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JUNE 2004:
AS MUSIC PRODUCTS BECOME MUSIK SERVISES, ACCESS WILL REPLACE QWNERSHIP, AND THE CONSUMERS WILL TRULY DRIVE THE BUSINESS - BUT WILL IST ALL MEAN A BIGGER PIE FOR EVERYONE? ORIGINALLY PUBLISHED FOR THE CONFERENCE CATALOG OF M4MUSIC 2004 (ZURICH, SWITZERLAND); SLIGHTLY EDITED IN NOVEMBER 2007

The music industry is in a very exciting if somewhat stressful transition phase – and one that the other so-called “content industries” (film, television, publishing, etc.) will also have to master. Seven years after the first digital music “revolution” and the painful burst of the dot-com bubble, the “Creatives” (i.e., the musicians, producers, writers, composers, etc.) and their representatives are finally starting to get a glimpse of what a second-generation music business may ultimately have in store for them: going direct to the audience, less control but more ways to make money. At the same time, forced by the incessant decline in CD sales, the industry’s “leaders” are finally starting to follow where the consumer has been leading all along: that inevitable transition to content as a service, rather than a product. The winners: the Creators, and you and me – the “users,” the People Formerly Known As Consumers.

THE PEOPLE FORMERLY KNOWN AS CONSUMERS" - THE FUTURE OF MEDIA IS INCREASINGLY USER-DRIVEN

• User Generated / Programmed Content
• User Rating / Filtering Mechanism
• Mobile back-channels
• User tagging and social search
• “Wisdom of the masses”
• Viral “word of mouse” changes marketing
• Remixing and mashing

An interesting side-effect: An industry that was once (in)famous for its “top-down” style must now learn how to embrace a “bottom-up” paradigm. Digital technologies – though still cumbersome and not quite user-friendly enough – have become an unobtrusive and omnipresent part of our lives. The manner in which the entertainment, media, and “content” industries must conduct their business has therefore changed forever. The digital tide cannot be reversed; digital technologies have simply become part of our lifestyle. Our habits have changed, and our own inventions are starting to challenge our old, tried-and-tested assumptions. A lot of changes are coming, bringing with them much uncertainty, but also an ocean of opportunities. In 2004, we may already see a second, more mature coming of digital media ventures, and thankfully, “the rising tide will float all boats.” Savvy independent players will have a major role in this new digital music era, simply because they can be more agile, often have a much shorter decision-making process, and can quickly embrace change. The music business has made the transition from wax records to vinyl, from the Walkman to the CD and the DVD, sometimes in a very short time, and has only recently arrived at the broad acceptance of “disembodied” digital downloading. Broadband Internet access is quickly becoming a standard, and as greater connectivity heightens the desire for more content (and vice versa!) we are now finally getting ready for some serious changes in how we do business. We already have more wireless phones than landlines world- wide, and it seems very likely indeed that mobile music will become bigger, in an even shorter time, than “online music” has ever been. All of this is a boon for the consumer, promis- ing more value, fewer restrictions, total transparency, endless choices, and lower prices to boot!

FROM SERVICE TO PRODUCT AND BACK AGAIN
Interestingly, music has already been transformed from a service to a product and back to a service: from the pre-electricity era of the agricultural society to the industrial society (the gramophone and the CD) to the information society, and digital music. Before there were any music “products” that could be purchased just like a box of soap or a can of beans, music was controlled “by foot” (as my friend and fellow museratus Jim Griffin likes to say). In other words, the artists had to be physically present to perform, and equally, the listener had to be present at the same place and time of the performance. Music was simply a service (as it still is in many developing countries, which is why they will head into Music 2.0 even quicker, skipping the entire product-centric period), and artists enjoyed great influence and appreciation. The productizing and, to use one of those good old Silicon Valley buzzwords, monetizing of music brought us the music industry, the few and seemingly almighty gate-keepers, the arduous and self-serving legal frameworks, and the often criticized “content oligopolies” that many cutting-edge music fans and P2P (peer-to-peer) file-sharers loath so vehemently (and for good reason).

THOSE SPECIAL MOMENTS
Now, just above the horizon looms the “experience society” in which not just the steady and abundant flow of information, data, communications, and “content” reigns supreme, but also the actual, embodied entertainment experience of each individual. Remember that special moment when you first heard a song that would stay with you for the rest of your life, what it felt like, and all the things that it stood for? Creating these experiences will become the music industry’s most important value proposition; and purveying those “special moments” for people suddenly becomes a lot more tangible in an interactive, personalized multimedia format rather than with a static media product – the tremendous power of digital media is all in those “special moments.” So, let’s take a look at what the future of music holds in store for us – the fan and user, the artist, and the industry professionals.

FORGET THE INTERNET
– THINKK DIGITAL CONTENT NETWORKS

Clearly, it’s no longer about “online” or “offline,” and it’s certainly no longer about the Internet. The Net is no longer a big deal in its own right, just like having a cell phone is really no longer worth mentioning, just like having a fax machine does not make you a “fax-business.” New technologies that utilize the Internet (and almost all of them do, one way or the other) are now being seen as regular work tools. This is happening in the travel industry and in banking, and it is now severely impacting the music business.

K4

A message to all those dot-com “fat-years” digital music pioneers that have been hunkering down for the past two to three years: You weren’t wrong – you were just way too early! Technology has always created larger, more vibrant markets and the consumer has always ended up benefiting from it. Already, the World Wide Web is merely one step in the digital food chain, just one pipeline for the stream of zeros and ones. Very soon, we will find mobile phone networks, Wi-Fi, Bluetooth, E-Home networks, satellite radio, and the good-old Net seamlessly interconnected, giving us access to massive depositories of data and audio-visual content. This is the ultimate challenge for the music business – the days of the lauded “Internet music revolution” were just a mere testing ground, like the first kicks of a baby during pregnancy.

GETTING DIGITAL ATTENTION
Tomorrow’s music companies (yes, let’s forget about mere record companies) must figure out how they will get their tracks into any and all of these new digital channels, and just how exactly they will get the user to pay attention to their artists rather than the latest Grand Theft Auto videogame, a hot Terminator #37 preview, the latest streaming footage from the Paris-Dakar rally, or some breaking news from the stock market. The question is not if the industry needs to make its catalogs available, nor how much a track should cost, but just how the world’s consumers will even find them, and how artists and their modern-day representatives can get and retain the attention of that perfectly matched customer. Once this all-important attention is secured, the way into the wallet is cleared. This leads us to the next point.

THE FUTURE OF MUSIC:
exposure + discovery + community = revenue

EXPOSURE AND DISCOVERY ALWAYS LEAD TO REVENUES
Exposure and discovery are the main mileposts on the digital highway of the future: If an artist can score and retain good exposure, then 90% of the battle is won. After all, the Net (and any other digital network) is really just a giant funnel for data, information, and communication. And what is its purpose if not to bring exposure to that “information”? The issue is not how much the “user” should pay before he gets to discover an artist but how much it will cost the music company to effect that exposure in the first place – and then, of course, how to convert it into real dollars! Simply put, once pretty much all music ever released is available on all digital networks (and that development is 100% certain, legal or not), multiple value-and-payment models will doubtlessly become available to fit a given user’s needs, whether it be an à la carte deal, a custom-made, on-demand product, streams, samples, or bulk deals. Simply because there will be boatloads of new money on the table, these issues will be solved across the board – with the new

BECAUSE IN DIGITAL MUSIC IT WORKS LIKE THIS:
revenues -> community -> discoveryexposure

money being used to break the log-jam. This development will inadvertently be catalyzed by the presence of even more simple yet powerful P2P and torrent-style content networks, soon be available to pretty much any computer user in any territory, regardless of the recent RIAA witch-hunts. At that point the question will simply be if the industry accepts this new money that is on the table, and gets on with it, or whether it forgoes yet another opportunity in order to spend yet more money fighting the “digital villains” that rocked its boat on behalf of the consumer.

THE WAR ON FILESHARING
Somewhat like the “war on drugs,” the “war on downloaders” is only skimming the most blatant (but not the smartest) offenders off the top, while the savvy (and therefore most important) ones take refuge in the twilight zones of society – in this case, in private, members-only “darknets.” The recent criminalization tactics by the RIAA, IFPI, and BPI have brought us no reprieve – they have just led to more disgust and rejection from the consumers, the artists, and the ISPs and CE companies. In contrast, just imagine the enormous power of exposure and discovery that legalized and UI-optimized peer-to-peer services could conjure. Music marketing costs would shrink to a mere increment of what they are today, niche markets could explode and prosper, the consumer would feel like he’s struck a goldmine, and the music would be paid-for (or better yet, the artists would actually receive the payment!). Music will be everywhere, and music will be contained in just about everything that used to be “images only,” from on- line advertising to interactive slideshows and video clips, from automobile software to digital photography and personal richmedia presentations. Audiovisual use of music will soar and business-to-business licensing income will become a major cash cow. The industry’s entire revenue pyramid will gradually flip: Instead of 90% of the cash being earned by selling products (CDs) to consumers, as much as 50% of the revenues may ultimately stem from content licensing and revenue-sharing deals with digital content networks (both business-to-business and business-to-consumer).

NEW PRICING SCHEMES
Today’s music pricing schemes will be made obsolete by sig- nificant habit changes across most market segments, as well as by the ever-increasing competition from other entertainment products. The hundreds of millions of people who have figured out how to get free music from those seemingly bottomless digital wells – legal or not – will unlikely be persuaded to come back into the old world of unit-based payments; rather, they must be empowered to pay for access first. Until just a few years ago, the music industry has had the amazing windfall of earning tens of billions of euros every year despite the fact that consumers have had to constantly sacrifice their own agenda simply to get anything from the industry at all. Let me name a few of those “quietly accepted sacrifices”: the impossibility of getting only a single track by your favorite artist without having to buy the entire album; the impossibility of getting any product from lesser-known artists if you do not live in the territory it is being distributed in; and the impossibility to get a copy of any recording that is out of print. Until the Net came along, music consumers were simply forced to sacrifice their real needs just to get anything at all from the industry: no product (CD) purchase, no music. But digital technologies are now putting a quick end to many customer sacrifices in just about every industry. Often some entrepreneurial outsiders who spot those unnecessary sacrifices are the ones who can exploit this opportunity better than the incumbents, who usually rely on those tacit sacrifices in the first place. And while much of this is already apparent today, tomorrow it will be the norm. Any information about any artist and their work will be available instantly, while downloads and streams become accessible anywhere, anytime. One need only look at the popularity of eBay, Etrade, Ama- zon, Mapquest, Google, Expedia, and Easyjet to realize how much of a boon this new approach will be for us – the users and consumers. This trend is becoming so all-encompassing that, in the music business, we will see many more consumers categorically refusing to accept the old limitations, and no longer sacrificing their needs on the altar of ancient industry rules and traditions. A huge challenge is certain but a huge opportunity awaits as well – witness the tremendous success of companies such as eBay that are built entirely on customer empowerment rather than sacrifice.

MUSIK LIKE WATER
The digitization of music has released music from its physi- cal product shackles, forever – it has no more plastic it must stick to in order to reach the listeners. Music may already move freely from an artist to the desktop of a manager or agent to the editing suite of a film production company, but once this flow is truly organized and becomes much more user-friendly, watch the use of music go up another notch. When the gates are finally opened, and Liquidity is the official mantra, music will become truly ubiquitous, and revenues will start to flow from previously unimagined (and unattainable) sources.

ACCESS WILL REPALCE OWNERSHIP
In three to five years, consumers will have access to “their” music anytime, anywhere, and the physical possession of it will in fact be more of a handicap, or a pastime for collectors. Music will feel (and act) more like water, and music providers will become utilities. Multiplatform and mobile access to music will be the default setting, allowing consumers to “fill-up” their music devices at gas stations, train stations and in coffee shops, using wireless as well as fixed-media applications. Mobile phones as we know them today will be replaced by much more powerful “mobile communication and entertainment solutions” that will network seamlessly. Mobile music players will connect to open digital music services using GPRS, UMTS, Bluetooth, and Wi-Fi connections, and will be able to stream or download music content, in addition to serving as mobile phones, PDAs, mo- bile gaming stations, “social software” and interactive networking platforms such as Match.com, Friendster, and Linkedln. Mobile music will support all kinds of interactivity between users, such as playlist sharing and collaborative filtering, and storage power will be virtually unlimited, with devices sporting up to one terabyte of storage within the next five years. Flat-fee access deals, cheap international roaming, and “content and connectivity” bundles will make mobile music offers virtually irresistible. Tie that in with new, web-based music offerings and you have the model for the future – Music Like Water. Everyone uses, everyone pays – but it feels like free. Cell phones and other wireless devices will utilize and suck up more content than any other small consumer device. Polyphonic ringtone offerings, Multi-Media SMS (MMS), Java-based games, wireless streaming of audio and video, i-Mode type applications (such as location-based multiplayer gaming), and other cell-phone based offerings will proliferate, at first in Europe and Asia, and only then followed by the U.S. What else can the wireless carriers sell to their existing cus- tomers? Calls will continue to get cheaper while content serv- ices will always use more and more data.

THE "REAL THING" BECOMES EVEN MORE CRUCIAL
“Making music” is taking on a new meaning. For quite some time now, people have been creating new music by using hard and software tools that allow them to freely snag and reuse existing snippets of music and create entirely new versions. This “cut and paste” culture will surge, and eventually a lot of new music will no longer be defined by melody and/or harmony, but by the overall aural “image” or “print” that is being created. At the same time, more people will be encouraged to learn “real” instruments precisely because they have experimented with software and hardware tools that have captivated their interest. Virtual experiences will always want to be completed in “real-life” scenarios – as we can see in the concert business.

PRICING
The current music pricing model will be replaced by a very potent “liquid” pricing system that incorporates subscriptions, bundles of various media types, multi-access deals, and added value services. And yes, it will uphold the Fair Use provisions that the consumer is already used to, such as the right to share and the right to resell. After all, it has proven impossible to make significant technological leaps and yet take backward steps as far as user rights are concerned. We will likely see additional “built-in/no-choice payment” schemes, i.e., relatively small payments that all consumers must make in order to get some basic service. This can be compared to the obligatory license fees for public television and radio that most European residents already pay every year. Similar levies, taxes, or bundled fees are likely to be established for ba- sic content services that will be available on digital networks, such as for wireless carriers, Wi-Fi providers, and ISPs that may yet end up paying a flat fee for some basic content services for their customers (see the UK’s PlayLouder MSP), with the understanding that they are likely to be very incremental and thus not an obvious burden to the individual user. Imagine if all of the 1.4 billion cell phone users around the world would pay only one euro (or the local equivalent in real value) each, per month, to get access to a basic music service. This would already amount to half the value of annual worldwide CD sales. Not realistic today, perhaps, but very likely to happen tomorrow. Beyond this, we will have what I like to call “little choice payments,” where the consumer can choose from a variety of good-value deals but cannot alter or customize them; and “choice payments” such as premium subscriptions, memberships, donations, and pay-per-view offerings. All in all, once the pricing models have changed and music can flow freely, we may see up to 95% of the population in the leading markets revert to active music consumers. Compare this with the today’s average 10–25% that actually buys music on physical media, and you can sense the potential of this fundamental shift.

RADIO MUST BE PERSONAL
Terrestrial radio as we know it will become largely irrelevant because people will have access to carefully programmed and custom-cataloged music anywhere, anytime – digital music in its perfection is as good as the best radio ever was. Therefore, radio will have to compete head-to-head with digital music services that deliver music via satellite or via wireless networks, just as terrestrial television broadcasters are competing with pay-per-view services and digital TV providers. A single powerful attraction that will remain in radio’s favor is the “people component,” though – a good presenter will always make a great difference. However, if radio is to survive it must embrace digital technologies, but retain the personal approach to presenting music and news, while adapting to the certain role of being just one of the options for people who are mobile and connected. Here are some simple Music 2.0 guidelines to sink your teeth into:

1. FIRST, FOCUS ON VIRAL DISSEMINATION OF MUSIC and on reaching the highest possible rate of exposure. Liquidity is the name of the game! This includes providing streaming previews; downloadable files; correct meta-tags and detailed content in- formation; history of uses; music-specific data such as genre, mood, lyrics, etc.; restrictions; permissions – everything. Tedious, yes, but without correct and up-to-date data you will have no business in a digital-content world.

2. TRANSPARENCY WINS. Do all your business online. Start by powering A&R with digital tools (and by that I don’t mean creating musical landfills like MP3.com). Move to using online contract and royalty-administration tools; integrate online payment systems for licensees and licensors; create online interfaces for your business partners (such as other record labels, publishers, film and TV companies, ad agencies, etc.); offer deep information archives for media and marketing purposes; put online syndication tools to good use; apply instant messaging and wireless communication technologies to speed up internal communication; and so on. Yes, these may be expensive investments, but they will save you up to 50% of your staff, administration, marketing, and accounting budgets in the long run. And transparency is the name of the game, today and in the future: The more transparent your business activities, the more loyal your customers and business partners will be, too.

3. LOWER THE PRICES AND UNPLUGED THE PIRATES. Drastically lower the prices for music products and you will see “piracy” disappear quickly because pirates cannot compete any longer. Can you make a profit on a lower sales price? Here is my math: Reduce your productions costs by 25%; sell the product for 30% less; cut in the artist for 25–40%, but most important look to get 95% of your catalog exposed to their perfect target groups, via the Internet; save 50% on your marketing budgets; and take advantage of a much larger market altogether, because now people will be paying attention to music again. And now, let’s look at new ways to release music. Why is it that every new product must be released on CD, and join the other 3,500 new releases per month in the battle of shelf space and media attention? And why is it, in the age of almost limitless data storage, that almost 90% of all catalogs is no longer available to anyone? How about reviving the singles format, but in a digital form (releasing new singles on the web, as well as on bundled media products), and packaging new tracks into games, phone subscriptions, and ad campaigns. And how about providing complete back-catalog series on new audio sound carriers? Abort the old way of thinking “product” – think service.

4. HIRED TO WORK, NOT WORK FOR HIRE. Work-for-hire turns into “hired to work” as the tables turn on the music industry oligopoly. While in “the old days,” artists sold their rights tothe record companies, and in the U.S. their performances and recordings were often deemed “work for hire,” the next gen- eration of up-and-coming artists will hire their managers and agents to do the work for them. What a seismic shift, and what a great opportunity for smart entrepreneurs who know how to address these markets: artist marketing services, agenting and recommendation technologies, business networking tools, small enterprise solutions, and agile application service providers.

5. USE TECHNOLOGY TO RE-IGNITE YOUR MUSIC BUSINESS. Technology has always driven the music business, and it will drive it this time too. Think back to the advent of amplification, the rise of radio, the invention of the player piano, the gramophone, the Walkman, the CD, etc. Every time a significant technology invention came along and impacted the music business, legal struggles ensued and lawyers had their field days. Ultimately, though, once a disruptive technology was actu- ally widely adopted by consumers, everyone moved on to ex- ploit it, and the overall market became bigger and bigger and bigger. The music publishers sued the piano-roll manufacturers, music companies and artists sued radio broadcasters, the TV networks sued the first cable operators, the film companies sued the VCR manufacturers, and now the RIAA sues consumers that contribute to the file sharing networks. Despite the current uproar, this seems to be just part of the “natural” chain of events, always with the same result: If a technology indeed makes a real difference to a vast number of people it will always prevail, regardless of the hurdles erected and the objections of the powers-that-be. And laws get changed, too. So, rights holders and creators, stand back for a minute. Allow this “deep music web” to be created, and agree to let that ominous celestial jukebox become a reality. Put your entire catalogs and all related information online both for B2B as well as B2C purposes. In the future, “content” assets will only be truly meaningful if they are available as zeros and ones. Look for “feels like free” distribution models that get some serious and free exposure for your content, because exposure is always first – before you sell, you must be found!

6. LET´S UNICHAIN THE MUSIK WE ALREADY HAVE. Allow your back catalog to emerge from obscurity by placing it into the digital networks, under the lowest possible set of restrictions that you can get away with. This means a solid “yes” to free music services, feels-like-free online radio, and even free media products – make it “free” if and when it has to be, and charge for it when, where, and how you can. The new game here is up-selling (i.e., selling more and more stuff to your ever-loyal customers), cross-selling (i.e., selling more stuff to someone else’s loyal customers who were referred to you), and re-selling (i.e., selling the same stuff in a different package or bundle) – already com- mon practice in the software and videogaming world. Today, hugely valuable back catalogs remain unused, unappreciated, and untouched, and are not generating revenues. How about custom DVDs of entire genre collections and back catalogs, interactive online radio stations featuring back cata- log, and P2P back-catalog subscription services? $19.99 for 500 MP3s of classic Americana – I’d buy it! Put your back catalogs back into the food chain and watch the new monies roll in.

7. LICENSE COMPULSIVELY. Preclude the formulation of compul- sory digital music licensing laws by compulsively licensing to everyone who knocks on your door. Establish some basic, sim- ple, affordable, transparent, yet industry-wide standards that can be met by just about everyone, and let it flow. Stop using the size and weight of your catalogs as leverage to get a better deal than the next content provider, stop pushing for high advances, “favored nations,” and other corporate favors, and you’ll see compulsory licensing initiatives evaporate (incidentally, so will piracy!). Here, again, transparency will win the day.