SharkJumping

Kathleen Edwards Concert - When is it NOT OK to Record

My wife and I rarely get out to any type of live music these days due to the usual children issues, but our good friends Fred and Barbara invited us and another couple out to see Canadian singer Kathleen Edwards at the local specialty concert hall The Independent.  The short review is that she put on a GREAT concert, alternating between slower songs and rocking bigger songs, without too much conversation - the crowd loved it, she did an amazing show, the bar was easy to get to, and the acoustics were good -  you should definitely see Kathleen in concert if you like any aspect of Alt Country music.

However, the main irritation and inspiration for the blog is that some really tall guy fought his way in front of our little group in order to hold up a pretty sophisticated recording device, and then proceeded to spend 10+ minutes adjusting the various buttons on it to presumably make sure it could record her concert at the highest enough fidelity.  Having spent enough time with Rhapsody and the legal side of music, I simply don't believe you should be able to nakedly record music, presumably to do something else with it, like make it available on your site - it's simply not your right...The only possible exception would be if Kathleen had a pro-taping policy, as some bands do, but there weren't any signs of that, and he didn't act like it was legitimate.

Am I aware that there are a variety of services which allow you to steal/borrow digital rights to their music ?- Of course.  However, when I ask you in the middle of an artist's live show why you feel able to record a  full concert and your answer is "i will talk to you later, and I haven't have time to ask her", you should not be surprised when I make sure to yell into the mid-point of each concert recording, so that you eventually went away, as you did tonight.

The end result is clear - Kathleen Edwards rocks in concert, and more importantly, stop recording digital musical concerts and pretending its OK, unless the artist approves of it - otherwise, you should all drive these guys out of the arena.  Great creative music is too important to leave to music pirates.

FTC Accuses BurnLounge of Being Pyramid Scheme

In what may not come as a surprise to some industry followers, the Federal Trade Commission (FTC) has filed a complaint in Federal Court alleging that digital music multi-level marketer Burnlounge is an illegal pyramid scheme - see article here, while you can download the actual FTC document here -  Download 061207memorandum.pdf

MLM services need to have very high gross margins to support an actual operating business through multiple levels - I have personally never understood how a digital music business with 20-30% gross margins can support one level of retailer, let alone multiple levels, but I guess we're about to find out on June 19th when the hearing takes place.

Lala.com - Nuts - Bubble #2 is here

Lala was originally a way to swap used music CDs, similar to an eBay meets NetFlix, similar to PeerFlix.  They have been gradually moving in a digital fashion, and last week they launched a fairly aggressive move in the digital space, with the initial support of Warner Music and of some indie labels.

The basis of the service is a free, unlimited streaming service which encourages users to share playlists and then purchase the digital albums, which can be loaded directly to your iPod without using iTunes.  In addition, the program scans your hard drive and uploads the music it finds to the service so you can access it online.

I could further discuss the feature set and pricing model, but it's really not worth even spending the digital ink on it.  There is literally no logical business basis for this service, and we will look back at this as one of the signs of Bubble #2, just like College Club, Free ISP services, and other similar gambits were a hallmark of the last Bubble.

The reasons are clear:

1. There is a very limited set of content for the service, with no reason to believe they will have a full set of content any time soon.
2. iTunes/Apple has a history of blocking 3rd party systems which access their iPods - it doesn't stop the usurpers forever, but it makes for a difficult user experience, having lived through it at RealNetworks when we went through that process
3. The prices for digital albums don't seem to be cheaper than on iTunes - in fact, a spot check of albums appeared to show that LaLa was actually more expensive than iTunes.
4. The 3MB LaLa browser plug-in doesn't truly communicate to you what's going to happen - then it starts scanning your hard drive and uploading the information to LaLa, without making it clear what's going on.  Is happening as I write this note and is very irritating since it reminds me of the old P2P services.
5. There doesn't appear to be any huge technology barriers to entry to their offering, which means that if the service actually became successful, the numerous other larger players would duplicate the model.
6. Oh yeah - and the business model makes no sense.  Unless the labels are giving LaLa a break on royalty costs (which is presumably not happening), then the ongoing costs are $6-8 a month per registered user, or some similar type of usage based royalty.  Given that the digital commerce model offers providers like LaLa a 20% profit margin (including Apple at $1B in sales a year), the customer acquisition costs are going to be much higher than what the gross margin will be, even if we assume that users can be trained to purchase solely from LaLa given that it doesn't have a lot of content and appears to be more expensive than iTunes.

The running thesis is that LaLa has other ways to monetize the service, through advertising or other TBD sources, and that this is a way to ramp up interest (try LaLa.com in Quantcast to see how low the traffic appears to be) in the midst of a very competitive and low margin marketplace.  We haven't seen those initiatives yet, but given the smart investors and management team, I assume there is actually a better plan coming - however, in the current vein of the movement to keep the TV show Jericho or as used in the classic WWII Battle of Bastogne, the answer is NUTS.

Copyright Royalty Board Denies Appeal

The Copyright Royalty Board this week denied an appeal of their usurious internet radio broadcasting rate decision (see earlier post here), thus sparking a frenzy of lobbying attempts to get Congress to intervene, and causing digital radio broadcasting companies to consider other legal options.  The broadcasters have also started petitions, emailed their users about impending doom, and have aggregated it all at www.savenetradio.org.

After speaking with a few folks on the label side, I still get the idea that they are stunned by the decision to grant them their full demands and they are almost at a loss as to what to do.  The closest analogy is a salary negotiation - standard tactic is to ask for a larger salary than you believe you deserve since you know that the result will be something in the middle - in this case, the labels got everything they asked for, which realistically should mean the end of free Internet Radio as we know it today, pushing everything back to a paid model, unless it's truly a loss leader.

What's the lesson here?  Don't invest money into categories which can be changed overnight by government regulations, especially those lobbied for by much larger companies.  All of those investors in online gambling firms are feeling the same type of pain right now as anyone in the Internet radio biz.  The question really is "what type of music business would benefit from this big change?"

New CARP Rates - Another Reason I Don't Miss the Music Biz

The Copyright Royalty Board last week released its ruling on Internet radio royalty rates for the next five years, and all it did for me was trigger brutal reminders as to why the digital music business is a terrible sector for anyone but content creators.  As a reminder, music labels are not paid directly in the US for songs played on the radio (publishers are) since it ostensibly contributes to sales of the music as a promotional vehicle. 

But the RIAA was able to insert a clause into the DMCA legislation which gave the labels the right to a royalty on Internet radio play, and the CRB determines the royalty rate in multi-year segments - it's a government statutory rate, similar to the 8.5 cents paid to publishers for every download or physical sale.

The 2005 rate was $.0007 per song, or roughly 1 cent per hour, assuming 15 songs per hour, although it can be more with a song skipping feature.  It doesn't seem like a lot, except that a company pays that fee PER USER (unlike broadcast) and still has to pay for bandwidth.  In addition, the Internet radio ad market is still nascent, especially since most radio advertising is local, and Internet radio doesn't have enough scale in any one market to make it worthwhile for the local car dealer to create ads (although it might change in time). 

Well the new rates are going to be far higher, moving steadily up to an amazing $.0017 per play by 2010, or 2.5X the current rate, which is somewhat higher the projected inflation.  And the new rates eliminated or reduced any type of exemption for smaller broadcasters.  Kurt Hanson has a good take on the ruling here.

So who does this affect?  in the public markets, only Real (RNWK) has a big enough Internet radio presence to be hurt, and it's still only a portion of Real's music business.  In the private markets, this could be devastating to popular radio services such as Pandora, Last.FM and Live 365 - and it will positively destroy the smaller players who have no chance of generating enough revenue to pay for the royalties.   

Hell is sometimes defined as "getting what you ask for" - well the RIAA and the labels just got it.  In the short run, this may be a revenue boost for labels and artists.  In the longer term, it just points out why no investor should put money into any music business which requires label licenses, and that's probably bad for the entire music sector. 

As a sidenote, the CRB might actually want to consider both sides of the argument next time it rules on similar issues, but just as in other political sectors, he who pays the most lobbyists wins.

Squeezebox/Rhapsody Review - Rocking

I acquired a Squeezebox this month, which is a new Digital Media Adapter which allows a user to access digital music services without going through a PC client, as the older Rhapsody-Ready devices required.  The end result is that you get a pretty cool Music Unlimited experience without too much hassle, and without setting up a PC next to the stereo, which rarely passes the wife/partner test.

Logitech recently acquired Slim Devices, which produced the Squeezebox - this was a great purchase for Logitech, and I was surprised that one of the larger networking providers like Linksys didn't step up first for this team.  The resulting product reflects both the amazing technical chops of the dev team, as well as some of the continuing consumer flaws in the product and service of a smaller technical company.  It's a $299 small/attractive device which has Ethernet, Digital and Wi-Fi connections, as well as the usual audio plugs.

The absolute key feature here is that you can access Rhapsody and other music services like Pandora, Live 365, etc, without having the PC turned on anywhere in the house - it's a key move in the inevitable trend towards reducing the role of an actual PC download client in the music consumption process.  You need to set up an account at Squeezebox, which is irritating, but after that, it's really straight forward to set up and deploy music accounts.  There is no longer any connection to the PC, which solves a lot of the big issues involving the PC being turned off somewhere in the house when you want to listen to Rhapsody - in fact, you could just bring the device to any wi-fi connected area, and then access all of your music, which is pretty cool.

The other great feature is that Squeeze has integrated with a whole new set of Rhapsody API's, which go beyond typical MyLibrary functionality to allow user access to new editorial areas such as Search, Recently Added, Staff Picks, etc.  It's gone far beyond the usual playlist functionality to start to give much more access to the set top box vs just a small subset of the PC content.

On the other hand, this great new functionality is still stuck within a small LCD screen on top of the TV which most people can't see from more than a few feet away.  Unlike the much more expensive Sonos system, you still have to move forward to find and play your music, although Squeezebox still does a decent job of providing a basic interface.  The other big issue is a more systematic one - the Rhapsody system just cuts out too much once you average it over many hours - it's not a big issue for a couple of hours but when you really want the system to simply "always be on", it doesn't seem to work that way, although I may just have a lousy data ISP.

In general, the Squeezebox is a great mix of price, power, and functionality.  It's a full generation above the previous dumber, less functional, and harder to use boxes, and the non-PC functionality part is a HUGE step forward.  But at the end of the day, I'd recommend holding off another year before the Sonos or other more expressive functionality comes down to a lower price point since the current Squeezebox functionality is still a little too limited for a mainstream crowd.

Music Giants Review #2 - HD Music Service Still Not Ready

I reviewed the Music Giants HD digital music service a year ago (here) and concluded that although it was intriguing, it just wasn't ready for prime time from an overall user experience.  Now the company has launched version #2, in conjunction with Windows Media Player 11 - unfortunately, the short answer is that I still can't recommend the service.  To recap, MG provides a lossless Windows Media music service which should produce a higher quality experience than the lower fidelity iTunes and Rhapsody music services.  The downloads are about 10X the size of an MP3, but still download quickly, with most albums arriving in less than 10 minutes on my office connection.

So what has changed in the last 12 months?  The first positive attribute is that there is no longer a 30MB separate MG client - now it's a relatively simple plug-in to WMP 11, and it's listed as a store in WMP 11.  The 2nd good thing is that the catalog has expanded a great deal - most major artists seem to have the bulk of their albums in MG, a big change from the previous year, and MG is making some moves in providing HD video downloads as well, primarily through HD Net.  The 3rd positive change is that MG has worked diligently with over 500 high end audio dealers, as well as high end stereo suppliers (e.g. Onkyo) to integrate into the very expensive music systems which would most benefit from a lossless HD audio experience.  Finally, the company has eliminated the $50 requirement to purchase any music, which should open up the experience to more users looking to experiment with high fidelity music downloads.

So why can't I recommend the MG music service?  The primary reason is because the consumer search and discovery experience simply sucks.  I rarely use that juvenile term, but you spend enough time with this user interface, and you would think time stopped over 10 years ago from a consumer experience - it's mind boggling.  There is NO concept of an editorial experience here - you can filter only alphabetically by album, artist or genre, and there is a limited selection of albums listed as New or Featured Releases on the first screen of a limited set of top level genres (20 genres vs 500+ in Rhapsody), in addition to some AMG album reviews buried deep in the album information where most people will never find them.  The search experience is mediocre, and there is no idea of "Related" or "recommended" albums, special playlists, popularity charts, user ratings or basically anything that would help a user filter the wide range of content.

Other issues are:

1. The service doesn't work at all with Firefox, even on the basic web site
2. You can only purchase music by the album, not by the track, thus defeating one of the true joys of digital music
3. The video selection is terrible and overpriced - why are there no HD concert videos?
4. There is an incredibly confusing experience between the WMP11 side and the MG side - I keep being told to upgrade my WMP on the MG web site, but if I call up the site through WMP, it works just fine.
5. There is no concept of saving a user name/password, so you need to remember your information every time you log in, and the auto-remember function has been disabled.

Finally, the worst problem is that I have tested it over and over, and I still can't tell the difference between the HD downloads and the same Rhapsody or iTunes files.  This may change on a much higher end audio system than what I use (or with a more sophisticated end user than myself), but I've been A/B testing them today, it doesn't make a difference to me, although I could see why it might make a big marketing difference to folks buying a $10K+ audio system.

So I can't really recommend the Music Giants service, although I think there is definitely a good opportunity to address a higher end audience if MG can fix these issues before others enter the marketplace.

Zune/UMG - "Label Taxes" Arrive

A special thanks to Forbes.com for featuring this blog on their site today here.

The Web 2.0 show was in town this week, which was a great time to catch up with a number of former colleagues in the digital music business.   The consensus was "Thank god we're no longer in that sector", and now the #37 reason occurred this week with the announcement by Universal Music that it would share in the hardware revenue from the sale of the new Microsoft Zune, and would look to strike similar deals with other hardware manufacturers - the next question is whether they will demand a $1 royalty for each of my children since they have ears which can hear music and a brain which can store it - or would that be $2 since they each have two ears?

I understand that in a capitalist society the labels are just maximizing returns wherever they can, but this deal is the slippery slope to Hell for all other players in the category.  Walt Mossberg from the WSJ reviewed the Zune earlier this week and pointed out that it didn't have UMG music - well, I guess they got what they wanted by holding out longest. 

As I have pointed out in other posts (here), the music business is what I personally term a serial monopoly where any digital provider in the space must have at least all 4 labels to be competitive since you can't substitute Eminem (UMG) for Norah Jones (EMI).  This is a key test of supplier dominance, unlike in oil where Saudi crude and Texas crude are relatively similar substances.  That gives unprecedented supplier leverage to the labels, although the formerly Republican DOJ didn't agree when we argued that 4 years ago in a private anti-trust case.  That dominance is a huge part of the reason that I started Meez since we control our own content, with the ability to license-in amazing trademarks such as Major League Baseball and National Hockey League where it makes sense, but it's not required to have them to make the business work.

So now hardware manufacturers will have to pay flat per unit royalties to labels (aka the "Label Tax"), whether or not the consumer purchaser ever buys a track from that label.  If that label deal is not struck, then the label's content will not be available to the manufacturer's store, and since everyone is going vertically integrated these days (Apple iTunes, Sony Connect, Real Rhapsody/SanDisk, Microsoft Zune), it gives the labels even more power over the channel.

I could go on and on about the flaws in paying labels for hardware, but we'll keep it short

1. Why pay labels for hardware if they are already getting paid for each download?  Paying on software sales directly matches royalty payments with who generated the sales, vs me buying an MP3 player, but using it solely for my own collection or with eMusic.  The users have to pay a higher price in the end for a service they may never use.
2. How will hardware vendors possibly decide who gets which share of the Label Tax they will now be obliged to pay?  Having been in these discussions multiple times, the smaller labels are not going to accept a significantly smaller payment than UMG, even if their overall market share is much smaller.  And what happens to the next tier of labels - how do they get paid, or is this only for large labels?
3. How do artists and publishers get paid their share?  Since we have no idea how to match the UMG payment with any type of usage, how will a label accurately apply it across an entire artist roster, or even harder, across the various publishers, many of which are not even part of Universal?  You could base it on digital sales, on physical sales, on catalog sales, etc., but there is no way to make it match actual consumption since the Label Tax isn't based on consumption - it's a flat fee payment to get the rights to offer songs in a service.  Some people would call it "tying", but that's a complex Anti-Trust term :)
4. Where does this new Tax stop?  I joked about taxing my children, but does this levy extend to cell phones, recordable CD-ROMs, RAM chips, new game consoles, any device which can record audio, etc?   I think in reality, it extends as far as labels can exert leverage - what this means is that if you are a manufacturer interested in offering any type of music service, then you should now be either prepared to pay an extra fee yourself, or find a digital provider with the rights to offer it to your hardware, and let them take care of the tax.

There are other strong reviews of this issue including a good one here at Beta News.  The end result is that it simply points out how difficult the digital music business can be due to supplier leverage, and how insane VC's need to be to invest in the sector since there is no reason to believe this new levy will stop at a few dollars - like an intelligent parasite, the tax will increase enough each renewal period to suck all of the margin out of the business, but not enough to kill the host. 

The big test will be when the Apple deals come up for renewal - the labels talked a huge game last time about how they were going to force Apple to a higher price last year, and all quickly backed down when push came to shove.  Any Apple investors will need to note this in the risk column as they look at the next few years, but this will also affect other suppliers such as XM/Sirius, Motorola, etc., although it's a larger part of Apple's business than any other company. 

What's funny about the entire process is that services were the traditionally profitable part of the media sector used to sell lower margin hardware (E.g. game consoles, phones) - then the labels made the service part unprofitable, but Apple was able to make it up in hardware.  I think we're running out of high margin drivers for anyone but the labels, who continue to drive alternative revenue sources.  This is a great development if you're a Warner Music or EMI shareholder, but not so good for the other members of the digital music value chain.

The Death of "Plays for Sure" - Long Post

I'm late to the party with this post, but after overwhelming evidence from every quarter, it's clear that Microsoft is putting Plays for Sure (PFS) to bed and replacing it with the Zune hardware and software combination.  So why do we care?

Well, the reason is that it concedes the online audio battle to Apple - it's officially over.  Why is that?  When PFS was up and running, there was a reasonable chance that the combined forces of the "Everyone but Apple" crowd would eventually dent the iPod/iTunes dominance with a series of differentiated devices and software services, all of which were transferable across this array of devices - thus the term, Plays for Sure.  The download model alone might not do the job, but the Janus/MS 10 subscription services would be a different factor, and the combined weight/range of alternatives would be enough to move users to the new systems.

Unfortunately it didn't happen.  Apple continued to have an 80%+ share in devices, as well as in downloads, and the Janus/MS10 functionality simply doesn't work well enough to be a good customer experience.  The array of MP3 players didn't match up to Apple's focused designs and great advertising, and the software/hardware integration failed to produce a good experience.  Try updating firmware on a PFS device, or watching it "time out" while trying to play a PFS song on an airplane - you will throw the device out the window.

So MS, building on its expensive but successful Xbox experience, decided to break away from PFS, and to develop its own integrated hardware/software solution, called Zune, slated to launch later this year.  On paper this made sense - tie the service and platform together, differentiate on features such as WiFi, and roll out aggressive pricing and cool hardware.

However, it causes HUGE sets of problems in the marketplace.  MS continues to maintain that PFS is a focus for them, but no one believes that, including the labels, who aren't necessarily happy about this development.  The MP3 player companies are totally screwed - they now need some type of integrated solution vs just plugging in a turnkey MS PFS system, so they're scrambling like wild, with SanDisk hooking up with Real, Toshiba doing a deal with MS for Zune, Nokia buying Loudeye, and the others all looking at Napster or smaller alternatives.  Since everyone is adding some type of "Secret Sauce" to the base PFS system, it's possible that none of the non-Apple music will play on other PFS devices.  Sony Connect is still being featured on the back of a milk carton ("last seen in 2003") while MTV URGE is soon to be a key player in a "Where Are They Now" special on VH-1.    And by the way, what ever happened to the well regarded MusicMatch once it was sucked in by Yahoo Music?  This overall scenario is like being on the set of Under the Rainbow, with midgets running everywhere while Apple rampages away on its way to $2B in download revenue in 2007, even though its hardware isn't that superior anymore.

And the Microsoft Zune?  Based on all known facts, there is no way the Zune takes any more than 5-10% market share, especially now that it looks like some of its vaunted next generation features such as WiFi are not really implemented in this version, and there is apparently no video solution, at least at launch.  So what did we get in return for MS creating the Zune? We blew apart the coalition, splintering the anti-Apple group, and weakening all of the players.  That's the end result of the the death of Plays for Sure. 

Next battle is in video, where again, Apple is taking a strong lead due to better hardware, good software integration, and great marketing.   The best bet is for the competitors to fight it out at the cell phone level, with Nokia and possibly RealNetworks (Wider Than deal) building potentially competitive solutions.

Napster Replacement Value?

Analyst Darren Aftahi of Think Equity put out an interesting report today calculating the value of Napster's assets in a M&A scenario since Napster has retained investment bank UBS to "look at strategic options" (meaning sell itself).  I agree with Darren that Napster is the most attractive M&A target out there today in digital music, and that there is a decent sized group of potential buyers, although I think a hardware maker will end up buying them vs a service provider.  Given Napster's $100M in cash, decent brand, $100M in revenue and 500K subscribers, $5 a share seems like a reasonable value, even if the economics of the digital music business are pretty rough.

However, where Darren's analysis breaks down is on the replacement cost of what he calls Napster's "subscription architecture", meaning the content library, the label deals, the customer/subscription management system, database, etc.  He places the replacement value on that piece at an astonishing $120-$145M, giving the stock another $3 in value, which is why he indicates there only 3 significant subscription providers, vs many music download providers.

That number just isn't right.  In the last few years, it has gotten substantially easier to build a digital music service, subscription or otherwise.  On the label side, the major deals are now pretty standard, and most of the indie deals can now be done through aggregators - that process has matured enough that it's almost become a rote process now if you know what you're doing.   On the content library side, there are a few people who have built one from scratch who could do it again, or you can use Musicnet to do so, which accelerates the process.  As to the "subscription architecture" part of it, that's just a fancy name for a consumer-facing media delivery system - it takes work, but there is nothing unique or impossible to understand about subscription music versus other media.  Finally, hardware, storage and bandwidth prices have plunged in recent years, and off-shore development is now a lower priced option in many cases.  And this time around, one could hire a team who has already built a music system, accelerating the entire process by skipping the known issues.

The end result is that a good team could now build a competitive Subscription Architecture for the US market in less than 12 months for less than $20M.  Now a new market entrant may not want to wait that long, or may want other aspects of Napster's assets, which is why I believe Napster has significant value, but let's not go crazy over-estimating what it takes to build one.  Plus in today's competitive market, I would build in other characteristics such as enhanced community, avatars (Meez), karaoke (SingShot) or other user-generated content options in order to differentiate the experience, but it's simply not that hard.  What's hard is actually making money in the digital music business, which is why I believe there aren't that many providers anymore - they can get a better ROI in other parts of the digital media sector.