Fred Wilson recently pointed me to David Hyman’s manifesto on how the music labels can save themselves. It’s well worth a read, but David’s point is basically that they should:
- Drop their penny-per-play streaming-on-demand rates by 90 percent, to one-tenth of a penny
- Link streamed songs to a commerce opportunity, such as buying the MP3 from a store such as Amazon
- Upsell a premium subscription
I’m not sure that this will fully replace the foregone revenues from a decline in physical CD sales, but it does make a lot of sense. I’ve been privately telling my friends at the labels that their licensing pricing strategy has been flawed, notably that it’s skewed towards short-term financial rewards. I’ve also been telling them that they’ve priced out a large part of the market, which is one reason that so far it’s made more business sense for even well-meaning startups to beg forgiveness instead of asking permission.
In other words, the labels were able to ram the penny-per-play rate down the throats of major portals and distributors such as Clear Channel, AOL and Yahoo. These large companies were financially able to do the deals, and most likely looked at the licensing of the music as an investment or a loss leader to acquire users cheaply. A penny-per-play equals a $10 CPM. At that rate it is very hard to break even, let alone sustain a viable business (don’t forget to factor in other COGS like bandwidth, sales commissions, serving costs and songwriting royalties, which I don’t think are covered by the label’s rate). Factor in assumptions on CPMs, ad frequency and sell-through, and it’s hard to make the curves cross.
I’m not sure what the optimal rate should be — David’s suggested rate may well be it, but I don’t have the data. Another approach would be for the labels to get some equity participation from companies wishing to leverage lower rates, which would allow them to capture greater upside for the additional “risk” they’d be taking, whilst charging market rates to companies that can afford it.
Regardless, to use a tax metaphor, instead of having one tax rate aimed at the super-rich — which simply encourages tax avoidance in the lower strata — the goal should be to broaden the tax “base.” I know that the labels are already experimenting with this but, like David says, they need to act fast.
Based out of London, Raghav “Rags” Gupta is VP of International Partnerships at Brightcove, where he has worked since ‘05, prior to which he was a senior executive at Live365. His blog can be found at www.ragsgupta.com. The views expressed here are personal and do not necessarily reflect those of any company with which he is affiliated.
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9:20 PM PT
[...] How Can the Music Labels Save Themselves? - GigaOM (tags: music gigaom) Posted in Daily Links | [...]
10:44 PM PT
[...] My friend Rags Gupta wrote a post today on how the record labels can save their dying business, (published on GigaOm… nice!), a comment on David Hyman’s manifesto on the same [...]
3:38 PM PT
[...] How Can the Music Labels Save Themselves? Fred Wilson recently pointed me to David Hyman’s manifesto on how the music labels can save themselves. It’s well worth a read. [...]
13 comments so far
1:59 PM PT
The record labels are going to be fine, no matter what. There are the few star artists who can support the “failed” (aka tax write off) artists, while merchandising is always a source of revenue. All these labels want to “save” are a few more pennies. As a former musician that was signed to a successful label, I can easily say that though that record company has gone down the ranks in recent years, like so many others, its head honchos are doing just fine in the money department. It’s the rest of us (musicians, employees, etc) who are affected.
2:25 PM PT
Penny a play streaming is a financial disaster if a stream gets accidentally left on for a long period of time. Leave a stream on and go to your vacation home for a few months and the royalties can be $1,000. My wife is always hitting the mute button instead of the off button. I can’t even tell if the stream has been left on.
2:26 PM PT
They should do what a true warrior does when disgraced in battle.
Fall on their own sword as not to be a burden on their still productive comrades.
2:26 PM PT
I’m dubious that an internet-only solution will work for Big Music. Let’s start with the assumption that they need to replace $7B with .01/song streaming royalties or $.99 iTunes. To make their $7B nut will require 700 billion streaming songs! or 7 billion iTunes per year! That might be doable if the alternatives (Bittorrent, Limewire, etc) are totally eliminated. But file sharing technology is only going to get easier, faster and stealthier. In any case, digital solutions always produce thin thin margins. If iPods stop selling (as the stock market seems to think today) you will see Apple disinvesting from iTunes very quickly. The only way Big Music survives is if it can create a product that is appealing to physical retailers ie Big Retail than cannot be easily replicated online.
3:51 PM PT
There`s new technology on the horizon that will revolutionize the music and movie industry. Its called player on the chip technology this chip can be used in any smart phone and can hold up to 2-3 hours of content this is happening as I write this comment.The movie and music industry will be beating down the doors to get this technology go here to see it
(link)
4:40 PM PT
Ok Here is the disconnect most vc’s and technology people really do not understand how the music/record labels make money. Even most artists don’t.
I have run technology companies, worked in venture capital, and worked in music in various forms (manager, agent, promoter, label owner). The real money for the labels don’t come from the atual initail album sale but more so from all the ancialliary fees and monies related to producing albums ( breakage fees, distribution fees, marketing , cross collaterilization, pressing and distribution). Labels make more money on a cd that comes back as broken and then is sold to rack jobbers. It becomes a double dipping mechinism.
Labeles do this becuase the traditionally participate in one revenue stream. Now they want the other pieces as well. Unfortunatley the major multi platinum artists ( I manage one) and their management dont trust the labels to do their one job well help sell records, why would we trust them in areas they know nothing about.
What we have to realize is that labels hsould morph into vc’s for music and stay as pure investors who can spot talent. Albums will be expensed as marketing tools to pump revenue into the live event business as well as for tv, film , videogames. With so much money available in various forms a major manager or artist no longer needs the label to finance their projects as bad banks. There are other instruments such as entertainment vct’s in the UK.
Also the player on the chip is nothing new. I can put a movie now on an sd card and play from it. This is just adding another format to deal with like Sony’s Atrac vs MP3. These are the rehashing of old ideas.
that’s my 2 cents. Also please excuse my poor spelling.
P.S. Om hope your feeling much better.
6:24 PM PT
The labels really need to consider what they’re doing to innovation. If you look at different industries, the Internet and web 2.0 has been able to revolutionize the way business is done and generate enormous wealth, simply because innovation was allowed to happen and encourage. Hopefully the labels will look to new models that are taking an active step in the right direction.
We’re really proud of what we’re doing at Grooveshark to take radical steps towards creating a legal p2p network that matches the value of the illegal networks, adding in a social layer, and making an overall service that’s better than free — think bottled water industry.
And unlike other networks, Grooveshark believes in compensating everyone in the value chain, so we pay the copyright holder for their work, and we even split our profits 50/50 with the users. We’re building our Beta now, and we’d love your input — Grooveshark.com
5:26 AM PT
Perhaps the more important question is whether we should care if the labels save themselves. I gave up on the major labels years ago, and I buy (and promote) indie music instead. You can get your music on iTunes & other stores via TuneCore for well under $100, and with Myspace and podcasting, you can promote yourself very cheaply.
Seriously, who needs major labels?
9:59 AM PT
You forgot: “Stop trying to cram over-modulated, oversexed, pop garbage down our throat at every instance.”
2:22 PM PT
They cannot and Sony (and its rootkit) was the one who put the nail in the coffin from my perspective. They are untrustworthy today and will be tomorrow. They do not care about the end user (as WE are not their customer). That is the flaw in the model.
I will buy music from artists directly, but any artist that is in bed with RIAA no longer gets my ears (or money), and also the music must be DRM free and sub .75c per track
10:43 PM PT
Read this article I wrote:
(link)
The End of Music: When Did Music Become A Penalty?
8:44 AM PT
There’s some question as to whether the music companies are actually losing money. The Boston Globe recently reprinted a lengthy AP article that was printed in other papers in a shortened form. The short form created this dire picture of the music companies, however, some of the data presented in the last few paragraphs of the longer version indicated the exact opposite.
For example, yes, CD sales are down, but music video DVDs have had double-digit and triple-digit increases over the past several years. People are simply buying DVDs of their favorite bands instead of CDs.
Also the article reported that revenues were up 14% for last year when you added in online sales and music videos!! Three of the four major labels had revenue increases. Whining about declining CD sales is like whining about declining cassette or vinyl sales. People have moved on.
I also think the music industry is damn lucky it’s still making money. Look at the Billboard 100 from 1990 on. There are damn few acts on the charts that I have bought. Most of the artists I follow have been kicked off the major labels and are now putting out their own material or are on indie labels. The major labels have been putting out crap, and they’re lucky that teenagers who don’t know better still buy the stuff. When they get older, there’s nothing the major labels are putting out that will hold their interest.
8:52 AM PT
What surprises me the most when I read articles about the music industry these days is that all are written pruposely for bigger labels. There seems to be a wide ignorance of other music who do not express themselves for popular masses, and which in my opinion reveal true music talent. These ‘lesser’ but genuine labels are being killed off by all these deals the bigger labels are trying to cut - such as a penny for a click. Obviously, this system only supports mass popular labels, not to mention it is very unfair to the artists as well. I know most people are fed up with big labels as they claim more then their due right, but people should really wake up to the fact that there is much, much more to this then silly pocket avids. But I guess this whole situation is about realizing how little interest or love there is for music at all.