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Free Isn’t Working, What’s Next?

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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.

 

 

TC

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