EVENT TRANSCRIPT ARCHIVE. UK MUSIC INDUSTRY BUSINESS.

The Great Digital Debate: How Do You Divvy Up A Download?

This Think Tank will look into the cost of a download – from the perspective of artists, labels and distributors – and ask, is the price structure right if we want to build a viable long-term sales model and, perhaps more importantly, is the revenue being divided fairly?

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Transcript

1. KEYNOTE (SUMMARY) – Gary McClarnan

[To start his keynote – as a test, free of any peer pressure or “the madness of crowds” theory – Gary explained that he would read out loud a sliding scale of the potential price for a single track download (startiing at £2, descending in 10p increments) and would ask the audience to close their eyes and to then raise their hand when they think, as a music fan, he reaches a price that is correct and fair].

Just to let you know, at no point during that experiment was there any kind of majority consensus in the room.  That gives some illustration of just how hard it is to decide this issue.

In the traditional music industry, deciding on a price would have been relatively straightforward – simply carry out market research on a representative sample of consumers.  But the music industry missed its chance to do this with digital music – that chance came and went with Shawn Fanning and the original Napster.  Instead we let Apple do our pricing for us and we’ll never know if they took a poll of consumers or, more likely, just asked 10-12 executives to decide among themselves in the boardroom.

The music industry has been a “community of geniuses” on the issue of digital pricing – much as they have been in the past on A&R and distribution issues. Failure to think things through properly at the beginning has resulted in in-fighting further down the line when lumbered with an imperfect system which should work better.

The majors have also been largely responsible for the commodification of what an artist does – treating music as product and then being complicit in the driving down of price, primarily in the physical sales market but now also in digital.  Independent labels can be just as bad, for example in the ways they’ve traditionally done synch deals and shared revenue with artists.

Basic economics appreciates that value never simply disappears out of a system.  When value shifts, the sensible folks follow.  In the music industry value has shifted to brand and artist relationships, the live industry and into premium products (e.g. premium tickets, seven-inch singles – anything new and intelligent being done with physical and/or digital product).

The live sphere in particular is where we generate a fan-artist relationship, and is up 13% worldwide.  We need a download channel which works in tandem with this – some form of new digital avenue which offers something of more value than a one-off download.

The problem is that many in the music industry are so afraid of risks that they miss the opportunities – that is where someone like Apple comes in and takes advantage.  As long as we consider a music file as a commodity then we have a problem; as long as that commodity is disassociated from the artist-fan relationship, we have a problem.

There is a real opportunity here to set new models without dragging in the old paradigms.  It’s great that the old reliance on high street sales is changing because it means music can become less of a commodity and we can start to think differently – more in terms of fans instead of consumers.

2 . PANEL RESPONSE

Jay Barbour:  It’s not easy to see a clear and viable future record company model from that opening.  ‘Live’ has traditionally always been separate from what we do and, before you can sell any premium product to fans, you have to create a demand.  Meanwhile, indies have been harder hit that anyone by the drop in traditional sales.  The lack of one dominant accepted digital format is going to be a massive problem for us if CD sales continue to drop off here in the UK as drastically as they have elsewhere.

Mark Mulligan:  The core problem is that the digital music market has so far been driven by technology companies, not by record companies.  Apple’s iPod now accounts for well over half of the installed MP3 player base and the digital market depends on how well iPod sales do, not primarily on download sales.  So to some extent it is a case of the tail wagging the dog.

Massive iPod sales can look like great take-up for digital music, but those iPod buyers are not necessarily core music consumers.  As a result download sales remain disappointing.  Apple have small margins but massive sales, record companies suffer from both small margins and reduced sales.  This is why it was a mistake to let Apple set the download price.  If ISPs start to object to consumers using their network to download music and films and demand their own cut of the download price, record company margins could get even slimmer.

Thor Peterson:  In an interview over a year ago I said the music industry is currently “pissing in its pants to keep warm”.  This is a short-sighted fix and pretty soon they’ll stink.  Well now, the situation stinks.

With the mobile industry coming in, it only adds to the “music everywhere, all the time” mentality and the music industry will have to work hard to get out of the stink. But, 194m music phones were sold last year, and 3’s dual mobile and online download purchase could be a fantastic and simple solution.  A big problem however is the fact that people moving between mobile operators are not able to take their purchased music with them.

Neil Cartwright:  To progress, we must support models which help people discover music.  iTunes is fine for music that you’ve already heard and know you want to purchase but as a way of discovering music its pricing model is totally out of line with what people are willing to pay.

The market is being distorted between two poles – on the one hand iTunes, laying down the law on how music should be consumed, on the other hand the music is also out there for free.

This is why we have to look at how people want to discover music, not how we wish they would consume music.  And it’s not as simple as iTunes.  It comes down to the tiniest margins – e.g. how do you divide 0.02p from a streaming service?  We need to support, not dictate, ways people want to download.

Gary McClarnan:  It is easy to overlook the positive outcomes from Apple and iTunes.  They after all, established a viable digital music market with their model.  Meanwhile the eMusic model could end up killing itself.  With their monthly subscription they set the lowest level of downloads at forty thinking that, like a health club, users will overlook their membership and forget to download the maximum every month.  But that’s not happening.  And in the eMusic model, forty downloads per subscriber every month leaves nothing left once they’ve paid the labels.

It is also tempting to overlook the fact that people are still buying tracks for their iPod on CD first and then transferring them.  At some point in the future it is likely that digital music will need a co-existent physical format.  In the transit period, while CD sales slump, downloading does need to grow.  Perhaps in order to do this it will jump straight to mobile?  In the mean time, the majors are unlikely to drop their current habits, including DRM and nor, necessarily, should they. DRM does have a use in tracking consumer habits and reporting valuable information back to us.  Otherwise we are back to the old days of a fan going into HMV, picking up a CD and leaving – with no further potential for us to build a more dynamic relationship with that fan afterwards.

Mark Mulligan:  CD sales will probably continue to decline by 5% every year and digital will have to catch up.  How it will do this is not yet clear.  iTunes is now, it won’t necessarily be the future.  It may well be that the successful future models are ad-funded or even that online music becomes more like radio – supported by a PPL-style blanket licence.

Gary McClarnan:  What worries me about emerging models – such as the deal Universal did with Microsoft’s Zune – is that the money being made is not actually trickling through to the artists.  If labels took the time to explain why and how they were doing new deals and how the artist would benefit then the artists would probably be largely in favour of new models.  But at present, because of the lack of transparency in the deals the artists are becoming disenfranchised with new models at the earliest stage.

Thor Peterson:  We have been extensively involved in setting up digital music in emerging markets such as China.  They are still where we were before iTunes came along and any revenue you can derive is an improvement on the zero percent which artists and labels are getting at present.

In these markets it has been understood from the outset that you need a business model which first and foremost sets aside enough to pay the intermediary.  Therefore any royalty paid to the labels and artists is only worked out after you have deducted the transaction fee – which can be as much as 50% of the retail price.

In China it has also been accepted, even by the majors, that you can only price downloads at a level reflecting the average income of the population.  In China this is around 6p per download but, when you factor in the massive population you are reaching, the economics work.

Conversely, in Norway we set up a system whereby consumers can buy downloads for both their PC and mobile phone via MSN messenger.  Two prices applied – £1.20 for the standard version and £2.50 to purchase it direct to mobile (this covers the higher SMS transaction fee we were being charged).  90% opted for the more expensive version showing that convenience is also a major factor in determining the price people are willing to pay.

Keith Harris, Chairman:  So perhaps it is wrong to assume a) the download price can’t rise and b) that people won’t pay for music if they can get it for free?  Meanwhile, when we talk about DRM, do the panel think it is important to differentiate between DRM – Digital Rights Management – and TPM – Technical Protection Measures.

Mark Mulligan:  DRM has become something of a Frankenstein’s monster – something the record industry invented to help them reach fans.  The likes of Apple then took DRM and used it to lock consumers to their own portals.  But, while this makes interoperability impossible, just look at the games industry – they have thrived on the rivalries brought about by a lack of interoperability.

Neil Cartwright:  To pre-empt future problems and turn customers off buying your music because you dont want them passing it on at a later date is just insane – another case of the tail wagging the dog.

Jay Barbour:  DRM probably is the wrong word.  Something like “fingerprinting” is preferable – a way we can non-intrusively track usage of music to help improve our operations.

Thor Peterson:  There are 7,000 or so illegal download sites in China.  Baidu is an MP3 search engine which derives up to 70% of its income, equivalent to 70 million US dollars, from facilitating access to these illegal sites.  Imagine if they could use some form of DRM to help track all the music files being shared and demand some revenue from the facilitators.  This isn’t necessarily that far off – EMI already have a deal with Baidu.

3. QUESTIONS FORM THE FLOOR

  • Ad-Funded Models:

Mark Mulligan:  Ad funded models could help us sidestep the whole download pricing debate and turn internet music into something more akin to radio. SpiralFrog may not be the answer but other ad-funded services such as QTrax look far more viable.  Ad-funded models give us a way to accept the fact that certain people just aren’t going to pay for digital music.

Thor Peterson:  While I don’t think ads on PCs and the like will be particularly successful I do see a future for ad-funded content on mobile which everyone agrees is a much more targeted market, one-on-one, where you can get 100% return for your advertising spend.

Neil Cartwright:  Relying on advertising won’t work in a single download model because advertisers rely on knowing how often they are likely to reach the same person over a certain period of time.  A subscription service, however, could provide this essential component.

Gary McClarnan:  There’s only going to be a finite amount of advertising money coming into the music industry and I can see a ‘low bridge’ coming up when companies realise their spend on reaching music consumers isn’t necessarily converting into sales of their product.  The ad companies are buying into the kudos of celebrity around music, not the music itself – so genres like R’N’B and Pop are likely to get the best funding.  And if their investment doesn’t pay off, the advertisers will quite happily switch their attentions to sport or any other celebrity-led field.

Jay Barbour:  Does this ad-funded future mean that potentially advertising executives become the new A&R men?

What was most interesting about the recent Apple / Beatles settlement was the trademark trade-off agreement between the two.  This means Apple will likely launch a pre-loaded Beatles iPod very soon.  This kind of reverse licensing is a completely new model to potentially subsidise the fact that the download market has not yet made up for the decline in CD sales.

 

  • Added-Value Downloads Vs. An ISP Charge:

I would pay more for a download if it offered me better sound quality.

Jay Barbour:  Outside this room, I have never heard anyone complain about the sound quality of downloads.  Granted, for DJs and a niche market of audiophiles better sound quality might be needed, but the millions of mainstream downloaders would be unlikely to pay more for higher bit-rates.

Mark Mulligan:  In the 1970s and 1980s the public valued sound quality more but now choice and convenience are the main factors driving the modern consumer.

Neil Cartwright:  While for the dedicated music fan an offer of premium content or deluxe subscription service might be the answer, for the average mainstream James Blunt buyer perhaps a blanket charge on ISPs would be better – letting them get the basic content with minimum fuss.

In the digital music market at the moment we have a situation where the price tends to zero but the value of the product remains high.  So what are the solutions to access that value?  The value of digital sales in the UK last year was £50 million.  But if we had charged £1 extra a month on ISP charges this would have made £150 million.  Could this be an answer to how we remunerate artists in a world where the track-by-track price tends to zero?

  • Giving Away Product For Free:

I’m launching an artist-focussed download store which roughly follows an iTunes pricing structure but also offers the opportunity for artists to give away some free content at their own discretion.  The aim is to strike a balance with the consumer between core new product, which is bought at a premium, and promotional extra content, which is free.

Gary McClarnan:  Giving away extra value stuff for free is a totally inverted model.  I would advocate treating it as added-value premium content.  By giving it away you run the risk of further driving down the overall perceived value of downloads.

Amie Street is a new site offering a more sensible new business model where the more popular a track becomes, the higher the price – and people do pay extra for the more in-demand music.

Thor Peterson:  When we launched a download service via MSN Messenger in Norway we offered free track previews up to 30 seconds.  3.6 million individuals opted for these previews and we still managed to convert 2.6% of hits into sales – a very respectable number.  It just proves that some kind of free taster product can be very effective in helping to drive sales.

  • Flexible Pricing Vs. Giving The Artist A Fair Cut

The average person buying a James Blunt album doesn’t care where the money actually goes, they just want to know how much it costs to them.

Keith Harris:  So what is a fair artist/label revenue share on a download – 50/50?

Neil Cartwright:  It totally depends on the role of the artist as opposed to the label, distributor and service provider in each case.  Everyone who comes in and does a genuine service deserves a cut.  A smart artist / manager needs to look at who is adding value and earning their percentage by helping get the download to market.  Why should this mean 50%?  An artist might get 90% or, if they want a fuller service ensuring their music gets on all platforms, their eventual percentage might be tiny.

MusicBrigade are an example of a pan-European download service which is only making money by working with media companies and the like, not from its core business of selling downloads.  Similarly HMV Digital is experiencing scary times and had to ditch its subscription service and opt for a iTunes-like service without the iPod compatibility.  All these services are just having to convince themselves they’re in it for the long-haul – they’re not making money now.

DRM is in its infancy. It will eventually grow into a kind of Digital Rights Enabling technology capable of tracking, for example, how consumers value certain tracks differently over their entire lifetime. It could also facilitate a flexible pricing structure along the lines of Amie Street on a more massive scale. The question is whether record companies and artists can then accept a suitable flexible payment structure.

Mark Mulligan:  We are experiencing a particularly anomalous situation at the moment whereby you can walk into any branch of HMV and pick up a CD from the bargain bin – the price will average out at as little as 10-15p per track – but the same tracks digitally will cost as much as a new release single. Flexible digital pricing is needed to tap into the consumer’s real life purchasing experiences.

Neil Cartwright:  In the old world of music sales it was perfectly reasonable for an artist to expect a set percentage of an album’s PPD.  But now the artist royalty needs to be flexible based on a justification of the new costs at each level.  The same technology we use to deliver this music can also be used to devise and track a just and flexible artist payment system.

If a model like eMusic is suffering under its own popularity then it could be because the underlying inflexibility of the industry is wrong (e.g. in terms of the percentage labels and artists demand) rather than a failure in the basic business model.