The Artists, Like Trent Reznor, Will Lead The Way

This has been a revelatory couple of days for me. Yesterday the subject was ad-supported streaming music services.

Today's revelation is that it is the artists who will lead the charge for advertising supported music.

After all, it is the artists who are pioneering the most promising developments in music (while the labels are pushing ringles):

• Give away the music - Prince
• Name your price music purchasing trend - Radiohead, Cliff Richard, Trent Reznor
• New distribution outlets - Paul McCartney
• Product placement - Fergie
• Corporate sponsorship - Plies
• Sell a piece of everything I do in the future for big money now - Madonna

The New York Times has a an excellent article on this phenomenon.

The lesson in this for me is that the way to promote advertising supported music is to forget the labels and go straight to the artists.

imeem Has A Future

I haven't been to imeem since it launched, but the announcement that it had licensed EMI's catalog motivated me to re-visit the site. I like what they are doing.

imeem only supplies streaming music and I concentrate on downloaded music. I think downloaded music provides a superior user experience and always will, even when WiFi is ubiquitous. (Would the iPod have caused the revolution it did if it was a streaming solution? No way.)

Nonetheless, imeem has convinced me that streaming does play an important role in advertising supported music. I have always believed that a key difference between the new recorded music business and the old recorded music business will be the replacement of a single format (CDs) with multiple formats.

Providing music to listeners is, frankly, easy. The challenge for imeem (and any other ad-supported music business for that matter) will be to understand that they are in the advertising business, not the music business. Thus after they build out their catalog, success will hinge on how well their service meets the needs of advertisers.

This is not at all easy. Look at Facebook. It has all the users a site could want but it is still building an advertising infrastructure and the jury is still out whether it will be an advertising success. Facebook's predecessor MySpace is still an advertising adolescent.

Advertising supported music has many unique formats and benefits to offer advertisers. The successful ad-supported music companies will be the ones that recognize and provide this value.

More Music Business Blather

I was referred to this article in The Register by the coolfer blog.

The article covers some of the happenings at the In the City conference in Manchester England England Across the Atlantic Sea.

I gotta say that I find so much of the thinking, that comes from music industry insiders, about the business of music to be stunningly sloppy and solipsistic. Cases in point: two of the topics discussed in the Register article.

Topic 1. The Blanket License - From the Register article: "The subject of a blanket license for digital music came up in a panel entitled "Leave Those Kids Alone…” And They’ll Sell Your Records For You". The idea of "decriminalizing" P2P was unanimously welcomed."

The blanket license has been championed by Gerd Leonhard. He refers to the concept as Music Like Water. The idea of the blanket license is that service providers such as ISPs and mobile operators charge everyone a monthly music fee and in return provide free legal access to all the music they want. In essence, a tax everybody pays for access that only a few use.

From the Register article: "Founder of The Orchard, Scott Cohen, was the loudest advocate of a blanket license. There's no point chasing pirates with view to converting a P2P transaction into a discrete paid download. "But people are getting access to music. If they paid just $1 a month they don't know, we have 1.1bn ISP customers and 2.6bn mobile customers, giving us $45bn overnight to be divided up."

This is like the inexperienced entrepreneur explaining his market projection to a potential investor by saying: "There are six billion people in the world, if we get only 1% of that market..."

Cohen's statement seems quite naive and could only have come from a member of the music elite who believes everyone values music as much as they do.

There will never be a blanket music license. The market won't accept it and the government won't legislate it.

Smart people in the music business won't waste any more time talking about it.

Topic 2. Doesn't anybody understand what advertising supported downloaded music is? - From the Register article: "And Scott sounded a timely warning about advertiser-supported sites. The entire internet advertising business is just $31bn, and only a fraction of that goes back. Jupiter's Mulligan pointed out that 100 ad impressions are needed to recoup a single digital song download. Who on earth would get that?"

Mark Mulligan is clearly referring to Internet ad impressions. Real (not Spiralfrog) ad-supported downloaded music has nothing to do with Internet ads. Ad-supported downloaded music is not a new Internet application, it is a new medium. Its ad-format is audio ads integrated with the music.

Mulligan writes a lot about new music revenue models but he doesn't get ad-supported downloaded music.

The Radio Conundrum

Paragon Media Research just published a new research report called Youth And New Media Habits . This report surveyed about 500 people from the ages of 14-24.

Here are some charts from the report with my commentary below:

Young people are listening to less radio. This is no surprise.

Young people are listening to less radio primarily because they are spending more time listening to music on their mp3 players. We knew that too, but here is an interesting finding: commercials on radio are not a big turn-off to this group. I think we can safely assume that, if they are getting downloaded music for free, they won't mind advertising very much in this context either.

By a 3 to 1 margin, young people listen more on their portable music players than they listen to radio.

So why is music radio a $17 billion advertising industry and growing and recorded music is a $12 billion industry and shrinking?

Doesn't this seem like an imbalance that will correct and create great opportunities when it does? It does to me.

Ocean Tomo IP Auction

Today and tomorrow I will be at the Ocean Tomo IP Conference and Live Patent Auction so I won't be posting.



My company has a patent in the auction.

Tantalizing Tidbits for Tuesday

Here are a couple of items that have me scratching my head:

ATT and Napster

So ATT and Napster have hooked up to deliver $1.99 over-the-air downloads (includes file delivered to PC). I read one report that quoted an analyst saying that ATT is late to the game but that this move is an important piece of the mobile content puzzle.

Come on, the market has already shown they won't accept this price point. Sure, ATT is coming to the game but they are coming with $14 hot dogs. Read the Register and Silicon Alley Insider posts on this topic.

This product offering is tied with ringles for Stupidest Music Related Product of the Year.

Music on cellphones should be free.

Sugar-Coating the Music Industry's Lemon Won't Make Lemonade

I came across this silly analysis from Chris Anderson, the accomplished author of The Long Tail.

From Anderson's post:

Indeed, it appears that every single part of the music industry except the sale of compact discs is up.
Concerts and merchandise: UP (+4%)
Digital tracks: UP (+46%)
Ringtones: UP (+86% last year, but probably just single-digit percent this year)
Licensing for commercials, TV shows, movies and videogames: UP (Warner Music saw licensing grow by about $20 million over the past year)
Even vinyl singles (think DJs): UP (more than doubled in the UK)
And, if you include the iPod in the music industry, as I'd argue a fair-minded analysis would: UP, UP, UP! (+31% this year)

Only CDs are down (-18%). They're around 60% of the industry not including the MP3 players, but just around 25% if you do include them.

Anderson concludes from this data: "So the problem with the music labels is not that music is an industry in decline, but that they have a too-narrow view of what business they're in."

Huh? Does this mean Warner should start making mp3 players?

The music industry is about recorded music. Take out mp3 players (which don't belong here anyway) and I'll bet that just the decline in recorded music revenue from its peak, is greater than the sum total of revenue from the sources Anderson lists.

At the risk of mixing metaphors, Anderson's argument would be akin to an analyst saying that things are great at McDonalds's amidst a steep decline in hamburger sales because apple pie sales are way up.

TSL Analysis Shows Unbundling to be Irrelevant

I was referred to this item from Bruce over at hypebot.

The Register reports that some consultants did a study for a British music industry trade group, which concluded that:

Capgemini calculates that of £480m lost to the industry since 2004, £368m was the result of format changes: principally the unbundling of the CD into an "a la carte" selection of digital songs. Of the remainder, 18 per cent was lost to piracy.

Since I see everything in the recorded music business through the lens of TSL, the attribution of revenue losses to unbundling doesn't make sense to me. Please follow my logic and if I get something wrong, let me know.

One constant in music is that 15 four-minute tracks are played in a hour; listen longer and more are played; listen less and fewer are played. Even the revolution in digital music can't change this.

We know that people are spending more time listening to recorded music. Let's assume that average track length and the average number of times a track is listened to haven't changed. Let's also assume- just for a moment - that the average price of a track hasn't changed and that the listener pays for every track in their library.

Under these conditions consumers would have had to purchase more music to fill their increased listening time. They would have had to engage in many more transactions to acquire all this unbundled music, but their spending on recorded music would have gone up, not down.

Since this didn't happen, unbundling cannot explain the drop in recorded music revenue. The culprits, of course, are piracy and price erosion.

But we already knew this.

What most interests me is the value of TSL as an explanatory factor in the current recorded music market. I have said this before, but only after the recorded music industry begins to focus on TSL will real solutions to their crisis emerge.

The Futility of Programming Music Radio

Yesterday I was reading an article in the Seattle Post-Intelligencer about how it is getting increasingly difficult for radio programmers to find undiscovered tracks. The thrust of the article is that this problem is being caused by all of the, primarily on-line, sources listeners have for discovering new music.

As I was reading the article I was struck by two thoughts:

• If so much new music is already discovered, such that radio stations are having a hard time discovering new music, then the music discovery business opportunity is probably gone.

• With the availability of downloaded music; the increase in TSL to recorded music and the decrease in TSL to radio, the notion of programming music seems out-dated. Now listeners pull the music they want to hear rather than having broadcasters push them the music they think they want to hear.

Certainly the pull phenomenon is hurting radio but it doesn't have to hurt radio advertisers. In the medium of advertising supported downloaded music, an advertiser's commercials are played in the context of music the listener has chosen, not music a programmer has chosen.

This is very powerful placement and by definition it happens every time an ad is played in this medium.

Given the elegance of this self-programming, hasn't the effort to program music radio become futile?

Re-Distribute the Ad-Supported Media Wealth

Dave Morgan is Chairman of the behavioral targeting firm Tacoda and he also writes for the MediaPost blog online spin. His post today is entitled: Too Much Ad-Supported Media? Worth a read.

My take is that in a number of areas too many companies are chasing limited advertising dollars - think social networking, streaming music and music discovery.

In other areas there is an audience waiting for free ad-supported content that isn't available- think downloaded recorded music.

Here is a graphic I put together in 2000. Hard to believe today, but the Internet didn't rank as one of the top ad-supported media at that time so it wasn't on the chart.

That would certainly change if I re-did the graphic now, but there still wouldn't be any ad-support for recorded music. The only thing that would change for recorded music is that the annual hours spent with that medium would be significantly higher.

Wow! We Can Earn 1.9%!

Yesterday I listened to a couple of conference calls: the third quarter earnings call from Yahoo and the Live Nation call discussing the Madonna deal. I learned a few interesting and relevant facts:

Yahoo

Quote from Jerry Yang: "For example, we have de-emphasized our focus around subscription music in favor of advertising supported music. "

Not sure what kind of advertising supported music he is referring to. Unfortunately for Yahoo, he probably means streaming. The real growth and money is in advertising supported downloaded music.

Live Nation

I would summarize this call as a bunch of music executives congratulating themselves for coming up with the "innovative" strategy of taking touring and merchandising revenue from the pockets of aging stars.

The "brilliance" of the Madonna deal seems to be that Live Nation gets a cut of all her future touring, merchandising and recording revenues. This is a continuation of the industry's focus on deals that split the pie in new ways as opposed to deals that grow the pie (Amazonmp3 and the Total Music proposal fit on this line).

Last week I put up a post entitled The Fallacy of The Concert Savior. The basic premise of the post was that it is delusional to think it is a good business strategy to give away recorded music in order to boost touring revenues.

When I wrote this I wasn't aware of the profitability level of concerts. At about 18:00 minutes into the Live Nation conference call, the question of profitability came up. Michael Rapino, CEO of Live Nation, stated that the one-night concert, of which Live Nation does more than 10,000 per year, is "the lowest margin business in the music industry."

What level of profitability are we talking about? In the second quarter of this year, operating margin for Live Nation's concert business was 1.9%! No wonder they are so excited to pluck merchandising revenue from their artists. By the way, their expectation is that the Madonna deal will provide an EBITDA in excess of 4%. It is a very sorry day for a business when this is something to get excited about.

Music is perhaps the most fundamentally creative human activity. Given that, it just blows my mind how uncreative the music business is.

iTunes Kicks in to Pricing Freefall

Back in May I predicted that the $1.29 price at which iTunes was selling DRM-free tracks would become the standard price for downloads. Well I was wrong on that prediction.

Ars Technica is reporting today that iTunes is dropping DRM-free track prices to $.99. As Ars Technica points out, this price drop is no doubt in response to Amazon's DRM-free pricing of between $.89 and $.99.

I remain correct, however, in my broader and more important prediction that Low Price Wins in Toilet Paper and MP3s.

As I said yesterday regarding the music business: The market will grow only by finding ways to meet consumer needs and profit demands through lower prices. Lowering prices is easy. Preserving and growing profits while lowering prices is the hard part.

In most industries the classic response to falling prices is to cut costs. The record industry has been shedding staff in an effort to do just that. This, unfortunately, is a losing game because costs can never be cut enough to keep up with prices that are quickly heading to zero.

Still the record industry is in an enviable position - they have potential new customers who are more than willing to pay, and would pay even more than their current customers.

Who are these potential new customers? Why, advertisers of course.

Total Music is a Total Loss

Last Friday, Business Week put up an article describing a plan by Universal Music chief Doug Morris called Total Music.


The outline of the Total Music service:

• All of the labels participate


• Total Music is available only with certain devices


• The consumer gets unlimited music with the purchase of the device


• The device manufacturers pay the labels about $90 for each device sold (based on $5/month for 18 month average life of player)

It is not clear to me from what I have read, whether Morris expects the device manufacturers to subsidize all, part or none of the music cost. The BW article suggests that Morris's pitch to manufacturers is that they will sell more devices if the devices include this service. Well maybe they will sell more, but if their profits are cut from the subsidy how many more devices do they need to sell to get back to the gross profit they were earning before the subsidy?


Whaf if manufacturers pass on part or all of the cost to the consumer? I think the market has already answered this question - they won't sell very many higher priced devices.


Price rules in music and consumer electronics. The market will grow only by finding ways to meet consumer needs and profit demands through lower prices.


TechCrunch summed up the silliness of the Total Music service in this graphic:

Someone Out There Doesn't Like Me

I added our motto last month and I really like it. However, not everyone in the blogosphere does. I found this flame in the Brass Revolver, a blog by trumpet player Ashley Morgan:

Another supporter of free music even goes on to advocate ad-supported music. What a ridiculous idea. Their motto is “Don’t Sell the Music - Sell the Time Spent Listening to the Music” and is truly the work of someone who values money but not music. If this scheme ever gets anywhere it will just drive music lovers away from the ad-soaked music back to the ad-free music once they experience how truly horrible it is. Imagine sitting down to listen to a new album, and real music fans do take time to sit down and listen, only to be bombarded by adverts. To a casual listener this might seem fine, but to a real music fan it is a living nightmare.

Ashley I agree 100% with your conclusion that ad-supported downloaded music is targeted at the casual music listener. This group makes up most of the music listening audience. Members of this group tend to be young and don't spend much on music. In fact they get most of it from P2P networks. Ad-supported music is free to the listener, but unlike P2P, enables artists to be paid.

You are correct, ad-supported downloaded music would not be embraced by music lovers. This group will purchase ad-free music for serious listening. However, music lovers also love to experiment with new music and ad-support might be a great way for them to try out new stuff. They can then buy it if they like it.

Ad-supported music will not replace ad-free music. It is an option that brings something to both casual and serious music consumers that they did not have before.

Still think ad-supported downloaded music is a ridiculous idea?

The Fallacy of the Concert Savior

Radiohead's "name your price" distribution plan for their new album has generated a lot of discussion about free music business models. There seems to be a consensus among commentators that the motivation for giving away recorded music is to sell concert tickets:

From digital media wire: "So why give away your album for free? It’s certainly a model that’s becoming fashionable in the music industry. Indie band The Charlatans also announced last week that they would give away their new single for free, while Prince has just finished a hugely successful sell out run of gigs at the 02 Arena that was promoted by giving away his new album with the Daily Mail. Using the music as a trailer for concerts is probably the most talked about approach, and the Radiohead example bears this out: the number one website visited after their homepage last week was a ticketing site."

From webpronews.com: "Again, this depends on that which you've based your business. Radiohead has a new CD and it can be obtained for free. It's more of a donation model, but they have larger packages for sale that includes artwork, lyrics, and even vinyl records. They're banking on the up-sell, as well as concert ticket sales."

Mike Masnick at Techdirt takes this one step further and says that the upsell from free recorded music is the way to make money in the music industry: "In other words, more bands are recognizing exactly what a bunch of folks knew was inevitable at least a decade ago. Unshackle the music, give it away free, and use it to make a lot of other stuff a lot more valuable, and there's plenty of money to be made."

Touring revenue is not the business model that will save the music industry and here is why:

Touring revenue growth is constrained by ticket prices - Domestic touring revenue grew 16% in 2006. Most of this growth came from increasing ticket prices an average of 8% to $61. Look at the ticket prices of the Top 10 grossing concerts at mid-year 2007. How much more room is there to raise prices? What do you think will happen to concert attendance when the economy takes a dip?

Touring revenue is relatively small - Domestic touring revenue in 2006 was a record $3.1 billion. In 1999 recorded music sales peaked at $14.5 billion dollars. This says something about the potential size of these revenue streams.

Touring is work - When touring, the artist is an hourly worker. Sure, Rod Stewart may make a million bucks an hour while on tour, but there are only so many "tourable" hours in a year. Real money is made through leverage and there is no leverage in touring.

The only new business model with the scale and leverage potential that can replace the loss of recorded music sales is advertising supported music.

Would Disney stop selling advertising on the Hannah Montana television show in the hope of selling more Hannah Montana concert tickets? Of course not. They have a model that allows them to have their cake and eat it too.

The music industry could be in this same enviable position.

Tantalizing Tidbits

Random, but relevant, facts and analysis:

• paidContent has this quote from Les Moonves, CEO of CBS: “If somebody wants to share an episode of CSI with a friend after it’s been on CBS, fine with us - there is advertising on it. If they transfer it, as long as the advertising is still there and they are getting more advertising and we can count those viewers, we’re fine.” Apply this thinking to music downloads - advertising supported downloads co-opt file sharing and allow the industry to profit from it. Notice that Moonves says sharing is OK only if it is measurable. This is an important point for ad-supported music - more on this topic in a later post.


• Last week the Digital Music Forum West was held in Los Angeles. There was a panel on advertising supported music. I don't want to disrespect anybody, but who are these people? Why wasn't anybody from SpiralFrog or We7 on the panel? DMF is an industry event; to me this panel shows that the music industry still treats ad-supported music only semi-seriously. digital music news has a write-up on the discussion about ad-supported music at DMF (If the observations from the Sony rep. sound familiar, it's because you read them here first).

• Here is an interesting article from a Korean newspaper that says the availability of DRM-free tracks in Korea did nothing to grow the market for downloaded music in that country. I have posted numerous times about how DRM is a red herring. Nice to get some market data support from the most digitally advanced country on the planet.

How Much is Recorded Music TSL Worth?

If TSL to recorded music were monetized, how much would the market be worth?

Here is a projection that I put together a few years ago:

.

Critics can quibble with the estimated CPM; it really doesn't matter.

There is substantial value in recorded music and that value is locked in time spent listening.

Read This TechCrunch Post

Last week, Michael Arrington, founder of TechCrunch, put up a post entitled: The Inevitable March of Recorded Music Towards Free. He posits a "pseudo-economic" argument that the price of recorded music will inevitably fall to zero. I don't agree with the argument but I do agree with the conclusion.

I also don't agree with the solution that Arrington outlines:

First, other revenue sources can and will be exploited, particularly live music,
merchandise and limited edition physical copies of music. The signs are already
there - the live music industry is booming this year, and Radiohead is releasing a special edition box set of their new album for £40.00 simultaneous to the release of their “free” digital album.

Second, artists and labels will stop thinking of digital music as a
source of revenue and start thinking about it as a way to market their real
products. Users will be encouraged (even paid, as radio stations are today) to
download, listen to and share music. Passionate users who download music from
the Internet and share it with others will become the most important customers,
not targets for ridiculous lawsuits.

Arrington is dead wrong here. The revenue streams he calls the "real products" are incremental at best. He completely misses the key point, which is that the most valuable thing the industry can sell is TSL to recorded music.

Anyhow read the post. It generated an incredible 180+ comments.

Some Advice to Microsoft

As everybody knows, earlier this week Microsoft introduced their new line-up of Zunes. I am not going to critique the players as the Internet is awash in reviews. I do, however, have a few things to say about how Microsoft is playing in the digital music space:

The Cool Factor

Through their advertising and design, Apple has established mp3 players as icons of cool. Microsoft can't out cool Apple but they shouldn't go out of their way to make the Zune look uncool. To that end they should never allow Bill Gates to be photographed holding a Zune. Gates is the poster boy geek.

The first 30 seconds of this video are great advertising for the iPod:



Microsoft just put Rick Thompson in charge of Zune. In this article he is quoted as saying: "The vision and cool will continue to come from J," Thompson says. "No one would ever confuse me with being cool." Like MS, I think "J" is trying too hard to be cool.

Advice to Microsoft: Stop trying to play the cool game, you can't. On the other hand don't go out of your way to be uncool.

The Value of Ad-Supported Downloaded Music to Microsoft

This week Steve Ballmer predicted that advertising would grow to account for 25% of Microsoft's revenue. Ballmer also had this to say:

“As much as people sometimes like to pick bones with advertising, people much
prefer an ad-funded experience to one that they pay for,” he said. “Even
the basic software that we’ve delivered for so many years — if it can be
ad-funded in the way it gets delivered to consumers, it probably will be
ad-funded.”

I don't think I have ever heard a better endorsement of ad-supported music. However, Ballmer and Gates need to get on the same page, because Gates is talking-up subscription services (see point above - MS needs to keep Gates out of music).

Advice to Microsoft: Understand that you are sitting on the most potent ecosystem out there for advertising supported downloaded music. This will be a multi-billion dollar business and could be a key contributor to your 25% advertising revenue goal.

Flawed Launch Strategies of SpiralFrog and We7

In my post yesterday I indicated that today I would write about the flawed launch strategies of SpiralFrog and We7.

Let's forget about ad-supported music for a moment. SpiralFrog and We7 are start-up companies. The classic and proven strategy for start-ups is to target and service a niche market. So what are the targeted niche markets for SpiralFrog and We7?

According to its SEC filing, SpiralFrog is: "...targeting the 13-34 year-old demographic that represents 75% of music downloaders...". This is not a niche market. This is the market for recorded music (OK, three-quarters of it).

We7 has a broader view of what constitutes a niche market. According to one of its press releases: "The WE7 site has been designed to appeal to a wide range of audience demographics (ages 14-65)...". Now this is the market.

Perhaps I am wrong, but I would have a completely different strategy for reaching and serving a 13 year-old than I would a 34 or 65 year-old. Wouldn't you?

An established company like Apple can serve a broad demographic with iTunes. A start-up cannot. Especially when the start-up is launching a disruptive technology like advertising supported downloaded music.

The bible on disruptive technology is Harvard Business School Professor Clayton Christensen's book The Innovator's Dilemma. I suggest the managers at SpiralFrog and We7 read this book. If they have already read it they should re-read it and this time pay attention.

Here are some relevant things that Christensen says about disruptive technologies:

1. Disruptive technologies are typically first commercialized in emerging or insignificant markets.
2. Disruptive technologies are generally embraced first by the least profitable customers in a market.
3. Attributes that make disruptive products worthless in mainstream markets typically become their strongest selling points in emerging markets. Companies that have succeeded in disruptive innovation initially took the characteristics and capabilities of the technology for granted and sought to find or create a new market that would value or accept these attributes.

I am not going to do the work for SpiralFrog and We7, but these findings suggest a number of things these companies could do (still) to improve their chances of success. Successfully launching a disruptive technology takes time and a number of iterations.

SpiralFrog and We7 sought to eat the big enchilada first. By skipping the nachos they may never get to the main course.

Reaction to Ad Format Post

My post yesterday on ad formats elicited a reaction from both SpiralFrog and We7. It is nice to know they are paying attention.

I received a couple of e-mails from a PR rep for Spiralfrog, Brian Posnaski:

Marc - Your post today states that "Spiralfrog's problem is clear: users will
not watch ads during the delayed download of tracks." There appear to be
some misconceptions floating around about SpiralFrog's ad-supporting downloading
model, and this notion is one of them. Your statement suggests that
SpiralFrog forces users to watch ads while they download (it's also repeated in
the 9/24 post, in a quote from We7, about our "video model"). Not
true. At no point in the SpiralFrog user experience do we force visitors
to watch ads -- video or otherwise.

I responded that I didn't write that users were forced to watch ads, but that Spiralfrog hopes they do, which brought this e-mail from Brian:

SpiralFrog does in fact rely on ad revenue, but that revenue comes from ads
served across the entire site. They can be viewed when people are
discovering music, searching for artists, viewing other content, etc. The
ad viewing is not simply restricted to downloads. More importantly, there
is nothing that locks people into viewing ads during downloads. The most
important point here is that SpiralFrog's ad-serving model works just as people
have come to experience on just about any reputable site. There are a
variety of ways to see the ads -- none of them intrusive.

I agree with Brian - the most important point is that "...SpiralFrog's ad-serving model works just as people have come to experience on just about any reputable site." This is exactly why SpiralFrog will fail as an ad-supported downloaded music service. It has an Internet advertising business model, not an ad-supported music business model. Giving music as payment for watching web ads will not work.

I also received this comment from Steve Purdham, the CEO of We7:

Hi Marc,

As the CEO of WE7 I read you article with interest. Your point re wear out
is valid and we have technology within our environment that is designed to
manage that going forward. On We7.com we use MP3 music format as this is what
the fans want as this gives them total control how they consume music. But MP3
is technically restrictive especially to do fancy things to manage issues such
as wearout, so you have to be creative in how you handle such things. However
before we get to that point we have to get the momentum up in the acceptance of
ad supported music.

Thats all for now, all the best keep up the campaign.

Cheers

Steve Purdham - CEO We7

We7 has a lot going for it and I am glad to know that they are working on the wear out problem. Still, I find Steve's last statement a bit haunting: "However before we get to that point we have to get the momentum up in the acceptance of ad supported music." I am afraid that We7 will get the momentum up - but to the benefit of later entrants into the field.

The financial and consumer markets are very unforgiving, and I think We7 should have waited to launch until it had a service that provided a better user experience.

In fact, both SpiralFrog and We7 followed the wrong strategy in their launches. I'll write about that tomorrow.

Ad Formats and Delivery Matter

There seems to be consensus that, of the ad-supported download services launched so far, We7 is superior to Spiralfrog. However, each has fundamental problems intrinsic in their respective ad format and ad delivery mechanisms, which derail their chances of success.

Spiralfrog's problem is clear: users will not watch ads during the delayed download of tracks. We7 gets some important things right: audio ads delivered while a user is listening to music. Where We7 goes off the tracks is by grafting the ad to the beginning of a track, so that the listener hears an ad before every free We7 track. Thus the same ad is heard at the same time each time a particular track is played.

Can you imagine listening to a playlist composed solely of free We7 tracks? You would get sick of the ads really fast. The advertising industry calls this "wear out". The Wall Street Journal published a good article on this phenomenon yesterday.

We7 could have avoided the wear out problem by implementing technology that plays different ads at unpredictable intervals. Why didn't they? Because the technology behind this solution is much more challenging than the technology they implemented. We7 was halfway there but the half they missed is where consumer acceptance, and ultimately success, lives.

Advertising supported downloaded music is a difficult technical problem. The current players seem to have devoted their efforts to signing label deals, rather than developing the system that consumers will accept.

I guess failure is to be expected when you put the cart before the horse.

Bronfman on the Re-Invention of Medicority and Failure

blip.tv posted a video of Edgar Bronfman giving a keynote at the convergence 2.0 summit in New York last month. I have embedded the clip below because I thought it would be fun to give running commentary on what Bronfman has to say.

Click To Play

01:45 minutes in: Bronfman mentions that more people are listening to music than ever before. Correct. What are you going to do about it?

02:10 minutes in: Says that he wants to outline the opportunities for WMG in four areas: on-line, mobile, international and relationships with artists. What huge opportunity didn't he mention?

03:55 minutes in: Describes what "everyone agrees is a gaping chasm" between consumer demand for on-line and mobile music and market supply. Demand for on-line and mobile music exceeds supply? My god, this guy is out of touch.

06:00 minutes in: Piracy in Asia is rampant. WMG will deal with this by pursuing revenue opportunities in areas like: concerts, premium ticketing and merchandising. I see. People are stealing music so the way to compete with this is not to. Apparently Bronfman is allergic to the concept of free.

11:00 minutes in: Describes creation of WMG's Brand Asset Group and acquisition of artist management and merchandising companies. Typical corporate response to organic sales declines - acquire your way out.

11:30 minutes in: WMG has come up with a great way to reward fans. Only those fans who sign up for one of their new services will have the opportunity to purchase compelling new experiences. This is how Bronfman conceives of staying connected to fans.

Bronfman mentioned that people are listening to more music than ever but he completely failed to see how this is the key to saving the recorded music industry. There was no mention of ad-supported music, which is the proven method for monetizing time spent with a medium.

Instead, Bronfman talked a lot about how his company will make money from other aspects of the music business like concerts and merchandising. If I were a major label artist I would be figuring a way out of my contract as fast as I could. The record companies want more of your money. They are not getting it from lopsided recording contracts anymore so they'll take it from wherever you get it.

Bronfman also talked a lot about the creation of new products for music consumers to buy and new platforms for selling. When will record industry guys take off their blinders and see that consumers don't want to buy music content anymore? They want to get music content.

Overall I found this video to be both disturbing and optimistic. The disturbing part came from seeing how out of touch and misguided this major music company leader is. The optimistic part came from realizing that WMG, and probably the other major record companies, will not be the ones who succeed in the next chapter of the music industry, so the opportunites remain wide open.

The record industry doesn't need "re-invention"; Bronfman's favorite milquetoast corporate buzzword. It needs revolution. It needs leaders who feel the energizing frustration described by H.L. Mencken: "Every normal man must be tempted at times to spit on his hands, hoist the black flag, and begin slitting throats."