black and being in the red.

Theresa touched upon the strong growth of DVDs being a good thing. I think the opposite. If you look at the amount of floor space at HMV given over to DVDs and console games, music is becoming a decreasingly important part of the equation. There are opportunities from these products, but the bottom line is that people are spending more money on stuff that isn’t directly music. People are buying movies, which is great if your parent company owns a movie studio as well, but the amount of money people are spending on CDs is getting less, there’s no two ways about it.

The good news is that young people are spending money on music but in different ways, we’ve mentioned ringtones, and I think it’s wrong to suggest that it’s a niche market, because it’s a dynamic part of young people’s relationship t music. They are much less willing to spend 79p on a full-length download from iTunes than they are to spend £3 or £4 or a 30 second polyphonic ringtone. It’s more relevant because it does the job of identity that albums used to do for generations of music fans in the past.

This is an opportunity and a challenge, there’s money being spent challenges are that the money from ringtones don’t go to the record labels, and what happens if people grow out of ringtones. It might be that in 20 years time there a lot of 40 year olds who change their ringtones every week just the way they do now, but the odds are decent number of them are going to grow out of it. The challenge is, are they going to be spending that money on music, or is it more likely that the mobile operators are going to be throwing different types of services at them, so the revenue will be diverted completely away from music instead of partly away from music.

The fragmentation of the music industry means that record labels are going to have to find new ways to operate, they are already dealing with ISPs and talking to mobile operators. I think there is a more important step after that, which is to recognise that although the CD is the right format for the majority of music fans to appeal to younger fans you have to be more agile in the way that your company is structured. That means different types of artist contracts that will develop artists in different ways. Not every artist will become a CD album artist, some artists might be ringtone only artists, or download only artists. That means less up-front costs and investment for a label, less studio costs, less marketing costs. Most bands when they start out are very used to using the Internet to communicate with their fans already, so if you bring that in-house that cuts even more costs.

It seems like there are lots of different fragments all over the place, but there isn’t any more a standard way to develop an artist. We are already seeing BMG and EMI trying to move in this direction, because music means so many different things to so many different people.

The music industry started out as a single event business in the 50s and 60s and then moved to an album business in the 70s and 80s and now with ringtones and digital downloads it’s moving back to a single event business, except the singles chart is dying. That means that people are consuming music, but not in a way that is directly meaningful to record labels, unless we shouldn’t be talking about the music industry from a record label perspective any more. Should we actually be talking about it as all the stakeholders in the equation?

Finally looking at mobile and digital downloading. Looking at the numbers at the moment the digital market is very small, the penetration of iPods is about the same as minidisks, and no one’s talking about the minidisk revolution apart from a few execs at Sony. We are talking about a tiny market which is going to grow. Theresa has rightly pointed out that there’s lots of margin pressure from Apple, but Apple aren’t trying to sell music, they’re trying to sell devices. Broadband ISPs aren’t trying to sell music but broadband access. What we are seeing with digital is that other people are selling music in order to sell different products, mobile operators aren’t doing it because they love music they are trying to get increased data revenues. If you are a publisher or a label trying to sell digital music you have to accept that you are prostituting yourself, people aren’t interested in the creativity or the artist, but what sells their products. Once you accept that you are in a position to capitalise.

Finally I’d like to mention the idea that mobile will be the panacea, and all music will be distributed over mobile. It’s simply not true for any meaningful time frame even with the advent of 3G there are huge issues about distribution. If you look at O2s music service the tracks are coded at 28Kbs, that might sound great on your hands-free set, but put it on your stereo and it will sound like an out of tune am radio. So the quality is terrible, the price is OK, but only because the operators are making a loss in order to try and raise their profile. The biggest problem is the handsets. Mobile have come on a lot over the past few years, they’re smaller and can do things you wouldn’t have thought possible only recently, unfortunately battery life hasn’t kept up with those developments. Even on the best mobiles you can only get four hours of playback maximum, that’s without using it for calls, so the battery will probably only last two and a half hours. People carry phones because they want to talk to people, if people aren’t going to be able to talk because they have listened to a few MP3s it won’t work. There’s too many technical hurdles to stop mobile music taking off for a number of years.

The outlook isn’t bleak though. The music industry was probably over inflated in the 90s with CD replacements and price rises. The decline now is probably bottoming out, and record companies just need to harness these alternative channels.

Phil Stokes: I also think the music industry has a lot of opportunities. There is a lot of doom and gloom written about the music industry, which is largely attributed to the fact that there was this big spike, the music industry went up to about $39bn turnover for recorded music up to about ’99. We’ve now seen that fall to about $30bn, and everyone is trying to work out why.

Back in ’97 or ’98 when CD burners took off I first saw them in Germany, and the German music market said that they were responsible for a drop of 15% in the market that they suffered. Then the next thing that came along was downloads. So, is it downloads, CD burners, physical piracy or general economic conditions? Has anything fundamentally changed about what a record company does? If you think about the value chain of a record company from creation to selling to a consumer, you could almost say a record company is in the business of the creation and exploitation intellectual property. Everything else it does is a side issue, it doesn’t need to be the manufacturer, it doesn’t need to be the distributor. It does need to be the person who is finding the acts of tomorrow and it does need to be the person who is controlling and exploiting the rights that go with that property. When Theresa says it’s very important for a record company to know what intellectual property it owns I agree, and I don’t think most of them do know.

What I think is also important is the digitisation of back catalogue. I don’t believe the CD is dead, I think deluxe editions are fantastic, I’m doing with deluxe editions what I did when CDs came out, and replacing CDs from the first time around because I love bonus tracks. When you ask is digital inherently more profitable ? I’m a sucker for packaging, so perhaps I don’t understand how people will look at music in the future. One of the partners in the office told me a story which illustrated this about how his nine year old son’s friend came round for tea and saw they had a complete Encyclopaedia Britannica, and the child asked, ‘What’s that up on the shelf?’ so he told him it was the Encyclopaedia Britannica, and the child said, ‘We’ve got that at home, but you’ve printed the whole thing out.’ I want to own things, I love DVDs with all the extras, but digital downloads don’t do that for me.

There will be format wars over downloads which will differentiate them, and I don’t think Apple will open up their technology, neither should they be forced to because they are stimulating the market, but ultimately someone is going to win in the download war until the proprietary technology becomes ubiquitous, so if you copy of iTunes you will be able to play it on a media player somewhere else. Until that happens, and until consumers can pick their way through that marketplace CDs will remain the dominant carrier of music. I’m still optimistic that the music industry can get back to doing what it does best, that is finding the next generation of artists, but they will now need to know what to do with those artists once they have found them. It’s what the music industry is good at, finding talent, pricing talent, making great product and getting it out to people. People are not consuming less music now than they ever did, they are probably consuming more. The ability to monetise it is what we are struggling with.

For me you make people want to pay for music because it is compelling. If you are competing with mobile phone bills and branded clothing people will do the thing that is cool, and getting music to be cool again is the challenge.

Keith Harris: I remember in the 80s, there used to be a thing called national music day. It always struck me at the time that it was done the wrong way round. The right thing to have done on national music day, which would have alleviated a lot of the problems about monetising music now, is rather than a national music day, have a national no music day. A day when there was no music radio, no music in supermarkets or lifts ? no music at all for a day. Then people would begin to understand the value of music. At the moment one of the problems with music is that it is everywhere, and most of the time we are consuming it is apparently free. Most of the time it is just there in the background and we don’t pay for it. There is a perception now that it should be free and I think we missed an opportunity.

Theresa Wise: There are a couple of points I would like to make. I was struck by the claim that music is there to sell other things. Having worked with the people that are selling the ‘other things’, I think the interesting thing is that if you always have the philosophy that something is there to sell something else you end up making a big loss. That touches on another point about digital being profitable. From a music major’s point of view you’re not going to stop selling physical product, so you have to have another channel alongside it, which tends to be more expensive. People who distribute music also have to pay for bandwidth, and it is hugely expensive. The amount of investment to build a 3G network, or a cable or broadband network and then service it is enormous; it’s way more than a content provider can even think of. Because bandwidth is so expensive you can’t just keep pushing broadband access and making a profit, so you can’t have the situation where nothing makes money only to make money for something else.

I don’t think that mobile is an insignificant area, I just think that it is a tactical distraction. Music companies should be doing it but not at the expense of the bigger picture.

Finally having worked in lots of other media industries, I’m a sceptic about subscription. In TV people have reached saturation point with subscription services, I think people’s tolerance for that kind of payment mechanism and commitment is increasingly being strained. I think that we have to get more of the on-demand, impulse revenue; we need to look at things that people aren’t already committed to.

Phil Hardy: Can I come in and talk about profitability? One of the problems for those people who own content, is that it is often perceived by consumers as being part of something else. This becomes a problem for the industry when it is negotiating with someone who is more concerned to sell another product, but the reason it has entered into it is because it sees a glimmer of hope.

The other areas is digital, which is also problematic at the moment because it makes up a small percentage of sales. Let’s imagine that HMV on Oxford Street has 250,000 albums on sale, once you have digitalised your catalogues, you can offer to the world 2 million titles. This is an advantage for artists such as jazz acts, whose albums aren’t easily available, and whose online sales make up a large percentage of their total sales. Put simply, greater choice means there is a possibility of greater purchase.

Obviously, there is a starting time where you have to digitalise for that to happen, but that is a given if you are to take advantage of the digital revolution in any way. There are also advantages to digitalising in that you don’t have to pay for transport, storage, or sales space. Although I understand the appeal of packaging, there is also online packaging available, it is possible to download the details and the sleeve art. So removing a lot of cost makes it inherently a lot more profitable, the only problem is making the leap of faith to get there.

Mark Mulligan: Can you inevitably sell something and not make money on it and do that as a business model? For people who are selling other products, music is secondary, and this puts people who just want to sell music at a disadvantage because they have to compete in the same market. But you might not discover that immediately if you had been putting your faith in marketing.

The reason this is such a problem is that this is a completely alien way of distributing content. Where has the idea of digital rights management come from? The whole history of music is people get music and they consume it and they think they own it, even if legally that’s not the case. It’s not in anyone’s interest to tell consumers that they are actually buying a license to play the music back because people like to make copies to play in their cars and give to their friends. Digital rights management is saying that actually, if you are going to consume digital music, which is by definition a lower quality project because it is normally encoded at a lower rate and it doesn’t have artwork, and you have the wait and all the possible problems of downloading, but you can’t actually anything with it because of the limit on the number of times you can burn it onto CDs and on the devices you can use it with. So you are essentially taking even more away from an inferior product that you are trying to sell at around about the price of a CD.

That’s why the idea of digital rights management is completely alien to consumers. So lets just work on the principle that DRM is here to stay because labels are so heavily invested in it, that means a massive amount of education, probably a generation’s worth of learning, is needed to make people familiar with this, particularly when you are talking about alternative business models like subscription.

Keith Harris: I’m interested to see what will happen when artists start to get their royalty statements and realise how little they are earning from downloads, because at the moment the whole thing is being hyped up, but what is the artists’ share and will they continue to co-operate with the idea of their music being downloaded at that price.


What do you think about subscription services? How is this going to benefit artists?

KJ: Why I’m so interested in a service like Rhapsody is because they have transformed their music, the question is whether it will work out financially. I think it would be better if it was bundled up with broadband internet access, so that you would pay a little bit extra to get access to music. That’s not the end of the story, it depends what kind of customer you are, whether you are interested in music.

A good customer for subscription services would be someone who is a bit out of touch and interested in getting recommendations and trying things out. The editorial is very good on Rhapsody; I thought at first it was a recommendation technology ? the best I’d seen until I found out it was 60 editors. No one is going to want to pay $10 a month for a subscription service and expect it to end there. You should be able to pay $7 or $8 a month as part of your broadband subscription and then your happy to buy your favourite music within the service, which for me is revolutionary part. It’s something that takes the risk out of buying music and it gives you a chance to get back into discovering music, but it will be a mixed economy.

TW: I’m afraid I’m a subscription sceptic; subscription is fantastic because you know who is subscribing and it’s a steady revenue stream, so that’s good from an artist’s point of view. The trouble is how saturated people are.

We know that people are prepared to pay subscriptions for mobile phones and there are certain advantages to bundling things in there, because people perceive that it good value. Some people also pay subscription rates for television service, but interestingly, when Sky tried to launch its Sky Plus service by subscription, they had to drop it because people weren’t into paying the subscription because they didn’t perceive any additional value.

The issue is if you are bundled into something, people might not perceive the individual value, whereas the issue with music is getting people to perceive the value of something that has historically been free perhaps too much.

PS: Can I add something on the question of the artist and what revenue they will get? From a simple online sale, the artist will get what the record company, in negotiation with the management has set as an appropriate sum based on a single download. When you move to a subscription service, the amount of money offered to the artist has historically tended to be less.

MM: I think it is really hard to defend the value of subscription services from an artist’s point of view, although it is very good from a consumers’ perspective. Digital downloading is only using the internet as a payment mechanism, that’s not utilising a fraction of its ability.

What subscription services do is create a hybrid between MTV, radio and music, an all-encompassing experience with all the added value of details on the artist, outtakes and all those things that are bundled with subscription services and are getting more advanced, by Napster as well as Rhapsody. It is huge value for money for the consumer because it is designed by people who love music and you can personalise it. It will always be a smaller percentage of people that buy subscriptions, but they will be more valuable customers.

KH: For those of you who haven’t used or seen Rhapsody, its Real Audio’s subscription services, and what they do is for a fixed fee you get to list to any of the 700,000 tracks they have as many times as you like. If you want to burn a copy, then they will charge you to do so. The benefit from the consumers’ point of view is firstly, that every time you listen to a track, you get a recommendation list of similar tracks or similar artists, but the feature I thought was particularly useful is that you can choose up to twelve artists that you really like and drag them to what is called your custom radio player and the editors then program a radio station based around those twelve artists. Not just their music, but other things they think you would like based on your choice, so it does bring you to a wider choice of music.

The value of this for artists largely depends on whether the streaming service of Rhapsody is treated as broadcast as opposed to a download system, which is a sale. Because if it is treated as a broadcast it will be licensed through PPL, artists in the UK will be paid fifty percent of the proceeds directly, the record company will not take a cut for recoupment. If it is counted as a sale, the artists basically will be paid under their normal record contract with its usual deductions. This means that if artists are being paid on the basis that it is a broadcast, they will see a great value in subscription services, whereas if it is being treated as a sale, they probably won’t.

KJ: What is more interesting to me is what does downloading do to the business market as a whole. You’ve got a situation now where people are more inclined just to download the track they like. A survey done recently in the US suggested that people downloaded around eighty-two percent back catalogue and only eighteen percent front catalogue, material released in the last eighteen months. But, eighty-eight percent of people were only downloading one track, and only one percent downloaded entire albums. So what that does for the music industry is than the idea of financing other acts through the success of one act is turned on its head, as only single tracks are monetarised.

PH: I thought I read a piece of research last week that suggested that half the downloads in the US which were about 168 million, 55 million of those were of complete albums. That’s around a third, and there’s a lot more evidence to suggest that downloading isn’t cannibalising album sales, especially as in the US and UK, where the download market is significant, album sales have actually increased.

(Dominic McGonigal PPL) I’m a subscription sceptic as well. I think there will be a subscriptions market, but it will be for people who want a fairly rich product. Looking at another example, most of the stuff on Amazon, you get reviews, lots of extras with no charge to browse, just to buy. Looking at broadband, we have a strange situation in the UK where people are paying a huge amount upfront and then virtually nothing for using it. In Japan, in the mobile market, which is a very well-developed market, you have very low subscription rates but huge value-added for extra services, and everyone takes part in that. Where are we going in the UK and Europe in terms of the value of broadband, bandwidth, the pipe, versus the value of the services it is providing?

TW: Docomo in Japan decided they wanted the very best content, and that therefore they would take very little of the percentage of the retail value as a deliberate ploy to get as many content providers as possible and the content providers responded very well in Japan. The issue in the UK is that the mobile providers have taken a different view and said ?we own this area, we want to control it and take a large percentage’. So it’s a different situation, where the best content providers are not competing for that space. So lets hope they start taking a different view.

MM: First of all, the Japanese model is now in Europe, they have about 2 million subscribers. The other thing about broadband is that our surveys every year have shown that the one of the main reasons for getting broadband was to download music. But, most of the people who get broadband to download loads of free music already have it.

There’s a problem that at the moment, record companies as exploiters of intellectual property only benefit from one or maybe two parts of the revenue. How does the panel think the involvement of the industry and major record labels in other revenue streams will change and develop?

PS: I agree that the majors have done very well by concentrating on one particular area, but other people have also done very well by specialising in other areas of music. Two observations: firstly Sanctuary are blazing a trail for doing things a different way, the question is whether that is scaleable up to really big revenues from the artist base, but it terms of capturing revenue from every possible source, they are doing a great job. The other is the Robbie Williams deal, which did tie in different revenue streams. I’m not sure if any of us know the ins and outs, but the idea was that you could not invest that kind of money without tapping every possible revenue stream. People in boardrooms should ask themselves how quickly they want to embrace other areas, there’s a lot of corporate uncertainty at the moment, with a lot of companies changing hands. This means there is not a lot of corporate risk-taking, those opportunities are there, whether the majors or someone else will embrace them.

MM: There already evidence that the majors have finally realised that they have to embrace these things after a missed opportunity about five or six years ago when if the labels had stepped in and licensed music widely, the whole file-sharing phenomenon probably wouldn’t have happened in the way it did. That opportunity was missed, so the difference between now and then is that revenues are declining, and therefore record companies can’t afford not to maximise the alternative revenue streams and are forced to license to people like iTunes. Universal’s UMTV is a good example of a move into creating a specific type of content which isn’t music content in the traditional format, so issuing a parallel release, a CD compilation along with a CD of ring-tones, logos and icons, all specifically designed around that content. That makes the label participate in all the parts of the revenue share.

What about the artists generating sales on their own, for example through live performances? Its debateable whether file sharing actually generates sales or not, I’m inclined to believe it doesn’t, but the original Napster, before it became a legal music service, sponsored a tour of Outcast in the US, because Outcast were getting much more revenue by people trying out their music on Napster and then going to gigs and buying merchandise, rather than buying the album. For most artists, they won’t make much money out of album sales anyway because of recoupment costs, so it is good if more people come to the gigs because they have been downloading music.

If the artist begins their career with full knowledge of digital rights, at the least, it will give them leverage to get a better deal and at best more control over their music. It is more of a gamble from an investment perspective because it is so much driven by the value of a particular artist.

PH: To add a note of cynicism, major artists have major managers and lawyers to represent them and they are not going to allow companies to exploit them. Therefore we must understand realistically that there is a limit to the idea of the record company significantly changing and becoming a music publishing company.

None the less, there is a significant change that has taken place with reference to recorded music. To use a comparison with Hollywood, there was a time when they gained all their significant revenues from people going to see films in the US. The realisation that people wanted to see them in Europe and elsewhere finally led them getting more money from outside than inside the US. Then they realised later that the ancillary revenue from TV and so on was even greater, and now with the arrival of DVDs, the aim has become to get one great weekend show, based on which, the revenue from the next two years can be calculated.

We are not fighting that situation in the music industry, I noticed in the Guardian, a Spanish company that can tell you whether your record will be a hit or not. The revenue stream of a film is quite long, though not as long as that of music copyright, in that the owners of White Christmas are still receiving significant revenues, but DVD created a whole back-catalogue of film. Its very tempting to think of EMI as very brave in going for Robbie Williams but it is quite clear that Robbie William’s albums have a long revenue stream, much longer than would have been the case in the past

(Contribution from the floor) It is only a handful of leading artists who can call the shots when it comes to recording. Major labels call the shots because there are very few deals to go round and artists are desperate to get one, so they will give away their rights left right and centre.

(Contribution from the floor) My reading of the Robbie Williams deal is that he asked more a lot of money upfront to resign to EMI. He’d delivered all his product to EMI so he could demand a lot to stay and in return EMI wanted access to some other revenue streams. There is no evidence that EMI tried to set themselves up as management specialists or touring specialists or anything on the back of it. So it was a financially-driven, probably tax-driven deal rather than a precedent for major record companies changing the way they deal with their artists.

Artists will be perceived in different ways, as downloading, touring or ringtone artists, but I think it is unrealistic to think that record companies would be prepared to sign them up just in those areas. If you are investing large amounts of risky money in a new artist, you want as many rights as you can get.

I don’t know whether record companies will succeed in transforming themselves into overall rights-owning companies but it order to do so they have to persuade artists to give them a lot of rights. It used to be common for record contracts to have a merchandising clause so that the record company acquired all merchandising rights. One of the first things I learnt to do was to strike a red line through that clause in the first draft I sent back, and no record companies insisted on retaining it because they weren’t serious about becoming overall right owners. On the other hand, most record companies now have rights over artists’ websites. So I think it is possible that artists will be prepared to concede comprehensive rights, the question is whether the record companies will exploit them in a satisfactory way. Universal has invested in his own management company to deal with ancillary exploitation, providing management and merchandising services, and that’s a possible role that other companies could take on.

MM: I do have an idea what its like to be an artist; I spent a lot of money on lawyers, but still ended up signing away a lot of rights. I think the record company will still sign an artist with the rights to distribute however they want, its whether they see them as worth investing in.

The majors seem to be locked into a certain view of how things will be, and don’t treat artists very well. So maybe the best thing to do is for artists to start signing to independents. I suspect that trying to make a business while deserting the culture won’t work in the long term. Does the panel think that the concentration of the record industry increases or reduces the barriers to entry for independents?

TW: Yes and no, if you wanted to get really big then it harder because you need to put a lot of marketing muscle into a major artist, which not a lot of companies can afford. But it should leave a lot of space for independents, and that’s what you see it other markets. Not everyone has to make money by a growth model; the trouble is that the majors do because they need to show fairly high shareholder returns, that’s how these companies are judged. The only way they can make money is by consolidation. But that should leave the way clear for people like Sanctuary who are judged by different criteria, because being saleable is not the major issue. I don’t see that the barriers of entry for local artists are getting any lower.

(Contribution from the floor) One of the concerns about concentration is that space won’t be left, that access to markets like radio and retail will be increasingly dried up as the large companies do deals. A lot of the discussion has been about how to exploit new and emerging revenue streams: I’d to like to discuss the changes in uptake of music by younger people, who no longer identify themselves in terms of music. Perhaps we could discuss tactics like the live sector, which has had the biggest two years of its life, to get people more interested in music in the first place. Things like mobile phones and games are increasingly the focus of entertainment.

KJ: Education is very important and the live sector is a growth sector. There is a big event culture behind it. One of the frustrations of being a music fan is that you often have to wait two years for an album to come out to see the band play live. I think record companies will change that; digital brings the possibility of releasing downloads more frequently, so having more ?events’, which means more music and more revenue.

PH: National repertoire is a big part of revenue for a record company, the cost of marketing in another country is much higher. Independents cannot afford that, so national repertoire has recently become more popular in most countries, and the same time there is less of it because it is difficult for the independents to fund these acts and the majors are not interested. Consolidation is clearly not good in terms of the general good of music, and its quite surprising that the live music scene in Europe has managed to survive, let alone grow, when you look elsewhere: in Latin America live music is not doing well and in North America its a disaster. I doubt that the figures for the UK are that good outside of huge events.