Napster's (Strange?) Take on Ad-Support

PC World.com published an article earlier this week on mobile music that featured some quotes from William Pence, chief technology officer at Napster.

I can't tell from the following quote if Pence was misquoted or if his logic is upside down:

In addition, ad-supported models are coming as well, Pence said. The ads
will probably target "older professionals," who are the predominant users of
paid digital music services. "College students still do not pay for music, and
the people who do pay are older professionals who have more money than time,"
Pence said.

If older professionals pay for music, and college students don't, shouldn't the ads target the college students?

last.fm Purchase is Ad-Funded Music Play

Happened just a few days ago, but it is old news in the blogosphere, that CBS bought last.fm for $280 million cash.

I am not really clear about the rationale behind the purchase. Om Malik just put up an interesting post that speculates the purchase is a way for CBS to move its flagging terrestrial radio division further onto the Internet.

In this WSJ piece, Les Moonves describes the acquisition as: "...adding a next-generation platform to allow audiences to communicate with us and each other as never before." I don't really know what that means.

CBS is a company that sells advertising inventory, be it on TV, radio or billboards. For me the last.fm purchase can really only explained as the acquisition of new ad inventory. Thus, the last.fm purchase is an advertising supported music play.

The inventory supplied by last.fm has potential in its current streaming incarnation. Hopefully, CBS will realize that the real potential in advertising supported music comes when it is downloaded and tracks are played on demand.

Ad-Supported Mobile Music Projection

Earlier this month eMarketer published a report entitled: Mobile Music: Mixing it Up. The price of the report is a bit too rich for me, but the company released a nice summary.

Included in the summary is the obligatory revenue projection chart. What caught my eye about this chart is that projected revenues from ad-supported mobile music are broken out:

I don't put too much stock in revenue projections, but I am encouraged that the report authors see the opportunity for ad-supported mobile music. I have written previously about the natural match between ad-supported music and cellphones (check out this post and this post).

One question that isn't addressed in the report release, but may be in the report itself, is what form will predominate in ad-supported mobile music: streaming, OTA downloads, sideloads, subscription?

Another Plea for Focusing on TSL

The New York Times provides generally excellent coverage of the recorded music business. Yesterday the paper published an article by Jeff Leeds describing what the industry is doing to to try to make up for plummeting CD sales.

Revenue strategies discussed in the article include; more focus on music publishing, merchandise sales and releasing CDs through alternative sources like Starbucks.

The article misses the key dynamic of the current recorded music market: people are listening to more recorded music than ever. Therefore, the new way to monetize the recorded music market is to monetize the time people spend listening to recorded music.

TV and radio - together a $75 billion advertising market in the US alone - teach that TSL is monetized through advertising. My mission is to get the recorded music industry to heed this lesson.

A Couple of News Items

A couple of news items on advertising supported downloaded music companies:

1. Ruckus raised a second round of $10 million. Apparently they have raised over $37 million in funding. Coolfer has this to say: "Ad-supported online music service Ruckus, the most miserable music service I have ever seen, has landed $10 million in funding. Well...it obviously needs it."
   


2. It seems that a new advertising supported downloaded music service has launched. Here is the description of the service according to the press release: "Digicorp, Inc. (OTCBB:DGCO) announced today that it is launching a new advertising service for online music to be delivered via its web portal Beat9.com. The new service will utilize Digicorp’s ViraCast technology to dynamically insert advertising into music files wherever and however they travel across the Internet. Digicorp offers both music labels and advertisers an immediate opportunity to tap into the power of peer-to-peer (P2P) file sharing, which accounts for 60% of all web traffic." I am not too impressed but I will hold off passing judgement until I learn more.

TSL, MP3 Players and Radio

Earlier this week I wrote about a study published by Bridge Ratings and commented that they produce really useful data on new media, primarily as it affects terrestrial radio. Well, they published another great study this week.

The focus of this study is time spent listening to radio and competitive media. Below is a graphic from the study:

The chart shows TSL for different media for users of that medium. Except for MP3 players, all other media are a radio variant and all offer advertising supported music.

I want to make a couple of points from this data:

1. The average MP3 player user listens more than 14 hours per week, which is a lot. However, the study also found that the 13-24 year old age group spends over 21 hours a week listening to their MP3 players - more than any other medium on this list.



2. MP3 players make up the only medium in the chart that lets the listener pick his own music. Given the choice between ad-supported music that someone else programs (radio variants) or ad-supported music the listener picks (MP3 player with ad-supported downloaded music), what choice do you think the listener will make?

Advertising supported downloaded music gives the listener much more control than ad-supported "streaming" music from radio. The radio industry needs to wake up and realize that they face a huge threat from advertising supported downloaded music.

Digital Advertising at Microsoft

Not sure if I have stated this before: I believe that Microsoft is in an ideal position to capitalize on advertising supported downloaded music. With the Zune, Windows Mobile and Windows Media Player, they have the ecosystem to deliver ad-supported music to all platforms. Now they are very focused on getting revenue from advertising.

Yusuf Mehdi, is the chief advertising strategist for Microsoft. He did an interview at the Goldman Sachs Eighth Annual Internet Conference today. The interview is worth listening to for an overview of how Microsoft looks at its advertising business.

Mehdi says that Microsoft has all the pieces in place for delivering digital advertising through all media yet there was no discussion of advertising supported downloaded music. We still have a long way to go to raise awareness.

Thoughts on Terrestrial Radio

Terrestrial radio is the granddaddy of advertising supported music, and is the medium that is most affected by the growth of digital music. Bridge Ratings regularly produces excellent studies chronicling the effects of new media on radio.

Last week Bridge published a great overview report on the effect of digital music on radio called "The 10,000 Foot View". The bottom line is that terrestrial radio is losing a lot of listeners to new media. Here is one chart from the report:

When not involved in financial engineering that does nothing to help them retain listeners (read Clear Channel going private) the industry is making some attempts (which I can only describe as feeble) to arrest this slide. Yesterday, for example, Clear Channel announced a "free" program for cell phones users to text-message (charges for texting still apply) radio stations from their cell phones to make song requests, get real-time traffic reports and access other information.

In the midst of this market turmoil, terrestrial radio is now facing growing demands, from the recording industry and webcasters, to pay performance royalties. By federal statute, radio stations are only required to pay publishing royalties. The law is quite old, passed when radio was in its infancy, and I agree that it is time to level the playing field. Of course, if terrestrial radio is required to pay the level of royalties that webcasters are being required to pay, it will kill music radio.

Terrestrial radio is a $20 billion advertising medium. Most of this advertising is on music radio stations. As the audience for terrestrial radio erodes, these advertisers will not stop advertising. Putting their dollars into radio shows that they like to advertise around music. Moving these dollars to advertising supported downloaded music should be a natural shift.

Comment on the Coke-iTunes Giveaway

Coke and iTunes are getting together again, this time giving away 2 billion songs in Europe. In the summer of 2006, Coke and iTunes gave away 70 million free songs. The new promotion - consumers will redeem codes on specially marked Coke products for downloads via Apple's iTunes Music Store - is almost 30x bigger. This promotion must be costing Coca-Cola a fortune: if iTunes is charging nothing (hoping to make money on purchases from traffic brought to site) but still paying about 70 cents in royalties, the cost to Coca-Cola of music alone will be close to $1.5 billion.

In this promotion Coke gets associated with the music, and gets value, only when the music is downloaded. There is no association (except in the receding memory of the listener) between Coke and the track each time the track is heard. In a true advertising supported downloaded music model, the brand association would be present whenever music is listened to.

If Coke is willing to spend a billion or so for a one-time association with free music, I don't think it is a stretch to believe that they would be strong supporters of ad-supported downloaded music. I can't think of a better advertiser to get this new medium started.

The Next Advertising Frontier

So Microsoft just announced its purchase of Internet advertising firm aQuantive (for an 85% premium). Add this to the transactons in the space over the last few weeks: Yahoo bought Right Media, AOL got ADTECH, Google took DoubleClick, and WPP Group purchased 24/7 Real Media.


I am sure there are other Internet advertising firms still out there for the picking but, by and large, the consolidation in this industry has happened. Now the acquirers must absorb and integrate the new buys. It is now time for the players to turn their development efforts to the next new advertising medium which is...advertising on cellphones.



An ideal approach to advertising on cellphones is ad-supported downloaded music. Check out this post from earlier in the week and this post from last month.

DRM Free, Dollar Higher Redux

Everyone probably knows by now that Amazon announced that it is starting a digital music store that will sell only DRM-free tracks.

In light of this announcement, and all the pronouncements that DRM-free tracks will save the recorded music industry, I would like to republish this post from last month:

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.

Music and Advertising on Cellphones

Last month I published a post in which I laid out why I thought that the cellphone was an ideal platform for advertising supported downloaded music.

There have been some recent developments in the area of music on cellphones that I would like to comment on:

1. Mark Mulligan of Jupiter Research covers the digital music space and writes in his blog that handset manufacturers are making big moves into music, and if consumers just sideload music to their phones they may shut out operators from this space. Mark is right under the scenario he puts forward. However, the outlook is great for operators if they have an advertising supported music solution. The operators would control this space since it is the network that makes real-time ad delivery possible.
2. Motorola announced its "media monster" -the Moto Z8 - earlier this week. The phone has OMAP2420 and ARM 11 processors. Nobody knows this yet (except the people at Lirix, Inc.) but dual processors open up new, mind blowing ad formats for downloaded music.
3. In the last couple of weeks buying mobile advertising companies has been the thing to do- Microsoft bought ScreenTonic and AOL purchased Third Screen Media. I think its great that these bigs recognize the potential of mobile marketing but I don't think they really understand this new medium. The cellphone is an audio device but Screen Tonic and Third Screen serve visual ads. Downloaded music is the best way to deliver audio ads to the cellphone user.
4. Virgin has announced a new music information service called Headliner: "This unique and personal downloadable mobile application delivers a database of thousands of artists and bands from every music genre, upcoming concert tour dates, music festival coverage, and albums and shows directly to the mobile phone." Subscribers are charged $2.49 per month for the service and pay regular SMS charges for each message they receive from Headliner. As Headliner seems like an ad delivery service, kudos to Virgin for being able to charge for it. The Headliner service points to a larger issue: how many $2.49/month services can cellular operators get their subscribers to pay for? Headliner seems like an ideal free-to-consumer service funded by advertisers. I will be watching Headliner's take-up, which I predict will be insignificant.

Microsoft Takes a Plane and Misses the Boat

Microsoft will run its own factory in China to build the Zune. This is unbelievable to me. The Zune is fighting for its life and I can't think of one competitive advantage Microsoft gains by building the Zune on its own.

Microsoft builds the Xbox itself, and it will point to the success of the Xbox to justify their Zune factory. This is a red herring. The innards of a gaming console are critical to what the console can do and convey significant competitive advantage.

An MP3 player is, lets face it, a commodity electronic device. Most manufacturers use the same components from the same source; memory, screen and decoder chip. I can think of only one hardware component that conveys a competitive advantage to an MP3 player and that is the iPod scroll wheel. UI software gives an MP3 player a competitive advantage and you don't need a factory to create that.

Microsoft will be devoting time, energy and dollars to this factory that should be devoted to developing a better, more desirable Zune. How about an advertising supported download capability? That would be a unique feature and would drive sales through the roof (see this post).

I guess Microsoft execs took a plane to China, but missed the boat to market success (at least for now).

Labels and Ad Revenue - NY Post Article

The New York Post published an article today about how the recording industry is beginning to turn to advertising for revenue.

Record Labels Take Spin at Ad Biz, by Peter Lauria, isn't particularly interesting - the advertising example it gives is how record companies are putting banner ads on their websites.

Still, once the labels get a good taste of ad revenue they will inexorably move to ad-supported downloaded music because that is where the big money is (lots of inventory and high CPMs).

Music Analogue to Projected Death of Paid Video Downloads

A new report from Forrester Research, Paid Video Downloads Give Way To Ad Models, predicts that the availability of advertising supported video downloads, will kill the paid video download market.

An excerpt from the report:

An all-star cast of players premiered online video download services in early
2007. The question of who will dominate is moot since there is no long-term
market to master. Sure, a small market is coming: Current downloaders are media
addicts who will spend aggressively in 2007, driving revenues up to $279 million
from just $98 million last year. The paid download market, however, is
ultimately a dead end. To attract mainstream viewers, media strategy executives must develop new business models and delivery mechanisms to make video downloading ad-supported and geek free.

I haven't read the report (can't afford it), but I presume that the analysis is based on the historical precedent that ad-supported offerings dominate all media.

The dynamics are no different for recorded music and, as the enabling technologies and business models proliferate, ad-supported downloaded music will kill the paid music download market.

Spiralfrog Canadian Beta

Spiralfrog is running a beta test for users in Canada only. A Canadian blogger has posted a review of the service.

You should read the post, but here are a few things that are noted about the Spiralfrog service:

• You need to log-in to the Spiralfrog website every 30 days to "renew" membership.
• At each "renewal" you need to fill out a multi-page questionnaire.
• You can download only one song at a time, each download is extended (other sources have reported 90 seconds per download).
• Within 60 seconds of the download completing you need to answer a question to verify that you are present, and theoretically have watched the ad that played during the download.

I think advertisers will have many problems with this model (see my earlier post). But let's focus on users here. This is a classic example of where the perceived demands of business constituencies have been placed above the natural behavior of consumers.

Spiralfrog is testing a service with a terrible user experience. Therefore, users won't use it. Advertisers demand accountability and record labels want to preserve the sale of digital tracks, but Spiralfrog has perceived and implemented these needs poorly.

Nobody will have their needs meet because this implementation of the Spiralfrog service will tank.

Ad Supported Music Ignored by Those Who Need it Most

Last week Microsoft held the MIX07 conference in Las Vegas. MIX07 is a conference focused on developing, designing and business applications for Microsoft technologies.

All of the sessions from the conference are available on the Internet. One of the panels that I listened to is called: "Great User Experiences for Ad-Supported Content". The panel talked a lot about ad-supported video. They also talked about subscription downloaded music but never broached the subject of advertising supported downloaded music (45:30 minutes in).

The panel also talked a lot about "thinking out of the box", but I didn't hear much "out of the box thinking" from them.

Ad-Funded Music is The Future

Back in April and January I wrote about Jupiter Research report on advertising supported music entitled: The Future of Digital Music, Fighting Free With Free.

I really want to read the report but it is priced at $1,500, which is too steep for me. Luckily, Billboard.biz did a nice article yesterday that reprints some useful information from the report.

Check it out here.

I Like What SpotDJ is Doing

I came across an interesting company called SpotDJ. They have all small program that works with iTunes to insert UGC audio clips between tracks played out of iTunes.

Here is how the service is explained on their site:

Who or What is SpotDJ?
SpotDJ is a service that adds a something new and, frankly, !*#$@ing awesome to your music listening experience. You listen to your music just like normal, but every once in a while, SpotDJ will play a “spot”between songs. A spot is simply a short snippet of audio about the song you were listening to. It could be basic information about the song, a story about the artist, an interpretation of the song, news, gossip,
recommendations, whatever!

A SpotDJ is also a person — and by using SpotDJ you become a SpotDJ. All of
the spots on SpotDJ are created by our users. So if you’re listening to a song
and have something to say about it, just flip to SpotDJ, click the “Spot this
Song!” button and record your spot. Other SpotDJs listening to that song will
hear your comments at the end of the song.

For now the spots are UGC as described but they could easily be audio ads. My guess is that this is the company's plan, but I won't ad them to the list of ad-supported music companies until this happens.

I believe that audio ads integrated with music will become the standard model for advertising supported music. SpotDJ doesn't have all the pieces yet, but they are on the right track.

We Can't Let the Ad-Supported Music Industry Get TiVo'd

I read several articles this morning that got me thinking about the issue of skipping or fast forwarding through the advertisements that appear with downloaded music and pay for the music.

(Note: this pre-supposes a model like radio or TV where the ads are in the same format as the content and integrated with the content. This is not the model that most of the ad-supported music companies are experimenting with, but it is the only one that will work. The company that has the technology for this approach is Lirix, Inc.)

The biggest battleground in the fight between advertisers and ad-skippers is DVR'd television. The issue is so significant that the "holy grail" for advertisers is to make commercials that are TiVo proof. Neilsen is starting to measure commercial viewing.

A new study suggests that fast forwarding through commercials on a DVR is better for the advertiser than flipping channels during commercials, because at least the viewer has to interact with the commercial in order to fast forward through it. Still, I think advertisers and media people would agree that they would prefer a world where the audience couldn't skip or fast forward through ads.

The Wall Street Journal reports that ABC is seeking to create such a world for the content it puts on cable video on-demand systems. Sister companies ABC and ESPN cut a deal with the Cox cable company that allows the operator to put its shows on its on-demand service with ads that cannot be fast forwarded through.

Getting back to ad-supported music, I advocate a system where the technology does not allow listeners to skip or fast forward through ads. I say this, firstly, because this preserves the implicit agreement between the advertiser and the listener - we'll pay for your music but you have to listen to our ad.

Secondly, the ad-supported music industry is just starting. The industry needs to think ahead and build in the features - at the beginning - that success will require. Consumers are likely to accept not having the ability to skip or fast forward ads if that is how it has always been. If we give consumers this control - and then try to take it away - there will be a revolt and ad skipping and fast forwarding will become permanent features of the ad-supported music ecosystem.

If we let that happen we will regret it.

iTunes Prices Going Up? Duh..

Earlier this year when Steve Jobs posted his open letter Thoughts on Music, advocating DRM free music, I wrote that Jobs's endorsement of DRM free music was really just a cover for raising prices on iTunes.

Apple is negotiating its licenses with the labels this month. In prior negotiations, Jobs staunchly defended the 99-cent per track price point. The Washington Post reports today that Jobs is open to higher per track prices so long as they are sold without DRM.

I have no doubt that my prediction about iTunes pricing will soon be proven correct. In fact, I will make a bolder prediction that the new pricing ceiling (as the market leader, always set by iTunes) will be $1.29 by the end of the year.

This price point will be justified by the removal of DRM, but for how long will consumers buy this? What is the cover story that will be used for the next price increase?

This whole DRM removal/price increase thing is really shortsighted. It is an unsustainable response to the new world of digital music when what the industry needs is a sustainable adaptation.

Ballmer's No. 1 Regret in Business - Repeat?

In a recent USA Today interview, Steve Ballmer expressed his number 1 regret in business:

It doesn't mean we always do everything right. Really understanding the power of advertising as an Internet business model we came to later than I wish we had. That's the No. 1 thing I regret. We underinvested in some opportunities for a while.

And now it is being reported that Microsoft is back in talks to acquire Yahoo! If these re-energized talks were initiated by Google's DoubleClick acquisition (at it would be hard to believe if they weren't), then Microsoft seems to be late again.

Let me suggest an emerging advertising medium that Microsoft can lead in - you guessed it; advertising supported music. With Windows Media Player, Zune, Xbox, adCenter etc., Microsoft has the ecosystem in place to drive this new medium. Google does not.

Planned Spin-Off of Qtrax

In a press release today Brilliant Technologies, a public company, announced that it planned a spin-off of Qtrax into a separate company. Not sure what this is all about but perhaps they believe they can better capitalize - raise money/sell shares - on the anticipation around advertising supported music if Qtrax is an independent company and easier for investors to find and buy.

Another tidbit from the press release is that Qtrax plans to launch in September.

Making Piracy Irrelevant

Grooveshark is a start-up in private beta. They have a business model to legitamize P2P where consumers earn credits for sharing and purchase music they want from the network.

The model is not ad-supported so I am not really interested in it. I am writing about it because I read an interview on zeropaid with someone from the company whose comments about piracy point up an important characteristic of advertising supported music:

How our users originally acquired their music won't matter to us; all that
matters to us is that the copyright holders get appropriately paid for their
work within our marketplace. We are embracing the power of p2p while enabling
copyright compensation to occur. In a sense, we are legitimizing files that were
once deemed "pirated"—once a file enters Grooveshark, any transactions of that
file within our system will be legal, paid for, and will compensate the
copyright holders.

This is well said and describes what can happen when a pirated track plays in an ad-support enabled ecosystem.

I think the advertising supported model is better than Grooveshark's P2P system because it monetizes the time people spend listening rather than the transaction. (Fundamentally, the Grooveshark model is just another way to purchase music.)

Grooveshark and ad-supported music models work against piracy in the most effective way - they don't fight it; they co-opt it and thereby make it irrelevant.

Blogosphere Reaction to We7 Announcement

The blogosphere is reacting to the We7 launch announcement. As expected most of the comments are denouncements of the advertising supported music model. I ignore these comments not because I am an advocate of the model, but because I don't believe that bloggers or blog commenters, represent the mainstream music consumer.

I found two interesting critiques of the We7 approach. Cnet UK focused on the poor user experience of an ad before every track. I talked about this in my post also.

Comments to a post in The Tech Report, focused on how easy it would be to strip out the ads with readily available software. I hadn't thought about that, but the criticism is on target.

The other thing that I forgot to mention in my post yesterday is that the economics behind We7 can't work. A 10-second ad cannot command a high enough price to pay royalties, costs of doing business and a profit. I have seen some suggestion that after four weeks of downloading the ad-embedded track, the user can download an ad-free track. This can't be right because it is economically impossible.