The Digital Lowdown

The Beatles Decide to Ditch iTunes

Maybe...maybe not.  ALmost two years ago, I wrote a blog about the impact of The Beatles catalog going online. Every six months for the past several years, there have been rumors about when you can download "Let It Be" (by the Beatles, of course).  I have to admit that at that time, I still had a few LPs that I had not replaced with a CD. So I might have been enticed to purchase some Beatles tracks.

9/9/09, the release of the Beatles version Rock Band, and the re-mastered CDs, was a strong contender for seeing The Beatles go on iTunes.  It came and went.  No iTunes.

Now I am wondering if Apple Corps missed the window of opportunity.  

Most people can easily rip a CD into their computer.  It used to be a complicated task to do this.  Many people bought a track from iTunes that they already had on a CD just to avoid ripping it. 

Today, it couldn't be easier.  All the song information is filled in automatically and the music files are nicely organized on your computer.

Further, if Beatles fans didn't already have every album on CD in 2003, the re-released masters will surely fill in any gaps.

Apple Corps may be correct in withholding their tracks from the digital services.  How much more money do they really need to make?  Yet, The Beatles are seen as the Golden Grail and most everyone expects that they will make digital sales skyrocket.  

I think that it will be an exciting moment when you can buy The Beatles online.  But I don't think it will change anyone's life, including Ringo Starr, Paul McCartney, yours or mine.

(If anyone noticed, I made it thru this whole blog without saying "Money can't buy you love" more than once.)

What is the Value of Music?

As I sit down to write this current column, I am reminded of one that I wrote about 9 months ago called "Does Music Have Value?"  That entry discussed the intrinsic value of music as a retail product versus a marketing tool.  Today, I want to address a different aspect of "value" by precisely rephrasing the question as "what is the value of music?"  

We all have seen the ubiquitous television commercials for MasterCard (i.e., "priceless" is the tag line). Obviously, this does not apply when it comes to spending one's hard earned money on various forms of entertainment.  More often, consumers are being forced to evaluate where they get the most value for their entertainment dollars.  This got me to thinking of an EROI - "Entertainment Return On Investment".  There are many different ways to buy entertainment.  For brevity's sake, let's limit it to a few of the most common:  movies, CDs, DVDs, live music, music downloads.  

What is the EROI of each of these items?  As a mere form of experimentation, let's define EROI as a ratio of experiential hours divided by the cost in dollars.

Movies (EROI = 0.13):  Take the two hours of an average movie experience (including trailers) and divide by $15 (one ticket and one small popcorn).  

CD (EROI = 1.33):  Assume that one listens to a CD 20x (about 1 hr per CD) over many years and divide it by the average cost of $15 per CD

DVD (EROI = 0.75):  Assume a three hour DVD (with features) watched 5x and divided by $20 per DVD

Live Music (EROI = 0.04):  Assume a 3 hour show divided by a $50 ticket

Music Downloads (EROI = 2.00):  Assume a 4 minute track played 30x and divided by $1.00

Obviously, many of my assumptions are purely arbitrary.  Yet, still they are very plausible. I could argue that some of the assumptions are actually conservative.  After all, I still have the very first CD that I purchased (along with the first LP, btw).  It still sounds great.  

Many consumers will gripe about the costs of CDs.  It is a common complaint that CDs have always been priced too high and many fans will further object to the treatment of artists by their label.  I would argue that CDs represent one of the best entertainment value that one could have.  It is remarkable to me that the same people who might complain about paying $15 for a CD would often see more than one movie per month and wind up paying $5 (or more) for a bag of popcorn that is worth 25 cents (or less).  

I am not suggesting that there is no room to discount music.   There are many business models that endeavor to make music feel highly discounted or, even, free.  These new revenue structures are very important for the growth and development of the music business.   However, I believe that it is very important for people to recognize the immense value that recorded music has and not to immediately discount it as an overpriced commodity. 

Video Blog with Gerd Leonhard

My good friend, Gerd Leonhard, is one of the official bloggers of MidemNet.  In the midst of a crazy busy Midem this year, I did a one-minute video interview for his blog.  Weary-eyed, I managed to sound somewhat cogent.  Here it is:

Video Interview at Midem

A Holiday Miracle: How To Get 50% Back On Your Marketing Dollars

According an IFPI study, 20% of music on iTunes does not sell even one download.  That is really amazing to me.  One would think that everyone who posts music on iTunes (most likely thru a digital distributor such as myself) would have at least a few friends and family willing to buy a track or two.  Yet, BFM's own quarterly accounting reports showed about 100 labels/artists that had no revenue at all during Q3.

My takeaway from a sad number such as this is that these folks are doing nothing to get the word out about their music.  I mean if you can't convince your Aunt, brother, or your buddies at work to buy a track, then how the hell is a perfect stranger going to find out about your music. Personally, I have posted a few tracks that I recorded.  It gives me a giggle to see if my paltry four tracks will make me the winner of the smallest royalty check each quarter.  Proudly, I can say that I've never hit the very bottom ever.  I've been close.  Why?  That's because I am always mentioning to friends that I have an EP online and a few of them inevitably buy them.

The key to selling music on the digital services is two-fold:  marketing and discoverability.  In reality, it is really all about marketing since that only serves to increase discoverability.  But I will write about the latter in a subsequent column.

Now, I am not about to tell you the magic secret for marketing your music.  Usually, it comes down to marketing 101 techniques and there are plenty of books out there that are great.  I am here to tell you about one of the most powerful marketing techniques that has remained unknown (or ignored) by most artists and labels.  

What if I could tell you of a way to get 50¢ back on every marketing dollar that you spend? ...automatically!  That would be incredible wouldn't it.  Well, here is how you can do this.

Gift ONE track from your album to 100 people. (Do NOT send them the whole album.) iTunes has a very cool feature that lets you buy a track or album and send it to someone as a gift.  It won't cost them anything and they will have to come back to iTunes to download the track.  This accomplishes many things.

First, it exposes your music to 100 people who may not have heard it before.  I know what you are saying:  "I don't know 100 people that I can gift my music to."  That is pure B.S.!  If you add up your co-workers, friends, musicians, family, religious organization, college buddies, etc., you should be able to easily come up with 100 people.  Plus, you can also include your local music promoters, critics,  producers and the people at the supermarket.

Secondly, some of these folks may just buy some more tracks.  I think it is quite likely that this may happen.  Of course, there will be those recipients that are not into your music.  It is equally likely that many of them will like what they hear and will want more.  This is why it is critical not to gift the entire album.  Just do one track and let them come back for more.

Third, one hundred people should be enough to start a bit of a viral effect on your album.  Hopefully, they will each tell a friend about your music and spread the word.

OK, now comes the most obvious objection.  Many of you reading this will say that you don't have $100 to do this.  Well, the good news is that for every $100 you spend, you will only be spending around $50.  That is because you'll get about 75-80% back from your digital distributor in royalty payments.  If you have an 80/20 deal with your distributor and spend $100 at iTunes, that means that you'll get $56 in royalty payments the following accounting period. In reality, your $100 of marketing has only cost you $44!  Where else could you get such a great deal and save 56% on your marketing dollars?

When you made your album, I am sure that you spent money on items that were not essential.  For some, I imagine the beer-budget came close to $100.  Perhaps you rented that amp that you used on only one song.  Or maybe you had to slip some money to a club owner to use their space for a studio.  Regardless of your recording, mastering, and manufacturing budget, I don't think that you wanted to spend all that money only to see it languish at the bottom of the lists on iTunes or to look at the zeroes on your royalty statements.

Lastly, please remember that some of the best digital marketing plans began by giving away free tracks.  That works very nicely if you already have the traffic on your site.  It does not work well if you trying to generate interest from scratch.  If this technique doesn't work, you are out only $44.  But if it does work, you can be proud that you took a proactive step and created a buzz about your album.

Happy Holidays!

THANKS FOR THE MUSIC BIZ

Today is Thanksgiving.  Every year my extended family sits around the table and each us gives thanks for something in their lives.  As I was running this morning, I was trying to think of something meaningful (and new) to add to the usual list:  my family, my job, my health, etc.  I didn't come up with anything new for the dinner table.  However, I did come up with music business-related items for which I would like to express gratitude:

1)  Thomas Edison/Emile Berliner:  These two pioneers invented ways to record music into a format that could be easily distributed.  Until then, if someone wanted to hear music, they had to bring in a musician or go to where a musician was.  After the invention of the phonograph (Edison's cylindrical device) and the gramophone (the early version of an LP), music could be widely shared.  You could say that it was the first form of P2P and launched a consumer desire for music products.

2)   MP3:  It is without question that the MP3 file format, invented in 1991, created a revolution that is still rippling throughout the world.  It is undeniably that an MP3 file sounds worse than other file formats (wav, aiff, wma, etc.).  Previous physical, audio formats proved that audio quality was not the main concern of the music consumer.  Does anyone remember how awful a cheap cassette sounded or how bad an 8-track was?  Without the development of the MP3 format, however, we would not have seen the meteoric rise of the digital music industry which was, for the most part, a desperate response to the growing availability of unlicensed, free music content.  So whether you are an audiophile who curses how MP3's are dumbing down our ears or an out-of-work record exec who wonders what the hell happened, we can still thank MP3's for exposing music creators to music lovers on a global scale.

3)  My Staff:  The music industry has an undeniable allure to it.  Music instills passion and there are always many people who want to be near those that create music.  I suspect that there are many industries that one can simply sit at a desk and do the work without caring much about the end product.  But in the music industry, that is really hard to do.  I am very fortunate to have an incredible staff.  Not only are they hard working, intelligent people, they also care deeply about music.  Many of them are budding composers, songwriters, producers and engineers.  I used to think that I wouldn't want to hire such people because they would care more about their music then the work they needed to do for me.  Now I realize that it is the same passion for creating music that benefits a company like mine.  Who better to understand how important an album is to one of our 1000's of indie artists then a fellow artist.  Even the staff who are not actual creators of music still possess a love of music that motivates them to succeed.  So, today, I have to acknowledge my thanks to my entire staff.  They are an incredible group of people.

4)  Artists:  I used to be a self-unemployed film composer.  I have to admit that I sometimes miss creating music.  Nowadays, I don't play very much and my playing chops have significantly waned.  To satisfy my creative urges, I rely on writing, speaking and running the business; all endeavors that tap into the same creative resources that my composing used to do.  Every day, we receive albums from musicians and artists that obviously reflect their dedication to and love of music.  Ultimately, that is where the content comes from.  Even if we are getting music from a publisher or music library, all roads eventually point back to some composer, singer, artist, or sound designer working in their studio and deciding if they have the right amount of reverb, the drums are too loud, do I need to tune that background vocal line, etc.  I can never forget that the source of business success originates from the vision and energies of the people that create the music and audio products that we represent.

5)  CERN:  For some people, Al Gore invented the Internet.  In reality, the credit can most likely be given to CERN, the Geneva scientific institute which created the World Wide Web project in 1991.  Elements of the Web had proceeded them.  But it was CERN that really put it all together.  Everyone can admit that our lives have been transformed by the Internet.  For the music industry, it is more than obvious to state this.  Forgetting the impact of P2P file sharing, the most amazing thing about the Internet is the ability to connect people in disparate regions around the world.  Admittedly, I am still one of those people who is amazed at the fax machine.  But when I think of the empowerment of the Internet, I am overwhelmed.  Ten years ago, if you were a jazz musician in Chicago and wanted to sell your music in Germany, you had to press an album, find a label locally, find a German distributor who then has to convince a German store to carry your album.  Then hopefully a German jazz lover will find it in the bins and buy it.  Now, thanks to CERN and the Web, any musician with an Internet connection can make their music available to any music lover ANYWHERE IN THE WORLD!  That's incredible.  OK, the issue of discoverability is always going to put a slight damper on this.  But that doesn't diminish the remarkable potential we now have at our fingertips.

6)  My Partner:  The ongoing joke here is to say "my business partner".  When I conceived of the idea of BFM Digital (nee Big Fish Media), there was only one person that I could envision turning to. Looking back at the past four and a half years, he has been an excellent compliment to my skill set.  He has pushed me to do things that my instincts rebelled against.  I feel it is important for a business owner to always have a sounding board, partner or not, to give one a sense of perspective.  It is very easy to lose site of the trees for the forest.  I am grateful for my partner to help push me out of my comfort zone in order to build a thriving business.

7)  My Family:  You are probably saying that this last piece should be reserved for the dinner table.  Maybe you are right.  But creating a digital distribution business from scratch involves the support of one's entire family.  When I moved my office out of the house, my children cheered because they each could have their own room.  The flip side of that coin is that I now get a call at the end of each day:  "When are you coming home, Daddy?"  Knowing that they love what I do for a living and give me their complete support is crucial to survive the challenges of being a small business owner.  It sounds corny, but I couldn't have accomplished what I did without it.

HAPPY THANKSGIVING EVERYONE!

  

Yes, You Can Make Money With Your Music!

OK, Ok.  The title of this blog entry sounds like one of the many "get rich quick" emails that clog up your spam folder.  It is possible to make a million overnight in the music biz.  But that is, by far, the exception as opposed to the rule.  Most of the successful artists and labels that I deal with are in it for the long haul. They know that today's music business requires an equally creative approach to marketing their music as it does to create it.

In the past few months, I have been working on some very interesting, and off-beat, types of music licensing projects.  It made me think about the diversity of opportunities that exists in our modern world.  Even though everyone bemoans decreasing CD sales, I would like to describe some of the more innovative revenue sources in the hope that it gets you thinking of new ways to earn money from your music.

1)  Greeting Cards:  I recently walked into a Hallmark store to buy a card.  The last thing that I expected to hear was the theme to "Monday Night Football."  But wafting from the back of the store was a tinny, yet clearly recognizable recording of this well-known tune.  I stopped my quest for a sympathy card for the death of an employee's pet to find the source.  Turns out it was one of the many hi-tech cards that employ audio devices to play music.  Aside from the obvious "Happy Birthday to You", there are dozens of other songs that make a lot of money for publishers and labels.  It doesn't take much thought to realize that you can license "When Irish Eyes Are Smiling" for St. Patrick's Day and "Jingle Bells" for Christmas.  But how about "Pomp and Circumstance" for Graduation Day or "M-O-T-H-E-R" for Mother's Day.  THe typical compensation structure for audio cards is a either a per unit royalty or a revenue share of the retail price.  Selling a $2.99 card doesn't seem like an adequate substitute for a $12.99 CD.  But believe me; it adds up to a sizable sum.  

2)  Toothtunes:  Imagine having an electric toothbrush that plays music that can only be heard when it is pressed against your teeth.  A friend of mine at EMI Music gave me a few samples for my kids.  One played "Let's Get It Started" (from Black Eyed Peas).  Another one had "Wake Up" (by Hillary Duff).  The song plays for two minutes which is how long dentists want us to brush.  So instead of selling 500,000 CDs to get a gold record, publishers can sell 500,000 toothbrushes (for a gold tooth??).  That may seem like an overly ambitious goal.  But just imagine how many parents want to get their kids to brush more often.  That has to be way more than platinum level of sales.

3)  Online Karaoke:  For several years, I have been working with the first (and best) online karaoke service.  Most people know about karaoke from the many, cheesy karaoke clubs and old cassette systems.  But the karaoke business is a multi-billion industry that, until recently, has consisted primarily of unlicensed content.  Utilizing the sensibility of social communities, a friend of mine developed kSolo.com.  Ultimately this was purchased by Myspace and it is now known as Myspace Karaoke.  In an age where music publishers and record labels are combatting lost revenue from illegal download services like Limewire, Myspace Karaoke attempts to take the karaoke industry, which has been mostly illegitimate and bring it back to the fold.  The revenue model for services like these employ a combination of a subscription and advertising sources.  It enables publishers a way to breathe new life into their back catalog of songs.  Instead of being able to license only eight compositions per CD-G disc, they can now license 1000's of songs for an online karaoke service like Myspace Karaoke.  

I know that none of these sound as glamorous as licensing a song for a national car commercial or a big, studio film.  These types of high-ticket placements are proving to be one way for publishers and labels to offset decreases in mechanical revenue from CD sales.  

As physical sales continue to fall without being completely replaced by digital sales, music owners will need to find new ways to generate licensing revenue from their existing catalog.  I would say that the same Chinese curse is also the salvation for the music industry:  "May you live in interesting times."  The challenges of the digital age also presents new streams of income.  Some of them are wacky and some are simple.  All it takes is a little imagination... and a willingness to tolerate hearing TV themes while shopping for a condolences card.  

Texas Bar Association Speech (Pt. 2)

Note from author:  I recently gave a speech to the Texas Bar Association’s annual entertainment law conference.  It was held in Austin, Texas on October 02, 2008.  This entry is the first of several excerpts drawn from that speech.  Eventually, the entire speech will be posted.  It was accompanied by a slide presentation from which selected slides will be posted here.  

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Part Two:

It is sometimes easy to forget that the digital music services are only 4 years old. The illegal services are a bit older but still only go back to 1996.  It’s hard for us to remember a time when we didn’t have emails, the internet, cable TV.  But compared to those technologies, stores like iTunes are mere babies. 

Here's a look at the growth of digital music sales:

The percentage that digital sales has continues to grow.  But let’s not forget that it is a two-prong process.  Digital sales are growing as physical sales decline.  So this will give an inflated growth curve.  Eventually, most pundits predict that digital sales will be primarily all that there is.

When we talk about digital music, it’s important to define what is being discussed.  There are really three distinct verticals:

• Subscriptions services like Rhapsody and Napster
• Online Downloads like iTunes and Amazon
• Mobile Services like Verizon and Sprint (downloads thru your mobile phone)

Here’s a breakdown of the average market segments worldwide.  Obviously in some territories these figures can vary widely.  For example, in Japan, the mobile market segment is 91%.

Just to put things in perspective, here are the three top selling artists in the download market.  In this slide, we see the top three best selling artists in the download world:

Some other interesting statisics are:

• 4 million tracks downloaded at least once (937k majors / 3 mil indies)
• 1% of all digital tracks accounted for more than 80% of track sales in 2007
• 1 mil only songs were downloaded once
• 9 tracks sold more than 2 mil DLs ("Crank That” by Soulja Boy led with 2.9)
• One track did so in 2006

(Source:  IFPI)

Statistics continued:

• There are more than 500 legal music services worldwide, ten times as many as four years ago.About 6 million individual digital songs are available legally.
• 1.7 billion digital tracks were downloaded legally last year, up 53 percent.
• Tens of billions of songs were swapped illegally.
• The ratio of unlicensed tracks to legal tracks downloaded is 20 to 1

One thing to remember is that the music industry has adopted digital distribution more than any other media.  It is more advanced in terms of digital revenues than any other creative or entertainment industry except games. Its digital share is more than twice that of newspapers (7%), films (3%) and books (2%).  Many of you will instantly note that that music files use much less bandwidth than video files, for example.  Regardless, there are a lot of lessons to learn from the exploitation of music in the digital world.  

Texas Bar Association Speech (Pt. 1)

(Note from author:  I recently gave a speech to the Texas Bar Association’s annual entertainment law conference.  It was held in Austin, Texas on October 02, 2008.  This entry is the first of several excerpts drawn from that speech.  Eventually, the entire speech will be posted.  It was accompanied by a slide presentation from which selected slides will be posted here.  Lastly, there are some references to panels at that conference.  Likely, they will seem odd.  But laziness prevents me from deleting or correcting them.)

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As an homage to the famous “Last Lecture” by Carnegie Mellon professor Randy Pausch, I’d like to begin this presentation by letting you know what will not be discussed today:

1)  Is the Music Industry Dead? 

In June, the IFPI reported that the worldwide sales of music were at a 23 year low.  Combining digital downloads, at a equivalent rate of 10 tracks per album (an unrealistically low estimate), with physical sales, there were only 1.86 billion albums sold last year.  That is down 11% from 2006.  The last time album sales were this low was in 1985 (remember “We Are The World”?).   The peak year since that time was 1996 when album sales were 3.4 billion units worldwide.

The knee-jerk reaction to this news is to predict the inevitable death of the music industry.   It seems natural to join the chorus of the doom and gloom advocates.  I must admit that sometimes I wonder if digital distribution companies like mine are part of the future of the music business or merely the top deck of a sinking cruise ship awaiting our ultimate drowning.
For the past 10 years, nearly every prediction of future revenue, trends, and activities beyond a year or two have been dramatically off.  I refuse to partake in such speculations.  There should be one of my articles in your packets that more fully explore my feeling about the doom and gloom forecasts.  Suffice it to say that I believe the music industry is still facing major paradigm shifts and will take several years to settle down.

2)  Is the CD Dead?

One of the best conferences that I ever attended was called MB5.  This took place in Berkeley in 2001.  Not only did I meet one of my creative idols, Alan Parsons, I met some of my best business partners and friends at this particular event.  There was a particular panel that I fondly recall.  Sitting in a small classroom with about six of the leading Internet music pundits on the dais, the subject was discussing the future of the CD format.  At that same show, I remember a guy walking around with a small, quarter-sized disc that could hold…a whopping 500 megs.  It was going to replace the CD. Back on the panel, the moderator asked for a show of hands of those people that thought the CD was going to be gone within 2 years.  I am proud to say that only two people did not think so.  One of these was Alan Parsons.
I think that it is inevitable that the CD will disappear.  But the music industry will survive.   A client of mine put it well.  When 8-tracks came out, you didn’t see Warner Bros. Records change their name to Warner Bros. 8-Tracks.  

3) How Do You Make Money From 1 Million Plays Of A Music Video On Youtube?

Regarding how you can take millions of plays on Youtube and convert this to a revenue stream…I don’t know how one does this.  Sharing ad revenue, click thrus, etc.  are all possibilities.  But none of these are really working right now.  So we’ll leave this mystery alone for now.  If I figure out the answer, I probably will make an infomercial and sell “how-to” kits on late night TV.

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(Note: this is a taste of future excerpts)

WHAT WILL BE DISCUSSED TODAY IS:

 1)    An Overall View Of The Digital Music World

The music industry has many facets and components.  Dividing it between digital and physical goods is an obvious, but not easy, demarcation.  Within the digital arena, there are distinctly different revenue channels of ringtones, downloads, streams, etc.   The music buyer can still be distinguished between digital and physical.  So I’ll give a brief state of the digital music industry just to give us a perspective.

2)    The New Role Of The Artist/label

The buzz phrase of the past year has been”360 deals”.  I admit that the deals being offered to Madonna and Jaz Z are incredible.  But the majority of indie labels and artists have always had a “360” perspective.  I’ll explore the concept of disintermediation and the new responsibilities that artists now have.

 3)    The Various Types Of Digital Services

It seems that new digital music services (aka Digital Service Providers or DSP’s) are launching every week.  There are a wide variety of business and marketing models.  Though time doesn’t permit me to be completely detailed about all of them, you should get a good overview here.

 4)    Licensing/legal Challenges

Other panels today and tomorrow will discuss this subject in greater detail.  Today, I’ll cover some practical challenges and issues that many labels and artists face as they attempt to get their music distributed around the world on various DSPs.

 5)    New Opportunities That Are Available

Lastly, I want to end this presentation on a positive note.  The digital world creates a lot of headaches and worries for content owners and creators.  On the flip side, it also creates a wealth of opportunities that are truly exciting.  

NEW MUSIC ROYALTY RATES

This week had some very important rate decisions by the Copyright Rate Board. For over a year, they have been hearing testimony about the statutory mechanical rate as well as the rate that subscription services should pay for publishing royalties. Both rate structures were announced this past week. Since it affects nearly everyone in the music business, I think it’s important to give you my initial take on these rulings.

Since 1909, there has been a set royalty rate the record companies had to pay publishers whenever a reproduction occurs (i.e., LPs, cassettes, CDs, etc.). From 1909 to 1976, the rate was 2¢ per track per unit sold. It was increased in 1976 to 2.75¢ and has risen regularly to 9.1¢ in 2006. 

That rate expired December 31, 2007. So for the past 21 months, the rate has been unchanged and everyone has been awaiting the new rate structure. The major battle here has been between the publishers on the one hand (represented primarily by the NMPA). On the other hand, there are the music services and the record labels represented by DiMA and the RIAA respectively. The publishers had been arguing for an increase in the mechanical rate. They sought a rate from approximately 12¢ to 15¢ pre track per unit. DiMA and the labels wanted the rate reduced to 5-6¢. 

So, after a year of testimony and months of deliberations, the rate has been finally set at…. the same rate of 9.1¢. This is now the official mechanical rate for all physical goods and permanent digital downloads (e.g., iTunes, AmazonMp3, etc.). The most important fact to know is that this rate is fixed for the next five years.

In the same ruling, the CRB has set a statutory rate for ringtones that involve master recordings commonly known as ringtunes, master tones and trutones. The rate for these ringtone products is 24¢ per tone. This does not apply to polyphonic or monophonic, MIDI ringtones, however. 

On the subscription side, the rate ruling is much more complicated. Early last week, the parties agreed (and the CRB will likely validate) an agreement whereby publishers will earn 10.5% from subscription revenue (which includes streams and tethered downloads) after the cost for the performance royalty license has been deducted. There is actually a very complex and confusing grid of rates and services that will apply. 

There are two important considerations to remember. First, this means that the bold threat iTunes made to close down its store, in the event of a royalty hike, is now meaningless. I really didn’t think that this was a likely, or even a possible, scenario. Fortunately, that bullet, real or otherwise, was dodged. 

Secondly, the rate is now going to be stable for five years. This may seem like a long time. But before you know it, there will be the start of discussions for the next rate adjustment. If the predictions of the death of the CD and the rise of the subscription services live up to general expectations, then it is quite likely we may be looking at a fundamental change in the statutory royalty structure. Instead of a “penny” rate, it is probably that this will be converted to a percentage rate. 

This remains to be seen. In any event, I laud the CRB’s decision. I look forward to a period of modest stability during which all sides of the table can continue to develop business models that support the artists and labels while meeting a consumer’s needs. 

In the meantime, it is too early to understand how these recent rate changes will affect indie labels and their aggregators. We will try to keep you informed about any new developments.

Doom & Gloom? Not so.

This week the IFPI reported that the worldwide sales of music were at a 23 year low.  Combining digital downloads, at a equivalent rate of 10 tracks per album (an unrealistically low estimate), with physical sales, there were only 1.86 billion albums sold last year.  That is down 11% from 2006.  The last time album sales were this low was in 1985 (remember “We Are The World”?).   The peak year since that time was 1996 when album sales were 3.4 billion units worldwide.

The knee-jerk reaction to this news is to predict the inevitable death of the music industry.   It seems natural to join the chorus of the doom and gloom advocates.  I must admit that sometimes I wonder if digital distribution companies like mine are part of the future of the music business or merely the top deck of a sinking cruise ship awaiting our ultimate drowning.

We still mourn the death of most large brick and mortar retailers.  The loss of Tower Records and others affected not only the sales figures but severely limited the available shelf space for music product.  It appears that not even Walmart, the stalwart seller of CDs, can withstand the relentless growth of iTunes. In April, Apple announced that iTunes was the largest retailer of music in the U.S.   They cite a NPD study that credits iTunes with 19% of the U.S. market versus Walmart’s 16%.  [Note:  iTunes uses an equation of 12 individual downloads per album and not 10 as the IFPI uses.  That makes iTunes a more reasonable album count.]   

While there are many downward trends in the music industry, there are also very positive developments that, I believe, will lead to digital sales increasing enough to compensate for the declining physical sales.   Here are a couple of positive trends that are worth noting:

• Most of the largest digital music services are ingesting 10,000’s of tracks per month.  One of the great benefits of digital store is the unlimited “shelf space”.  Even though this can make searching for music unwieldy, it also gives every music creator access to buyers around the world.  Often, I am asked, as a content aggregator, if there is a lack of available music to distribute and that every label is already signed up to a digital distributor.  Two years ago, I might have agreed to this.  However, as I write this column after the first day of London Calling, a prominent digital music conference, I can honestly say that there is still of lot music that has not been made available to the digital stores (and I don’t mean just The Beatles catalog).  Today, alone, I was presented with about 20,000 tracks of material that has not been digitally released.
• Digital sales continue to grow internationally.  The U.S. market is still the leader in digital sales.  UK is a distant second with the rest of world trailing behind.  One reason for this lag is probably the reluctance to use credit cards for Internet transactions.  U.S. consumers have been accustomed to give the credit cards out to catalog companies for decades.  In contrast, much of Europe, for example, simply distrusted websites and were uncomfortable to use their credit cards online.  Amazon should be credited with converting a lot of these skeptics by providing a secure haven.  Still, this prejudice lingers and is evidenced by the meager adoption of services like Paypal outside the U.S.  The trends for digital music consumption internationally are continually positive.  If the rest of the world matched the U.S. purchases of digital sales, then no one would be negative about the prospects of the music industry.
• The last, and most powerful, major indicator of growth is the launch of music services by strong, retail organizations.  I would put AmazonMP3 and Tesco stores at the top of this list.  When Amazon launched its download service, the big question is would they steal some of iTunes’ market share.   The more important issue is whether or not they could grow the entire digital music market or not.  It benefits no one to have market share shift from one online retailer to another.  However, it is crucial to create more buyers.  Utilizing their powerful search and recommendation engine, Amazon, I believe, is doing just that.  Many other retailers are launching music stores and betting on being able to convert buyers of non-music products into digital music consumers.  This is a great strategy that I believe is destined to work. 
  

The main take-away from the above points is that the music industry is still in the pains of adjusting to the digital world.  Admittedly, it is taking longer than most would have predicted and certainly longer than anyone likes.  It is clear that the dust still has not settled and that it likely will be stirred up more before it does.  When it does clear up, we will find more artists making more money from their work than ever before and that the music industry will continue to flourish.  It may just take a different path and follow a more convoluted timeline.  We will get there eventually.  The music industry may be in a slump.  But it is ultimately a growth market.