Three Messages For EMI

In guidance for their latest earnings results, troubled major label EMI cited the dominance of Apple’s iTunes as a major concern for the digital music market.  The exact words were:

"The substantial dependence on a limited number of online music stores, in particular the iTunes Store, for the online sale of music recordings, and the resultant significant influence that they can exert over the pricing structure for online music stores."

I have three things to say to EMI (and indeed the other three majors also):

  1. I told you so.
  2. It’s your fault. 
  3. Forget iTunes.

Let me explain in a little more detail:

I told you so. We’ve been warning the labels about the overdependence on Apple for years.  Not just because of the pricing and competitive concerns a dominant player brings but because of Apple’s motives.  Apple is in the business of selling hardware.  Music has been a useful tool to help them do that.  But they’ll change tack as soon as it suits them.  Heck, these are the guys who started out their music strategy with ‘Rip. Mix. Burn.’  Yet the more cantankerous the labels get (e.g., giving everyone else MP3 licenses before Apple), the more Apple will look elsewhere.  cf the iPad, a device which should have had music embedded in its DNA to drive a new generation of music products but instead becomes a Holy Grail for book and magazine publishers.

It’s your fault. If the labels had got their licensing acts together sooner, other services would have gained traction, creating a more balanced competitive marketplace.  Instead, when Steve Jobs convinced the labels to humour him with his Mac-only iTunes ‘lab test,’ contemporary services didn’t even support MP3 players.  That’s right, you paid to download tracks that only played on your PC.  No wonder piracy boomed.  It took Jobs & co to change that, and the rip-roaring success of the ‘lab test’ saw the iTunes Music Store come to the PC.  The rest is digital history.

Forget iTunes.  At least forget the iTunes 99 cent download store.  And indeed Amazon, 7digital, and the rest.  The 99 cent download is a transition technology with an eye on the future but with its feet stuck firmly in the past.  Consumers value access to content, not paying for units of content.  They value high-quality, interactive, on-demand social experiences.  The 99 cent download model is a useful tool for transitioning between the distribution era of the CD and the digital consumption era, but nothing more.

The great irony is that Apple is currently probably still the best-placed company to help the labels get to their digital end state.  Music product innovation is the #1 strategic imperative that will drive success.  The iPad should have been the first great next-generation music product device.  It can still be, but unless EMI & co start to look beyond the narrow focus of the 99 cent download market and start understanding the value that their new partners can bring, then the story of music sales will continue to be digital failing to meet its potential.

Comments

Hi Mark, All good points.

Hi Mark,

All good points. I've always viewed iTunes as a transition, a very successful one, but not the future.

iTunes

Given that Samsung invented the MP3 player and attendant online music download store, not even Apple's iTunes is that innovative. The application itself they also bought.

Where Apple shone was Jobs' ability to negotiate with the labels to get them to trust him with their catalogues.

Recording companies have never known what was good for them and fought every technology advance even when it was in their best interests to adopt it.

A few points

It's worth clarifying of course that the concern about Apple's dominance is a concern of all 4 majors (and indies also) and that Warner offered similar guidance in their earnings. Which is why I specified in my post that these messages apply equally to all labels.

Regarding Apple's innovation: the 1st commercially available MP3 player was made by Audio Highway, followed by SIS's MPMan and after that Diamond's Rio (which many mistakenly believe to have been the first). But details aside the fact remains that Apple were not first movers. They never are. Apple are a best practice example of the early follower that lets 1st movers expend resources & learn lessons creating a market for them to then clean up in.

Product innovation indeed isn't a historical competence of record labels. But they're learning new skill sets now and will need to accelerate that process. But most importantly they need to empower the marketplace to innovate with even greater licensing flexibility.

Definitely agree with your

Definitely agree with your post, more to the point is that the music industry definitely needs to innovate beyond the paths they have already carved out for themselves.

I think in the future, services like Spotify and Youtube will be where the sources of innovation lie as they allow social connectivity, are more engaging and can easily adopt a subscription based pricing model instead of individual product purchases.

I think the biggest problem that the music industry faces is that consumers are becoming more frugal and with digital downloads, the actual tangible product received is only the mp3 and artwork and as artist generally release albums which consumers will only like a certain amount of tracks, having a subscription model will allow the customer to pick and choose which songs they like and create their own albums thus creating a culture of individualism of expression and greater amount of control of what content the listener will want to listen to.

thinking more about it, the music industry is similar to the news and tabloid industry where there are declining sales as there are cheaper sources to get the same information from.

I can definitely see a record company pay wall being introduced into the future where listeners will have to log into the site and access the content they wish to listen to.

although this might earn higher profit for record companies, i think history has taught us that the listener always finds a new way to pirate software and undermine the initiatives.

in the end of it all, i think that the industry has to pick a subscription model and pricing strategy that delivers value to the listener and not make the feel that paying the price doesn't feel like a burden.

Customers value owning over renting

"Consumers value access to content, not paying for units of content."

Unless I'm misreading it, the above is a disguised way of saying that people prefer subscription services over regular services. I feel that depends entirely on the customer. I don't want to spend £x a month for something I don't own. The music I buy I own, the music I rent I don't. You are locked in to paying that amount each month, otherwise you get nothing. Music is a luxury and so if times get tough people will cut back on spending on it, the question is do they want to end up with no music when that happens or end up with a library of tracks they own no matter how much they spend in future? For some that doesn't matter, for many it does.

Not in disguise!

The statement is intended to refer to consumption patterns not premium subscription models per se. In the on-demand world the audience has control. They no longer have to traipse down to the high street to buy a CD of a dozen songs of which they only like a handful.

Subscription business models are currently the most likely means of monetizing consumption (I don't think the levy argument holds water). But subscriptions does not mean charging the customer 9.99 a month for music they don't ever actually own. Unlimited MP3 subscriptions has to be the end state but major labels (Universal excepted) are a long long way from that yet. They'll get there, but not perhaps for a couple more years.

The price remains a major issue. Somewhere below a fiver a month is where mass market consumers start to bite. But it's probably closer to 2.50 than 5. That's a big disconnect with current license fee structures, let alone potential licenses for unlimited MP3. So 2 things need to happen:
1 - labels license unlimited MP3 at competitive rates
2 - 3rd parties subsidize some or all of the cost to the end user so that the services end up feeling like free

Labels are making all the same mistakes with cloud services

The labels are making all the same mistakes with cloud services such as all you can eat services (Spotify/Mog) and personal locker services (like my co MP3tunes). They sue those they don't like, show little price/term flexibility and are turning those services into antagonistic players rather than partners.

I know of know digital music company who thinks of labels as partners (or vice versa) and it doesn't have to be this way. But if it is, then interests diverge instead of converge.

-- MR

Michael - it's a shame that

Michael - it's a shame that there has often been a disconnect between what services want to implement and what they can secure licenses for.

In my view the 2 biggest differences which need resolving in the next few years in the licensing arena are:
1 - wholesale rates (especially for subscriptions and ultimately for unlimited MP3 subscriptions)
2 - an updating of definitions and understandings of ownership and usage

Innovation

@Mark the reference was to a bonded hardware-online music store service. Samsung (Saehan) created kiosks where listeners could download songs to their MPMans (MPMen?) ;-)

Jobs bought the iTunes software, iPod hardware and liberated Samsung's e-commerce B2C innovation then used his connections and weight through Pixar to knit the strands into a tapestry. It was masterful but not inventive.

The Manifesto

Great post Mark

Gerd Leonard forwarded it on twitter.

Ages ago me and a pal wrote the music industry manifesto which includes some of the same thinking: http://musicindustrymanifesto.com/the-manifesto/

And in case you don't like external links - here the the 25 theses of the manifesto:

1. Music will always continue, but the parasitical 20th Century music industry is dead.
2. Music does not rely on technology or distribution. It simply requires people. It did not begin with vinyl, the CD, the electric guitar or the synthesizer.
3. If piracy is able to damage your ivory castles, you should seek to understand it and learn from it. Piracy is the most effective distribution.
4. You will never win the war on privacy, because the pirates have a belief, and you are protecting a business.
5. People will only pay for what they want to pay for. Get used to it.
6. Artists and fanatics run the show – if you are in neither camp you’re fucked.
7. DRM’s only function is to limit the spread of music and to irritate the very people you should be pleasing – your audience.
8. I’ve paid for the tape, the vinyl, the CD and the MP3 – if I ever pay again, I’ll pay for the rights to the content in whatever format is appropriate for the rest of my lifetime, not for something limited to one format.
9. Let’s face it..artists can make more money if middle-men are not involved
10. Look – we all know you’re pissed about you’re expense bill no longer being approved but please stop taking it out on the rest of us
11. The people of the world want to share what they love. If you stand in the way there is only one outcome. Rebellion
12. People embrace what they create. We all want to take part. It’s no longer your industry, its ours. Sure that hurts…
13. Just become a concert promoter. Live music will never end. Rip-off, insular and selfish business models already have. Sorry
14. People will pay for what they want to. If you create something of value to people, people will pay for it
15. People will not longer automatically pay for something that YOU think is valuable
16. Resistance is futile. However powerful your connections are, the people of the world will find a way around it
17. Every time you sue, you nail an even heavier nail in your OWN coffin. Think about it…
18. The people of the world love music as much as they always have – not less – its just they have seen behind the curtain now
19. Artists love fans and will get paid by them for products and services the fans adore. Get out the way and let it happen
20. Copyright is a byproduct of the business model for content creation and distribution. It’s not the reason for content creation
21. The case studies of artists making more money from not using your regime will never stop – only increase. Listen up
22. It makes no difference how connected you are to the government. Artists and fans out-number you and always will
23. All the time you spend whining about protecting music you could spend working out ways to help the new world mature
24. If you really wanna get rich, concentrate on facilitating fanatical advocacy. There is no ceiling of value to that
25. People can only truly be of financial benefit to you if they are free. Confined humans have no long-term monetary benefit

Hi Jonathan I actually saw

Hi Jonathan

I actually saw your manifesto when you first published it. In fact it was part of the inspiration behind the 'Digital Music Consumers' Bill of Rights' I created for my Music Product Manifesto report last year.

These are:

1. The right to great consumer experiences first (and business models second).

2. The right to unique music experiences. L

3. The right to share in the creation process

4. The right to share.

5. The right to fair use of technology.

6. The right to be social.

This was a blog post about the report at the time of publication:

http://blogs.forrester.com/consumer_product_strategy/2009/09/music-produ...

lets do it

Honored that the manifesto was of value

I would love to work towards fixing the music industry...

If anyone reading this, Mark included, want to take any of this further to work towards something revolutionary, please contact me off my blog

I care about music and it's purpose so much, and something needs to be done

j

Catch 22

I agree with all the comments here and particularly the "Manifesto" and digital music consumer's bill of rights. But here's the conundrum for the Big 4 (EMI etc). If I have a choice of "free" or "paid for" - guess which one I am going to go for? And this hasn't just happened - didn't we all "copy" LPs onto cassettes (well some of us did who are old enough to remember vinyl!).

Of course the difference today is
1) Digital Quality (cassette was always crap)
2) Digital universe - as in the connected WWW - (I couldn't share my cassette with someone in Sydney, Mumbai, Shanghai, Cairo.......or all the world)

So for an EMI if we "share" we therefore make stuff "free" then prima facie they are between a rock and a hard place........the business model is broken.