Music Business – Hindsight 20/20

July 18, 2009 at 7:23 am | In Marketing, Media Business, Music Business | 1 Comment
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EMI Music CEO Elio Leoni-Sceti has been recently quoted saying:

Looking at the music industry, which has become something of a bellwether for other media businesses, we have a situation where seventy percent of music consumption is digital and yet only about twenty percent of music company revenues are derived from digital.  Music is in demand and the demand is growing all the time, but we’ve clearly lost touch with our consumers.

Not to ‘Monday Morning Quarterback’ too much, but I would argue that in order to lose touch with your consumers, you actually have to be in touch to begin with and that has never been the case.  Consumers are ’song’ driven and have been since the beginning of radio, but it was always the format that restricted consumption.  From vinyl, to 8-track, to cassette, to CD there were always natural barriers in place to restrict unauthorized distribution.  While those restrictions were in place, artists were bloating their records with filler and labels were increasing their profits, compounding consumer frustration.  The Music Industry can claim ‘bellwether’ status all they want, but to miss the potential of the Internet was just ignorant, filing copyright infringement suits against your consumers was, and is, counterproductive, developing DRM technology was wasteful and futile, and to think consumers wouldn’t gravitate back to single consumption if given the opportunity is just evidence that a few key people had their head stuck in the sand.  It was a nice effort, but it was all ‘reactive’.  Nothing was proactive.  Nobody thought to look ahead.  Nobody thought to plan ahead, and for that, let’s take a moment and pause for the 7 Ps:

Prior Proper Planning Prevents Piss Poor Performance

So…In order to leave you with something other than complaints about the obvious, here are a few things I’ve come up with that I would have done differently:

  • Embrace and build P2P in an effort to monetize, cross-market, gather consumer data, and track consumer behavior
  • Demand variable track pricing from day 1 in order to generate revenue with regard to demand
  • Raise the ‘Standard’ track price
  • Build Label-Owned and Label-Merchandised online music destination equipped to compete
  • Empower a 3rd party vendor where competing labels have an equity stake
  • Bring Booking, Publishing, and Management, Distribution, and Merch In-House where possible
  • Develop a modular and streamlined way of delivering digital product
  • Monetize every Artist website and begin a relationship with the consumer at a transactional level
  • Abandon all DRM efforts
  • Invest heavily in a more positive, artist-driven, public re-education campaign around Intellectual Property and Fair Use
  • Aggressively restructure and reorganize
  • Simplify physical product pricing, promotion, and distribution

You may agree or disagree with many of these, but I encourage you to leave your own ideas in the comments section, especially if you believe I’ve left a gaping hole somewhere.  Not to necessarily ‘blamestorm’, but to better understand where we came from and what we have come through in order to better prepare ourselves for the future.  Also, if you want to a consistently good read from a guy who really appreciates the history of the Music Business and music in general, subscribe to the Clore Chronicles.

Moving on though, I think the real challenge is where we go from here.  Leoni-Sceti’s comments above regarding digital consumption versus revenue is a huge disconnect and a code that isn’t easily cracked.  It makes it even more difficult to dig out given the macroeconomic constraints present in today’s US economy.  From my perspective, I still don’t think we are proactive enough.  I still don’t think we are aggressive enough.  So many people are just clinging to their jobs and trying to manage their daily duties, previously handled by multiple people.  I’m not sure who’s looking ahead anymore.  Godin and Anderson are two of my favorite idea guys, but they aren’t the decision makers here.  To make matters worse, I don’t think the future of the business is going to be as glaringly obvious as before.  In the last year, we’ve watched Myspace rise and fall, Facebook gravitate towards women over 55, and Twitter rise to the top overnight in a manner that screams ‘fad’.  We don’t have time for a slow build formula, technology, model, or destination, but that’s what instills trust, relationships, and ultimately transactions.

To sum it up:

The Music Industry can’t afford people spending time looking ahead, but then again…they can’t afford not too

The Long Tail in Question

May 25, 2009 at 5:00 am | In Marketing, Music Business | 1 Comment
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Chris Anderson’s Long Tail Theory is under scrutiny, and both sides have reason to claim victory.  I’d be interested in Chris running his numbers again with data from iTunes and AmazonMP3.  If I had to guess, his 98% rule is overstated at best.  Keep in mind he was doing his research on data from 2004, which is way too early to develop a trend rule that will stand the test of time.  Regardless, after analyzing the data that I do have access to, I fully believe in the value of the “tail”, but I’ve come up with a series of x-factors that I believe were underestimated, ultimately leading to a 98% rule in question, and Long Tail under the microscope.

  • Project Studio Proliferation in the 90s:
    • Creative and Financial filters were destroyed.
    • Music creation became affordable…not just consumption.
    • Supply increased exponentially.
  • Digital Content Delivery Services:
    • Popularity of companies like CDBaby and Tunecore provide a quick and affordable way to deliver digital content to retailers like iTunes, AmazonMP3, and others.
    • Increased supply finds distribution
  • The Internet:
    • Destroyed traditional distribution filters
    • Introduced a retail environment absent of scarcity.
    • Distribution products without demand became possible.
    • Consumers given access to their niche
  • The Majors realize value in Digital Distribution:
    • Released a flood of product with little or diminishing demand into the market.  For example, out-of-print titles could be resurrected without the traditional costs of manufacturing, stocking, and distribution.
    • Streamline processes to make extend their “tail”.

I believe we will hit what I call a “Ground Zero” with audio content by 2010.  The Majors will have completed their catalog delivery and any pent up product still looking for distribution will have found it’s way into the digital marketplace.  By then, who knows what new technologies will be available or what challenges lie ahead.  I appreciate Anderson’s work in trendspotting and hope, for the sake of us all working in the industry, he will continue to keep his theory fluid, updated, and transparent.

iTunes – Sticker Shock & Basic Economics

April 17, 2009 at 4:45 pm | In Marketing, Music Business | Leave a Comment
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iTunes introduced variable pricing at the beginning of April.  Early research is showing a decline in sales for titles bearing a $1.29 price point.  This is absolutely no surprise for 2 reasons:

1)  Sticker Shock:  The iTunes customer is conditioned to a 99cent track price.  $1.29 is a 30% increase.  Most of us notice a 30% price hike on any product that we regularly purchase (gas, groceries, etc.) so it’s no surprise that the impulse buyer is going to prioritize their list of desired music and think twice before buying.  The good news for the labels is that sticker shock wears off quickly and as soon as the price structure feels like the new standard, people will resume their impulse behavior.

2)  Basic Economics:  When you raise the price of a product, you reduce the demand.  Conversely, you usually lower a price to stimulate demand.  This is why even the top tracks are suffering on the charts right now.  People consume based on their purchasing power and a higher price per track reduces the number of tracks a consumer can afford.  The bad news is that the laws of economics are rarely broken, but a move to variable pricing is a healthy move.  All tracks aren’t created equal, and although scarcity doesn’t exist in the world of digital music, value still determines demand.  A top selling title has more value than a low selling title, therefore, it yeild a higher price.  The consumer’s shouldn’t have to pay the same price for tracks of different value, and the labels or artists shouldn’t have to charge the same price for different products either.

If I had to guess, I’d say that sticker shock will be a moot point in a few months and there will be a more consistent list of higher and lower priced tracks by the fall.  Once most of the top titles are $1.29 and most of the low titles are $0.69, the charting will look normal again.

Relationship Marketing: Bringing back “Direct to Consumer”

March 1, 2009 at 4:28 am | In Marketing, Mobile, Music Business | Leave a Comment
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I can’t prove it, but my guess is that “Direct to Consumer” was the earliest form of retail.  An artisan crafted his product and then sold it directly to those in the community who were willing to pay for it.  His brand was his reputation and his reputation was only as good as his product and his relationship with his customers.  Marketing his product was exactly the same as marketing himself.  Things have changed since then.  Mass manufacturing and distribution have opened the doors for specialists, but specialists, by default, need partners, and partners, by default, come between the maker and the buyer, effectively destroying the essence of Direct to Consumer.

So there is a disconnect.  One that marketers have tried to cover up for decades by telling stories and connecting the dots between products and consumers.  It’s just that those messages are falling more frequently upon deaf ears, or at best competing against a hundred other messages at once.

There are also technological issues at play.  Marketing is story-telling; stories require channels, and most channels are dictated by technology.  So “gadgets” become the gatekeepers of the story.  This was not a problem when the gadget was ubiquitous, but buyers are dispersing at an exponential rate into niche electronic ecosystems where standards are sparse and quality is demanded.  The mobile industry is a perfect example of this.  Even though almost everyone you know owns a mobile phone, each carrier is proprietary, each handset model is unique, and each user utilizes the phone’s features differently.

Abundant resources are still being spent on some tried and true methods of marketing (TV, Radio, Advertising, Email, Retail Placement, etc) but it’s becoming a crap-shoot at best.  If you’re selling records, radio stations have to hit millions of people weekly to see any retail conversion at all, and the costs of advertising has becoming more difficult to justify with every click-thru campaign.  We all know that email open rates are unacceptable and retail shelf space is shrinking.  So this brings us back to the basics.  Back to an entrepreneurial level.  To make matters worse, while the industry straps up its boots, history laughs as we complain about going through this inevitable valley that some argue we created for ourselves.  Especially in this economy, the Music Industry’s corporate structure is a great way to be cost effective, but the corporate mentality is a liability.  So what is the most important asset moving forward?  Relationships

What are 2 key elements of a successful relationship?

  • Communication
  • Trust

And what does a relationship get you?

  • A Valid Email Address
  • An Attentive Ear
  • An Impulse Buy
  • An Early Adopter
  • An Open Wallet
  • A Repeat Customer
  • Word of Mouth (The loudest most effective Voice)

To the music industry’s credit, over the years they specialized in “music” while forging thousands of crucial and lucrative partnerships with 3rd parties (iTunes, Wal-Mart, Amazon, Best Buy, etc) to accelerate their product into the marketplace and amplify the message.  For these partners, product was supplied, so their efforts were focused on building a strong relationship with their consumer.  While there is nothing wrong with these partnerships, the labels failed to create their own direct relationship with their artists’ fans, ultimately bringing us to where we are now; completely reliant upon our partners to generate revenue for our products and communicate with our customers.  Sure.  We did a lot of good things to help promote the roster, but we didn’t do anything to take the relationship to the next level.  We didn’t complete the cycle.  We didn’t monetize it.  Monetization requires a higher level of trust.  A clearer method of communication.  A level of trust and communication that turns a fan into a consumer.  It’s a different challenge altogether.  A challenge that is dependent upon deep relationships.

Maybe it wasn’t possible to facilitate this relationship then, or maybe it wasn’t cost effective.  Regardless, our partners are not only taking our margin, they are taking our customer data and severing our communication lines in the process.  Every credit card swiped at Wal-Mart or account setup at iTunes is another brick in the wall between the labels and music buyers.  Sure, the product is moving and that’s great, but the spoils of the sale go to the partners, and the longer we wait, the more difficult it becomes to get that back.

So we begin with relationships.  Deep relationships.

The Long Tail (A Second Look Pt. 1)

December 23, 2008 at 6:44 pm | In Marketing, Music Business | Leave a Comment
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I read Anderson’s The Long Tail when it was first published and I have to admit my intrigue.  I was new to the world of digital marketing and I was responsible for expanding the company’s digital revenue stream.  Unfortunately that was a few years ago and though the theory has been a topic around the water cooler since then, I’m a little rusty on my Anderson quotes, so I am rereading it in an effort to re-examine the theory in detail and try to make some sense of the recent scrutiny it has undertaken.  Here’s the first of many thoughts to come.

Scale (The 98% Rule)

On the surface, page 8 tells a compelling story about how 98% of a 10,000 track Digital Jukebox (i.e. TouchTunes) catalog sold at least one unit per quarter.  The story is used to explain how digital distribution defies scarcity and when consumers are given options, they spread out more comfortably in their preferred niche of music consumption.  The problem here is scale.  98% of 10K tracks is 9800 tracks.  Apple released a press release in 2004, the same year Anderson was speaking to Robbie Vann-Adibe at Digital Jukebox, stating that iTunes had over 1 million songs available in their store for download.  If Digital Jukebox were operating their business as anyone else would they would be prioritizing their ingestion process and their deal-making to secure the tracks with the most demand first.  Even if Digital Jukebox was not prioritizing the content for distribution, it would have been prioritized for them by the labels as there are cost involved with digital product delivery.  So let’s do the math.

10K Digital Jukebox Tracks / 1Million Digital Tracks in Market = 1% Digital Catalog 2004

Long Tail

In essence, it’s hard to conclude that Digital Jukebox proves anything about the long “Tail”, because they were most likely operating almost completely within the head (see pic).

Over the years, I have seen evidence of the Long Tail at work, so this blog is not to discount the theory, but it is important to understand that it’s only a theory.  It’s no more accurate than the 80/20 rule, but it’s a great starting point for labels to realize potential revenue as the rules of distribution change and scarcity becomes extinct.

…Comments Welcome

The “Price” of Customer Acquisition

November 4, 2008 at 4:20 am | In Music Business | Leave a Comment
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Customer Acquisition…For this excercise, there are 3 kinds of digital consumers:

1.  Rookies:  Consumers who have never purchased a digital download

2.  Veterens(2 types):  Experienced Digital Consumers.

_______a)  Loyalists:  Consumers that value a specific brand of music service and are not easily intrigued by cheaper prices, additional service features, or an alternate, higher quality end product.  They are comfortable with the way they already consume music and find value in the brand they have already chosen such as Image, Usability, Convenience, Security, etc.

_______b)  Experimentalists:  These consumers are crafty and have no existing brand loyalty.  Price carries a significant amount of weight in their decision but other factors are an issue such as interoperability, selection, and freedom.

So let’s say you want to start a successful digital music store.  There’s only a finite number of customers and you need to motivate them quickly in order to stay afloat, so you prioritize your attack it in this order:

Experimentalists  => Rookies => Loyalist

How do you separate them?  Price.

Customer Acquisition via Price – This automatically aligns your consumers to the desired priority above and here’s why:

Experimentalists are first because they are proactive about new ideas and new processes.  They are already acclimated to what you are asking them to do so you don’t have to teach them.  They see the value in what you are offering before they begin and are willing to experiment for that reward (a cheaper price).  Experimentalists are also great because their pioneer efforts hardly ever go unnoticed.

…and that’s where you get the Rookies.  They want what the Experimentalists are blabbing on and on about, and while they would have never gone down that road on their own, they now have a partner in crime and proof that someone else survived the journey before them.  Sure, you may get a few Rookies by chance, but the Experimentalists make great teachers and offer a support structure for them that is crucial to success.

Loyalists? – How do you get the loyalists?  Doubt…and this takes time.

You won’t win Loyalists over immediately because they are wrapped very tight in their brand security blanket, but they’re smart.  They’ve been around a while – hence the term “veteran” and at one point in time, they used to be “Experimentalists”.  They hold tightly to their belief that what they have been doing is best and take great pride in their methods, but the Rookies and Experimentalists continue to plant that seed of doubt with every successful transaction and in every conversation about music.

Rookie, “Oh, I can’t believe how easy that was…and cheap”

Experimentalists, “I know, and the price and quality is so much better than ___”

Once you win over a few Loyalists, then you have yourself a battle.  One Loyalist can convert a multitude of others because they know what it would take to convert one of them.

Want to Fail quickly? – create a bad customer experience for any of these consumers. Experimentalists are experienced shoppers and are not going to vouch for your service without good reason.  Rookies are newbies for a reason and any misstep will send them back to buying physical CDs or to your competition where they can find tried and true security.  Any misstep with a Loyalist will just reinforce his faithfulness to his current system.

______________________________________________

This is exactly what AmazonMP3 and Walmart.com are doing right now, and eating a ton of costs in the name of customer acquisition.  Releasing new records (Keane and Snow Patrol) at huge discounts is a great first step in getting the Rookies and the Experimentalists to try it, but it has to be a first step of many.

PRICE_is only the first step, and by itself, it doesn’t create brand loyalty or “sticky” consumers.  Both of these companies have a huge online footprint and a broad product selection that is unmatched by most, but when it comes to digital music, they have a long way to go.  They must followup their aggressive pricing with a competitive service and brand identity.  It is expensive to play offense, and deep pockets are essential, but it’s going to take much more than that.  It will be interesting to see how well they execute the next phase of their attack.

iTunes Shutting Down?

October 4, 2008 at 1:39 pm | In Music Business | Leave a Comment
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I blogged a while back on thin margins for Digitial retailers, but given the recent publisher fiasco, where they were asking for a rate hike to 16cents, I felt it necessary to reitterate with this link.

iTunes certainly wouldn’t shut down and risk losing the 90% powerplay they currently have on the market, but it does show that the margins are thin enough to get them on board against the NMPA.  The bigger issue is that iTunes doesn’t want to discuss variable pricing, but if the labels pass the hike onto the retailers, they would have no choice in the matter to keep the store open and in the green.  Variable pricing has been a long standing issue between the labels and Apple, and any crack in that foundation could lead to significant ground for the labels.

No Profit in Downloads

July 14, 2008 at 8:45 pm | In Music Business | Leave a Comment
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Let’s face it, the Labels are going to take 70% and that’s fair. What? It’s Not? Of course it is…They spent the thousands in studio and production cost, not to mention manufacturing and distribution, only to have the artist sell more T-shirts and stickers at their merch table because all of their fans are hooked up via BitTorrent. It’s not like they pocket the 70% anyway. There’s overhead, mechanicals, and other royalties that have to be paid, not to mention someone who has to sit down and sift through the data so the auditors don’t pitch a fit.

The question is…Can you be profitable with the other 30% and the answer so far is an overwhelming NO!

You may think you’ve struck gold when you find that company that allows you to setup your own storefront for 10 or 20 bucks, pull in the titles you want to sell and then let’s you make 10 to 15 cents per tracks sold, but the reality is that noone shops at these stores. iTunes and Amazon are satisfying 95% of the digital consumers out there and Rhapsody, Napster, Zune, Passalong, and many other reputable brands are fighting for the loose change already.

After you realize this doesn’t work, you can try building your own store from scratch and licensing in the labels in order to keep more of the profit. The reality of that is that in order to be your own retailer, you have to engage with Visa and Mastercard who are going to take 15 cents per transaction and then another 2 or 3 percent of everything you make leaving you with the same 10 to 15 cents you had in the first scenario. It forces you into developing a marketing strategy around bundling and encouraging larger purchases and that’s where you lose touch with your consumer. They don’t want to spend more than 99 cents and if you make them, they will still find what they want and buy it…just NOT from you.

The economics just aren’t there. They just don’t work. It’s barely worked for iTunes and the dream of selling digital music is driving company after company into the ground. It’s not worth the hassle and if you are looking to be entertained with your money, you’d be better off buying lots of fireworks or just flushing it down the toilet.

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