Freakonomic Analysis of the Record Industry

The New York Times runs a very neat column called Freakonomics - The Hidden Side of Everything. It is written by the authors of the Freakonomics book. Last week their subject was the music industry: What’s the Future of the Music Industry? A Freakonomics Quorum.

The piece featured contributions from: Koleman Strumpf, professor of business economics at the University of Kansas Business School whose papers include “The Effect of File Sharing on Record Sales”, Fredric Dannen, author of Hit Men: Power Brokers and Fast Money Inside the Music Business, George Drakoulias, music producer, artists & repertoire executive at American Recordings, and veteran of Def Jam Recordings, Peter Rojas, founder of Engadget and co-founder of RCRD LBL, a free, online-only music label launched by Downtown Records and Steve Gottlieb, president of TVT Records.

I was not impressed by the contribution from Strumpf. He couched his arguments in the scientific terms of "what the data show" but his proof was anecdotal and causality was asserted, not demonstrated.

Frederic Dannen made one of the most insightful points about recorded music that I have heard in a long time: "My epiphany, if you want to call it that, was simply this: consumers of recorded music will always embrace the format that provides the greatest convenience. No other factor — certainly not high fidelity — will move consumers substantially to change their listening and buying habits."

I agree with this statement. It applies the principle of conservation of effort, which I believe governs consumer behavior, to recorded music. I believe it also suggests why advertising supported free music downloads would be preferred over free P2P downloads by most consumers. A legitimate free download site would be more convenient than P2P sites. On a legitimate site, the consumer would always know what they are getting - kind of like eating at McDonald's.

The piece ends with this nugget from Steve Gottleib: "Regardless of what created this mess, if we accept that free music has become the model for consumption, then we have little choice but to invest in advertising-supported free services that will make this type of consumption profitable. This step will require patience, leadership and a long-term view. After formulating a way to recapture the revenue it’s losing, the industry can then address the development of a new, secure file format that offers audio, meta-data, and other digital features superior to those of MP3s. This should be an easy task, and will give the industry access to both ad-supported free “iPod quality” MP3s, and higher-quality digital products that can be sold directly. Unless the labels actively reinvent themselves and embrace change, they will continue to find themselves in an expanding music marketplace that rewards their efforts less and less."

Amen brother.

Can Amazon Grow Music Industry Revenues?

By now it is not news to the readers of this blog that Amazon yesterday launched its music download store; Amazonmp3. Bruce at hypebot put up a great post today that summarizes reaction from around the web.

I would like to share my reaction, in the context of course, of advertising supported music.

• What Amazonmp3 will do: The Amazon store will be a strong competitor to iTunes. It will take a lot of business from iTunes. It will cannibalize its own CD sales. It will hasten consolidation in retail music. Just as Amazonmp3 launched, Sony, anywhereCD and Virgin closed their music download stores. I predict that iTunes, Wal-Mart and Amazon will end up controlling upwards of 90% of recorded music sales - physical formats and downloads.

• What Amazonmp3 will not do: It will not grow the market for music downloads. This is the critical point. I don't believe that any more than an infinitesimally small portion of the digital music market has not bought a download because they couldn't find the right store. As I have written before, I also think DRM free is pretty much irrelevant.

The music industry has to stop focusing on finding new ways to sell music. Consumers don't want to buy music. Growing revenue from recorded music can only happen by selling the time spent listening to recorded music.

Lessons From Print

There is a debate in the music industry about whether subscription services will be successful. I think we can learn something about the likely outcome by looking at the experience of other media.

CNBC has an interesting article about how newspapers and TV networks are abandoning Internet subscriptions and paid downloads in favor of free access. In Britain a new magazine called ShortList, aimed at 18-34 year-old men launched as a free publication.

Free newspapers are growing in the United States. From an article on the subject: "Don Nizen, operations director for Boston Now, a free daily, describes giveaway papers as 'the Internet in print.' Younger readers are 'used to getting news for free'. Nizen describes free dailies as, 'The Internet in print.' He says people are used to getting their news for free and haven’t developed the habit of paying for it. Younger readers, the coveted 18- to 34-year-old demographic, normally get their news from the Internet or TV. "

Certainly, the digital expectation of free content is starting to swamp traditional media such as newspapers and magazines. It has already swamped recorded music.

The difference is that the print media are responding by giving consumers the free content they want and asking advertisers to foot the bill while the music industry is trying to find new ways to make the consumer pay. Like subscription music services. The very model the print media are abandoning...

We7 and Spiralfrog

I came across some interesting stuff regarding We7 and Spiralfrog this weekend:

• Hypebot (which has done an excellent job covering ad-supported music) has an interview with We7 CEO Steve Purdham on the subject of We7 vs. SpiralFrog. Read the interview (its short), but here is a quote I agree with: "Already independent research from Frukt has shown that almost twice as many consumers prefer our audio model to SpiralFrog’s video model." A theme of this blog is that video ads don't work in an audio medium.


• Billboard.biz has a video interview with Spiralfrog CEO Joe Mohen. Joe does a great job of putting a positive spin on Spiralfrog's service.


• One of the panels at Popkomm in Berlin last week was entitled: Who Supports Advertising Supported Music? The following text is from a We7 press release regarding the panel: "Steve Purdham, CEO and Founder Investor of We7 (www.we7.com), was featured as one of four key industry players on the 'Ad-Supported Music' panel alongside Joe Mohen, CEO of Spiralfrog; Rick Riccola, Senior Vice President of Qtrax; and Christian Vollman of Germany's MyVideo. Each pitched to top advertising executives in an attempt to persuade them that their model is worth investing in, with We7 proving that their model is where the ROI and innovation lies. The judging panel, compiled of various influential advertising executives unanimously decided that faced with the choice they would recommend We7 as the model of choice for delivering targeted and effective advertising to brands."

• On the same topic, Hypebot is running a poll on this question: WHICH AD SUPPORTED MUSIC SERVICE HAS THE BEST CHANCE OF SURVIVAL? Here are the results as of this morning:

• I agree that We7 is a better ad-supported music service than Spiralfrog. The essential reason is that the We7 service sells the time spent listening to music, Spiralfrog does not. Spiralfrog sells time spent on a website.
  

Lessons From NBC Direct

NBC just announced that they will make free, advertising supported versions of some of their popular TV shows available for download. They are calling this service NBC Direct. There is a lot of coverage on this story but I will refer you to this article from the New York Times.

I think there is a lot advertising supported music can learn from this move:

• A principal motivator for this offering appears to be NBC's desire to reach younger viewers, hence this quote from an E! News story: "For the past few years, broadcasters have been engaged in a seemingly never-ending quest to find new ways to engage existing viewers and attract young and technologically savvy new fans." Remember, the younger audiences listen to the most music and get the most music from P2P networks. They don't like to pay for content. NBC Direct is a data point the music industry should consider in favor of the argument that ad-supported content is a good way to reach young people.

• The downloads will contain ads that can't be skipped. Back in May I put up a post arguing that advertising supported music must incorporate un-skippable ads. When introducing a new format start with this feature - don't try to add it later.

• Last month NBC decided not to renew its contract to sell content on iTunes. This must have been a big blow to iTunes since NBC accounts for 40% of video download sales on iTunes. I think the lessons here are that iTunes is not the place for ad-supported content and that there are alternatives to iTunes.

Tantalizing Tidbits

• From a couple of weeks ago: Spurred by Apple's announcement of a 160 gig iPod, Bob Lefsetz posted a critique of the record industry (they are a pretty easy target). The essence of his argument is that an iPod can hold 40,000 songs and that people will buy a lot more music in an effort to fill that capacity if the music is a lot cheaper than $.99. Mike Masnick at TechDirt picked up and expanded on the post. Both are worth reading. These analyses are consistent with my oft-repeated theme that in this music market price is the only thing that matters.

• From last week: The Financial Times published a good article about the thriving state of the live music business (from Coolfer). From the article: "In the US alone, ticket sales grew by 16 per cent last year to $3.6bn, up from $1bn a decade ago according to Pollstar, one of the few research firms attempting to measure the fragmented business. The audience has grown by 50 per cent in that period and average ticket prices have more than doubled." This is good news for the music business but money from concerts will never replace revenues from recorded music. The simple reason is leverage - there are only 365 days in a year so concert income for any group is limited to an annual maximum of what they can earn from 365 concerts. On the other hand, there is no calculable limit to how much can be earned from sales of time spent listening to recorded music.

• From yesterday: Forbes has a slide show of the top-earning musicians. Interestingly, most were older artists and most of their money was made from touring.

TSL to Music Around the World

Motivated by our new blog motto I have been posting quite a bit about time spent listening to recorded music. Last week I presented the latest data on TSL from Bridge Ratings.

I was going through some of my old TSL data and found this nugget. This graphic is from the
report: It's A Family Affair - The Media Evolution of the Global Family in a Digital Age, an "original research study, presented by Yahoo! and OMD, explores the intersection of family, media and technology across 16 countries".

Detail from graphic:

The bottom line is that listening to music is the #1 use of digital technology in homes around the world. Sounds like an advertising opportunity to me.

Future Music Industry Power

This is a post on the implications of the motto I introduced last week: Don't Sell the Music - Sell the Time Spent Listening to the Music. I want to explore where the power would lie in a recorded music industry run according to this motto.

Selling time instead of product means that the recorded music industry would begin to resemble ad-supported media like TV, radio and the Internet. Where does the power lie in these industries? I believe it lies in the networks.

On TV power resides in the broadcast and cable networks - CBS, Fox, FX, HBO, etc. On radio it is in the Clear Channels. On the Internet the power is with portals like Yahoo!, Google, MSN and AOL.

Why does the power lie in the network in advertising supported media? Because the network is the conduit to the audiences' time. This is bad news for the record companies. As currently situated they have very little contact with their customers.

The closest thing to a network in the music business today is iTunes/iPod. Not surprisingly, most people would agree that Apple now holds the power in the industry.

The music network of the future will be different than iTunes/iPod. It will span devices and wired and wireless connections. It will offer ala-carte downloads, subscriptions and ad-supported music.

Still, I believe that the MP3 player manufacturers are in the best position to build a music network and therefore own the customer. Why? Because they are the conduit to time spent listening to recorded music.

Apple, of course, would be the early favorite to build such a music network, but I am not betting on them. I believe the network needs to be primarily ad-supported and I don't see Apple adopting this model.

On the other hand, Microsoft is embracing advertising. With their reach across devices - MP3 players, computers, cellphones, etc - they have the ability to put the network everywhere people listen to music. Thus, I believe that Microsoft is in an excellent position to dominate the recorded music industry if they follow the right strategy.

Of course I don't know who will create the winning music network. What I do know is that in order to do it, those trying must have access to the time people spend listening to recorded music. That is the key.

Spiralfrog Launches

You have probably read that Spiralfrog launched today. I used the service in beta but figured that I would wait until launch to write about it.

I have to say that, overall, I am impressed. The site is buggy but that can be worked out. It was easy to find and download tracks. The tracks can be handled in WMP like any other track.

Perhaps the thing I am most impressed about is the quality of the inaugural advertisers. I saw ads from Chevrolet, the US Army, Burger King and Acuvue (Johnson & Johnson). Advertising Age reports that charter advertisers also include Colgate and Discover Card.

This is not a huge number of advertisers but they are definitely A-list. Spiralfrog might not be charging them much, if anything. Still, I interpret their willingness to be associated with an unproven advertising supported downloaded music site to be an endorsement of the concept. This is a milestone leap for our new industry.

Unfortunately, as I have posted before, I don't think Spiralfrog will survive. The reason is simple: I don't think they can make enough money from their approach to advertising to support their costs, profit and royalties.

Essentially Spiralfrog is just another website supported by rich media ads. The difference between Spiralfrog and other sites, however, is that Spiralfrog provides high cost content. Rich media ads don't command a high enough CPM to pay the costs.

I am sure that Spiralfrog's deal with the labels includes a revenue share agreement. I believe that in the end, however, the revenue that the labels earn from Spiralfrog just won't be enough to keep their interest.

Success or failure, Spiralfrog's launch is good news for ad-supported downloaded music.

Taking a Break for the Holiday

I will not be posting today and tomorrow.

To those who celebrate the Jewish New Year holiday of Rosh Hashanah, I wish you a Happy and Healthy New Year. If you don't celebrate, I still wish you happiness and health.

More Good News on TSL

Yesterday I declared that the new measure of success for the recorded music industry must be time spent listening. I ended the post with the assertion that this would be good for the industry because TSL to recorded music was growing.

Bridge Ratings provides great data on the music industry. Earlier this month I posted results from a Bridge study that showed TSL to mp3 players among young people was the only media time growing for this demographic (cell phone use was also growing but TSL for MP3 players was higher).



Last week Bridge published media time projections for Fall 2007. Here is the killer graphic:



Bridge is projecting that 58% of MP3 player users will listen to content on their devices for 9 or more hours per week (a motherlode of virgin advertising opportunity). This is up 8% from June.

Here is the explanation of these projections from Bridge:

The MP3 player market will get a massive infusion of users and use during the fourth quarter with manufacturers bringing multiple new product versions to market. The fourth quarter has always experienced a surge in purchasing and this will greatly enhance the over consumer use of these products.

As Bridge Ratings has discovered in the several studies we have done on consumer use of iPods and MP3 players, initial use of these players by new consumers especially, is at least 25% higher in the first six months than it is by the twelfth month use.

This year's influx of new models will enhance overall use in the heavier quintiles in the chart above.Overall, Bridge Ratings estimates that 22% of MP3 player users will increase their MP3 time-spent-listening this fall.

The demand for recorded music is robust. The business of recorded music is not. Focusing on TSL is the only way to reconcile this dichotomy.

Baby Needs a Brand New Metric

Yesterday I introduced our blog motto: Don't Sell the Music - Sell the Time Spent Listening to the Music.

The first implication of this motto is that the recorded music industry must fundamentally change its measure of success. The RIAA continues to measure success by unit sales of CDs, downloads and other music formats. In today's market this is an outdated metric.

The relevant measure of success for the industry is now: time spent listening to recorded music. Neilsen measures time spent watching for television. Arbitron measures time spent listening for radio. Comscore, and others, track analogous metrics for the Internet; such as visitors, page views and time spent on a site.

When the recorded music industry starts measuring its success by time spent listening, it will grow up and truly enter the digital age. With this move it will take the first step toward joining television, radio and the Internet among the ranks of the major media.

The great news is that time spent listening to recorded music is higher than it has ever been and continues to grow.

We Now Have a Blog Motto

For those of you who have read this blog before, you will notice a new layout. It is nothing fancy, but I like the refreshed look.

I hope you will also notice that I have added a motto for the blog to the sidebar:

Our Motto: Don't Sell the Music - Sell the Time Spent Listening to the Music

Revenue and profits from selling recorded music remain in a downward death spiral. In today's market the monetary value of recorded music resides in the time that people spend listening to the music. The major media have taught us that selling advertising is the effective method for monetizing the time an audience spends with a medium.

Thus, our motto reflects what I believe is the commercial essence of advertising supported music.

This week I am going to post on some of the implications of selling the time spent listening to the music.

Subscription Music Services Are For the Rich

If you haven't yet, please read my post from yesterday.

The main point of that post was that consumers want free music and the industry is just giving them more ways to pay for music. Today I am going to put subscription music services in this context.

Let's look at the cost of to-go subscription services. The leaders, Yahoo and Rhapsody are $14.99/month or $180/year, billed monthly.

Now lets look at how much music consumers spend on music. I don't have highly specific information on this but here are some good data points:

• A recent UK survey found that 55% of MP3 player owners had purchased 10 or less downloaded tracks ever. Put into US iTunes dollars that is $9.99 or less over the entire time they have owned their MP3 player.
• Another recent survey out of the UK found that among 11-25 year-olds who download music, 45% pay nothing for music and 30% spend less than 5 pounds (about $10 at today's exchange rates) per month on music.
• A US survey from last year of people who listen to music over the Internet asked respondents this question: "Approximately how much do you spend in one year on the enjoyment of music (CDs, downloads, music subscription service fees, concert tickets?)." 50% spend $200/year or less on total enjoyment of music. By the way, the survey also found that 66% of respondents attend at least one concert per year, which will eat up that $200 pretty fast.
• A survey of iTunes purchases found that 3.2 percent of online households bought at least one download, while the average was three iTunes transactions a year. The median transaction was slightly under $3 or less than $9 total spent per year.

What can we conclude from this data? That music listeners don't spend very much on recorded or downloaded music, certainly nowhere near the $180 that subscription services are asking them for.

For me this is the main reason why subscription music services will never be more than a very niche product. Music is now all about price. The argument is made that people will pay for good music. I disagree - people will consume good music, they won't pay for it.

Heavy music consumers are young and young people have always been budget constrained. In the past these consumers had no choice but to buy music, now they can have the music without paying for it. Under these conditions how can we rationally believe that mainstream music consumers will pay more for their music?

Yes, subscription services are a great deal but they are for the elite music aficionado who has lots of money to spend. People like venture capitalist Fred Wilson or music producer Rick Rubin, who are both fans of subscription services.

Some commenters have said that I am pushing too hard on one horse. Sorry but ad-supported music is the only way to give both consumers and artist what they want and need.

Music Start-Ups and Vets Great at Giving Consumers What They Don't Want

I am amazed by the steady introduction of new ways to purchase digital music when the market is screaming that it doesn't want to pay (a synonym for the word purchase last time I looked) for digital music. This would be a good time to read my buggy whip post.

In 2006, probably for the first time, consumers acquired more music for free than music they paid for:

This trend seems to be continuing in 2007:

What got me started on this, is the announcement of the new Wi-Fi enabled iPod. I think this is a great product and soon all portable MP3 players will have wireless access.

What can users do with this wireless access? They can buy music wirelessly at Starbucks.

I think that Apple's first use of the iPod's wireless capability is as lame as the sharing feature on the Zune.

Now if users could get free music wirelessly at Starbuck's that would be giving them something they really want.

Tomorrow I think I will continue this topic with a rant on subscription music services.

A Couple of Spiralfrog Reviews

Two good posts about Spiralfrog from other blogs. Check them out.

1. Silicon Alley Insider - references an SEC filing from Spiralfrog, which is also worth reading. Basically they say that the company is a great opportunity for investors to lose money.
2. Coolfer - Reviews the beta service. Basically a critique of the website, which concludes that it is an average product that misses its potential. Also, makes the essential point that while tracks were downloading, the reviewer navigated away from the site. Remember, a key part of their model is getting paid for users who watch ads while tracks are downloading.

Check out our earlier posts on Spiralfrog. I agree with Silicon Alley Insider that investors will lose their money in Spiralfrog. Not because of the critiques in the Coolfer review, but because users won't watch the ads, and even if they do, their basic economics will not support all of Spiralfrog's costs.