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july 01, 2007:
gerd leonhard’s open letter to the independent music industry
music 2.0 and the future of music is yours – if you can resist the temptation of becoming just another music cartel!

On June 29, 2007, while at London Calling, I was invited to speak to a small group of indie record label leaders at the annual AIM/WIN gathering in London. I took this opportunity to take a good look at what I think needs to happen in order for the independent music companies to actually take advantage of the new music economy that is rapidly unfolding right now.

Here are my views on what I like to call “Music 2.0” – the next generation of the music industry that is being created as we speak. The Music 2.0 model is dramatically different from the traditional music business; many old ways of doing things, many old relationships, and many outmoded traditions cannot and will not survive. I want to seduce you, the leaders of the independent music industry, to fearlessly go down this new road, to take a leap, to leave some of your assumptions and your “religions” aside, and to make bold moves – because that is what is required to turn this ship around.

F. Scott Fitzgerald, the famous novelist, once said, “The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” This will clearly be the music industry’s task go- ing forward! Technical and economic innovations have, for the past ten years, stripped away many traditions, social and economic hi- erarchies, and monopolies in the music industry, and if there is one thing we can say for sure I guess that would be that it’s now showtime: The music industry is finally reaching a major inflection point, ten years after the first dot-com ventures shook the ground. It took a lot longer than we all thought, but it’s hitting us much harder now: CD sales are down between 20–40% YTD, and digital sales are not going to make up the difference any time soon – and the one-horse race with the omnipresent iTunes clearly is a dead-end, too.

We are very quickly nearing a point where we will be forced to dive into what I like to call “Music 2.0” – a new ecosystem that is not based on music as a product, but music as a service: first selling access, and only then selling copies. An ecosystem based on ubiquity of music, not scarcity. An ecosystem based on mutual trust, not fear. A sales model based on merit, not control. As Don Tapscott points out in his great book Wikinomics, we may want to think of Web 1.0 – the “old” web – as some sort of digital newspaper, whereas Web 2.0 is a canvas that allows syndicated content and information to be put up, shared, changed, and remixed. It’s now all about the interaction, the send-and-receive options that make it useful and “special.” And of course, in music, it’s always been about interaction, about sharing, about engaging – not just about sell-sell-sell right from the start.

Stop the sharing and you kill the music business – it’s that simple. When the fan, a.k.a. user, a.k.a. listener, stops engaging with the music, it’s all over. Today, you urgently need a canvas for music, not a one-way product (such as the CD). Let’s face it: Most “leaders” of the major record companies as well as a good many independents are, by and large, still in solid denial about the fact that their unit-sales-based model is utterly broken and crashing quicker than they can fathom, and many still hope for some magical technology solution such as DRM or TPMs to solve a serious business problem. Just take a trip to the annual MIDEM convention to see how disconnected most people in this industry still are!

Billions of dollars have already been lost due to misguided strategies, outdated policies, and lack of true leadership. Forgive me, but I think it’s time to get your act together and do whatever it takes, not just what fits comfortably into your current mindscape – this is a make-it or break-it moment. How come most music rights societies (PROs & MROs) are still at a total loss when it’s about “licensing the un-licensable” (as my dear friend and colleague Jim Griffin puts it), when it’s about making new models legal? Thousands of companies with innovative business models are left unlicensed by default (or shall we say by tacit consensus?), and most of them have given up on even trying. Major money is left on the table due to the industry’s tardiness and internal squabbling. Many of the traditional music licensing organizations have utterly failed in their mission of making music available – in fact, they have, by non-action, succeeded in making it unavailable. What you need now is action, not continued excuses.

Today, we have arrived at the paradoxical state that any startup that wants to use music will not even try to be legal right from the beginning, since there is no reasonable way of doing so, and since it will eat up a lot of resources without any tangible results.

Look at the biggest exits in this turf, during the past two years: MySpace, YouTube, and to a lesser degree, Last.fm – either they did not even bother with the “proper” music licenses, or it was unclear if and where and when they would even need one. Non-compliance with existing copyright regimes, and extensive loophole-exploitation succeeded and was handsomely rewarded; while complying with the existing laws and regulations was punished by becoming irrelevant in the market place (see Napster). The music industry must now admit that it has failed to act. Its leaders’ cluelessness, incomprehension, and general lack of willingness to embrace true change allowed paying for music to become voluntary. Congratulations.

As an example, Don Tapscott points at the year 2006: The losers built digital music stores, and the winners built vibrant communities based on music. The losers built walled gardens while the winners built public squares. The losers were busy guarding their intellectual property while the winners were busy getting everyone’s attention. Warner Music Group’s stock nose-dived from $30 to $14 in less than one year; Google rose from $323 to $526; Apple went from $50 to $127. For the independent music industry, the question is: Which side do you want to be on? Do you want to become another “major player” and stay stuck in the muck of Music 1.0, or do you want to lead the way into Music 2.0?

In this context, please allow me give you a glimpse of the future, so that you can make some decisions based on what is coming.

1. ubiquitous sharing

Within 18 months, in many key music territories around the globe, wireless broadband networks and device-to-device adhoc networks will connect every conceivable device with each other, as well as with gigantic online content depositories – or shall I say media switchboards – that will contain every imaginable song, film, or TV show. If you think “sharing” is a big deal now, just give it another two years – music sharing will be a hundred times as easy, 500 times as fast, and enabled on every single device, from music players to car radios to wrist watches (i.e., not just computers). And over three billion cell phones and over one billion wireless music players will connect seamlessly to each other. Wireless broadband access and devices will become so cheap, fast, and ubiquitous that sharing content will become the default setting, at very high speeds and with anyone who is close by. Search – Find – Select – Exchange. Click and get! So how can the content industries monetize this? The only sensible approach is by licensing participation via a blanket license, i.e., to legally enable the networks and the devices through which the content flows. The music industry in particular must license the use of pretty much all existing and newly released music on these networks, and it must make irresistible, irrefutable, and utterly compelling blanket offers to those who run the networks. These license deals must be conversations, not monologues, so that they are not perceived as yet another stick to the ISPs and telcos but welcomed as a mutual benefit.

2. audiovisual synergies

Thousands of new TV, online video, and gaming channels will get underway in the next 2–3 years, and all of them will need music to go with the visuals. Millions of songs will be synched to video, and this market opportunity will surely explode. If you are 360° music company (i.e., if you own can represent both the master rights and the publishing rights, and if you serve as a trusted agent to your artists), it may well be that those burgeoning B2B licensing revenues end up being more than 50% of your future income. However, exploiting these opportunities will only be possi- ble if an efficient and frictionless system for those myriad B2B transactions is available, and widely used everywhere, and this is where I believe the huge opportunity for AIM, WIN, and the independents’ new Merlin initiative lies. Think eBay + Alibaba + Chemdex + Getty Images. Every euro invested in better B2B processes will make tens of thousands of euros for music rights holders – while they sleep, or better yet, make more music.

3. using the flow

Streaming music, on demand, will be everywhere. On every website, every widget, every mobile, every device; supported by a new generation of ads, sponsorships, and commissions on transactions. Performance-based income will surge beyond your wildest imagination. But again, only if the industry’s licensing organizations and their members finally chose to play ball, to participate, to provide irresistible license and flat rate offerings, create reliable standards, and go flat-out for liquidity, not try to maintain artificial scarcity. U.S. public performance rights organization BMI’s revenues have grown from $630 million in 2003 to $779 million in 2006 – not bad considering the overall demise of the recorded music market at the same time! Read my mouse: It’s not the copy of the recording that will make all those new dollars or euros or yen or shekels or rupees – it’s the use. In fact, the use of your music may just be the next big format you have been looking for.

4. multimedia riches

Rich media (i.e., multimedia ads with music, video, animations, audio, etc.) will become the default advertising format for online advertising, representing yet another huge growth opportunity for music. Researchers predict that soon, over 10% of all ad spending will be on the Internet and 16% of all Inter-

net ads in 2009 will be rich media. With an estimated $700 billion of global ad spending by 2009, that means $70 billion for online ads, and over $10 billion spent for rich media ads. Hundreds of millions of $$$ for music licenses!

5. radio digitized Digital radio will deliver 100% time- and place-shifted music experiences, stopping only a tiny bit short of becoming a “feels like free” version of iTunes. The reality is that Net radio is really just another TiVo – but for music. Radio will indeed become the feels-like-free, on-demand music box once again: The only remaining “Radio 1.0” factor will be that it will continue to be curated and expert-produced, as well as taking in social recommendation and smart technology agents. The best radio stations will become very strong brands (BBC Radio 1, KCRW, WYNC, etc.), outdoing what used to be record labels. So how will the rights holders license Radio 2.0 if they insist on staying with a per-copy model? Talk about a clash of paradigms....

6. watch and learn

All music companies will become video companies, by default – music will be multimedia, from the get-go. Think: music + video + audio + text + games. If you aren’t already diversifying into video and TV, you really should.

7. foreign intrigue

China, India, South America, and Africa will explode with new models for usage-based rights bundles and flat rates based on access. In other words, content will be monetized by accounting for usage, not by counting copies.

But again, you will not have truly liquid (i.e., efficient, lowfriction, and vastly scalable) markets until you allow, support, enable, and trust them. The music industry must swing this ship around, because right now, they are failing miserably: failing on technical and on licensing standards, on flexible pricing offerings, on competitiveness, on compatibility, on being trusted, on transparency. Let’s take a step back for a minute. The music industry’s past was based on:

• Control
• Exclusivity
• Monopoly
• Closed-ness
• Guarding/Protection
• Secrecy/Non-Transparency
• Territoriality

The challenge is that the industry’s future – if it chooses to go there – is based on:

• Openness
• Transparency
• Peering
• Sharing
• Trust
• Un-Control
• A truly global outlook
• Liquidity

To quote Jim Griffin again: “Monetize anarchy, and license the unlicensable.” I predict that as much as 60–70% of this new music business – and with that I mean a newly revived, $100 billion music business – will be independent within 3–5 years – but only if its leaders don’t follow the major labels into liking control more than income. In this context, here are a few of my favorite bottom lines:

1. the media ecosystem of the future is, and must be, fric- tionless.

Frictionless means music anytime, anyhow, and anywhere, ranging from free and “feels like free” to bundled, up-sold, and premiumed. Your job as a music company is to do away with the friction, not to add to it, much less to reinsert it. On the Internet, every hurdle is treated as damage, and the traffic is simply routed around it. Create friction and be sidelined.

2. it’s now all about participation, not prevention.

Because of the utter impossibility of maintaining any real hurdles to access, it is absolutely crucial that you find ways to participate in any and all forms of commerce that use music in one way or another. Charge smartly and efficiently for access but make music available the same way that cell phone operators make cell phones available: at a very low cost, in an irresistible way that engages people – and sell upstream from there. Whether it’s streaming-on-demand, remixes and mashups, playlisting and social network music applications, adding music to video, or digital radio, being part of it is what it all starts.

3. let’s face it: the web is like a giant tivo,

a huge recorder, or a DVR – all performances are or can be recorded, all broadcasts really are deliveries. You need to stop distinguishing between music “to keep/own” and music “to listen to” – your users and those pesky digital natives already did this a long time ago! License the use. Share revenues. And then up-sell to ownership.

4. copyright is the idea, the principle, the backdrop, but usage right is where you will actually monetize.

Licensing usage and collecting for usage is where you need to focus your energies, not the “protection of intellectual property.” This is a tough spot but again, do you want total control, or do you want revenues?

5. end the fear-inducing endism:

Very few things end completely when new inventions are taking hold. Usually, the market simply changes, and most of the time it becomes larger. And it will be no different this time. Yes, the fax machine and the Internet killed the telex and the telegraph, but we still have books even though we have Xerox machines. And we still have theatres even though we have DVDs. CDs will decline, and may eventually fade out completely, but nothing you do in digital music will completely wipe out physical media – in fact, there is likely to be a new physical media format emerging from the total digital access paradigm (think HD!). In reality, the web is just another format, and it’s called access.

6. we must remember that the only real limit to growth, in music and in media, is the consumers’ and the users’ time.

Media consumption will continue to rise as the offerings become cheaper and more ubiquitous, and as more of the “Digital Natives” consume multiple media at the same time. Content creators and media companies are now engaged in a battle for the wallet and the clock – but the clock comes first. Mindshare means time-spend means money spend! Again, this is where attention translates into money, and this is why the first objective is to get attention, and only then to get money. The biggest problem for most artists (and their labels) is obscurity, not piracy.

7. engage, not enrage.

engagenotenrageStop anything that enrages the users. And do it now.

8. yes, you can compete with free,

because what only you can offer must never just be free. Yes, a copy of a file is free. A CD burned from another CD is free; a USB stick’s content copied to my computer is free. But the real-life connection to the artist, the experience that is happening around the music, the added values such as videos, films, games, chats, books, concerts and merchandising, the context (!!!) – all of that must not be given away “for free.” In fact, the more unique and valuable the experience is, the more expensive it will be – look at the global rise in live concerts! The music companies formerly known as record companies must quickly stop the obsession with trying to make money merely from selling copies, and instead provide 360° access, because only the legitimate and authorized source (i.e., agentlabel-manager) can provide these comprehensive bundles of values that the users, fans, the People Formerly Known As Consumers, will feel compelled to open their wallets for. Music 2.0 is an unprecedented opportunity, very much like when music went from acoustic to electric. Everyone wants music. More music is used on more platforms, all the time. There’s an unprecedented hunger for music that you need to fulfill! Lastly, here are some challenges that I believe a music industry led by independents must embrace.

1. licensing

Once released, a recording becomes, in reality, available by default and must be made “usable” under a default license – all else equals tacitly conceding that it’s free to use without permission. As a result of such a new “default license,” some rights principles that we have gotten used to may not translate into this environment, such as the moral right of deciding where your music is being performed or maybe even otherwise used. However, I don’t think this will apply to commercial use in films or ads – unlike the private or semi-private use in UGC and web-generated content – and of course, to public performance.

2. copyright

The traditional definition of copyright and intellectual property cannot, for the time being, be the sole key to monetizing your creations. Because it is no longer about copies, it’s no longer about the right to copy, it’s no longer about reproduction – it’s about how music is being used and how to participate in those much larger revenues. Call it ephemeral copies, tethered downloads, rented media, streaming, buffering, caching, storing, time-shifting, downloading, ripping, or whatever – the fact is that digital technology has already done away with the distinction of a so-called performance being different from a so-called DPD (digital phonographic delivery). All computers – and that now means all cell phones, too – are by definition copying machines. As scary as this may sound, you must therefore discard the idea of charging more to “keep” music, as opposed to just “listening” to it as in radio. Instead, you must focus on charging for added values (such as a better way to keep the music ;-), and on collecting revenue at every point of access, and then go from there. Charge for music like utility companies charge for basic water and electricity service, and then charge more for all the other options. Did you know that the bottled water business is a $100 billion industry?

3. finding new streams

Your revenues from selling copies of songs will soon dwindle down to maybe 30% of your total income. The rest will be revenues from licensing, sync, performance, bundling, flat rates, revenue sharing, and the many other streams that are yet in their embryonic stages. Get busy creating and supporting those new revenue streams!

4. resisting exclusivity

You can’t afford exclusive rights representation at high rates any longer, unless these traditional institutions and licensing bodies really give you 100% coverage and a flawless solution.

5. going global

Forget territorial rights clearance except for when serving local repertoire (which is on the rise, too). Most talent is global, and your audience is global, or at least virtually local. Internationalize right from the start and build systems that will support that. Build a worldwide licensing and B2B-transactions system that makes all repertoires available for all types of use, and build it quickly.

6. charging fairly

If you are independent music company, you must resist the temptation to do as the now quickly deflating major labels have done (e.g., extract huge one-off payments, extort equity shares, license at unreasonable rates, refuse access for no reason but marke control concerns, sue their own customers, etc.) – that is a certain death wish. In fact, now you can force them to follow you!

7. resisting lockdown

Resist all attempts at locked/protected formats, and go for open systems.

8. packaging

Bundle and package music in new ways: with other services, with other products. And prepare for the Flat Rate because it’s coming, without a doubt.

9. removing roadblocks

Remove any and all hurdles to complete market liquidity: pricing inflexibility, lack of standards (technology), lack of licensing transparency, territorial differences, rights monopolies.

10. looking outside

Embrace outsiders that can jumpstart the music business. Niklas Zennstrom disrupted the telecom business, Hotmail changed email, Stanford dropouts started Google – the innovation often comes from the outside. Call me a utopian, call me a dreamer, call me a ruthless optimist, but I think this is the future of music.