On June 29, 2007, while at London Calling, I was invited to speak to a small group of indie record label leaders at the annual AIM / WINgathering in London. I took this opportunity to take a good look atwhat needs to happen in order for the independent music companies toactually take advantage of the new music economy that is unfoldingright now. So… some of my thoughts are shared below.
Today I want to present my views on what I like to call “Music2.0”– the next generation of the music industry that is being created as wespeak. This new model is dramatically different: many old ways of doingthings, many old relationships, and many outmoded traditions cannot andwill not survive.
I want to seduce you, the leaders of the independent musicindustry, to go down this new road with me, to take a leap, to leavesome of your assumptions and your ‘religions’ aside, and to make boldmoves – because this is required to turn this ship around.
Scott Fitzgerald, the famous novelist, said: “Thetest of a first-rate intelligence is the ability to hold two opposedideas in the mind at the same time, and still retain the ability tofunction”. This will clearly be the music industry’s challenge going forward!
Technical and economic innovations have, for the past 10 years,stripped away many traditions, social and economic hierarchies andmonopolies in the music industry, and if there is one thing we can sayfor sure I guess that would be that it’s now show-time:the music industry is finally reaching a major inflection point; 10years after the first .com ventures shook the ground. It took a lotlonger than we all thought but it’s hitting much harder now: CD salesare down between 20 – 40% YTD, and digital sales are not making up thedifference, any time soon – and the one-horse race with iTunes clearlyis a dead-end.
We are very quickly nearing a point to where we are forced to diveinto what I like to call “Music2.0” – a new ecosystem that is not basedon music as a product, but music as a service: firstselling access, and only then selling copies. An ecosystem based onubiquity of music, not scarcity. An ecosystem based on mutual trust,not fear.
As Don Tapscott says, in his great book “Wikinomics” ,we can think of Web1.0 – the ‘old’ web - as some sort of digitalnewspaper, while Web2.0 is a canvas that allows information to be putup, shared, changed, and remixed. It’s about the interaction, thesend-and-receive options that make it useful and ‘special’. And inmusic, it’s always been about interaction, about sharing, aboutengaging – not Sell-Sell-Sell right from the start.
Stop the sharing and you kill the music business –it’s that simple. When the fan / user / listener stops engaging withthe music it’s all over. Today, you urgently need a canvas for musicnot a one-way product (such as the CD).
Let’s face it: most ‘leaders’ of the major record companies as wellas some independents are, by and large, still in denial about the factthat their unit-sales-based model is utterly broken and crashingquicker than they can fathom, and many still hope for some magical technology solution to solve a business problem.
Billions of $$ have already been lost due to misguided strategies,outdated policies, and lack of true leadership. Forgive me, but it’stime to get your act together and do whatever it takes, not just whatfits comfortably into your current landscape – this is a make-it orbreak-it moment.
How come many societies and PROs / MROs are still at a total loss whenit’s about ‘licensing the un-licensable’ (as my dear friend andcolleague Jim Griffinputs it)? 1000s of companies with innovative business models are leftunlicensed, by default (or shall I say by design?), and most of themhave given up on even trying. Major money is left on the table due totardiness and internal squabbling. Many of the traditional musiclicensing organizations have utterly failed in their mission of makingmusic available – in fact, they have, by non-action, succeeded to make it unavailable. What you need now is action not continued excuses.
Today, we have the paradox situation that any startup that wants touse music will not even try to go legal right from the beginning, sincethere is no reasonable way of doing so. Look at the biggest exits inthis turf, during the past 2 years: myspace, youtube, last.fm – eitherthey did not bother with proper music licenses, or it was unclear ifand where and when they would even need one. Non-compliance succeededand was handsomely rewarded.
The music industry must admit that it has failed to act. Theirleaders’ clueless-ness, incomprehension and general lack of willingnessto embrace true change allowed the paying for music to becomevoluntary. Congrats.
Don Tapscott points at the year 2006: the losers built digital musicstores, and the winners built vibrant communities based on music. Thelosers built walled gardens while the winners built public squares. Thelosers were busy guarding their intellectual property while the winnerswere busy getting everyone’s attention. Warner Music Group’s stocknose-dived from $30 to $14 in less than one year; Google rose from $323to $526, Apple went from $50 to $127.
For the independent music industry, the question is: which side doyou want to be on? Do you want to become another ‘major player’, andstay stuck in music1.0, or do you want to lead the way into music2.0?
In this context please allow me give you a glimpse of the future, so that you can make some decisions based on what is coming.
1. Within 18 months, in many key music territories around theglobe, wireless broadband networks and device-to-device ad-hoc networkswill connect every conceivable device with each other, as well as withgigantic online content depositories – or shall I say switch-boards -that will contain every imaginable song, film, or TV show.
If you think ‘sharing’ is a big deal now, wait another 2 years – itwill be 100x as fast and enabled on every single device (not justcomputers). 3 Billion+ cell phones and 1 Billion+ music players willconnect seamlessly to each other.
Wireless broadband access and devices will become so cheap,super-fast and ubiquitous that sharing content will become the defaultsetting, at very high speeds and with anyone that is close by. Search – Find – Select – Exchange. Click and get.
How can you monetize this? By licensing participation –and the networks and the devices that enable it. You must license theuse of any and all music on these networks, and make irresistible,irrefutable and compelling blanket offers to those that run it. Theselicense deals must be conversations not monologs. Not a stick to theISPs but a huge, shining and attractive carrot.
2. 10s of 1000s of new TV, online video, and gaming channels willbe born in the next 2-3 years – and all of them will need music to gowith the visuals. Millions of songs will be synched to video – thismarket will positively explode. It may well be that those B2B licensingrevenues end up being more than 50% of your future income.
However, exploiting these opportunities will only be possible if anefficient and frictionless system for transactions is available – thisis, imho, where the huge opportunity for the Merlin initiative (where AIM is a member) lies.Think ebay+ chemdex +ricall + pumpaudio+. Every $ invested in betterB2B processes will make 10s of 1000s for music rights holders… whilethey sleep, or better yet, make more music.
3. Streaming music, on demand, will be everywhere. On every website,every widget, every mobile, every device – supported by ads,sponsorships and commissions on transactions. Performance-based incomewill surge beyond your wildest imaginations, But again, only if youfinally chose to play ball, to participate, to make irresistiblelicense and rate offerings, create reliable standards and go flat-outfor liquidity not try to maintain artificial scarcity. BMI’s revenueshave grown from $630 Million in 2003 to $779 Million in 2006 – not badconsidering the overall demise of the recorded music market, at thesame time! So read my mouse: It’s not the copy of the recording that makes all the $$$, it’s the use. In fact, the use of your music is the next big format you have been looking for.
4. Rich media (i.e. ads with music, video, animations, audio etc)will become the default advertising format for online advertising,representing yet another huge growth opportunity for music. Soon, 10%+of all ad-spending will be on the Internet; and 16% of all Internet adsin 2009 will be rich media. With an estimated $ 700 Billion of globalad spending by 2009, that means $70 Billion for online ads, and over$10 Billion spend for rich media ads. 100s of millions of $$$ for musiclicenses!
5. Digital radio will deliver 100% time- and place shifted musicexperiences, stopping only a tiny bit short of becoming another iTunes.The reality is that net radio is just another Tivo for music. Radiowill indeed become the feels-like-free, on-demand music box, onceagain: the only remaining ‘Radio1.0’ factor will be that it willcontinue to be curated and expert-produced, as well as taking in socialrecommendation and smart technology agents. The best radio stationswill become very strong brands (Radio 1, KCRW etc), out-doing what usedto be record labels. How will you license Radio2.0 if you insist onstaying with a per-copy model?
6. All music companies will become video companies, too – musicwill be multimedia, by default (music + video + audio + text + games).If you aren’t already diversifying into video and TV you really should.
7. China, India, South America and Africa will explode with newmodels of usage rights – bundles and flat rates based on access. Andguess what: they will indeed have those $100 computers that Negroponte is trying to bring to them!
But again, you will not have truly liquid (i.e. efficient,low-friction, vastly scalable) markets until you allow, support, andenable them. You must swing this ship around, because right now, themusic industry is failing miserably: failing on technical and onlicensing standards, on flexible pricing offerings, on competitiveness,on compatibility, on being trusted, on transparency.
The music industry’s past was based on:
• Control
• Exclusivity
• Monopoly
• Closed-ness
• Guarding / Protection
• Secrecy / Non-Transparency
• Territoriality
Your future – if you chose to go there – is based on:
• Openness
• Total transparency
• Peering
• Sharing
• A truly global outlook
• Liquidity
I predict that as much as 60% of this new music business - and withthat I mean a $100 Billion music business - will be independent within3-5 years – but only if their leaders don’t follow the major labelsinto LIKING CONTROL MORE THAN INCOME. Update: watch this movie clip for more details 
Here are a few of my favorite bottom lines:
1) The media ecosystem of the future is frictionless. That meansmusic anytime, anyhow and anywhere, ranging from free and ‘feels likefree’ to bundled, up-sold and premium’ed. Your job as a music companyis to do away with the friction, not to add to it, or even to re-insertit: on the Internet, every hurdle is treated as damage, and the trafficis simply routed around it. Create friction and be side-stepped.
2) It’s all about participation not prevention. Because of theutter impossibility of maintaining any real hurdles, it is absolutelycrucial that you find ways to participate in any and all forms ofcommerce that use music. Charge smartly for access but make musicavailable the same way that cell phone operators make cell phonesavailable: a very low-cost, irresistible way of engaging people… andsell-up from there. Whether it’s streaming on demand, remixes andmashups, play-listing and social network music applications, toadd-music-to-video, to digital radio – being part of it is what it’sall about.
3) Let’s face it: the web is like a giant Tivo, a huge recorderor DVR - all performances are or can be recorded, all broadcasts reallyare deliveries. You need to stop distinguishing between music ‘to keep/ own’ and music ‘to listen to’ – our users have done this a long timeago! License the USE. Share revenues. THEN upsell to ownership.
4) Copyright is the principle, usage right is where you monetize.Usage is where you need to focus your energies, not the ‘protection ofIntellectual Property’. This is a tough spot but again… do you wanttotal control, or do you want revenues?
5) Very few things end completely when new inventions are takinghold – usually, the market just grows larger. And it will be nodifferent here. Yes, the fax machine and the Internet killed the Telexand telegraph, but we still have books even though we have Xeroxmachines. CDs will decline, and may fade out completely, eventually,but nothing you do in digital music will completely wipe out physicalmedia. This is just another format, and it’s called ACCESS. And evenbetter: after you provide access, you can sell ownership again, too(think HD!)
6) Remember that the only real limit to growth, in music and inmedia, is TIME. Media consumption will rise and rise and rise, as theofferings become cheaper and more ubiquitous, and as more of the “Digital Natives”consume multiple media at the same time. You are now engaged in abattle for the wallet and the clock – but the clock comes first. Mindshare means time-spend means money spend! Again, this is whereattention translates into money, and this is why the first objective isto get attention, and only then to get money. The biggest problem formost artists (and their labels) is obscurity not piracy!
7) Engage not enrage: stop anything that enrages the users. And do it now.
8) Guess what: you can compete with free because whatyou can offer is not free. Yes, a copy of a file is free. A CD burnedfrom another CD is free, a USB stick’s content copied to my computer isfree. But the real-life connection to the artist, the experience thatis happening around the music, the added values such as videos, films,games, chats, books, concerts and merchandising, the context (!!!) -all of that must not be free. You must stop the obsession with tryingto make money merely from selling copies, and instead provide access,because only the legitimate and authorized source (i.e.agent-label-manager) can provide the whole bundle of values that theusers, fans, the people formerly known as consumers, will buy.
Music2.0 is an unprecedented opportunity, very much like when musicwhen from acoustic to electric. Everyone wants music. More music isused on more platforms, all the time. An unprecedented hunger for musicthat you need to fulfill!
Finally, here are some challenges that I believe a music industry led by Independents must embrace.
1) Once released, a recording becomes, in reality, available bydefault and must be made ‘usable’ under a default license – all elseequals tacitly conceding that it’s free to use without permission. As aresult of such a new ‘default license’, some rightsprinciples that we have gotten used to probably won’t translate in thisenvironment – such as the moral right of deciding where you music isbeing performed or maybe even otherwise used. However, I don’t thinkthis will apply to commercial use in films or ads - unlike the privateor semi-private use in UGC and web-generated content, and of course, topublic performance.
2) The traditional definition of ‘copyright’ and ‘intellectualproperty’ can, for the time being, not be the sole key to monetizingyour creations. Because it is no longer about copies, it’s no longerabout the right to copy, it’s no longer about reproduction – it’s abouthow music is being used and how to participate in those much largerrevenues.
Call it ephemeral copies, tethered downloads, rented media,streaming, buffering, caching, storing, time-shifting, downloading,ripping or whatever – the fact is that digital technology has done awaywith the distinction of a so-called performance being different than aso-called DPD (digital phonographic delivery). All computers - and thatmeans all cell phones, too ! – are by definition copying machines. Asoverwhelming as this may sound, you must therefore discard the idea ofcharging more to ‘keep’ music, as opposed to just ‘listening’ to it asin radio. Instead, you must focus on charging for added values (such asa better way to keep the music ;), and on collecting revenue at everypoint of access, and then go from there. I don’t want to get into mygood old ‘music like water’ rant again, but charge for music likeutility companies charge for basic water & electricity service, andthen charge more for all the other options. The bottled water businessis a $100 Billion industry!
3) Your revenues from selling ‘copies of songs’ will soon dwindledown to maybe 30% of your total income – the rest will be revenues fromlicensing, sync, performance, bundling, flat rates… revenue sharing andthe many other streams that are yet in their embryonic stages. Get busycreating and supporting those new revenue streams!
4) You can’t afford exclusive rights representation at high ratesany longer, unless these institutions give you 100% coverage and aflawless solution.
5) Forget territories except for when serving local repertoire(which is on the rise, too). Most talent is global, and your audienceis global, or at least virtually local. Internationalize right from thestart and build systems that will support that. Build a worldwidelicensing and B2B-transactions system that makes all repertoireavailable for all types of use, and build it quickly.
6) Resist the temptation to do as the major labels have done(e.g. extract huge one-off payments, extort equity shares, license atunreasonable rates, refuse access for no reason but for market controlconcerns, sue their own customers etc) – that is a certain death wish.In fact, now you can force them to follow you!
7) Resist all attempts at locked / protected formats, and go for open systems.
) Bundle and package music in new ways: with other services, withother products. And prepare for the Flat Rate because this is certainlycoming.
9) Remove any and all hurdles to complete market liquidity:pricing inflexibility, lack of standards (technology), lack oflicensing transparency, territorial differences, monopolies.
10) Embrace outsiders to jumpstart the music business. NiklasZennstrom disrupted the telecom business, Hotmail changed email,Stanford dropouts started Google – the innovation often comes from theoutside.
Call me a Utopian, call me a Dreamer, call me a ruthless Optimist, but I think this is the Future of Music.
Gerd Leonhard, Basel, Switzerland, July 1, 2007
See lots more from Gerd at his Blog.
The big record labels are getting brazen. Really brazen. Today marks the opening of the first trial between the RIAA and a person it says illegally downloaded music. The problem for the RIAA is this person, and by person I mean damned hero, has decided to fight back. The RIAA has acted like a bully in most cases it’s pursued so far, so it’s great to see someone taking a stand.
