Friday, January 12, 2007

What’s That Sound? THWAP goes the long tail! – Part II

How “Sampling” Will Save RIAA
Sampling is an industry term for users listening to new music in order to find music they like. Broadcast radio is probably still the primary means of sampling music for most people. However, with people starting to express more varied tastes traditional radio formats are less and less effective because they try to cater to the broadest set of tastes and ignore niche tastes. So, to summarize so far, RIAA makes less money off of each individual artist and therefore spending more on any one artist is a bad investment. On the other hand, there is no effective way for them to spend less but expect the good artists to organically rise to the top and spark more sales. The answer, of course, is better sampling.

The Economics of Sampling
As I’ve said before, I have two main beliefs about why RIAA is making less money these days: 1) the product (music) is relatively less compelling than DVDs and games as each passing day goes by; 2) people have fixed budgets and RIAA is losing share to other markets.

You might be thinking that sampling doesn’t make music more compelling and therefore it can’t alter the purchasing choices of individuals – and I think that’s right. However, sampling does have two incredibly powerful economic aspects in its favor:
1) it reduces marketing costs dramatically thereby increasing profit;
2) it brings a new set of pocket books into play – advertisers!

The first point about reducing costs is self-explanatory so let’s get right into the advertising opportunity. You may not realize this but every time you listen to a song on the radio, RIAA gets paid. The more you listen the more money they make. Stated differently, the more you sample the more money they make. Who pays for all of this? Every other industry except the music industry – that’s who! While advertisers try and reach you to sell everything from sneakers to bubble gum, RIAA gets a slice of the pie when you sample music off of broadcast sources. Nice, right?

Listen And Love It
I’m sure you’ve figured this out by now, but we view BroadClip as the ultimate sampling tool. We view these changes as the natural progression of the radio market to match what’s happening in other markets. Fifteen years ago there was only one way marketing – print ads, broadcast TV, billboards etc.. Today we live in an interactive age of clickthroughs and targeting. That trend hasn’t caught up to radio yet.

When you time-shift/place-shift radio that you like, you discover new music in the process. Everybody wins – you get to listen to targeted radio without spending countless hours sifting through stuff you won’t like, RIAA makes more money, and internet radio stations have a viable business model because we can clear ad dollars to them (think along the lines of what Google does for bloggers and other content sites). Now that’s free love!

Wednesday, January 10, 2007

What’s That Sound? THWAP goes the long tail! – Part I

Nielsen’s numbers for 2006 music sales are out and to quote the article that summarized the report RIAA, “can’t stem the bleeding.” Given my last post I don’t find that all too interesting. What I do find interesting is the shift in the kinds of music being sold. What seems to be happening is that the big artists are selling less and small artists are selling more.

Hindsight is 80/20
For a long time in the video-on-demand industry I tried to convince people that the vaunted “80/20” rule of retail – that 80% of the sales come from only 20% of the SKUs - was an artifact of limited inventory selection. You see, my first job in that industry was to figure out how to maximize the effective use of digital storage. I think the facts are starting to bear out my earlier argument. Most people in the industry believed that the 80/20 rule would hold true when users had tens of thousands of titles to choose from. I don’t think I had any particularly bright insight since in my eyes Amazon had already disproved the 80/20 myth, but, as they say, hindsight is ….

It’s Catch 22, All Over Again
If you read my blog regularly, the exercise of “putting on your RIAA” cap is getting a little worn so today I’ll just cut to the chase. If you’re a label trying to figure out whether to invest marketing dollars into your favorite talent, you’ve got a real catch-22 on your hands. 1) Invest more dollars and possibly not get as much money back because the stars don’t sell as many copies; or, 2) Spread out your money on more artists with the knowledge that you may not be spending enough to move the needle of public opinion on any one artist.

Unfortunately for the music industry the option of “don’t spend at all” doesn’t make sense because “sampling” hasn’t found a better form of expression. That last sentence might have sounded like gobbletygook and I think it deserves its own post – stay tuned for Part II.

Tuesday, January 2, 2007

The Year Was 1982

My assertion for today is that the recording industry has seen its heyday and it’s absolutely unclear how they’re going to save themselves. Let’s see if you agree with me.

In 1982, the audio compact disk or “CD” was introduced to the eagerly awaiting public. If you were an exec in the record industry that year it would have seemed that the world was yours for the taking! The once-in-a-lifetime chance to sell music lovers a new, more expensive copy of the same thing they already owned and loved! Ironically, the very technology that brought superior sound quality to the masses signaled the apex of power for the recording industry rights holders. How could that be, you ask?

The Hi Def Moment
Despite the claims of audiophiles, most people can’t perceive better sound quality than is provided by CDs. For the recording industry their “hi def” moment was over 20 years ago when CDs started supplanting records and tapes. Unfortunately for the industry there’s now no more product innovation to be had by increasing the quality. Contrast that with TVs, DVDs, and games. Those products have been progressing steadily over the past decades.

The difference between video games in 1982 and now is stunning. We’ve gone from the Atari 2600 to the X-Box 360 – and gaming technology has no end in sight with things like modeling individual hairs on a character or shards of glass in a broken window pane. DVDs didn’t even exist then – and they are about to be upgraded to Hi-def standards like BluRay and HD-DVD. Conceivably, 15 years from now we’ll look at current HD video and think “yuck”.

Perhaps I’m mistaken but 15 years from now we’ll look back on current CD quality audio and think “same old, same old”. CDs may be outmoded by then, but the new media storage won’t give perceivably better audio quality.

When Quality Is No Longer A Possible Innovation Point
Let’s put our RIAA caps (helmets?) on for a little while. I guess when you can no longer make your product better in the most obvious sense your options are as follows:
a) re-invent the product
b) co-opt a related product
c) attempt to preserve the status quo

As RIAA execs we view our $15 Billion+ annual industry as a sacred cow. With regard to option (a) I’m not sure about you, but I’m a little scared to walk into the boss’s office and tell him “let’s do the ‘New Coke’ thing!”

Let’s then look at option (b). The first big problem with this is ... what related product could be co-opted? There is no equivalent of the web-browser to be integrated into our operating system. Even if there were, with the exception of Microsoft, most enterprises don’t successfully co-opt new technologies within the context of multi-billion dollar industries. Microsoft co-opted the web browser and killed whatever chance Netscape had of becoming their angel of death. However, Microsoft has the advantage of having some really gutsy executives like Bill Gates around. I’m pretty gutsy but no one in the music industry commands the power that Mr. Gates does in Microsoft.

So, as RIAA execs we’re left with whatever the final option is.

Preserving the Status Quo, Consumer Revenge – Now What?
CD sales still account for 96% of music sales. iTunes seems pretty successful but it has barely made a dent. The only way to read this is that RIAA has been phenomenally successful at maintaining the status quo. The truth is, RIAA has a monopoly – they’ve got the rights to songs and we (the consumers) have to live by their rules in most circumstances.

Life is good as a monopolist because if you’re the only guy selling water in the desert you can charge pretty much anything you want. The problem RIAA has is that illegal download services like Napster and Grokster gave expression to what I call “consumer revenge”. Consumers have been gouged by RIAA for a long time, there’s no disputing it. Unlike some, I think that consumers generally shy away from activity that is generally understood to be illegal. Therefore, when consumers engage in widespread illicit behavior they do it only when they really feel like they’re getting screwed. When that happens, if the opportunity presents itself, consumers fight back with a vengeance and the phenomenon is something akin to civil disobedience.

In the final analysis, RIAA is now trying to figure out how to bring the glory days back. Unfortunately, they haven’t offered us anything new or exciting in over 20 years. Maybe, just maybe, some enterprising company will invent something new and compelling that grows the music industry - if and when that happens its unlikely that RIAA will go along with it willingly.