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.

No comments: