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JANUARY 25, 2005:
MUSIC LIKE WATER: THE INEVITABLE MUSIC ECOSYSTEM

I strongly believe we are heading into a “music like water” future, based on this very simple fact: Today, there are more people in more places around the globe tuning into music with more enthusiasm and sheer determination than ever before, and depending on their cultural backgrounds, they are using a myriad of different ways to get what they want. What’s more, to a large degree the “traditional” record industry is simply no longer invited to the party. The bottom line is that consumer empowerment has finally reached the music business, and many consumers have now taken charge of their own entertainment. It’s now My Media, not yours that you are simply “broadcasting” to me. Music fans (or, in Silicon Valley lingo, “users”) tune into online radio; buy satellite radio receivers; record terrestrial radio broadcasts onto their PCs; rip (copy) CDs checked out from libraries; swap tapes, vinyl records, and CDs via the Internet; trade files on instant messenger services; exchange entire harddrives or flash-memory sticks with music; FireWire playlists to each other; trade loaded iPods; buy or create their own ringtones; transcode music streams provided by online radio stations; distribute or trade files on a multitude of P2P networks, topsites, and darknets; edit samples and loops with free audio software tools; buy games and videos that feature their favorite music; tune into music shows on television and record it with their TiVo or other DVR; and stream music to their cell phones. And all of this is just the tip of the iceberg – we could probably continue this list for the next couple of pages. Music is BIG. Major. Crucial. Full stop! The trouble for the recorded music industry (yet not for the music publishers) is that these are mostly non-traditional ways of using and getting music (assuming there’s still a difference) and that the industry can’t control them nearly as well as CD sales could be controlled and monitored in that glorious “top-down,” über-control past. Therefore, the entire system and its underlying logic is starting to crumble.

This was a system that was all based on total and relentless control, monopolies and cartels, obscenely high profit margins for sometimes very little work, and an amount of customer passivity and sacrifices that is probably still unparalleled in any other industry. And things are getting worse, yet: Technologists and entrepreneurs all over the world will continue to invent new ways to find, discover, share, acquire, and consume music every other day. The cat, or rather, the music, is quite literally out of the bag, and – as my colleague and Pho-Group ringmaster Jim Griffin likes to say – nobody is going to succeed at putting friction back in a frictionless world, much less grow a strong business based on providing it. The only thing left to do is to monetize the existing, actual behavior of the users, a.k.a. consumers, a.k.a. music fans, and there are many new ways to do that (read on!). In any case the industry will now have no choice but to accept the fact that this ecosystem has morphed into a customer-driven, bottom-up world that renders many widely accepted “analog” paradigms and traditions instantly useless. Now, once we go down that inevitable path we will quickly realize that actually metering the use of music on a per-unit basis, as if we were still in the days of Colonel Parker and Elvis Presley, is simply becoming a “mission impossible” that most players will not be willing to accept. If we, for now, ignore the distinct possibility of a flat fee- based system that could precisely track what music is actually used, and that could distribute exact royalties accordingly, there is still no way we can continue to ask for fixed fees on a per-track basis. After all, it’s no longer even clear what constitutes a copy, a download, a digital phonographic delivery, or a performance versus a mechanical reproduction. On digital networks, just about any performance creates copies somewhere along the way, and every so-called copy is also being publicly performed somewhere (witness the latest discussions about “time-shifting” music).

This may sound a bit Orwellian, but it sure creates a significant transactional dilemma: A performance may be considered a copy that might also be downloaded and that could be transferred to some people under certain rules? That’s an unworkable traffic jam of outmoded definitions, IMHO. The argument reverberates in the latest definition of “music purchasing” on the Napster To Go (U.S.) download service: The user can download as many tracks as desired, as long as the subscription is valid. The Napster tracks cannot be used outside of the Napster application (which runs only on Microsoft Windows) and the computer it is installed on. Amazingly, and quite conclusively pointing towards the Music-Like-Water model, these downloads are actually not considered purchases – at least not until I want to burn a CD with them, and therefore own them “free and clear.” Clearly, we have already reached and crossed that border between performance and copy, between access and ownership, and pushed it further out to a more economically feasible and much more palatable place. But the bottom line remains: the only way to monetize people’s actual behavior and underlying desires on digital networks is to give them a simple, no-brainer, all-you-can-eat blanket deal, an all-in offer or a flat-fee bundle. Without wanting to sound like EasyGroup’s Stelios: we must make it easy, first and foremost. Call it what you want, but the conclusion is that this is a flat-rate and/or subscription model – not a “pay per download” model: One payment has me covered, but beyond this I have many other options to spend my cash on many other, related things. Call it levies, taxes, bundles, flat fees – that’s all just a variation of the same subject. Music-Like-Water is where we are going, and up-selling additional services is the name of the game. There’s plenty of precedent here: We make automatic, habitual, seemingly “thoughtless” yet fully accepted and even expected payments for water, gas, and electricity bills; we pay for cable television, Internet access, and wireless services; and here in Europe, we are paying a flat yearly fee for the use of any device (radios, TVs) that can receive public broadcasts. And most of us pay quite happily for those utilities and subscriptions we have accepted as must-have’s.

Imagine if you were asked for your ID and password every time you flushed the toilet at a public bathroom, or if your TV would count and bill the numbers of hours that you spend in front of it, or charge you more if ten people watched the hockey game rather than just you alone. Economically speaking, 99% of us already make these kinds of payments, all the time, and the pool of cash that’s being generated is vast. In Germany alone, approximately 80 million people pay approximately €70 per year for public radio and television – and this is compulsory, i.e., decreed by law, not an optional payment – so that’s over half a billion euros per year that’s available to support the activities of the public broadcasters. But this is an extreme example, and one that would certainly not go over too well in the U.S., where such public levies would be resoundingly despised (only to then face the constant barrage of mind-numbing ads that scream at you from every TV in every bar and airport lounge in America). But I am digressing. Consider this: a much lower monthly payment, say $3, something akin to a “content fee” imposed on some hardware or devices, and some services or transactions would get us there, just as well, and we would finally have a feels-like-free pass to do what many of us seem to already be doing, albeit with the “official” blessings of the rights-holders: enjoy our music where we want, when we want, and how we want, without having to worry about RIAA lawyers hunting us down, malware-poisoned software on our PCs, which type of bizarre DRM scheme is used by which label or retailer, which country we’re in, which files in what format are actually complete and don’t have viruses in them, which operating sys- tem we use, which devices are compatible with which PC and which application, and on and on. Of course, that $3 may end up being €3 in Europe, £3 in the UK, or, more important, the equivalent buying-power amount in other territories such as India, China, or Brazil.

If we don’t go down this road, how could we possibly expect the music industry to be successful in the future, when at this very moment the customers have to practically kill themselves to legally give the industry their cash for digital music, on the exceedingly narrow terms that are being enforced today? Once we can subscribe to music just like we subscribe to water, the music business will explode and we will enter a new ecosystem that will make the previous music industry look like New York City taxicabs from the 30th floor of the BMG building. DRM will morph into CRM; copy control will become usage-control (i.e., tracking and monitoring); record labels will morph into 360° music companies; radio will down(load)-cast; devices will truly plug-and-play; and yes, cell phones + music will likely kill the iPod’s dominance. There’s only one thing: we must stop asking the consumers to fill up their bath tubs with Evian, or to use Pellegrino to boil pasta – they have already discovered the tap water! So let’s just sell them tap water, via cheap, flat-fee deals, and the Pellegrino, as well. And this does not equal a flat-out, wholesale devaluation of music – quite the contrary. Ubiquity is a very powerful thing, and will create a nice pool of money for all involved parties, a pool that will only be the very first starting point for a much increased monetization of music. Because here’s another thing that will happen when the water/music flows freely: The up-selling opportunities will be huge, diverse, and multichannel. We will have all the user data we could ever dream of having: opt-in profiles and lots of user feedback, usage patterns, program preferences, personal pro- files, locations, and access modes. Apart from the obvious and quite serious concerns over data security and privacy (now there’s another huge business opportunity!), this data will allow the content providers and rights holders to zero in on one person at a time (even if anony- mous), and offer relevant and timely upstream items to him, and maybe to also place very unobtrusive and friendly product messages: Advertising may even become content, itself. Imagine listening to your digital radio station while you’re driving, and seeing a message on the display informing you of an upcoming show of your favorite artist that just happens to be in a location that you will travel to.

Simply push a button on the display, or send an SMS from your mobile phone, and within ten seconds you could have purchased a ticket for the show. Then, when you get to the show, you take up the venue management’s offer to zap the entire evening’s concert onto your memory stick on the way out, for less money than the cab ride back to the hotel. One can see where this is going. Once music is unleashed and we can stop the dinosaurial fight for the simple privilege of having access to it, distribution ceases to be a barrier to entry: All music, all artists, and all writers will be in those pipelines. Then, however, artists and their representatives will be facing the real challenge: getting anyone to pay attention to them, and surviving in this world of “digital Darwinism,” since the old marketing mantra of Exposure + Discovery = Sales (Income) will be even more pronounced in a Music-Like-Water world. Ultimately, of course, people will consume, or shall we say, use more media (music) all the time, but the real limiting factor is people’s time. Simply put, all of the world’s music (and its creators) will be competing for attention in this new ecosystem, and everyone will want a piece of your precious time. That will be the real challenge going forward: getting exposure and being

DARWIN:
“IT IS NOT THE STRONGEST OR MOST INTELLIGENT THAT SURVIVE, BUT THE ONES MOST ADAPTIVE TO CHANGE.”

A recent UK survey by Google showed that Internet vs. TV attention now was 164 minutes for the internet and 148 minutes for TV.

discovered. The rest is already built into the pipeline. So, brave new music ecosystem – yes, but not a built-in goldmine. Finally, here’s a take on that crucial question of just when this will come about: Any business that is built on this “interim window” (i.e., the window that may remain open while we morph from “music like bottled wine” to “music like water’) will have to have (at least) two parallel strategies. One that works and makes money now, and one that makes the real money when Music-Like-Water is a reality.