We’re seeing the future— all over again. Just when the music industry had finally started to almost get the hang of selling mp3s on iTunes (even if we still haven’t figured out how to sell music from around the world, which blows my mind) the weather shifts and suddenly our new technology is dead.

“Gone is the MP3!” all the headlines are reading, and indeed, for the first time, the sales growth of digital track downloads dropped drastically this year, from a growth rate of 26 percent in 2008 to only 8 percent in 2009. Apparently all of us who were waiting for legal downloading to make up the revenue lost to the death of the CD had better find a new dream to embrace, because this once-new technology appears to be over before it began. What once was the future now appears to be officially “past”.

What makes it official of course is Apple– as we all know, it’s Steve Jobs’ world and we’re just living in it. When the big Mac shells out money to purchase the start-up venture Lala, with its whopping 100,000 person customer list, something must be bubbling. As we enter a new decade, it now appears that bubbling sound is the music stream, which is bringing you the next big thing:

Cheap music!

Uh… wait. Don’t we already have cheap music? NO! This will be cheaper still!!! While iTunes, that old-school relic of yesteryear, still wants to sell you a download for a dollar, services like Lala will allow you to stream the same song once for free and then give you unlimited access for 10 cents a track. The hitch of course is that the music doesn’t really “belong” to you. It’s more like a library book that you never have to return– which is close enough to ownership for me. Rather than shelves of CDs (like your grandparents have) or iTunes folders full of MP3s, the listener can access a full collection of music from the Web-based “cloud”, for either a per-song fee, or perhaps a monthly subscription (as in the Spotify model).

In a perfect illustration of the new technology approach to finance, Lala, a company started with $35 million of venture capital (provided in part by Warner Music) generates revenues under $10 million dollars, but is purchased by Apple for somewhere between $17 million (not too great a deal for Warner) and $85 million (which seems completely inexplicable). The general consensus is that Apple did not buy the company with the intention of replicating Lala’s current business model, but rather using the start-up’s technology and executive talent to launch their own Apple streaming service, which if they do it really well, could render iTunes obsolete.

Interestingly, the one hitch in Apple’s plan, and the one silver lining for the music industry, is that the current music licenses allowing Lala to offer legal music streams are not transferable as part of the sale. This means that Apple will have to re-negotiate the licenses with the major labels and publishers before they can launch their new service– a prospect that has label executives digging in for their last real chance to save their industry (and their jobs). While it would appear that the general licensing framework on the publishing side has already been laid by the recent agreement with the DMA (see the blog “Triumph or Turkey”), both the labels and publishers are determined to protect their interests within whatever business model Apple eventually constructs. If songs downloaded from iTunes will now be kept in a permanent online “locker” from which they can be streamed at any time on any device, labels will want a higher price per download, a fee for each stream, and a cut of any fees that Apple gets to increase the size of the locker. Publishers will expect a “mechanical” royalty for the stream, as provided in the new DMA agreeement, and ASCAP and BMI will certainly consider the “stream” a performance.

http://ericbeall.berkleemusicblogs.com/?s=triumph+or+turkey#

That’s all good– provided the model catches on. Not too surprisingly, the jury is still out on that one. So far most streaming models have proven very popular when the music is free, but far less so once that whopping 10 cents per track price tag is attached. Subscription models have not caught on either. Spotify offers a premium subscription at 10 GBP per month. So far, only about 10 percent of their customers buy in.

The inescapable fact is that until these services become profitable, the money for music-makers and music licensors will be pretty paltry. On the positive side, Apple has proven quite adept at figuring out how to make money off of music. The danger is that the new streaming service kills off iTunes, which is just starting to make some real money for the music business, and replaces it with something that earns ten percent of what iTunes did.

In general, it’s hard for me to be overly optimistic about the technological trend. First, we replaced the CD, which sold for as much as $15-20, with a product that sold for a dollar. Now we’re poised to replace the service that sells music for a dollar with a service that sells it for 10 cents. That’s not a great direction for music publishers, music labels, artists and songwriters to be headed. Given the precarious position of major labels like EMI, collection organizations around the world, and the thousands of small and large music publishers who saw as much as a 30 percent drop in income last year, we MUST collectively drive a hard bargain with Apple. That won’t be easy. Then, once an agreement is in place, we must continue to take legal action against unlicensed services that undercut Apple and other legitimate business partners.

If streaming is the future, and it likely is, then we need companies like Apple to make that business profitable. We also need to see a fair share of those profits. Otherwise, our vision of the future will indeed look a lot like a cloud– gray, ominous and full of hot air.

    Hey Eric

    I’m not convinced for a number of reasons, but rather than go into all of those details the major point is the way you, and others, talk about the current situation. For starters, there is a general trend with the ‘industry’ folks to say the digital downloads/mps killed off CDs. Well its just not true is it. CD’s still sell in large quantities.
    Secondly, there is nothing to suggest that Apple turning to a streaming service would kill iTunes. Streaming has its benefits and drawbacks, as does iTunes and they should be seen as complementary technologies that each have specific situational benefits. I can’t stream in my car for instance (not yet anyway).

    Thirdly, just because current businesses that are dependent on traditional methods of pricing and distribution are suffering does not mean that the change is bad. Certain models, ways, of doing things, just fall by the wayside as technology enables all kinds of things to be done differently. It happened with the horse and cart, coal-mines in the UK, fixed land-lines for telephony and so on and so forth.

    The point is this, and it’s hard for a lot of people to swallow, I know:

    Change or perish. You may have to retrain, or find new ways to work with the new ways. You might not like it, but that does not mean it won’t happen. There is plenty of creative and interesting work to be done in the new types of industry – there will not be an overall loss – it will even out as the focus shifts from area to another.
    History appears to demonstrate that the world moves on despite the die-hards trying to resist it. Work out how to carve a place for yourself in the new model and make it work. It’s not that big a change, and nor is it particularly difficult.

    As ever, take it easy.
    Keith

    The line: “First, we replaced the CD, which sold for as much as $15-20, with a product that sold for a dollar” is quite misleading. We did not replace the CD with a one song download. Downloading an album usually costs around $10 so in fact we replaced a product which sold for $15 – 20 with a product that sells for $10.
    Other than this, I think you have a great article and it sure will be interesting to see how these things evolve.

    Eric, great post. To add my two cents, I’ve used Lala for a long time and was worried it would fail and then be taken away from me. Now that Apple has bought Lala, I feel good AS A USER because I now think Lala will persist thanks to Apple’s ability to be patient, a key factor when introducing new approaches. I also feel good as a budding SONGWRITER/PUBLISHER because Lala’s model, while cheap, certainly isn’t free and should not encourage the growing “culture of free” among music listeners.

    The music industry, in my humble opinion, seeks to maintain a cost structure that is simply very out of date, and as a result, seeks a revenue level that is no longer connected to reality. Consider: In music, the cost of production has plummeted, supply is through the roof, and demand is, at best, constant — a formula that guarantees lower prices, or at the very least a different pricing model (why should all music sell for the same price?). Yet, the music industry and regulators struggle mightily to maintain the status quo. Pathetic.

    Jeff

    Hey, Eric!

    Yeah, things look scarier everyday. I just think that people who like music (most of us human beings) have to be aware that we’re killing music like we do to our planet: we take everything for granted! That’s why people don’t want to pay for music – they think it was always there and will always be there, no matter what.

    Once I had a discussion with a friend that defends her position as “I don’t buy CDs, ever”. Then I told her: congratulations, you’re making your favorite artist starve to death! You know, the ones that gave you such great stuff that you call “the soundtrack of your life”.

    Forgive me if I sound bitter. People are stealing music everyday and think it’s ok! iTunes does not have a South American shop yet (I even have a song there that my friends here can’t buy) and they’re already on some new venture. Let’s hope this makes things better. After all, it’s easier to change the modern technology than to change the human hearts.

    Best regards!!!

    Moe

    I understand very well your post, and direction of this new era in music, with “digital revolution” etcetera. There’s one thing I hardly understand: the tendency toward the “single” against the “album”.

    In myspace there’s a plenty of status messages that sound like “EHI, CHECK NEW SONG!” or “New track, come to listen!”.

    In the Seventies the Boomtown Rats used to promote their tour with a claim. It was “hey, we just learned the fourth chord, come to listen it!”

    I agree that streaming seems to be the way things are going. It gets harder and harder for indepedent musicians to generate income from their music. My gut feeling is that we are at a crossroads. The cards could fall a number of different ways. Artists and songwriters need to jump in and get educated…and get creative on how to monetize. Many will miss the train, but the few who can adapt and innovate will be successful.

    Another important point I forgot to mention is that the £15 CD ‘replaced’ £8.99 vinyl and cassette! The cost of an album nearly doubled overnight. (Anyone under 35 probably does not remember/know that). Even with that huge price increase, people went out and re-purchased their existing libraries on the new CD format (so the labels and artists got paid twice (three times considering the 2x price of a CD). The industry tried to justify the high cost of CD’s by saying they needed to recoup their investment in the technology – but 25 years later the prices are still the same – when we all know that the cost of producing CD’s is (comparitively) tiny now.

    With that in mind, you can see that there are millions of consumers that know they’ve been getting stiffed for years by the industry. Some might consider that what goes around comes around.

    I’m sure part of the problem is that the music industry bods don’t really know what to do about the changes in front of them. A bit frightening for them, but many would say they’ve had it too good for too long anyway.

    I’d be interested to hear your thoughts on the Zune subscription model. I use this service and without breaching my 5th amendment rights; I am very much a part of the iGeneration and before I was interested in the music business I was interested in music. As a younger fellow; if it didn’t feel free I wouldn’t get into it unless I was a raving fanatic about the material. It isn’t fair and it isn’t right but kids are kids. I like that Zune has no pricetags on tracks/albums as a subscriber; which indicate the music costs money (the price is not important). You see the $15 charge once, and you never have to look at dollar signs on your music again. Less threatening I think.

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