Why Google's free music deal in China is so important, and what it may really mean

Image via CrunchBase

I have mentioned Google's music-related activities in China a few times during the past 2 years; and just yesterday this topic seems to have heated up considerably. I think these developments are crucial and need further exploration.

As you may know, Google owns a good chunk (or all?) of the Chinese search engine Top100.cn, one of the biggest rivals of the Chinese super-portal and ruling search giant, Baidu. However, Google is still a more or less distant second in the Chinese search market (in 2008, Google had approx. 16.6% vs Baidu's 76.9%) and really needs its Top100 property to better compete with Baidu. The major issue here is - you guessed it - the availability of CONTENT- or rather, the simple displaying of links to millions of music & film files that those hungry freeloaders i.e. digital natives want to stream or download. Baidu allows this - in fact, thrives on it - while Google / Top100 does not (i.e. it filters and removes the links to the files). This is a huge handicap for Google, because the filtering of those content-links is basically driving away all of those 100s of millions of Chinese Internet users that are looking for just that.

Realizing that the real value of the users is in their participation and engagement, and then in paying-with-attention, Google has clearly pursued a strategy akin to the 'Music Like Water' model that I (and Dave Kusek, my partner-in-crime for  "The Future of Music") have also described countless times: Google will simply provide the platform where music can be turned into money, by connecting the user with the content they want right where they already are (i.e. the search page), while gradually but aggresively monetizing their presence and their clicks via 3rd party payments - and this does not mean just ads. Sounds simple but maybe this has not yet been financially feasible in the past - today, any new money for the music companies is welcome, I guess, so here we are, finally: Search with us and we'll give you Free Music. Kai Fu Lee Image via NYT.

Clearly, it is much better for Google to offer and develop a new payment logic and mechanism for the music that is being used, i.e. to somehow license and pre-pay for it (I call this 'being the lubricant of the ecosystem') until such time where the revenues from advertising, up- and cross-selling are big enough to pay for everything, and quite possibly beyond that, as well. And as far as the music licenses are concerned - otherwise a no-go minefield that few Internet companies have crossed in the past - China is clearly a very good place to start as most of these new revenues will be 'found money' for the record labels.

Total Telecom reports:  "Record companies will take roughly half of any revenue from banner ads placed on the page users see when they are downloading or streaming songs, with Top100.cn taking the remainder. Google could benefit from increased traffic on its Chinese site, and can sell its trademark search ads on the search page" The bottom-line? For all parties, it is better to deploy new kinds of ads (think mobile - that will certainly be key), sponsorships and affiliate links while the music is being used (fka consumed;) and to thereby fund the pool of music licensing costs, then not to get involved and leave the turf to all the other guys that don't play by the rules, anyway.

Now, Google has apparently licensed 350.000 tracks from all major labels (how long did that take... I am afraid to ask... *rant alert) and many leading Chinese record companies and artists, and if you are logged into Top100.cn, and based in China (sorry - no access from EU / US), apparently all the music is yours to stream and download.

So: Google pays for the music to get our attention for their ads - sure sounds like a familiar strategy. Radio and TV broadcasting, anyone?

Another interesting morsel is that apparently streaming and downloading is treated as pretty much the same thing (again, from the WSJ coverage, see link below): "Google's Lee said songs on the service are downloaded or streamed around 1.5 million times a day, and he hopes the number will eventually be many, many times that".  I believe I have mentioned this basic fact of Internet music a few times before, too: streaming & listening IS downloading, access IS ownershop, and that's that. The legal artifacts remain, I guess...?

Now, just because I won't want to agree with the major labels and their lobbyists too much;) - here are my big questions:

If this works in China, why not do this everywhere else? If this works for Google, why not for telecoms, ISPs and mobile operators?  If this works for music, why not - sooner or later - for music, TV, video, books and newspapers?

First: China does not have much of a business of 'selling units', i.e. there are no Billions of $ in selling CDs or single-track downloads. Therefore, any money that the rights-holders (i.e. the record labels and music publishers, and hopefully the artists) can actually get from anyone in China is probably very welcome; and that is exactly what the Google / Top100 deal will provide. And even though it would be a fair bet to guess that this deal is probably not coming cheap for Google China, it is probably still quite doable since the 'competition' of physical music sales is negligible and so-called 'cannibalization' of traditional music sales is not a major concern for the record industry in China. This would of course be substantially different in the UK or Germany where CD sales and the omni-present iTunes still generate Billions of Euros per year. But this is the lesson: someone had to put some money down. Congrats to Google / Top100. Next: the telecoms - within 6-9 months, imho.

While the cannibalization prevention is, of course, entirely reasonable (if you still sell units), it does beg the question: why do those lucky Chinese Internet users - many of whom may never had to worry much about potential copyright issues, 3 Strikes+Out ideas or MP3-server raids - now get a de-facto feels like free music service, while we - the  more or less faithful and compliant residents of 'The West' - still need to pay 1 Euro / 1 $ for each single download on iTunes, $3 / month for Last.fm (ouch) or run off to the record store, or order on Amazon.

This clearly does not make sense: it  feels a bit like we are being penalized for having actually paid for our music until now. So, some will surely argue, does this mean we should stop paying for music until such deal is being offered in Europe as well? You tell me - but it's sure worth a discussion, I think. It seems to me that this model is workable around the world now - and not just for / with / via Google - and that it should be pursued in Europe and the US, as well. Give us a licensed platform provides 'feels like free' music to the users, based on collective and public blanket licenses that can enable anyone that wants to offer music with what they do, while paying for the licenses with the traffic that those offerings, the added values, the platforms, will generate.

Here is another interesting quote from the WSJ: "I can't overstate how important the new Google service is, said Lachie Rutherford, president of Warner Music Asia Pacific, which is making its entire global catalogue available in China as part of the deal: until now, the online market in China has been completely un-monetized by the music business" 

This strikes me as a very interesting way of putting this: Lachie / WMG: isn't the entire Internet music-sharing economy (i.e. P2P, stream-sharing, drive-sharing etc) un-monetized, as well? And why is that? If WMG can do this in China because their is no previous unit-sales income worth mentioning, why not do it for the Internet, period? Why not license Google - and Facebook et al - and the ISPs in much the same way? Or will you just do this in places where nobody paid anything to begin with?

Techdirt has a very fitting comment, on this (see the link below):  "The fact that the labels are moving forward with this plan in China, given its reputation as the wild west of copyright infringement, undermine their contention that they can solve the supposed piracy problem with legal or technological means elsewhere. Furthermore, it exposes the reality that what's staring them in the face is a tremendous opportunity, not a problem" 

Not much to add here, except for my usual Lessig-esque mantra "Compensation not Control". Google + Telecoms - will you do that for / with us, please? This year?

Related articles by Zemanta

• So Only When Piracy Gets Really Bad Will Record Labels Change Their Act? (techdirt.com)
• Google Launches Free Music Download Service in China (mashable.com)
• Google to Offer Free Downloads in China (nytimes.com)
• Google China Signs Big Music For Free MP3 Search Engine (techcrunch.com)
• The gloves are off: now Google needs to really get involved in the new Content Economy, asap (mediafuturist.com)
• The End of Control and the Future of Content: new Video of my Authors@Google Talk in San Francisco (mediafuturist.com)

Compensation Not Control Music 2.0 Gerd Leonhard Midem Net 2009

View more presentations from Gerd Leonhard.

Comments

[Jon Smirl]

1.

I've advocated this strategy several times before in my comments. Leave the consumers alone, let them download or stream.

License websites with reasonable fees. Sock it to myspace but don't kill someone who streams something obscure like traditional Hawaiian music.

Now turn the lawyers lose and chase the websites that won't license. Shut them down and drive the traffic to the sites that have licensed.

In this model P2P will just go away. If you can freely download from last.fm, why do you care about P2P anymore?

And provide these websites with something useful - quality digital masters of all recordings with an accurate database of performers. All music ever recorded fits on a $200 disk drive. Send them a drive when they sign the contract. These sites are sending you piles of money, at least do them the courtesy of giving them clean and accurately labeled stock.

[Frederik De Wachter]

2.

Amen.

I have another question: if Google is allowed to stream/download the labels their music in return for half of it's advertising revenue from Top100.cn, that's great indeed. I also believe there are lot's of opportunities to grasp for the labels as the attention is going to be worth more & more. Very nice.

But not only Google, ISP's or Telco's should be given this opportunity on a global scale. All the startups & services like Immeem, Last.fm... should be granted the same opportunity. Possibly via licenses for a share or API's, right?

[Gerd Leonhard]

3.

Jon, thanks for the comment - right on!
Frederik: 100% correct. It needs to be a license for EVERYONE. Like Radio.

[Ric]

4.

God Bless Google. They may not do everything right but they work to find solutions and in doing so create some great outside the box thinking. I dont know if its the same for others but this is a call out to never partake in the current western based music marketing machine ever again. Dear record companies, you can make a appropriate amount of ad money on my music acqusitions - and at the same time, reinvent your model - or you can make nothing when I go get my music for free elsewhere. Will it be obsolescence or will it be evolution for the music publishers?

[Nils]

5.

But have a look at the ongoing dispute between Google's Youtube and the German Gema. I don't think it's Gema fault alone insiting on the pay per stream model - there was a flat fee agreement in the past. Googel wants to get a stronger hold on the chinese market and is therefore willing to pay higher royalties to the music labels there. In Germany or the UK Google already is the number one player, so they try to benefit from their competive power to keep a bigger slice of the revenue pie.

[Gerd Leonhard]

6.

Nils, thanks for the comment; here is my 2 cents:
a)You can bet that Google isn't paying those kinds of license fees in China - probably not even per stream but just rev share. Google is not just a cash cow that can be charged for everything - if the rightsholders don't start getting that they will receive ZERO from anyone - not everyone is eager to make a deal, like Google is.

b) The beneficiary of the Chinese deal is NOT just Google - it's the record industry that has found new money where there was zero before. Why is it that we are always thinking: lose-win?? This could be a win-win-win for everyone.

The same is true everywhere else, too - but as long as the rights holders and organizations keep demanding pie-in-the-sky per track fees that will NEVER be financially feasible they are just destroying any possible collaboration in this 'new content economy'
A fixed payment per stream is not an option - that's what it comes down to. Not now, and not in the Future. GEMA is hanging on to the old model of on-demand play and 'mechanical reproduction' and that will kill every possible deal, for sure.

[Stephen Hill]

7.

Gerd,

Excellent post. It brings together many of the themes you've been promoting for the last couple of years in a fast-changing real world context.

There's one aspect of this that I think is glossed over, though. Look at it from a user's perspective: they get "free" music, but universal licensing to multiple large web sites/platforms would create some difficult follow-on problems for them. In that regard, the distinction between streams and downloads is significant.

Say the user is an iTunes diva who manages her download collection on her main computer, then syncs portions of it to her portable i-Pod-Touch-Phone device. With this system she retains full control over her growing base of music assets, personal playlists and the ability to share any or all of it, at the expense of having to manage (and hopefully back up)thousands of large files.

The user who streams free music from a single large search provider like Google in your example, is in a fundamentally different situation. Unless the site provides them with a substantial user account feature set that allows "virtual collecting," tagging, rating, and playlist creation (and possibly algorithmic personalization and recommendation features derived from his clickstream like Pandora and Last.fm) this user is effectively starting from zero every time he uses the site. While I can imagine very casual, non-technical listeners being OK with this, it would not satisfy any active music listener.

Moreover, if in the likely case that the user streams free music from multiple sites, he or she would need local music management software to capture the sum of their listening activity for future use or reference. iTunes provides part of this feature set today by saving the links to open "radio" streams in its database, but saves nothing at the level of the individual piece of music for streamed content unless has its own URL or is part of a playlist assembled from discrete sources. Even then, it is a challenge to organize effectively.

I can imagine media management functionality being built into future browsers as an evolution of their bookmarking capabilities, but it would be duplicative of most of the iTunes feature set. Moreover, services like Rhapsody, Lala.com and MP3Tunes.com are already doing it as a web service, via a hybrid "stream and/or download" model, supplemented in Lala and MP3Tunes' cases by a music locker feature set to organize and serve non-licensed content already in the user's collection.

A music fan who builds a profile and collection on Lala already has most of what you describe. It's not free, but costs 10¢ per track — cheap is the new free — if you have enough connectivity to make on-demand streaming your music usage model.

The larger question is, how will the user manage their media collection? Via a desktop app like iTunes, a web app like Lala.com, or some kind of portable profile/media manager that knows what they have and what they use, and somehow overlays all the platforms they use? I'm thinking of something like the Digg bar -- a functional layer that can be invoked when needed regardless of the hardware or platform, as long as the user is connected.

:: SH

[Gerd Leonhard]

8.

Hi Stephen, very thoughtful reply - thanks!! Basically, Google is already addressing this issue in China (I just can't see it unless people send me screenshots). They are starting to build in recommendation tools, buddy playlists and 'iTunes in the sky' kind of ideas as far as I know. In any case, since my music files will be in the cloud, so will, eventually, my music intelligence, given me access to all that cool stuff that iTunes does on my machine, now, but from any device anywhere. This will also make it much easier to present me with relevant advertising - or rather contvertising (ads as content) IF I chose to allow it. Most people will since it will unlock even more value in the system. A less liquid i.e. device-locked system may continue to work in the living room nut not for most users who will be 97% mobile and use whatever they have at a given moment. But: like MobileMe from Apple, maybe iTunes will move into the cloud, too, since once we have a flatrate their chief value will not be the music but the CURATION, the CONTEXT. Cheers!!!!