Thursday, 31 July 2008

Music Like Water? Evian Would be Nice

(You can also read this post on the excellent MusicTank pages).

With recent developments between the BPI and UK ISP’s and Sky’s announcement of its new music subscription service, so comes another major in the ‘music & ISP’ debate.

I’ll be unequivocal – I have never believed any such ‘flat rate levy’ model can work for music. I didn’t think so when first looking at the model as research director at IFPI. One year ago, in assessing the concept with Cap Gemini for the UK’s Value Recognition Strategy group I became doubly convinced, based on hard economic evidence and detailed analysis.

Finally, more recently on the business side, in reviewing recent service offerings from Nokia (Comes With Music) and Sky, I have become even trebly convinced, because all-you-can-eat or ‘total music’ solutions are already arriving under these new branded service models, without any notion of an ISP flat rate, government intervention or even the need for file-sharing functionality, thanks to the demise of DRM. Basically, the world has moved on.

In high level detail I’ll run through these three categories of issues: Politics, economics and business. Firstly, politics. I have never supported the idea of a government directly meddling with an industry’s business model , particularly one where technology is dictating the pace of change. How would they know what to do to intervene? I don’t think the UK Government would go that far. In his round of interviews last week regarding the BPI and UK ISP memorandum, Fergal Sharkey clearly emphasised this stating on Sky "There was never any discussion of any levy or tax or anything resembling that whatsoever." Government generally does what business wants, and where business can sort itself out, Government is happy to sit back and let that happen.

Second, economics. Without government setting a mandatory levy, a music ISP solution would need to be two essential things: voluntary and cheap. Consumers want to pay for music through their own choice. And they want music to be cheap. Let’s review the economic objective for an ISP solution – offset losses from file sharing. The Cap Gemini work for the VRS called this the ‘Value Gap’. Without revealing the confidential numbers in that report, there is one fundamental and to some less numbers-orientated thinkers, perhaps surprising problem: the revenues from a voluntary, reasonably priced ‘total music’ solution do not offset the music industry’s losses from file-sharing. Got that? It’s true. The UK trade music business value gap over five years would be nowhere near offset by music revenues (after conservative assumptions for price, take-up & churn, substitution of existing revenues, cost of service provision and re-distribution of income to right holders). Then factor in revenue share and anti-piracy costs (such services after all exist alongside pirate services). And those figures are trade, so assume whatever you like for the future of music retailers.

Finally, business. No ISP would sanction a flat rate levy on file-sharing. How would they control quality of service to consumers? How would they sell other entertainment content like movies? How would they administer payments to right holders? It’s a minefield of issues that in combination is impossible for business institutions to navigate. Currently in a utility business themselves, ISPs (especially new generation ISP’s like Sky, Virgin and BT) are far more motivated by the idea of providing branded, value-add services that keep their customers (and subsequently shareholders) happy. They are wedded to three models: service provision, ARPU and customer retention. That is what music providers need to leverage for future commercial models for music.

Wednesday, 16 July 2008

The Future of Music Retail? It's not in payment models

Monday evening's MusicAlly debate was about the Future of Music Retail and, as ever with panel debates, i don't think we solved music retail's future. But to my mind one element of the debate was very telling in just how far away we are from knowing what the future holds for all of us in the music production and distribution business (and those of us consultants etc. 'picking over the bones of the music industry'). It's this: the constant pontification over payment models. MusicAlly's research presentation focused largely on the future of a la carte vs. subscription vs. advertising vs. free. Inevitably, much of the discussion that followed centred on these and on the impact of 'total music' solutions - either Nokia's Comes With Music or the pipe dream of music through ISPs - on the current iTunes-led digital business.

As a business we are collectively becoming dangerously fixated on payment models. I don't think the payment model is such a big deal. It's a boring debate. There are so many other ways to present a business model for digital music, starting with consumers needs and passions, few of which relate to payment (other than perhaps file-sharing).

By way of illustration, I love music magazines - i read them all pretty much. I subscribe to The Word and to Uncut. I buy Mojo every other month but don't want to subscribe. I buy Clash (i love the effort these guys are making) regularly, Classic Rock sometimes, all nicely a la carte. And i occasionally dabble with RockSound, Rolling Stone & others really just for curiosity. I will read Q, NME, Music Week & Billboard wherever i see them lying around in company receptions (i.e. for free). My music magazine consumption is a mixed economy basically. How i pay is up to me but i know i want to consume the product. For music i mostly buy CDs (just better all round than digital, sadly) but also the odd download and and i have in the past subscribed to Rhapsody (fabulous) and Napster (good). I do borrow & burn, i check out free MP3 blogs and streaming sites (I don't file share for obvious reasons).

How i chose to pay is as mixed a bag as the way i chose to listen (see later posts). What's consistent for me is the brands i choose to consume. And this for me is the key for music retail's future. In digital music, the biggest brand is Apple, a computer company. Though i want to pay due respect to Apple's contribution & committment to music - making a very complex thing look simple - i find it extraordinary that neither established retail music brands or editorial music brands have not achieved in this space so far. Step up HMV, step up Q (or any editorial brand that has extended into radio but so far ignored retail). And for the technology brands we have Nokia slowly grinding it out and maybe, just maybe breaking through with Comes With Music.

But here's the rub, Nokia's CWM won't make a big impact in itself. Not until it becomes a true music service with brand equity i.e. much more than an alternative payment model/music utility. Like editorial brands and traditional music brands and even iTunes (a bit), CWM and other new music services will need compelling music programming & features, genre expertise, mixed products and mixed payment models - presented in a cohesive, exciting way. I've got 100 views on the latter so i'll have to make it the subject of future posts.

As far as music retail goes, i did once have modest hopes for Starbucks and Calabash, largely for attempting to build brand equity innovatively in music and by working in high value niches. I now have great hopes for ShockHound, a new digital music brand soon to launch (now in beta) in the US. It's been created by Hot Topic, a wonderfully successful music merchandise brand that has focused on the 'emo kids' market - a high value music buying segment if ever there was one (kids under 24 who spend a fortune on music in all it's product forms including CDs). It doesn't look well executed from the beta site though, so my hopes are fading fast. Unless a bigger brand with a bigger platform wants to step in with some investment & get this great global music retail opportunity off the ground.

My point here is that if we can get beyond the payment model debate there are plenty of opportunities here for development, with high value music consumer segments just waiting to be served and waiting for a compelling set of reasons to pay not poach.

Friday, 4 July 2008

Music lessons from HBO: the USA's content powerhouse

Having done a stint at a record company recently, a term i've grown to appreciate and use a lot, is Content Development. I mean this to be the essential thing the music business needs right now - new product. I mean better packaged CDs as standard not just 'special editions'. I mean high quality documentary video for digital channels, not just backstage DVD extra filler. And ultimately just better music projects. This i think is the real challenge posed by digital distribution, p2p & free and CD sales atrophy - a challenge to artists making music everywhere (whether or not in the 'label system') and the producers who get their product to market. I'll write much more about this in future posts.

My shining beacon in all this is not a music company at all but a TV company - America's HBO. It makes risky, edgy drama (and documentary, sport and comedy) that no other network or producer could make (some do now, but only because they have followed HBO's lead) and turns a strong proportion of them into massive, global hits. HBO depends on its hits, like all media companies do and always will. But by placing so much emphasis on content development (there it is, that key phrase) - it gets the hits other networks just can't - The Soprano's, Sex in the City, Six Feet Under (no other networks could dream up hits with subject matter so violent, overtly sexual or just down right morbid). When it doesn't get the blockbusters, what HBO achieves instead is something else - culturally relevant, critically acclaimed, auteur-attracting productions that speak volumes about HBOs committment to what it does (Deadwood, The Wire, Carnivale). Often the latter turn into slow-burn medium DVD hits anyway.

Suggestion to all media company leaders and execs - get yourself a copy of the excellent, recently published 'The Essential HBO Reader', edited by Gary Edgerton and Jeffrey Jones (Kentucky publishing).

The introduction and conclusion 'HBO's Ongoing Legacy' make insightful and inspiring reading. Here is a very short synopsis with some takeways for music companies:
  • HBO's generations of managers have always understood that the average American viewer doesn't care whether they saw their shows in theatres, broadcast, by cable or on demand - they use all these mediums but essentially just want great entertainment at an affordable price (music co's - don't get too hung up on distribution, focus on the content)

  • It pursued an often atypical strategy for television - of investing more money in programme development (more than doubling the industry benchmark) and the marketing of those programmes and the HBO brand (invest in A&R, be selective, back fewer artists but back them big)

  • HBO followed a patronage model with its creators. Seinfeld's creator Larry David (page 13 of the book); "the network's tendency to permit creative freedom made it a magnet for experienced producers, directors and writers looking for outlets for projects to which they were deeply committed" (put the artists vision at the centre of things, promote the 'auteurs' of the project - the artist, producers - and their personal stories and journey in getting these amazing programmes made)

  • HBO spread its creative and executive force across four key programme categories - comedy, drama, sports & documentary - in each instance becoming the premier home for creative talent (pick your genres and become unrivalled experts in sourcing talent, marketing and understanding genre audiences, using the label portfolio as the vehicle for this)

  • HBO's dramatic series was always first to the genre - provoking an after effect (if an artist comes along that is genuinely new or genre defining, work the project carefully & prioritise it in your portfolio)

  • HBO is more than a network, it is a global brand (this is harder for record companies with historically low brand equity, but brand building isn't just with consumers - for music it is with artists, managers, licensing and distribution partners. Label branding is a way forward for building future brand equity with consumers - see future posts on this)

In achieving the above concoction HBO has changed viewing expectations of a large swathe of the TV (and DVD) watching audience. The company has used technology to re-invent itself. It has partnered carefully and sometimes agressively in terms of its negotiation and protection of its content. It has diversified (backward integration from a network to a producer). And it has - most importantly of all, built a global brand. Central in all of this, is its focus on Content Development. It has become a content powerhouse, attracting the best creators to do the best work of their careers. Watch any of The Wire, Deadwood etc. and see it come together in all its fabulous glory.