Recorded Music - Hot or Not?

Om Malik has a good post about the "self-destruction" and re-invention of hotornot. The crux of the story is that hotornot had a steady profitable revenue stream from a combination of advertising and subscription dollars. Several months ago the founders decided to go to an all free advertising supported site.

The move to free doubled page views and the company has growth opportunities that the ad/subscription model didn't afford it. Destruction and re-invention re-invigorated the company.

Looking at the recorded music industry, hypebot reports this comment from Edgar Bronfman:

"This decline is steeper than we expected, but in some ways it means we'll get
to the bottom faster, and after that there's growth,"

There will be growth if the recorded music industry properly re-invents itself after its forced destruction. The lesson it can learn from hotornot is that re-inventing itself as free and ad-supported will bring greater growth and revenue potential.

iPhone Good for Ad-Supported Music

I wrote yesterday, and a number of times previously, about the importance of the cellphone to advertising supported music. I realized this morning that the iPhone is coming out tomorrow and I have not commented about its impact on ad-supported music.

The buzz on the iPhone has been ferocious and influential reviewers have praised it. My belief is that the iPhone will be a niche product popular only among tech and Apple aficionados. The device is too cutting edge and too expensive to sell a lot in cellphone terms.

I think it is apt to compare the iPhone to designer fashions - designers don't sell a lot of product but what they do influences the fashion of designs that do sell a lot of product. Some of the features of the iPhone will be adopted by the Nokias and Samsungs for their mass market phones.

The music functionality of the iPhone will further the uptake of music phones that I wrote about yesterday. This is a good thing for ad-supported music and in this way the iPhone is good for ad-supported music.

What's Good for Music Phones is Good for Ad-Supported Music

Some interesting data points regarding music on cellphones:

1. According to JupiterResearch there will be 27.9 million music phones in use in the US this year.
2. Groove Mobile has struck a deal with Vodafone UK to purchase data capacity at wholesale so that it can offer OTA tracks at a price that includes the data charge. This way buyers don't need to have a data plan.
3. The AP reports that there has been an across-the-board slowdown in sales of MP3 players. Analysts say that interest in music phones is a factor in this slowdown.

The cellphone is an ideal platform for advertising supported music. The growing strength of the music phone bodes well for the success of ad-supported music.





Data charges http://www.mobile-ent.biz/news/27757/Groove-to-widen-D2C-offering

Qtrax Signs All Majors; October Launch

Yesterday, The New York Post published an article about Qtrax. There are three newsworthy items in the article: 1. Qtrax will launch in October; 2. All four majors have licensed their catalogs to the service; 3. The company will be merged into a public shell.

That Qtrax has signed all four majors is great news for the emerging advertising supported music industry. Big problems remain for them, however. Their service is just not that compelling to users (listen to each track up to five times on Internet connected computer) and their ad formats (visual ads in proprietary MP3 player) are too low value to sustain the model.

Thus, I am afraid that Qtrax will be the pioneer that gets the arrow in the back while paving the way for the successful settlers that follow.

Even a $995 Report Can't Make the Unknowable Known

PriceWaterhouseCoopers just published their research study; Global Entertainment and Media Outlook: 2007-2011. They have a section on recorded music and a publicly available summary.

In the past I have quoted research projections when they support my position. Recently, however, I have come to realize that market projections are just inherently unreliable and of little value in making business decisions.

Case in point regarding this study: ArsTechnica reports that PWC predicts video game spending will surpass spending on recorded music in the US as early as this year. Perhaps this will happen, but I am concerned about the information the analysts are using to make their projections.

In their video game spending projection, the PWC analysts include spending on advertising in video games. According to ArsTechnica:

PwC sees in-game advertising as a prime area for growth. While in-game
advertising generated $80 million in 2006, the firm estimates that it could grow
as high as $950 million in 2011. PwC's Marcel Fenez noted, however, that the
$950 million estimate could in fact be a conservative one and that growth in the
area could produce even larger revenues in the future due to the changing
audience of the gaming industry.

In their recorded music summary, at least, the PWC analysts make no mention of advertising supported music. This is a huge gap in their analysis. A sophisticated examination of the economics of advertising supported music would show that this medium, with its high-value, high-volume advertising, has the potential to dwarf in-game advertising.

An analyst can only analyze what they know. Clayton Christensen, HBS Professor and author of The Innovator's Dilemma put it this way: "Markets that do not exist cannot be analyzed. Not only are the market applications for disruptive technologies unknown at the time of their development, they are unknowable."

For now, this describes the market for advertising supported music.

Rolling Stone Predicts the Future of Music

Rolling Stone Magazine has been running a special report on the decline of the recorded music business. Definitely worth a read.

The latest installment includes five theories on the future of the recorded music business. The first theory is advertising support:

Theory 1: Ad-Supported Music
Yahoo! Music General Manager Ian Rogers says all music will be free - paid for by ads - and any song by any artist will be accessible from anywhere in the world.

Of course I agree that ad-supported music will be a big part of the recorded music business but I don't believe all recorded music will be advertising supported. Probably just editorial hyperbole.

Web 2.0 - Music X.0?

Jadam Khan at the rocketsurgeon blog just put up a terrific directory of Music 2.0 companies. The directory includes several ad-supported music companies (Jadam - I will suggest some others).

This directory is an important and worthwhile effort. My only criticism is the 2.0 designation. Recorded music has been around a lot longer than the Internet and, I believe, deserves a higher release number, since new Internet models are being labeled 2.0.

Here is my take on the history of the recorded music industry organized into release levels:

Music 1.0 Vinyl
Music 2.0 Music Radio
Music 3.0 Portable Media - Cassette, 8-track, CD
Music 4.0 Downloadable Digital Enabled Business Models

So we are now in Music 4.0 which is defined not by the format, like previous releases, but rather by the business models that downloadable digital music makes possible - and destroys.

We7+V2 and The Algebra of Ad-Funded Music

We7 just announced that V2 Records (set up by Richard Branson after he sold Virgin) will provide its full catalog for their ad-funded download service.

This is good news for the advertising supported downloaded music movement. No surprise that V2 is not a major label and Branson has always been an innovator.

I remain wary, however, of the We7 service. From the consumer's perspective, an ad before every track will get old fast. The advertiser is concerned with targeting and tracking. We7 does OK with targeting by "grafting" an ad to the track being downloaded based on the demographic data supplied by the subscriber.

I haven't seen a description or analysis of how We7 handles tracking. Since We7 tracks are DRM-free, I can't envision a reliable and timely tracking mechanism. This will definitely limit appeal to advertisers.

Bottom line - the successful advertising supported music download technologies will: respect the user experience and provide targeting and tracking solutions at least as effective as competing advertising media.

I Recommend You Look Right Under Your Nose

Apparently Sony is closing Connect, its digital music download service. To me, this is further evidence that it is very difficult to make money selling digital music. The volume and margins just aren't there.

Looking elsewhere in the digital music landscape, there is a lot of activity in the music recommendation arena: CBS bought last.fm, mystrands received a new $25 million investment, lala.com is planning to spend $140 million to give away music. If people aren't buying the recommended recorded music, how will these companies make money?

It is easy to blame the recorded music industry for not taking the initiatives necessary to save themselves (I do this a lot). However, I am beginning to see that they are not getting much help from the tech or media industries. The solutions everyone has put forward to save music are pretty lame.

We don't need to reinvent the wheel here. Complicated new business models are not required. Identify the ingredient that drives growth, revenue and profitability in every other medium and apply it in the right way (this is where the tech community can contribute) to recorded music.

That ingredient, of course, is advertising.

Time For Pay For Play - In Reverse

There is a growing movement to force terrestrial radio (TR) to pay performance royalties. The movement is spearheaded by the musicFIRST coalition. The coalition was launched last week "to compensate artists", but it is pretty clear that this is an effort by the RIAA to compensate recording companies.

Still, I agree with the movement that TR should pay performance royalties. TR is statutorily exempt from paying royalties. This exemption went on the books in the 1920s when radio was in its infancy and needed financial help to become viable. In the ensuing years the exemption was supported by both the radio and recording industries because radio play really did drive record sales.

Well, the music industry has changed dramatically and this exemption must also be changed. TR is now an established industry and radio play no longer drives recorded music sales like it used to. In fact, consumers discover music from online sources almost as frequently as they do from TR.

It has been estimated that if TR loses this exemption they will be on the hook for about $7 billion in additional royalties annually. That sounds right to me. TR is no different than online music streaming services. Losing the exemption would put TR on a level playing field with other advertising supported music services.

Losing this exemption won't kill TR but it will re-shape the economics and structure of the medium just as the rest of the music industry is being re-shaped.

Logic is Leaving the Station

It is a familiar refrain to readers of this blog that I believe the cellphone is the ideal device for advertising supported music (here with more links in the post). Omnifone announced its MusicStation service yesterday, which is a European music subscription service for cellphones with an impressive list of partners.

Blackfriar Communications (a marketing communications firm) has posted an accurate short, but devastating, critique of MusicStation on its blog. Their most lethal point:

The €143.40/year fee is a whole lot more than the €5.93/year consumers pay to
buy tracks. MusicStation's own data says that consumers buy six singles a year,
yet MusicStation's €2.99/week amounts to a yearly fee of €143.40, or 26 times
the average annual cost to buy the music. Economically, the MusicStation value
proposition doesn't make sense, especially since consumers would no longer have
access to their music if they stopped paying. And MusicStation is notably silent
on the fact that most consumers already own a lot of digital music, which
subscribers end up paying to play on their phone.

Young cellphone subscribers will never pay for this service (as the Amp'd bankruptcy has taught us - they might sign up, but they won't pay).

I came across a post on the overvu blog (another consulting firm), which doesn't address MusicStation specifically, but does address the issue of cost:

while the subscription model hasn't caught on yet, the day will come when
someone comes up with a model that offers free access to a couple of million
tracks on a subscription basis - then watch it fly.

Ad-supported music subscription services are the future.

Carriers Must Let Go to Grow

The Wall Street Journal has an article today about the tensions between carriers and cellphone manufacturers over who controls new features and the revenues that they generate.



For me, the takeaway from the article is that the carriers still want to control all features used by, and revenues from, their subscribers. This is really holding back the cellular industry because users don't care who earns the money from what they want to do and some things are better controlled by entities other than the carrier.



In time, ad-supported downloaded music will be one of the principal applications on cellphones. This application can be implemented without the carriers. I hope that their "control freakishness" doesn't choke the growth of this application or keep them from participating in it.

It's the MP3 Player Stupid!

Terrestrial radio is a huge advertising supported music industry, the biggest in fact. The New York Times published an article yesterday about how terrestrial radio stations are beginning to focus on the Internet.

I generally ignore radio in this blog because we are focused on ad-supported downloaded music. To me, whether ad-supported music is broadcast or streamed is irrelevant, it is still radio and the user experience is the same.

So, the move to the Internet by terrestrial radio as is of little interest to me. What I did find interesting in the article is this quote: "Confronted by a slow erosion of listeners who are turning to iPods, podcasts and other sources for entertainment, the radio corporations are trying to merge their over-the-air music and D.J. chatter with the Web..."

People moving their TSL to recorded music on a portable MP3 player, has been reported to be the number one reason for terrestrial radio's declining listenership. So shouldn't the radio companies concentrate on getting onto the MP3 player more than getting on the Internet? The technology exists to bring the radio experience of ad-supported music to the MP3 player, with the added benefit that listeners control the music that is played.

Things will get interesting when radio starts to focus on their real competitor.

AD SPPRTD RCRD LBL

The New York Post published an article yesterday disclosing that Peter Rojas, founder of engadget, would start an on-line only, advertising supported record label (called RCRD LBL).

From the Post article: "According to a preliminary business outline obtained by The Post, the venture offers advertisers three different levels of sponsorship packages that feature a combination of contest, podcast and "single of the week" sponsorships as well as advertising plug-ins that run over the course of several months."

Of course I think this venture is a move in the right direction, but I am not too excited by any streaming music service, even if ad-supported. Recorded music will be saved only through advertising supported downloaded music. Getting ad support to downloaded music is critical because that is how people listen to their choice of music - from memory on a computer or portable MP3 player.

Real ad-supported downloaded music hasn't been offered yet because the technology and application are less obvious than streaming services, and few firms have figured them out. Lirix is one that has, WE7, Napster, SpiralFrog, etc. have not.

Out With the New, In With the Old

The continuous decline in CD sales is not news to the readers of this blog. Despite huge growth in digital downloads the recorded music industry is shrinking (look at the RIAA data).

A few years ago the record industry was all excited about ringtones. There were lots of start-ups and VC investment. In 2005 Yankee Group forecast that worldwide ringtone revenues would reach $28 billion. Now it looks like this market has peaked (at around $7 billion worldwide). Ringtone revenues in the U.S. were projected to reach $1 billion in 2010. BMI is now projecting that ringtone revenues will shrink about 10% this year to $550 million in 2007.

Similarly, digital downloads have been touted as the industry savior although growth in this area will never make up for the sales decline in CDs. Plus the growth of downloads, as represented by iTunes which represents the bulk of the sector, is declining.

If the recorded music industry wants to make money they need to stop looking for the next new thing and embrace an old thing - advertising support. Ad-supported content has fueled the growth of every major media. It will do the same for recorded music if implemented in the proper way.

Cellphone Users Will Accept Ads for Free Audio

I have written a number of times that the cellphone is the natural platform for advertising supported music (here, here and here).

More evidence that the traditional value proposition of "free content in exchange for ad exposure" will work for recorded music. Mobile audio listeners will listen to ads in exchange for free content, according to the "Mobile Audio Media Study," conducted in the fourth quarter of 2006 by Arbitron.

Some Recent Articles Worth Reading

I have come across a few recently published articles that are either on the subject of advertising supported music, or relevant to advertising supported music:

1. BBC News - This article discusses advertising supported music. The article contains this quote from the managing director of Yahoo! music Europe: "If someone is currently listening to music for free, you are going to struggle to make them listen through an advertisement. "Audio adverts added to audio content is not going to work." It is clear to me that the "experts" quoted in these articles have not thought very deeply, nor creatively, about how ad-supported music can be implemented.
2. Red Orbit - This article focuses on Blyk, the free ad-funded mobile service launching in Europe, and the opportunity for advertising funded content on mobile phones. Surveys show that young people are willing to accept ads in exchange for free content. In light of the Amp'd bankruptcy and the revelation that half its subscribers didn't pay their bills (see yesterday's post), I think Blyk's approach has a lot of merit.
3. New York Business - The subject of this article is the general sorry state of the recorded music business. Reading this article makes me think of buggy whips.

Amp'd Bankruptcy Shows Young People Won't Pay for Content

By now, everybody knows that Amp'd Mobile has filed for Chapter 11 bankruptcy protection. There had always been something about Amp'd that threatened my world view. A detail in their bankruptcy filing assures me that my world view is safe.

Amp'd had been reporting ARPU of $100, highest in the industry. A large portion of this revenue came from content downloaded to subscribers' phones. Amp'd catered to the 18-24 demographic. I always thought that this demographic wouldn't pay for content, and even if they would, they didn't have the money. Amp'd's reported ARPU figures shook this belief.

Well it turns out that I don't have to worry: young people will download a lot of content, but they won't pay for it. Business Week reported that the bankruptcy filing contains this nugget: 80,000 out of Amp'd's 175,000 subscribers weren't paying their bills.

Lessons learned: 1. I was right, 2. Young people want content on their cellphones, 3. Young people don't want to pay for content on their cellphones, 4. Advertising supported content solves these problems.

lala.com is LaLa

This post is off-topic slightly because while it does deal with free downloaded music, it doesn't mention advertising support (except for that).

You have probably already read about lala.com's plan to provide free downloads. Bruce at hypebot reports that lala's software downloads the tracks directly to a portable mp3 player. The files never reside on the computer hard drive and so it is assumed that tracks are less likely to be uploaded to a P2P network.

Cool technology but the business model is bizarre: the company expects to make money by selling CDs. They project that if they sell each user one CD per month they will break even (the average music buyer purchases two CDs per year, and that number is dropping).

I must be missing something: if you have just received the track for free, why would you want to buy the CD? The track is already on your mp3 player (where you want it) and you cherrypicked the tracks you like from the album (people don't buy albums anymore, just the tracks they like - has lala been paying attention?).

The kicker is that lala plans to pay $140 in million in licensing fees to the labels over two years for these free tracks. Unbelievable. Who are their investors?

Bill Ngyuen, one of the founders of lala, is quoted as saying: "I have no idea if this will work - this is a bet." Bill I have an idea if this will work - it won't. Save your money.

VC Attention to Ad-Supported Music

A couple of events in the last week that indicate VC attention turning toward the advertising supported music space:

1. Slacker.com, which is an ambitious music service company (offering a music store, subscription service, Wifi enabled portable player, desktop player, and ad-supported service) just received $40 million in second round funding. This is in addition to $13.5 million raised earlier.

2. Fred Wilson, probably the leading VC in the blogoshpere, wrote great initial and follow-up posts about how the music business can make money by giving away the music. Read both of the posts. Fred's conclusion is that the movement to free is inevitable but that it will take a while to get there. I concur.