ratpie

Category: strategy

  • Don’t Give Up On The Music Market Just Yet

    The huge and growing catalogue of music digitally available through an expanding choice of retailers and services might suggest that any supply side problems are well on the way to being solved. Look a bit closer however, and something is missing. There might be more songs, but the hits are coming from an ever smaller group of companies. And there are signs that, outside of a small handful of contenders for international success, less money is being spent on each new track.

    This matters, because a thriving music sector depends on more people rather than fewer having access to the best studios, the best arrangers, session musicians, and everything else required to make excellent new recordings.

    Chris Anderson noted that a long tail world favours aggregators over producers; how can the market be reshaped to put the incentive back into making great records, rather than simply collecting as much generic music as possible and tagging it for SEO? Some commentators advocate giving up on the market, and replacing it with a flat rate and a layer of bureaucracy. This seems to me a counsel of despair; we surely have not run out of other ideas quite yet!

    Perhaps part of the answer is to look at how new music is coming to the market. Is there a flattening effect which is failing to reward creators who make an extraordinary effort? I’d say there is; a track that was made in a rush by people who don’t care is most often on the market at the same price as a piece made with love by a skilled and careful craftsman. The reward that flows back is a reflection solely of popularity, which clearly penalises musicians who are chasing something other than broad appeal.

    This is carried through to the retail layer, where the way catalogues are traded makes it difficult for a business to find and develop a focus. Retailers and services are forced to buy huge quantities of music they don’t want in order to get what they need, and denied the chance to capture the value that they might otherwise have an incentive to create by serving a niche or two with currently undervalued music.

    Between these two effects we have strong incentives to avoid diversity and to invest as little as possible in risky new music. There is no reason why music should have to do without the tools that just about every other market uses to allocate resources and signal value to producers. Both price and popularity can be expressed and captured in a wholesale market with fine granularity on the same kind of electronic trading exchange that supports future contracts in commodities, or shares in public companies. Discussions about databases would evaporate as the ability to interact with the market would depend on robust and reliable data management and standards. Exclusion and unfair trading would be a lot easier to detect. There would be no need to collectivise anything, or force participation, as better conditions for trade would by themselves attract buyers and sellers to the market.

    This is easy to say but of course much more difficult to attempt, and might well do nothing to improve either liquidity or incentives in music. What can be said with some certainty is that it would create both openness and a lot more information about the value of music in the market, and would by necessity force the creation of sophisticated trading strategies on both sides. At least then we would find out what the market wanted, even if we might not like the answer.

  • Music v. Tech – How to Stop Fighting Yesterday’s Wars

    Google recently released some startlingly large numbers relating to the number of copyright infringement takedown requests it receives and continues to act upon. Almost at the same time (it can’t entirely be a coincidence) the UK book publishers’ trade association chief unleashed a broadside which looked calculated to prevent dialogue between content and tech for some time. For context, the Publishers’ Association chief used to be the lobbyist for the BPI, the UK record business body that appears in Google’s top ten complainants.

    Round table discussions brokered by the UK Government are supposed to be finding constructive ways forward, but appear to have stalled. UK ISPs are far from engaging at a commercial level with music, apart from a half-hearted affiliate deal here and there.

    Maybe the wrong people are in the room. Certainly more discussions happen between lawyers, trade associations, Government, and liability or anti-piracy staff than between the people who could actually do something to create new value. Does anyone really think a civil servant can invent the next decade of music industry infrastructure? No, thought not.

    Even the diehard digital rights activists that I talk to are aware of many positive uses of copyright (the integrity of open source licences depends on it) and would be excited by a genuine collaboration between music and technology. And analysts in tech and telcos are sweating over spreadsheets constantly trying to justify a business case for investing in new and innovative services. Innovators and engineers have no shortage of ideas. That much is obvious.

    So here’s a call. Skills, music, and distribution – let’s sideline the ranters, lobbyists, blowhards, politicians, and anyone else who thinks that they have a right to get in the way of progress. Music and technology are natural partners that should be bigging each other up, not trying to shame and hobble each other, and neither needs to go whining to Government for help. None of us want to end up being told how to live our lives by politicians. We can and must work together.

  • The Relative Incompetence of the Music Industry

    Perhaps in the days of paper forms and typing pools it was excusable that the music industry shied away from line by line accounting in favour of statistical sampling and pro rata share outs of royalty pools. An additional copyright in those days meant a collective investment in administration that could be disproportionate. Now however the source of the largest imposition of cost is maladministration by copyright owners, leading to disputes and disambiguation. Yet it is still common for businesses and societies or other collective organisations to cry about burdensome complexity as they plead an increasingly feeble case against complete transparency in copyright administration.

    Here’s Nic Garnett, in a report to WIPO about proposals for an International Music Registry:

    To a degree a key question in rights management has changed. Before, RMOs needed to ask: “Is this data worth collecting and processing?”. In the digital environment the question can become: “Is there a legitimate reason for not processing all the relevant data?”

    (RMOs are Rights Management Organisations)

    This would have been a farsighted question to have asked in 1995, and right on the money for industry leaders to be asking in 2000. The fact that Nic, a highly experienced and knowledgeable copyright lawyer and consultant, is asking it in 2012 is strong evidence for the miserable failure of the music industry to make itself fit for business. Nic should know why this is so as he was CEO of IFPI during much of the 1990s, but he’s also enough of a diplomat not to point any fingers.

    I can’t fault Nic’s list of music industry failings:

    • The necessary data systems are lacking
    • Music industry priorities are still, to a degree, shaped by out-dated structures designed for out-dated business models
    • There is insufficient interoperability between systems in different sectors of the music industry
    • There is even less interoperability with corresponding data systems outside the music industry’s core functions
    • There is little or no rights management infrastructure in emerging markets and what there is, is incompatible with systems in other markets

    At this point the average music executive’s eyes start wandering, as though they have found themselves locked in a cupboard with a nutter. But imagine if other industries were afflicted with the same lax and stupid attitude to their basic infrastructure. What if car companies couldn’t manage to provide a set of standard wheel sizes to tyre companies? What if shoe lace manufacturers couldn’t or wouldn’t sell b2b to shoe makers or shoe shops, so you had to visit two shops to get a functional pair of shoes? What if a new and fabulous plane required an extra 100m of runway but the manufacturer couldn’t be bothered to tell the airports? Imagine if eBay decided it was far too much trouble to process any transactions under $10, so it would roll them up and divide the pool pro rata?

    The music industry as a whole probably looks much like a failed state, such as Somalia, Chad, or Sudan, but thankfully with fewer guns. Reform is proving just as intractable as we move into the second decade of systemic incompetence. Nic’s handwringing at WIPO is a chronicle of failure, not a hopeful sign of reconstruction and recovery.

  • Some Numbers In The Digital Music Industry

    There are now very few barriers to entry in the digital music industry, if you are lucky enough to be middle class in a developed economy. Production tools are essentially free if you have a computer; broadband connects you to a number of service providers that can put you on sale. Even if you have no musical skills there is a growing public domain of sound recordings that can be repackaged and sold. Low costs and no gatekeepering are driving a continuing expansion in the number of tracks in the market, with 2012 seeing perhaps 15 million already on sale and probably at least another million or two arriving each year.

    I have gathered a few numbers from around the industry, which I shall present rounded off and anonymised or generalised to respect confidence and commercial sensitivity where they have not been widely published elsewhere. Some of them might well be wildly wrong, due to mis-remembered conversations or just poor data management.

    One of the many music services that includes on demand streaming has delivered at least one listen for each of 720,000 tracks over a year, out of a catalogue of approximately 5 million tracks. A similar service, aimed at families, finds that each  account expands by 15 tracks the diversity of the music that gets listened to. A European neighbouring rights society knows about approximately 5 million tracks of which somewhere between 5 and 6% get payments allocated over a year.

    ASCAP, the American organisation that collects and distributes royalties for the performances of compositions, shares the money it collects between the 200 highest grossing tours or concerts. It also makes discretionary awards to about 4000 applicants each year who would be entitled to be paid under a scheme that simply allocated royalties to reported performances. College webcast radio in the USA can pay an additional $100 on top of the $500 minimum fee to avoid reporting up to 825,000 performances of sound recordings per month, (9,900,000 performances per year).

    The global digital music industry brought in $5.2b for record labels in 2011 according to the IFPI. If that were evenly distributed across the sound recordings in the market that would mean each earned approximately $350. Markets don’t tend to work like this; if the revenue followed one of the most likely distributions, 70% of the revenue would be generated by 1% of the tracks. Each of those 150,000 tracks in the top 1% would therefore earn a little more than $24,000 on average. Assuming the same distribution the top 150 tracks would average about $8.66m each. Just sharing that money out between performers registered in the International Performers Database, a joint project between neighbouring rights societies, would net each performer about $10,000.

    Digital music is full of strangeness and contradiction, and as these numbers show, as a business its existence on its current scale is a triumph of either ignorance or hope over expectation. If any more interesting numbers pop up I shall update this article.

     

     

  • Sony’s Gatfield Shows Mutual Misunderstanding Between Music & ISPs As Deep As Ever

    Nick Gatfield, recently appointed CEO of Sony Music UK, took the opportunity of an interview with the Guardian newspaper to do a bit of grandstanding on behalf of the music industry. Broadband businesses he said “are being built on the back of illegal filesharing”, and went on to call ISPs liars if they claim they can’t block web sites.

    If the conversations I have been having recently are anything to go by he will find plenty of people in the music industry to throw him a herring for balancing that particular ball on his nose. But sadly just as few able to able to explain the economics of broadband businesses, or the technical and legal implications of site blocking, as there were five or six years ago, when the real conversation about the music and broadband business should have started in earnest.

    And that is a shame. Having worked with ISPs for many years I know how much they can learn from the music industry, and how much music can learn from them. The cultures might be poles apart, but complementary rather than antagonistic. Even at a very facile level a business with huge and expensive infrastructure and a 24/7 service ethic, where customer satisfaction – or lack of it – is the most important metric, is where some parts of music already are, and some think they ought to be. And from the other side, even a modicum of emotional engagement, which is the only wallet opener music companies have, could transform a telecoms utility into a much deeper connectivity business.

    So what a pity that music, instead of saying “we want to learn about your business so that together we can make more of both of our assets”, instead has dug in for a war of attrition on ISPs’ core technology, their customer relationships, and the fundamental legal protections that manage the risk of investing in public communications infrastructure. And what an opportunity for someone on the music side to reach across the divide.

  • Unreasonable and Discriminatory Licensing in Online Music

    Some time ago I was asked to provide a note that could be circulated to European ISPs about some of the practices employed by music copyright owners which, in my view, represented obstacles to the growth and health of the online music market. A recent discussion on the Pho mailing list prompted me to dig this out and give it a less restricted airing.

    It is certainly the case that new entrants to music distribution find the licensing process onerous. One ISP reported a year long negotiation for what seems a simple enough proposition. However the possession of a full hand of licences is such a valuable asset, even in their usual short term and maladapted state, that few successful licensees cry foul, preferring to enjoy the compromised advantages of being in a still exclusive club.

    And yet the information that they have, locked down under NDA and the threat of arbitrary withdrawals of catalogues, is crucial for our regulators and public policy makers if they are not simply going to change one set of dysfunction for another. I very much hope that people with inside knowledge of how music licensing actually works will come forward so that there can be a reasonable debate in advance of the macro reform rippling around the world.

    Some Unreasonable and Discriminatory Licensing Practices

    The fragmented nature of music rights, involving complex contractual obligations wrapped around IP rights in the reproduction, performance, and ‘making available’ of both musical works and sound recordings, makes taking a fully licensed music service to market extremely onerous even if all the rights owners offered simple and efficient ways to access their catalogues. Coupled with this, consumer expectations are very high for online music, and gaps in the available music are not well tolerated.

    Set out here are some additional obstacles to efficient music licensing which combine with the already difficult nature of the market to add cost and risk to the emerging digital entertainment industry. All of these practices are potentially repeated by the owners of each of the separate rights that are required to offer music to the public.

    Direct licensing or withholding

    Most music rights owning parties insist on licensing the use of their catalogues directly, rather than using collective or wholesale clearing houses. Music rights are highly fragmented and require complex management systems, so direct licensing multiplies cost and difficulty for the licensee. Each licensor has the ability to set terms and rates that critically damage the viability of a service, or indeed to withhold the catalogue required to offer a compelling customer proposition.

    Territoriality

    The underlying rights are territorial, and this is exploited by rights owners in order to limit the operations of music services to specific countries, and also introduce price discrimination. Additionally, licensing of rights within the music industry means that different owners might need to be found and negotiated with for the same rights in different countries, adding cost and complexity to rights and royalty payment systems.

    Advances

    The larger rights owners usually demand advance payments and deal and delivery fees, which can be many times the expected royalty payments for the use of the music during the term of the agreement. This introduces a financing risk as well as adding a start-up cost to launching a new service. Often these will be staged as quarterly payments, with the threat of catalogue withdrawal or even insolvency proceedings should they not be met. Advances also reduce transparency to other music stakeholders, as they break the relationship between sales and royalty payments.

    Short term deals

    Many deals have a one year term with no obligation on the rights holder to renew. This introduces obvious risks, that a new music service might not be permitted to continue to offer key catalogues, or that the rights owner might introduce new and onerous obligations. A one year term will in almost all cases be considerably shorter than the planning horizon for a large operator, making it impossible to predict the terms on which a service will be operating as it is rolled out across a customer base, or as marketing activity attracts new customers.

    Minima

    Rights owners use contractual minimum payments in order to inflate their revenues over and above the value of the music that is actually sold by a service. In some cases this is relatively benign, such as setting a minimum wholesale price per track and taking the greater of that or a percentage of retail price. In per subscription pricing however it can be used to set a price per subscriber that is higher than the licensor’s pro-rata revenue share, or it can be set across an entire service so that the licensor receives a fixed percentage even when their pro-rata share drops. The effect of this is to compel the licensee to pay out over 100% of the royalty pool, eating into margins or operating costs.

    Customer proposition approval

    Rather than set wholesale pricing and allow operators to develop compelling services, music rights owners seek approval over most aspects of the consumer offering, and insert conditions in contracts that require any changes to be agreed in advance.

    Equity assignments

    Rights holders sometimes tie warrants or grants of equity to licensing deals giving themselves a route to benefit from increase in the value of that equity alongside any revenue they receive from the sale of music. This has the effect of unbalancing incentives so that rather than the most compelling consumer offering being the market leader the rights holders instead have a reason to exclude competition from the services in which they hold the largest equity positions.

    Arbitrary conditions

    Rights holders can sometimes put pressure on music service to accept arbitrary conditions, such as using a preferred provider for some aspect of the service, or committing to guaranteed placement for priority releases. Some other arbitrary conditions might include anti-piracy action either as a pre-condition of licensing, or as a commitment included in a contract, or access to a large amount of consumer behaviour data, including data which does not relate to the music included in the contract.

  • We Need a Creators’ Revolution in Music

    It is telling how difficult it has proved in the UK for artists and songwriters to find their own voice. The Featured Artists Coalition (artists signed to record labels) has started for sure, but unless I am mistaken its funding comes from PPL, which is owned by the BPI. He who pays the piper…

    In the copyright term extension debate some artists did articulate a distinctive position around reversions, but that view was drowned out by PPL lobbying, in the name of artists but for a settlement that transferred money away from young artists and small artist friendly labels and towards dead artists and global corporates. The eventual reversion terms adopted ensured that the only recordings the artists will get back are the ones not worth exploiting.

    Composers and songwriters are not immune to the same tensions, with BASCA and the MPA having a spat in the pages of Music Week early 2011 at the same time as they were presenting a unified voice to Government with the MPA and UK Music in response to Hargreaves.

    The fact is that copyright lobbying, around both legislation and voluntary regulation, is driven by a very small number of large corporate interests, whose aim seems to be to enhance their control of a sick market rather than provide an open and healthy business environment for all, big, small, old and new.

    The original creators and performers, not the Johnny come lately producers, need their hand strengthened, and that will by itself bring more transparency and openness to the music industry. This is clear and obvious to me, and the regressive copyright term extension and the backroom deals being done around the UK’s Digital Economy Act by big corporates and their trade associations are clear evidence if any more were needed.

    The creators and performers seem to me to be looking beyond the industry we have to a more open and transparent market for their work. Artists and songwriters rail against the NDAs that their label and publisher representatives insist on inserting into each and every contract; they suffer from opaque reporting and the impossibility of effective audits; and they constantly call for the fetters to be taken off innovation in digital services.

    We need a true creators’ revolution in music. That is surely something that the public would understand and support with much more enthusiasm than a Government sponsored crackdown on ISPs in an attempt, probably vain, to protect the profits of a few global corporates.

  • Lessons for Music from the Steam Age

    If you go to London’s Science Museum and look at some of the early commercial steam engines you might notice a ‘pump counter’ which ticked up with every pump of the piston. Boulton and Watt’s original business model was to charge a build fee, and then a usage fee, on the basis that their engine was capable of doing more work more cheaply than the alternatives, within the constraints of the mines and factories in which it was installed.

    So, every month I imagine a man with a clipboard doing the rounds, and then a bill arriving which represented the work done – the value added by the engine. It wasn’t cheap, but it made things possible that had not been. And the benefit of their patent was to allow them to sell the work, not the engine.

    There seem to be two conventional opinions about this – the first that it was enough that B&W delivered power to kick start the revolution in productivity that changed the world. American industrialist Carnegie was a fan and proponent of this line. The other is that B&W’s overly aggressive use of their patents (they got a legal bill once for £30,000 – which in today’s money is multiples of what EMI is spending to annoy Michael Robertson) delayed the widespread adoption of the technology, and the revolution happened a few years later when the patents expired.

    I don’t quite buy either of these, though I am sure each holds some truth. For a start, manufacturing engines was difficult and risky, with many accidents and imperfections. B&W hugely improved manufacturing techniques during their patent period so that robust high performance engines could be made in much larger numbers during the first 2 decades of the C19th than the last 2 of the C18th. One might see a parallel in the electrification of the music industry here – no amount of interesting business model innovation could fill up a pipeline that lacks basic supply chain infrastructure and reporting.

    The second point is about the innovator’s investment dilemma, faced with the prospect of losing a constant portion of the value created. The benefit is there enough for B&W to make and sell hundreds of their engines over a few decades. But the mine or factory owner couldn’t run the engine 24/7 without paying more, and nor could they double the output by adding their own innovation. The incentive therefore was very strongly to keep up with the market, because engines did more at less cost, but not to get ahead of the market, because you ended up working for B&W and not yourself.

    In fact the greater incentive was to try to deny access to B&W’s engines to your competitors, either by tolerating a higher price than was really justified (in which you might have found B&W to be tacit colluders), or through more devious means.

    The parallels with our own rather less industrial music industry are so striking to me that I bothered to do a bit of reading about the subject. They have also led me to think that the digital music industry won’t achieve scale or commercial penetration until the rights owners are prepared to set a price, allow anyone to buy, and then stay out of their customers’ business. Nor do I think that the market will work with a price set on an abstract such as ‘access’ – that would be like selling thermodynamics without cylinders and pistons.

  • Pandora Tries to Flatten Earth – Cloud Dumps on PRS

    A few years ago Pandora tried to launch in the UK, taking a PPL or nothing approach to licensing which unsurprisingly failed. I thought they missed a trick, and could have established a strong foothold with independent catalogues – which is where all the exciting new music is anyway – at low cost, and then waited for the business to come to them. They didn’t, and still are not here.

    Pandora’s founder Tim Westergren clearly feels that the market for sound recording performance rights should be flat or nothing. Here he is in a recent interview with Music Week:

    “In the US it is an arbitrated rate,” he said of the deal terms there. “It is a negotiated, economically rational process. More than anything, centralisation is what facilitates the growth of the businesses.”

    At the same time as Westergren was telling the known universe how to trade its rights to his advantage, PRS chief Robert Ashcroft was fretting about the clouds that are massing above his collecting society picnic.

    “It’s a complicated legal landscape and one which we haven’t yet got to the bottom of,” he said, noting the organisation and the market in general were still yet to determine what a “real price” was for a mass-market service.

    Ashcroft seems to be coming from a position of startling economic and technical naivety, suggesting that clouds might both cannibalise sales and legitimise unlicensed music acquisition.

    “If you admit stuff into a service that was not actually purchased there will be value leakage. We have struggled for years to build up a viable online licensing business and we are very proud of what we have achieved. But all of that could be cut by a factor of 80%”

    What both of them are saying is that they feel incapable of operating in a free and open market. Westergren deliberately obfuscates, claiming economic rationality for a process which is in reality a punch up, with market dominance as the prize and the US government as the referee. The PRS board is presumably in the middle of a factional deadlock, and that means headlock for Ashcroft while he waits for a clear direction from the 6th floor, reducing him to Chicken Little-isms because he is damned if he does and damned if he doesn’t.

    This fear is understandable. The collective farm, expressed as a PRS or a Pandora, is a feature and product of the Union of Soviet Satellite Republics of Music, and it’s rubbish if you need some fresh turnips but great if you have the sole contract to supply semi-functional tractors. And it largely solved the problem of feeding the population at a very basic level.

    It is not surprising that nobody is stepping forward to be our own Nikita Khrushchev and destroy the Machine Tractor Stations that held the system locked in its under-productive state; hunger and disruption ensued when he did. These are difficult decisions for all of us, and any change requires a leap of faith. It will however, I am sure, be much more difficult to resurrect a free market out of an over-regulated technocracy, than to allow us to find our feet however shakily before the chains go on.

  • Music’s Lap Dancing Future

    Music can learn a lot from other industries. So I was delighted to see a piece of research into the UK’s lap dancing boom reported in yesterday’s Financial Times newspaper (which I find shrugs off butter and jam far better than would the iPad I don’t yet have).

    It’s not lechery that is driving the boom so much as an influx of dancers – it is an incrementally popular remunerative activity. Nor is it the business it seems – the women (I think the researchers were interested only in women) pay the bars and clubs a fee each evening to buy dancing rights, and then 30% of their earnings on top.

    The oversupply of dancers has driven the price of a lap dance through the floor, while the clubs of course have maintained or increased their fees. On the whole the dancers like the work, though earnings are down, and sometimes the women end up out of pocket for the evening. Average earnings for a session are around £230. Here’s the bit I love – “They call it a race to the bottom,” Ms Sanders [the researcher] said.

    So the learning?

    Ignoring any cheap shots, like comparing [insert name of scantily clad pop songstress here] to a telepresent lap dancer, this business looks remarkably like a Tunecore/iTunes combo, with a pay to play operator controlling access to the wallets of the customers.

    The key of course is the pricing power of venues and the supply of aspirant dancers. Customers will only pay for lap dancing in a limited number of clubs and pubs, so for the women there is no real choice. They couldn’t for instance offer their services in the municipal park on a Sunday afternoon, so they have to pay up.

    The other big factor is the interchangeability of the product, – because after 5 vodka & blacks one set of wiggling bits is both absolutely outstandingly beautiful, and completely indistinguishable from any other. And that is perhaps one possible future for the music industry.

    Here’s the study, and here’s the FT article.