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september 27, 2007:
outlining the logic of the flat rate for music
plus more details on “music like water,” part 1

Lately, a lot of people have been asking me why I am so sure that a flat rate for music would be a good thing, how it can be brought about, and how it may actually work. Since I have just started preparing for my keynote speech at the Flat Rate Music Event in Iceland (on Oct 17, 2007), I am getting pretty well tuned up on this, so here is a bit of a FAQ on the flat rate and what I have come to call “Music Like Water.” Some statistics gathered by eMarketer clearly illustrate the current conundrum – albeit from a U.S. centric point of view, so some of this may or may not apply to Europe in exactly the same way. Basically, what’s happening is that a much higher percentage of the total population is actually buying music today (32% of the U.S. population in 2006, versus 20% in 1980), but (and this is a very big but) the amount spent per capita has almost halved – and that does not even account for inflation since $100 is obviously worth a lot less now than it was in 1980. In fact, what cost $100 in 1980 would cost $267.76 in 2006 so $198 back in 1980 would be $530 today. I guess one could safely summarize that if we adjust for inflation it has actually shrunk by 75%!

Why is this happening? First, the music buyers’ behavior has changed and they have broken down the control mechanisms, and bypassed the pricing rules of the record industry. For one thing, people can now buy individual songs (i.e., just pick the cherries rather than buy the whole album), they can download music for free pretty much anywhere (and most of it cannot be tracked no matter what they tell us), they can swap music on IM, Skype, and via Bluetooth, and they have myriad other options to get free music (satellite radio, Pandora, etc.). Plus, and I think most important, the competition from other entertainment categories such as gaming is huge. The entertainment share of the consumer’s wallet is under serious siege, no matter how you look at it, and music has not kept the top spot here (to put it mildly). In any case, this development reflects that, as far as music is concerned, more and more people seem to want higher value at ever lower prices, and that they are tired of being forced into buying an entire album only to get the one or two “good” songs that they really wanted. Digital music has buried the concept of a “must-have-the-album,” finally – at least as far as its physical possession goes.

A quick note on that: I do think this will be revived once complete and unfettered access to digital music becomes the norm for all users. The downward price pressures and value perception shifts that go with these stats are rock-solid trends that we can only accept as the definitive reality, and ultimately we must now counterattack with a radically new model: Let’s lower the price of on-demand access to music (since that is what it’s all about – i.e., not copies); get 98% of the population to automatically pay a very low minimum, every month; suck them into the music vortex (so to speak); and then take them upstream to sell them lots of other stuff. Not rocket science, really – see cable TV, cell phone services, software, games, etc. – but certainly a huge shift for those record company cartels that are used to telling the users what to do, when, and how. The bottom line, however, is this: We urgently need eve- ryone to have “feels like free” access to music, access that will generate solid, recurring, and expandable revenues that are built into the ecosystem rather than remaining an option that every user must select (and thereby pay for) every single time he clicks on “get this song.” That model simply won’t scale – the Net Generation and those ADD-prone 12–27 year olds who have grown up as “digital natives” just won’t buy “the old way” anymore – that model is asking too much, too early, too rudely, too disconnectedly, and it will be the industry’s noose around the neck if it does not change.

YOU MEAN…LIKE A TAX?

It kind of sounds like it – and that may be one way of looking at it – but I would much rather see this as a voluntary collective license. (Again, just like radio!) Having said that, the thought of a universally accepted and agreed-upon, “common-good” payment may seem somewhat un-American, and therefore my hunch would be that Asia and Europe will be first to implement such a concept. After all, most Europeans already pay for a public TV and radio license, and for levies for devices and recordable CDs – and most Europeans love their public libraries, too.

Here is a simple appeal to the labels and publishers (and of course to the artists they represent, and their managers): License music on the Internet just like you licensed radio – but at better rates of course. In fact, the Internet, and social networks in particular, are already like Radio, and the likes of Facebook will in the very near future be as crucial to music promotion and marketing as radio was the past 50 years. Today, just as during the humble beginnings of radio, online social networks and services are by and large not yet licensed for their use of music because no workable, realistic, and practical license model exists. The rights holders and industry bodies have failed miserably to come up with a workable model because they have no idea what those hundreds of millions of people out there actually want. The result: Permission denied. End of story. As a consequence – again, just like radio – large percentages of Internet users are now basically forced to blatantly engage in unlicensed behaviors of some kind (such as streaming tracks on-demand on their blogs, ripping webcast streams…never mind P2P filesharing), a fact that is also increasingly attracting the attention of the European Commission, which wants this paradoxical situation resolved ASAP.

There is a market, there is demand, there are revenues – how come there is no license? Hello? So, to begin with, what is a flat rate for music? Basically, it’s the simple concept that literally everyone, in some way or the other, should be able to legally attain basic access to music, and that everyone’s open-access consumption of music should finally be sanctioned and legitimized. But payment for this must be offered in a way that does not feel like a major decision or impending credit card transaction every single time you do it. It is the idea of a built-in, universally accepted payment for a service that one cannot and would not want to live without, akin to water, electricity, and of course TV and radio. Similar to how cell phones and wireless services such as BlackBerry email only took off when device prices came down drastically, and flat-fee (or prepaid) offerings came about, and to how cable TV took off only after it was offered at a very low price point, the idea is to engage 95% of the population in a “payment-already-included” and bundled consumption of music so that they can become satisfied and engaged users, and then be converted to even more active market participants who are likely to buy something “upstream.” Again, just like the cell phone or cable TV, the mission is to get everyone into the system, at a very low price point, and then crank up the business with all kinds of extra offerings. Engage, not enrage!

Music simply cannot be reduced to a luxury offering for an exclusive group of buyers, and we must stop pushing expensive one-off deals (i.e., CDs and à la carte downloads) to a very exclusive group of buyers such as 45-year olds who want to “do the right thing,” who are not online all the time, who have more money than time – and who like stylish devices. Rather, the industry must urgently launch offers that can bring everyone aboard at a very low entry point, and with an irrefutable value proposition – a value proposition that can feel like free yet in the aggregate generate large amounts of cash. Let’s do the math: Get 90% of the Western population (i.e., everyone who is connected in some way or the other, be it on the TV, the computer, or the cell phone) engaged at €1 per week, and you instantly have a very sizable pool of money that would rival or even surpass the still-existing revenue streams derived from CDs and downloads. And that would just be the beginning: Those who still buy CDs now would not stop paying them then, either! This is how I am envisioning the Music Flat Rate structure:
for unrestricted streaming use: A revenue-share (and/or a share of expenses, such as in the case of non-revenue earning entities that offer music) in the neighborhood of 10%, for both the use of the master and the compositions, exact split TBD. This would not include downloads (formerly known as digital phonographic delivery); however, it would need to cover any and all types of “listening” uses including full-length tracks, on-demand, and interactive and unrestricted uses. Plus it would include all platforms including mobile. (Remember, there is no such thing as “the mobile web,” so why should this be any different?
for downloads (formerly known as “copies”):
A flat rate per registered user on a given site/ISP/platform/network; I’d propose €1/£1/$1 per user per week, with the exact fee to be adjusted in each country, of course. This would give every user unfettered access to “use,” i.e., download unprotected music files on/via any network of their choice (e.g., ISPs, telcos, operators, search engines, portals, or social networks). The catalog would need to be very substantial but quite a bit of it could also be subject to premium charges such as live concert recordings, etc. It is not unthinkable to have some sort of ceiling here (say, 500 downloads), but that probably wouldn’t really do anything for anyone, so…why bother? Most important, do keep in mind that most users will not actually pay the flat-rate charges themselves. Rather, their service providers will wrap the payments into other payments (similar to how XM satellite radio is bundled “for free” into new cars, or how 911/emergency calling access charges are bundled into all U.S. phone bills). And they will find many new ways to subsidize the legal mu- sic consumption via advertising, sponsorships, or upstream-selling schemes. Why would they do that? Because if these licenses are provided, they now can build a business around music and count on the content being part of it (again…like radio!).

how would the artists and creators of music get paid?

Any and all use of music on the networks can be monitored and tracked, i.e., any user who streams or downloads music will create a data trail that could be used to determine which music by which artist was used in a given month/week/day/ hour and in which territory. Leaving aside the complex and possibly daunting privacy and data security issues (which I believe can and will be solved) this means that an artist’s income will be totally and actually proportional to the level of attention he or she is actually getting on the networks. For example, if your music amounts to 3.1% of all streaming and 2.5% of all downloads in any given month in any given territory, you would receive the exact prorated amount of the available pool of money in that month as well. Of course, both rights (master and composition) would need to be covered and paid for, so the total payment would be split up in a yet-to-be-determined ratio – my proposal would be a 50-50 split but this will obviously be subject to the authors agreeing with the performers (or rather, their representatives). That’s probably another arbitration panel heading our way.

The total aggregate of all user payments, i.e., the “pool of money” as my fellow flat-rate evangelist and music industry catalyst Jim Griffin likes to say, could be collected by an appointed agency. For now, it would be by territory, but sooner or later on a per-continent or even global basis. This is a potential job for the existing societies but I personally don’t quite see this happening for them since the commission for doing this IT job will probably be no more than 2% of the revenue. As a practical example, if a German ISP wanted to provide “free” music to all of its users it would pay, or rather, generate, €1 per week via advertising, bundling, or simply by using its marketing budgets. The ISP would then pay that money into the German pool of all providers that are licensed under the flat rate. Note that this pool would probably increase over time, as well, since more services would take advantage of the flat rate as it becomes apparent how they can generate new revenues with or on top of it. Also, an interesting side effect could be that any single given user may well end up having several access points such as their ISP, their wireless operator, and their favorite social network, all of which would be likely to pay the €1 for the very same user, thereby increasing the total size of the pool over time.

would the flat rate completely kill cd sales and other physical products?

Definitely not. Keep in mind that buying CDs is already de- facto voluntary since anyone who has a computer and a Net connection can already search for and instantly find a myriad of ways of getting those digital copies for free. Of course, the music industry can no longer afford to, literally, bank on those voluntary actions and “random acts of kindness,” and it’s be- coming painfully obvious in almost all territories that the percentage of people who continue do this will rapidly decline over the next few years. The advent of the Music Flat Rate will without a doubt cre- ate a very powerful environment that will spur the discovery of new music. That may in some cases result in foregone CD sales but in many more cases it will actually revive them – provided of course that CDs (or whatever comes after them) can deliver real value and come down in price. Better sound quality, nice artwork, bonus material, and a very competitive price should do the trick here.