Taking Back the Market

How Apple Could Change the Face of Digital Music

Tim Nash - 2009.04.02

In April, the DRM (digital restrictions management) experiment forced on Apple by the major music labels should be over. As with much the music labels have touched since those heady profitable years of the 90s, it failed in the worst possible way.

Now there are tens of millions of iTunes customers who don't see the need to pay 30¢ per track to "upgrade" from good enough and will therefore stay with iPods and iTunes for as long as they want that music. These customers are a large part of the market still willing to buy music, so the major labels are beholden to Apple for the foreseeable future if they want to make money from digital downloads - and these days, the labels have little to offer beyond their back catalogs.

Meanwhile Apple's FairPlay DRM is a mature technology that can be applied elsewhere.

Music Radio

Music radio, in the days when it worked, helped listeners discover music. It gave them a connection to it that went beyond the liner notes in the heyday of vinyl. Obviously we are not talking Top 40 programmed playlists here. Even in the long off days when good tracks came out as singles, the top 40 had an awful lot of filler, stuff you were willing to tolerate while waiting for songs you really wanted to hear.

The good DJs, the ones who loved music, saw themselves as more than paid presenters and guided you to the B sides, the album tracks, the great music that was hidden by the label's taste of what was commercial.

Business or Passion?

There's a strong argument that much of this was killed by the labels and their looking on music as a product along with a continual desire to raise quarterly profits. It drove them to payola "pay for play" strategies. First, direct payments were made to some influential DJs and then, after the resulting scandal, "independents" were also to push the records, along iwth payments to the playlist managers and stations.

Owners buying more and more stations meant the payments effectively became corporate revenue, but treating music on the radio like product placement killed the audience. If you can't trust the station or the DJ to play music you want, why listen?

Internet Radio

There are still some good stations out there, like this one in France, but unless you are lucky enough to live in range of a decent signal, you are tied to the Internet when you want to discover music. The Genius feature in iTunes will recommend music, but you need to guess from the first 30 seconds if this really is a track you want. For music like jazz and classical and any extended live tracks, this is rarely enough.

Pandora (US only) and Last.fm are good ways for exploring too, if you want to listen to music in the same vein as an artist you like. Last.fm has had to give up on the ad supported model outside the US, UK, and Germany; it now wants to charge €3 (about $4 US) a month elsewhere in Europe. Is $4 low enough to stop it being thought of as yet another subscription service?

All Pandora, Last.fm and others, like Spotify, have shown so far is that there is a market for free music streamed over the Internet.

Away from the Internet

This still leaves a sizable gap for those journeys like commuting, air travel, and car trips where you can't rely on WiFi or your cellphone to stream music. It's fine if you want to listen to music you already have on your iPod, but when traveling there are plenty of times when listening to something new would break the boredom.

Adults, as well as children, like to be distracted, and here, when music failed to grow and fill the space, the competition pounced. Video, games, push email, texts, and tweets are fighting to take over those betweentimes entertainment minutes.

Rebuilding Trust

Music still has the means to fight back. At it's best, it gives an emotional impact over time that is rarely matched by the alternatives. What music needs to do is rebuild the trust between the musicians and the audience, a trust that has been eroded by the labels forcing people to buy CDs they didn't want but had to buy for a few good tracks, always trying to increase prices, and then suing fans who shared their music.

Trust is also being eroded by some of the groups profiting from ticket scalping.

The major music labels are in a dying business. They no longer control distribution. Those dollars are in the hands of iTunes, Amazon, and the Walmart. The labels have lost the exclusive power to break new bands into the mainstream. Too many bands have been ripped off by the labels and their accounting.

The real money is in touring, so why stay with a label after the contract is over?

Marketing the Back Catalog

The labels do, however, have a large back catalog. What they don't have is a better way of turning it into money than putting it on iTunes and hoping somebody buys it. There are over 8 million tracks already on iTunes. Gracenote, the database that gives track and album names to CDs imported into iTunes, holds details of over 50 million tracks. Digitising all the back catalog will take that way beyond 100 million.

So how do you find your way to the gems you've forgotten about - or never even heard?

What the labels and we, the audience, need are trusted guides to sort through the tens of millions of songs and take us on a journey. Guides who love the music, who want to share how great it is, who want to feed us the detail that brings it even more into focus. Guides who don't need corporate backing for a paycheck.

But they do need a paycheck and a way of taking us on a journey uninterrupted by ads.

Podcast Guides

iTunes already supports podcasts. The iTunes/App Store has over 70 million customers used to dropping a dollar here and there on tracks and apps. What the guides need is a way of producing podcasts with embedded music that can then be sold through the iTunes Store. If these podcasts are sold with Apple's FairPlay DRM to allow 30 days use, the music content could and should be treated as a radio program.

Look on this as ad-free radio or paid podcasts with great music. It can be cheap, and you only buy the hours you want when you want them. You're not tied to some month in, month out subscription. You see someone's playlist on Facebook, or a friend texts you about it, and you buy an hour or two of their podcasts. Love the journey, and you buy more; not so good, and you move on.

Apple's move to tiered pricing for music gives more flexibility to make this model work. It could offer a minimum length of podcast for 69¢, 99¢, or $1.29. Part of the paycheck for each guide would come from iTunes affiliates fees of 5% for every track or album sold.

A few cents per hour may not sound like much, but for anyone who can attract a following, even $20 per 1,000 listeners sounds good. Add in affiliate fees for music purchases from tracks on the podcast for all the new found gems the listeners love. If the payments to the music labels are time-based, then the background information fed to the listeners can be paid too. The more great music podcasts put out there, the more listeners will download, and good podcasts need never die.

Streaming radio pays a minimum royalty of 15¢ per subscriber per month (or 30¢ if the download is on multiple devices).

Outside the US, standard radio royalty rates, which include the performers as well as the songwriters/composers, could apply, and these rates are also based on the number of listeners. If these are the rates used, iTunes should only need to pay 15¢ or 30¢ per month for the music for each of the accounts that downloads these paid podcasts. So for one 99¢ download per month, which can be played on iPods, Macs, and PCs, Apple would take it's usual 30¢, another 30¢ would go for the music, leaving 39¢ for the guide.

Remaining Trustworthy

Of course, as soon as the guides are successful they will be approached by the music business. For as long as the guides remember that their success depends on how the audience rates them, there is much less incentive to play crap. As soon as they forget, another guide will take over.

Apple's business is based on trust. As Apple has $28 billion plus in cash and equivalents, there is next to no interest in the minor sums a failing music industry can offer. In fact, Apple will make much more from the sale of iPods by reestablishing trust between music guides and their audience.

There is also much less incentive for the staff behind the picks on iTunes to take handouts, since they are better paid than radio DJs and playlist managers - and stock options disappear on dismissal with cause.

Will the major labels try to block this? Will they ask for too much - instead of grasping the opportunity with both hands?

Since much of management there seems to live in denial of why they are failing, who knows? They seem to keep hoping that a subscription service will suddenly rescue them, that hordes of people out there will suddenly discover that they want to pay for music every month.

Ignore the Major Labels at First

There is an advantage in keeping the major labels out of the initial discussions - they won't have a say in how the payments are split up. Then after Apple takes it's usual 30%, there could be a much fairer split between the guides, performers, songwriters/composers and record labels.

In any case, EMI (owned by a private equity company that wants a return on its investment) and the independent labels (the future of recorded music) should jump at the opportunity of earning money from letting people explore music and then buy it. LEM

For frequent impassioned outpourings on the music business, read Bob Lefsetz's newsletter.

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Tim Nash is a Director of WattWenn which has a new approach to scheduling the production of TV and movies to make the most of budgets. The views in this article are his own and are prejudiced from spending more years working for computer companies than he cares to remember.

Tim lives with his wife, her website on the area ariege.com, two daughters, a cat, and a dog in the French Pyrenees. He lapsed for a while after the Apple II, but became a Mac fan when his wife introduced him to the Macintosh IIsi. If you find his articles helpful, please consider making a donation to his tip jar.

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