Archive for the ‘Who's going to pay…’ Category

Who’s going to pay…? Part 3

April 14, 2010

We’ve looked at the stricken economics of the streaming sector and the challenges of the artist services sector, now it’s time to take a look at the evolving industry from a new perspective.   A lot of effort is going into trying to recreate the old music industry online when perhaps we should look at how other sectors have been transformed forever by the Internet and look at it from a Web, rather than a music perspective.

‘The Music Industry’ is no longer limited to record labels and other related corporate music institutions.  They still (and will continue to) exist but they have been joined by millions of artists – effectively sole traders empowered (although not quite yet enabled) by the Web to build their own career, and distribute and profit from their music, without the necessity to partner with a label.

There are 7m odd tracks available from the 4 majors and this is the catalogue that, broadly speaking, every consumer facing music site licences and seeks to monetise.  But in addition to these there are well over 10 million artists and 100m other tracks lying around on sites such as MySpace.  So why do retail/search/recommendation services almost exclusively revolve around the 7m catalogue?  The whole point of the Web is that consumers can almost instantaneously find exactly what they are looking for.  It works for books (Amazon), retail (eBay) and travel (Expedia) – these sites don’t just list products from 4 major suppliers, they list everything from everybody and you can search for it.  So why not music?  Have you ever sat in front of a Spotify screen and thought ‘7 m tracks, there must be amazing things in here, but how do I find them?’  Better still, in front of 100m tracks on MySpace and wondered how great it would be if you could be taken to your perfect track every time?  At the moment, it’s like going onto eBay and only being able to select a category but not being able to enter a specific search.

It’s all about search.  On Amazon you type what you are looking for and, after you have found it, there are recommendations on what else you might like.  In music you just get the recommendations (and pretty average ones at that) – the fact is that other than artist name and track name, there is no search in music.

Fast Forward to Nirvana (the place, not the band), how should music search work? – well either you should be able to describe the type of music you are looking for (in free text) or, alternatively (and I prefer this one) use a reference track to search for all other tracks that were very similar, regardless of artist.  For many people, the emotional connection with the artist is an important ingredient, but for the vast majority (over 95%) it’s just about finding great music on a consistent basis, regardless of who wrote/performed/released it.  Emotion follows great music, not the other way round.

So why is there no music search? The nub of the problem is that the thing you are looking for must have data attached to it that is of relevance to the search being carried out.  On eBay we know what the item is, its age, description, the quality of the seller and a good idea of what others think of its worth.  It’s a magic blend of factual description, quality control and crowd wisdom.  In music the name of the artist and the track name tell you next to nothing about the listening experience of the track itself (or its quality), but for most of those 100m+ tracks this is all we have.  And for most of us it’s not about the artist it’s about the track, which is why most recommendation engines fall short, because they stick on artist and cannot go more granular.

Pandora are perhaps the current leaders in music search – and the way they have managed this – by manually wrapping data (up to 400 manually applied attributes per track + recommendation) around millions of tracks and then using the data around one track to map it to other similar tracks.  Does it work?  50m users (that’s 1 in 6 people in the US) and the only profitable personalised streaming business in the world is the result, so I think that’s a yes.  Pandora realised almost a decade ago that the secret behind music recommendation was data, unless a track is wrapped in data it is almost impossible to clump it with other similar tracks.

So where is this going…if you are an artist in the 7m catalogue you have some visibility because a small percentage of these tracks are played often enough to get you high enough in the recommendation engine to acquire new fans.  But if you are outside the 7m, however good you are as an artist, the consumer will not be able to find you, even if your song is the one they have been waiting for all their life.  Accept it.  And the consumer is mind-bendingly  lazy, they do not have the time, inclination or energy to look for you, and even if they did there is almost no chance of them finding you.  It’s like a monkey on a typewriter, there is a tiny chance something good will emerge…but the odds are against you.

So, as an artist, what do you do?  Most still strive for a record deal, and although a record deal is potentially a ticket to exposure, nowadays the financial returns for a relatively successful artist are pitiful.   Alternatively there are numerous digital silo services you can use to try and promote yourself.  You can pay to get on iTunes, you can pay to have your tracks fired at listeners on internet radio who like vaguely similar stuff and you yearn for radio play in the hope that someone randomly listening will connect with your music and track you down.  It’s a disjointed digital ecosystem because its new and there is no integration, no logical progression.  Its like a production line where all the machines are working but they are all out of order.  All you want (and need) is fans (and their email addresses), fans that will love your music, a sales channel that you can feed with great new music.  Fans that you can build a career around.

There is lots of data around consumers, what tracks they like, how much they like them.  Pandora enables you to put in an artist/track and stream similar music – this is only possible because all the tracks are wrapped in data.  If this could be turned on its head there would be a service for artists that enabled them wrap their track with data and then map their track to the wider market.  This would tell them where they fit in the music universe and precisely target the consumers most likely to love their music, a sort of permission marketing.  In the world of the long tail, this is the tail wagging the dog.  

If this were possible then all digital services fall into place, relevance would direct promotion and opportunity and the world becomes one of mass personalisation.  Artists can find their fans, publishers their customers, consumers music they love and record labels the next signing.

So how would this work in practice?  An artist lays down a track on a Monday, gets it datawrapped on Tuesday, uses this data to map themselves to the wider established market, (and by extension who and where the most passionate audience are) on a Wednesday and fire their track at that precise audience on a one to one basis on a Thursday.  By Friday they have enough new fans to start packaging music/merch/live bundles and offering this to the fans most likely to buy.  Weekend off/writing…and repeat…

It’s a little simplistic, but you get the idea.

Think its fantasy – well it’s on its way, consumers have neither the time or patience to find the artists, but the Internet enables the artist to find their audience, on a one to one basis.  This is the new music industry, one to many is yesterday, one to one is the new paradigm and the ecosystem to make this happen is already coalescing.

Music search is a universal solution for industry, publishers, consumers and artists – indeed anyone who wants to find or wants to be found.  In the same way as a niche supplier can be the top of a list in a Google search, the smallest artist will be able to do the same in a music search.  It’s all about rewarding relevance with prominence.

Who’s going to pay…? Part 2

March 8, 2010

In Part 1 we looked at the economics behind streaming services and concluded that on a pure play basis the gap between consumer appetite to pay and the cost of provision remains gaping.  Although consumers will pay for access to media (eg broadband, 3G etc) they increasingly balk at paying for content.   Music will increasingly be bundled into access: like radio or TV it’s going to feel free to the consumer. 

Artist services

So if there’s little money at the consumer end, how about artist services?  The services to help artists best promote themselves are legion but they all face the tough monetisation challenge.  On the one hand artists are typically passionate about their art and will pay for concrete results, on the other they are typically pretty hard up and it takes a lot to part them from their cash.  It follows that any successful service in this space must offer measurable benefits, real career progression plus have a broad application to a large number of artists.

This was brought into sharp relief last month when Sellaband, the fan financing site, collapsed into bankruptcy before re-emerging with a new owner 48 hours later.  The problem with fan financing is that, on a stand alone basis, there is simply not enough money to support a service without a parallel/supplementary revenue stream.  Sellaband financed over 40 artists to the tune of $50,000 each – but fees and royalties fell far short of overheads, they now take transaction fees of almost 25% of all sums invested in an artist, but it’s still doubtful there’s a viable business there (or indeed for any of the pure play fan financing sites).

Furthermore, track sales are being further cannibalised by streaming, so any model that relies on record sales/royalties is swimming against a riptide in the new music age.   At Slicethepie, we adjusted our model last year and reviewers on the site also now power an artist service that financially supports the fan financing platform; called SoundOut, it’s an insight and analytics service now sold around the world by multiple partners.   Fan financing has a great future and a critical role to play in the new music ecosystem, but it’s going to need to scale to be profitable – which is only likely to happen towards the end of the evolution of the music industry.  There’s other stuff that needs sorting first.

Elsewhere in the artist services world the ‘freemium’ model is not limited to music streaming services – it’s applied by a range of artist services from SoundCloud to ReverbNation, aiming to draw artists in with a free taster then convert them to paying customers once they realise how essential the service is.  But it’s a tough conversion, and although it is easy to demonstrate convenience, delivering hard payback (and persuading artists to pay) is way more elusive.  A recent survey we conducted amongst several thousand unsigned artists suggested a low single digit conversion rate to paid usage for many of these services.  The digital distributors such as Tunecore and IODA do better – as here the benefit is much clearer (ie get your tracks on iTunes). But even for them the market has become commoditised and all are now launching preferred partner stores in a collective move to be the services aggregator for artists on the web.  It will be interesting to see how this one plays out.

On the promotions side, the pay per play model adopted by the likes of Jango and Grooveshark is a promising twist on promotional streaming.  Here artists can pay to have their tracks streamed thousands of times alongside nominated ‘similar’ artists.  The listeners get the occasional promotional track amidst recommended music streams and artists get to place their tracks alongside similar, well known material.  The artists fund the listening experience, but in return they get to see, and (crucially) count, real fan acquisition. The challenge here is a quality one – as a streaming service you don’t want to be feeding inappropriate or poor tracks to consumers who are only there for a ‘great’ music experience and as such are just a click away from Spotify or Mog.  In short, the more income you grab from aspiring artists the more risk you inject into the model.  The solution would be to position the paid for tracks in exactly the right place – but more of that next time…

The level playing field

The first thing to recognise is that online, everyone is now governed by the same rules.  The revolution for artists on the web is not that they can all be found on MySpace or that they can distribute their music, it is that every artist has the opportunity to build their own channel to market – it is no longer the preserve of the record labels.

This will soon become both a reality and a mindset.

A new artist, however brilliant, needs to build their fan base – and this requires investment.  It has always been so.  Whether it’s a $10 million TV and radio marketing campaign by a record label or $100 and 5,000 plays on Jango.   This is an investment in building a sales channel for an artist, a channel that can be repeatedly monetised as more material is created.

This process is open to all.  We are approaching the moment when the line between signed and unsigned becomes so blurred as to be irrelevant.  Historically, getting signed was the key to both finance and access to well guarded marketing channels.  Now the finance has all but dried up and the marketing channels are open to all.  Even so, don’t forget that for all their ‘gut feel’ and experience the labels only had a 5% hit rate – ie for every 20 artists they sunk $1m in, only 1 resulted in a big enough channel to pay back investment and create an asset that could be monetised on a repeat basis.  The good news is fishing for fans is going to get a whole lot easier for all artists.  Tools are emerging that will take much of the randomness out of fan acquisition.  If the past was rod and line, the future is dynamite.

We are in the middle of a paradigm shift in music.  All the rules around marketing, distribution and monetisation are changing.  It’s not simplistically about headline grabbing DIY or the death of the labels, it’s about the emergence of a new rule set and tool set that will define the discovery and consumption of music for the coming decades.  It’s as big a challenge for independent artists as it is for labels  who will need to adapt, learn to survive and ultimately thrive in the new environment.  What is important is that whether you are a casual player or David Beckham you will all be on the same field, playing by the same rules.

So going forward, the service(s) that artists will pay for are those that demonstrably build the channel that they can monetise on a repeat basis.  This is the benchmark against which artists will judge and pay for service offerings.  With 2 billion web users there are undoubtedly enough fans to financially support many many artists – but you need to identify and accurately target those individuals who are going to rabidly adore your music, buy the deluxe CD set, pay for concert tickets and generally have you live in their heads and become woven into their lives…

Ultimately someone will ensure that your track will only ever be played to those people who are going to adore it.  Now that’s a service worth paying for…

Who’s going to pay…? Part 1

February 4, 2010

It’s been a couple of years since launch, but we’ve finally decided to start a modest blog, its likely to be pretty random with a number of STP bods contributing from time to time, but we hope you’ll find time to drop by occasionally.

Swimming around as we do in the digital music world we have our own ideas of what’s going on, who’s flying, who’s dying and what may happen tomorrow.    It’s not about Slicethepie or SoundOut its more of an observational platform.

As a kick off we’re going to give you our economic take on our view of the industry in 3 instalments (1 today, 2 others to follow…).   First we’ll look at the exploding streaming sector, next the artist services sector and some pretty strong trends/evolution happening there and finally our personal view of where this is all headed and where you’ll need to be standing when the tide goes out.

The last mile … and free supermarkets

There’s been a mass of commentary about streaming services, all pretty disproportionate to their eventual economic impact on the broader industry.  All these deliver the last mile of connectivity to the consumer and all sell/stream the same few million tracks from the same suppliers (labels).  On the one hand this is pretty limited as it only represents around 2% of music actually available, but on the other, as discovery technology is currently so nascent, it doesn’t matter right now.

As a result there is almost no tangible differentiation between any of these services , plus any that does exist is rapidly being eroded – and in any event when Apple, with their 70% digital market share, device dominance and Lala tech, switches on, its game over for the rest of the sector.  

Imagine a free supermarket chain.  Always open and offering free goods to anyone who wandered through the door – the whole concept financed by advertising billboards on the walls splitting advertising dollars with the suppliers.  Plus for just $10 a month you could also enjoy the home delivery service.  From a consumer perspective this would be compelling and would grab market share in no time at all.  Until that is the suppliers went bust or you ran out of money.  You’d need some VC backing of course and/or a neat way of not having to pay suppliers (steal the goods).  Broadly speaking this is the business model of many of the streaming businesses.  I’m not distinguishing between legal and pirate sites as the economic model is very similar – except in one case artists are being robbed, and in the other its VCs (plus the artists who inadvertently also find their feet in the same bath).  For the time being the labels are benefiting as the net effect is a cash transfer from VCs to them, a game they continue to play well.  From a consumer perspective it’s a similar experience – it’s all free music. 

Some operators have been and gone (Spiral Frog, Imeem, Napster (V1), Pirate Bay) some splutter along (Q Trax, Rhapsody, Napster (V2)) others continue and on the user number line they appear to flourish…but if you look at the underlying economics it’s pretty scary….

Take Pandora, who you’ll remember are in personalised radio rather than on demand streaming and enjoy licence costs that are a tenth of the on demand guys (0.1p per stream v 1p per stream), they’ve now got around 40 million users but are only just at break even.   Others have not aged so well – Imeem torched $35 million before collapsing into Mr Murdochs arms, Spiral Frog burnt $15m and Ruckus drank $41m of the VC cool aid before passing out.  Bottom line is that it’s not easy making money in music retail/streaming.  Even the mighty Apple who sold over a billion tracks last year could only manage break even for iTunes.

If music is going to be ‘free’ to the consumer it does not follow that the guy shifting the most free music becomes the winner, it’s going to be a phyric victory without some dramatic extra economic ingredient.

Those at the forefront of this ‘revolution’ continue to feed at the VC trough but the numbers ain’t pretty.  Take Spotify, the Waitrose of the free supermarket sector.  I, along with 7 million others, think the service is brilliant but does that make it a great business? Right now their numbers appear downright scary:  They state they need 12% of users to pay £10 ($16) a month to break even (I’m assuming this is on top of ad income) and that they are on about 3.5% conversion at the moment equating to £2.5 million/month.  So they are taking £2.5m from subscriptions a month but need £7.5m – indicating a current monthly loss of £5m ($8m).  Ouch.  At this rate the $50m they collected last August will soon be exhausted. No wonder they’ve gone invite only and the US is on hold.  It’s not a scalability issue either plus even if they have a sweetheart deal with the majors at the moment this is not going to last forever.  Cracking product though…

In a commodity market (which is what its now become) the defining metric is price – which in case you hadn’t noticed is now settling at around $5 a month (We7, Sky Songs, Vodafone, Mog etc) – so this would translate into a lofty 25% conversion rate for the likes of Spotify & Co to hit breakeven. 

So it’s unlikely many fortunes will be made in music sales or distribution, and the last man standing may simply be the one with the deepest pockets who can take the odd billion dollar hit with a parallel business model that is able to profit from its market position.   Hang on a minute; forget the iPad, the big Apple launch this year is still to come…and 125m credit card details and a wifi enabled iPod would be quite a head start.

I know the above is a simplification, but if the foundations are shot, the paint colour doesn’t matter.  So where does that leave us?  If there is little money in music retail/streaming anymore we’re going to have to look elsewhere for that pot of gold at the end of the musical rainbow.  It does exist, it’s just that right now most people are looking in the wrong place.  It’s not only about lots of music, it’s more about deeply personalised music on both a consumer and commercial usage basis.  Plus if there is a personalised filter the signed/unsigned distinction blurs and the volume of music explodes… Tune in for part 2…..


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