Free Isn’t Working, What’s Next?

Posted by | Nov. 19, 2009 | 4,054 views

free

In April of 2006, I spoke in Hong Kong at the Nokia N Series launch. The focus of my talk, that music as a product was dead; the future of music was service-based. At the time, senior executives at EMI were outraged by my perspective. I still believe it’s the future, we have to embrace it.

Over the past three years, free was supposed to be the industry’s big savior, a great value for consumers, a magnet for advertisers. MySpace Music, Spotify, iMeem and others touted free, on-demand streaming as the ultimate music experience, but it hasn’t exactly played out to anyone’s expectations, so what went wrong?

The main problem centers around the minimums, the economics just don’t work. A ‘mea culpa’, I was a big proponent of per-track minimum rates for both paid subscription and ad-supported services when I was at EMI. I WAS WRONG!

At the time, the concept of a penny-a-play seemed like a fair price and reasonable return for a consumer’s ability to hear any song they wanted whenever they wanted, and relatively easy to explain to a CFO who needed to be assured that there was real money possible from on-demand services. This concept was combined with the three-bucket scenario that worked like this:

For each consumer, the service was obligated to pay the greater of a) a penny per play, or b) a pro-rata share per label of a percentage of subscription fees, usually north of 50%, or c) a pro-rata share per label of a percentage of advertising revenues, usually north of 60%. While terms b) and c) are reasonable, a) just doesn’t scale, isn’t financially viable, and should probably go the way of the cassette single.

As I’ve outlined in many public forums, the penny-a-play model yields a $15.00 per month obligation by a service to labels, based on a use schedule of five hours per day, five days per week, four weeks per month. This for a service, such as Rhapsody, that retails for $13.00. In this model, the service’s biggest fan is their worst nightmare, they look for ways to get them to listen less. This is counter-intuitive to the current needs of the music industry.

They want fans to be listening to as much music as possible, discovering new artists is essential to a renaissance. But services are being crushed by per-track minimums. Even though they have dropped well below the penny level, they are still unsustainable. The press is full of stories that assert that success could truly kill Spotify, that their legion of loyal fans’ listening habits are draining Spotify’s coffers. This is not how this should be playing out, Spotify and the others should be thriving.

To be fair, there’s a lot of history that got us to where we are today. Ten years ago most digital streaming deals were struck on a rev-share basis, then things went very badly. While this example is hypothetical, it’s very close to reality: Allegedly, a deal was struck with a major music portal, revenues from the streaming of music through their customized radio service to be split equally between labels and the service. Sounds fair to me.

However, when the first royalty statements came in from the portal, the labels’ revenue share, in total, was $0.00. When queried, the portal replied that, although there was ad revenue generated around the music, there was no advertising on the music player page, hence no revenue to split! The deals were restructured asap to include minimums, even if the music wasn’t monetized. This evolved into the three-bucket approach described above, all of this because of some bad behavior and a general lack of mutual trust.

The current situation is made more brutal by the collapse of online advertising rates. The original penny-per-play needs a $10.00 CPM to break even, at .2 cents, a $2.00 CPM, etc. These aren’t sustainable in the current economic crisis.

At the same time, to add insult to injury, there doesn’t seem to be enough advertising inventory to make the ad-supported free service sufficiently annoying, driving fans to the potentially more lucrative paid service. Spotify has smartly addressed this situation by tying their iPhone and Android apps to the paid tier only. But there still doesn’t seem to be the conversion rate that everyone was hoping for.

Rights holders and creators need to be compensated, they need dependable revenue streams, they need to embrace the possibilities. Without viable digital services, revenues will continue to shrink, this result is inevitable.

It seems that the only way to achieve success for both the services and the rights holders in our current economic situation is through deals based on revenue-sharing that are structured with complete transparency. We need to break the cycle of mistrust, be bold, share the risk, share the reward.

Other Users Also Read:
MySpace Music: Going Freemium?
SPOTIFY AND THE USA. WHY NOT?

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Posted by on Nov 19 2009. Filed under Business Models, featured. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

14 Comments for “Free Isn’t Working, What’s Next?”

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  3. Tony

    Al,

    You could not hit the nail on the head any more than what you just said

    AMEN!!

  4. al

    one of the main issues confusing the broader consumer market is one of medium distinctions . for the consumer there is rapidly becoming a unified media experiece. there is no difference between tv , radio , internet streaming , download

    to charge for one medium but not another that has been traditionally free is no longer acceptable . downloading music illegally from one website then downloading the same thing legally for free , a tv/radio station website for example m makes no sence and developes a sence confusion and resentment.

    as technology advances content needs to be totally portable across all unified mediums and charged/developed on a business model directly targeting content specifically

  5. Tony

    Dudes, 42 years in the business as “everything”. I said it when napster came out and I will say it again, 10yrs later, as long as you can get it for free, there will be no money to be made. Unless the net is controlled in the fashion that some of you have mentioned, this part of the music industry is over. You record your music for postarity only. I have noticed though, that live music seems to be making a come back!! Thank god I still have my chops, working more now than ever.

  6. wallow-T

    I’m glad to see Mr. Cohen discovering one of the points I have been arguing: one of the problems the Music Industry has right now is that it is desperately trying to get the audience to listen to less music. (Re: Spotify’s licensing costs and the burden of heavy listeners.) The Industry has a similar problem as it tries to motivate (or bludgeon) the Audience from a free all-you-can-eat buffet to a paid system of music with much less listened to.

  7. Nothing changes. Currently working with a client who is setting up a portal both on web and mobile to provide realtones with personalised messaging – nothing too new you may say, but hey, it’s another digital retail outlet for paid-for music. He is paying to build it, to market and run it – his money. Getting the actual content – realtones, i.e. 15 second snippets at MP3 quality for a phone ring – is done via a 3rd party “aggregator”. Who don’t have the current chart tones, at least not the ones from the majors.

    Why? Because major labels expect in excess of >£100k guarantees (each) for what they see as “golden” content, the contract negotiations – if ever concluded – would take +6 months and cost client >£50k in legal fees, the tech requirements of actually getting the digital assets are not standardised, and would occur yet further cost – not to mention the all singing and dancing reporting requirements.

    Result: a less attractive consumer proposition than it could be, probably less sales/revenues and certainly no revenues for those artists who happen to have a major deal.

    So the consumer is not getting a full CHOICE of services that compete via good or bad retailing, marketing, pricepoints, user experience etc – but just a few chosen ones (usually large, pan-national, submissive entities that cause no hassle).

    No doubt Lady Gaga seeing a royalty cheque for some measily £100 for a year’s airplay on Spotify (reported elsewhere, tbc) is not a great outcome either, but the current licensing practice is a killer for any attempt to rebuild the music value chain in a meaningful way. And no I do not support P2P piracy, but I get why it’s here to stay.

  8. I’m reminded of Joni’s pawn shops that

    “…chew the last few dollars off
    Old Beale Street’s carcass”

    Furry Sings the Blues. Remember how huge ragtime was? You don’t? It was really, really huge.

    We are used to styles of music passing on. A good artist innovates or lets it go- or becomes an oldies act. They can’t insist that everyone still treat them as a hot item, or that the government pass a law to protect them.

    In my opinion what is passing now is the style of massive sales at tiny prices. Prices, long too low to support any but the biggest players, now can’t even do that.

    Farewell, so long, bye bye. Find a way to support the creation of art that reflects the true value of art to the listener, rather than one that reflects the ideals of Henry Ford.

    I accept sponsors.

  9. Neil K Wilson

    Piracy has always been around, will always be around. Chris Gilby – are you raising the Sony rootkit concept again? That was a real winner.

    I have issue was the discussion around ‘risk’. Labels, while keeping the majority share of the rewards, take the majority of the risk when it comes to signing, developing, releasing and driving to break artists. Chris & Ted, both of you have deep experience and knowledge on this fact both in Australis & the US.

    However, I take offence to the the notion that someone who develops and takes to market a disruptive technology, drives the value down of an industry, and stimulates consumers confusion around what is legal and what is not legal, should gain the trust of the recording & publishing industry and benefit from value transfer.

    What I do agree with is that things will never be what they were and we all have to move forward, working together.

    My view is that cloud / streaming solutions will compete with radio – not music downloads. Consumers will seek ownership and to build collections.

    To mitigate mass piracy – government legilsation to manage illegal file sharing is one part of the solution. hey, you need approvals for building permits and to build roads – both private & public – to the property that all adhere to appropriate regulations to protect environment & the public. Why not extent to the digital super-highway.

    Second – watermark digital media with the details of the purchaser as a deterent to file sharing. Let’s face it, if there is a will there will be a way to hack & strip these files. However, it will enable the mass market opportunity and education the file sharing on scale is not on.

    As an ex-music guy as well, it breaks my heart to see my music industry friends dropping like flys as the the market implodes, both professionals and artists.

    I am excited by the opportunity that is in front of us once things ‘click’. I just feel that government intervention (like it of hate it) will be needed to bring all the players in the value chain together.

    Let’s hope it doesn’t take too long as there is alot at stake across a number of media industries. The battel on the Film frint is just beginning.

    cheers,
    Neil

  10. I think that you and the labels have it upside down and pretty much always have.

    The issue is of course for copyright owners to be fairly compensated for the use of their copyrights.

    The problem is that noone in the record biz trusts anyone. They are all risk averse. And they all want big bonuses.

    So no true entrepreneurs in the music business.

    You have to look at the history of the publishing business for a parallel.

    Originally revenues were all about printed music being sold. Then along came the phonograph and disrupted that model. It took some years before the concept and the right to a mechanical royalty came into effect.

    The same happened with airplay. And the publishers had to come to terms with being licensors of copyrights rather than manufacturing publishers of print. That was a paradigm shift that the record business has yet to truly grapple with.

    The big problem for the record business is that they have moved from being addicted to selling albums that have a huge margin component to now being addicted to revenues from iTunes. And in the mean time can’t figure out how to deal with P2P other than to sue their customers.

    There is a simple answer, but they don’t want to hear it. That is to lobby for and get a levy on blank media, as happened in Canada. Their problem with this model is that it will do several things that they aren’t prepared to invest time into thinking through. It immediately provides tacit approval to P2P because there is revenue to be collected – albeit not at the source. It means that there would have to be a black box distribution method. And it would get a big push back from iTunes because it would mean that iTunes would essentially be defunct.

    But if you look at the amount of blank media being sold around the world and imagined only a small levy, the revenues would be absolutely huge.

    The simple way to solve the black box issue would be to offer to pay consumers, yes, pay, to put a small widget on their computers that would report on the content on each of their storage devices. That way you would have an insight into what consumers want to store, what they share and you reward them for it.

    Got to get some out of the box thinking going here…

    I was in the music industry for thirty years, as an artist, songwriter, producer, publisher, and record company exec, and I left the business because I it had become hollowed out by the obsession with money and law suits.

    But I still love the music… Truly free is actually the best model. Its just that to get to that point the anally retentive CFO’s have to relax their sphincters and take a risk!

  11. Dear Ted,

    I am an MBA student at London Business School writing an industry report on online music. Any chance you could get in touch so that I could chat to you/get quotes etc. My email is:

    avanger.semba2011@london.edu

    thanks for your time.

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  13. Maybe its time to reconsider this whole idea of the ¨cloud¨ as a major source of income , and focus on good old acquisition.

    The fact is that the industry never really gave digital distribution a fair chance. Prices are still tagged to the prices of CDs, a real digital format for music that substitutes the CD was never introduced ( one that integrates all possibilities of video/graphics ) , in the end the industry just never really tried to compete with filesharing.

    I think you´re right , revenue sharing,is the best possible deal that right holders can extract from streaming, but even then in the end this will never amount to a major revenue stream.

    Acquisition, in my view, is still the name of the game, the question is of price point and format.

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