Peter Gabriel Backs Ad-Supported Music Service

A new advertising supported music company backed by musician Peter Gabriel has just launched. The company, called We7, inserts 10-second audio clips at the beginning of the track when the file is downloaded. The files are not DRM protected, which I think is really smart. The ad is embedded in the file so the more people it is shared with, the better. I wonder how they will track ad impressions though.

I think the user experience with this service will be sub-par. I judge ad-supported services by what the experience of listening to a one hour playlist of ad-supported music would be like. With We7 the experience would be an ad before every track and every time you listen to a track you hear the same ad. I am afraid that We7 suffers from the same problems as Qtrax, Spiralfrog, Napster and Intent - they recognize the value of ad-supported music but they try to realize it with existing technology and fall far short of the quality user experience required to make the model successful.

The Recorded Music Industry Must Measure TSL

Last Friday Arbitron released the radio ratings results as measured by the Portable People Meter (PPM) for the Philadelphia market. The PPM is a pager-like device that replaces listening diaries and measures radio station listening by detecting an inaudible code in the radio broadcasts.

While the press release from Arbitron spins the PPM results as good news for radio, Inside Radio reports that the PPM shows TSL as 11 hours 30 minutes per week, whereas the paper diaries had indicated TSL per week in Philadelphia was 20 hours. To me this is evidence of the extent of the audience erosion that terrestrial radio has lost, mostly to recorded music.

More importantly though, the PPM highlights a critical lesson that the music industry must learn from radio: the time has come to measure TSL to recorded music. TSL to recorded music lies at the heart of advertising supported music. So long as people are listening to more recorded music the industry should be making more money, not less. The RIAA needs to take the lead in this effort - its measures of CD and download sales are still relevant but are not anymore the sole measure of the health of the industry. I will be writing a lot more on the topic of TSL to recorded music.

Good Intent, Not So Good Execution

I came across an article on CNN this morning about Intent MediaWorks. I knew that Intent had an advertising supported music application, but the article provided some details that I didn't know. Apparently, Intent has a proprietary file type for digital content that embeds a pop-up text or visual ad in the file. Intent distributes its files on P2P networks.

Of course, a fundamental problem with this approach for music, at least, is the insertion of a video ad into an audio medium. The other problem is that the ad is static - same ad every time you listen.

More interesting is that the article gives some figures for ad rates Intent is charging: $5.80 per 1,000 ad views for text and $30 or more for video. When you understand the economics of ad-supported music you understand that these rates are too low to support a viable medium. In my view however, these rates are too high for what the advertiser is getting - I just can't get over the disconnect of putting visual ads in an audio medium. How many people are looking at the screen when a song is playing?

There are high value ad formats that can support advertising supported music. Think targeted, interactive audio and visual ads.

Competing With Free Means You Lose - Unless...

Paul Resnifkoff, editor of the always excellent Digital Music News, has a post from the Leadership Summit Digital Music 2007 held yesterday in Nashville. Paul gives some figures from BigChampagne vice president of Sales and Marketing Joe Fleisher that files traded on P2P networks surpass one billion every month. Resnikoff also has this quote from Fleisher:

"Competing with free means you have lost,"

Of course Fleisher assumes you are competing with a paid approach. Legal free music can compete effectively against illegal free music. In fact, I believe that among mainstream listeners, legal free music will pounce illegal free music.

NYT Article about Advertising Supported P2P

The New York Times has an article today about legal, ad-supported P2P services. Read the article - I am curious to know if you agree with my reaction of so what? Legal P2P is nice for the provider because they don't need the infrastructure to host and serve the track files. I don't think it will provide the same easy experience to the consumer of a hosted music site. The article talks a lot about Qtrax - as I have blogged before - they are showing visual ads on a proprietary player. Is this type of ad worth any small sum to any advertiser? I don't think so.

Interesting tidbit from the article - Robin Kent, former CEO of SpiralFrog, has set up a shop to sell advertising for Qtrax.

Opening a New Front in Competition with Google

Google made another multi-billion dollar acquisition with its purchase Friday of DoubleClick. This acquisition furthers Google's already sizeable lead in Internet advertising. Microsoft, Yahoo! and AOL have all made competing with Google a major, if not the number one, strategic goal.

No question these firms need to compete with Google in the Internet advertising space, but how about opening up a new front? With the emergence of in-game-advertising, there aren't too many greenfield potential advertising media. There is, however, one and that is advertising supported music.

The data in the chart below is a couple of years old, but the potential size of the advertising supported music market is only getting bigger because people continue to listen to more recorded music.

Jupiter Endorses Advertising Supported Music

Back in January I blogged about Jupiter Analyst Mark Mulligan calling 2007 "The Year of Free" in regard to digital music. At that time, Mark mentioned that Jupiter was preparing a report on ad-supported digital music, which was published late last month. The report is called: Fighting Free with Free and is another endorsement for advertising supported music.

Mark Mulligan March 23, 2007, 10:20 AMFighting Free with Free
Jupiter has just published what we hope to be something of
a landmark report on the digital music market called The Future of Digital
Music: Fighting Free with Free (click
here for more details, or to see the report if you are a Jupiter
client).

This report tackles what we think will be one of the big issues
in digital music: Ad-Supported services. The report takes a look at what has
essentially gone wrong with music sales over the last few years and the roles
that technology and new behaviour have played in declining spend. It looks at
why paid digital services aren’t reaching mainstream audiences and then makes
the case for why Ad-Supported services have the potential to be a crucial
element of music industry online strategies (Note from Marc: It seems that Mark doesn't yet know that ad-supported music is not limited to on-line distribution. The technology exists to bring ad-supported music to consumers wherever, and however they listen to music - even when they are not online).

The report has extensive consumer and executive survey data to back up the findings, in addition to forecasts not just of music spending but also of free online music activity. If you want to know what the likes of Spiral Frog, Qtrax, Last.FM, Pandor and Ruckus will bring to the music industry, then take a look at this report.

Focus on Album Sales Decline is Misplaced

Digital Music News reports today on recorded music sales in the first quarter.

There are no surprises in the results:

Total album sales for the three month period topped 117.1 million, down
from 140.4 million recorded last year, while CD sales totaled 105.2 million,
down from 132.4 million. As expected, digital albums showed gains, moving
11.5 million units, a jump of 56.2 percent from year-ago totals of 7.4
million.

There is a lot of concern in the industry about the disintegration of the album. To make albums more attractive, iTunes introduced the Complete My Album program and is maintaining the $9.99 price for DRM free albums from EMI.

A recurring theme of posts on this blog is that the best way to make money from recorded music is to monetize the time people spend listening to recorded music. According to this view, sales of albums or individual tracks is irrelevant - all that matters is how much time people spend listening to music.

The industry needs to focus on getting people to listen to more music, in this environment this is much more important than getting people to buy more music.

Zune Subsidized by Subscription?

In a recent interview Jason Reindorp, Zune marketing director, floated the idea of subsidizing the purchase price of a Zune for users who sign a contract for the Zune Pass music subscription service. This cellphone model is so misplaced on the Zune, I find it hard to believe it was even floated as a trial balloon.

• A Zune costs about the same as a pretty high-end cellphone. A monthly Zune Pass costs $14.99, the monthly ARPU for a cellphone subscriber is about $50. In order to subsidize the cost of the Zune, MS would have to sign up Zune Pass subscribers for, like, five years. Not likely.
• Apple makes money from the iPod not iTunes. Since Apple is the only successful player in the digital music industry, why does MS think they could be successful by doing the opposite?

My suggestion to MS is to charge more for the Zune and give the music away for free. This can be done with ad-supported music technology that works only on the Zune. In this model, MS would make money on the hardware and the music.

DRM Free, Dollar Higher

I have posted several times about the issue of DRM free music. Again, my opinion is that what really matters to the consumer, and therefore what will really open up the market for digital music, is lower priced or free music, what I call "Dollar free".

So its already old news that EMI and Apple are offering DRM free tracks on iTunes. To me the real news is that Apple is raising prices on tracks to $1.29. Yes, this price increase is only on the DRM free tracks but I believe that offering DRM free tracks is really a smoke screen to raise per-track prices.

EMI, Apple and everyone else knows that every track ever released is already available on P2P networks, so eliminating something that isn't effective in preventing piracy is really no big deal. I also don't believe that the issue of interoperability is really a big deal. My wife and son have iPods. My wife wants to share some of her music purchased from iTunes with my son. The DRM restrictions will allow this, but she can't do it because iTunes will only copy complete libraries to other iPods.

So, in the end, I really believe that lowering the DRM restrictions is really about raising the price of digital music, which will shrink the shrinking music market, not expand it. Every media platform - TV, Radio, Internet - grew by offering free content. This is how the cellphone will grow as a media platform - a survey released this week shows that people prefer free advertising supported content for their cellphones over paid content for the phone.

Cellphones and Advertising Supported Music; A Natural Match

I think that the cellphone is the most promising platform for advertising supported music. I believe this for several reasons:

1. The cellphone is not the Third Screen, it is the Second Headphone - If you follow the mobile industry you are constantly hearing about how the cellphone is the third screen. Billions of dollars are being spent to bring Internet, TV and video to the cellphone. I don't really understand this. The cellphone is a tiny screen and mobile and video have never worked together. On the other hand, the cellphone is an ideal audio platform, after all it was designed for and is used primarily for talking. Thus the cellphone is an ideal device for new music applications.
2. Music enabled cellphones are becoming ubiquitous - Music-enabled phone sales doubled over the course of 2006. In the first quarter, they accounted for 16 percent of sales, rising to 32 percent in fourth quarter according to data from NPD.
3. Music on the cellphone is waiting for a dominant business model - Currently, those who listen to music on their cellphone use it as a conventional MP3 player, they sideload music from their collection on to the phone. This use does not take advantage of the unique music applications enabled by the phone's wireless connectivity. An advertising supported music application can take advantage of this wireless connectivity to offer a music experience that is not possible on other music players.
4. Cellphone music listeners understand the value proposition of free content in exchange for exposure to ads - More than three-quarters of consumers who listen to audio content via their cellphone say they would prefer free, ad-supported content to subscription or fee-based services, according to a study released yesterday.

To me ad-supported music on cellphones just makes perfect sense - a new medium made possible by a new technology platform.