Thursday, November 29, 2007
Have you ever watched a horror movie where you see the innocent victim unknowingly walk into the clutches of the horrible monster / murderer? You want to shout at the movie screen in some vein attempt to warn the victim in some way. Instead, you end up closing your eyes as you feel powerless to alter the course of the gruesome events about to occur. In many ways, that’s the feeling I had while reading an excellent article by Seth Mnookin on Wired.com. Seth interviewed Universal’s CEO, Doug Morris, and provided excellent insight into the thought process going on at Universal in terms of its digital music strategy. Read on if you have a high tolerance for frustration as the story is one of greed and ignorance.
Universal’s CEO Once Called iPod Users Thieves. Now He’s Giving Songs Away.
By Seth Mnookin 11.27.07 | 12:00 AM
“For the past several minutes, Morris has been listening to Rio Caraeff, executive VP in charge of the company’s digital strategy, tell me how the sagging fortunes of the music industry highlight the need to diversify revenue streams. Caraeff explains that the company will eventually need to transition from running a product-based business to running a service-based one. He talks about ringtones, subscription services, and deals with mobile providers, stressing the need to raise the industry’s “digital IQ.””
To set the stage, the picture is painted of Doug Morris being a successful record executive who’s spent is career on traditional music industry issues such as identifying musical talent, etc. Morris admittedly knows nothing about technology and it appears as though he doesn’t want to be bothered with it. As such, he surrounds himself with people like Rio Caraeff (the person in charge of Universal’s digital strategy) who seems to be capable of nothing more than blathering on with a moderate dose of buzzwords. Right off the bat, I take issue with the “strategy” they start to talk about. Caraeff goes on about raising the industry’s “digital IQ”. The problem is, technology isn’t the problem. Consumers don’t have a “digital IQ” problem. I believe the music industry is fully aware of what consumers want. By talking about “digital IQ”, they mean finding a way to force people to pay for a product they don’t want in such a way that the music labels can make a very large profit margin and keep control of distribution on their terms. It would be nice if they were honest enough to just state that right up front.
“But digital strategies are important these days, and Morris has become entangled in them whether he wants to be or not. Over the past several years, he has been one of the most staunch and vocal proponents of aggressive copyright enforcement, at one point publicly blasting MP3 players as merely “repositories for stolen music.” “
It’s certainly understandable why Morris is bitter. He’s been sitting on fat profit margins for years and has been able to oppress and control the artists at will. With the introduction of digital music, there is a paradigm shift taking place and it’s “upsetting the Apple cart” so to speak. At the same time, each change like this also brings new opportunities. Instead of capitalizing on these new opportunities and possibly offsetting a decrease in revenue flow from one area by increasing revenue flow from another, Morris just takes a bitter attitude towards consumers. As I stated in the past, treating your customers as criminals is not a recipe for success. It’s wrong to assume every portable music player is filled with stolen music. Sure, it happens, but very large percentages have been paid for in the form of CD purchases in the past. Some of it is purchased online and sure, some of it is stolen. The thing is, the right strategy is to figure out why people are stealing music rather than to just look at your potential customers with disdain.
“And in November 2006, Morris parlayed Microsoft’s desperation to establish a true alternative to the iPod into a $1 ransom to Universal for every Zune music player sold — and that’s on top of the licensing fees Microsoft pays to have Universal’s songs in its Zune Marketplace online store. It’s a sign of Morris’ power that he is able to pressure so many players in the technology world to bend to his will.”’
This was just one example mentioned which illustrates how Doug Morris is a powerful and influential music executive. He’s used to getting his way. I still shake my head in disgust at the notion of Microsoft paying Universal $1 for every Zune sold on the premise that everyone with a portable music player is stealing Universal’s music. I place shame on Microsoft for giving in to such behavior. That’s like rewarding a child for throwing a temper tantrum.
“Last summer, though, Morris seemed to change direction. After years of tightening controls on his company’s content, he agreed to let Amazon.com and other online retailers sell unprotected MP3s of Universal songs. These contain none of the digital rights management software that media companies usually embed in digital files to prevent piracy. Universal wasn’t the first big label to offer unprotected tracks; the EMI Group had begun selling DRM-free songs in May. But with its small market share, EMI’s decision seemed unlikely to have much effect on the market. Universal, on the other hand, was setting out to change things. In particular, it hoped to end Apple’s near monopoly on legal digital downloads.”
This is an example of why I don’t believe Universal is as technically naïve as they claim to be. Clearly they are aware of consumer’s desire for DRM free music. Though selling DRM free music goes against their desire, they are now doing it in an attempt to attack Apple.
Brief history overview:
In short, the music industry was losing money each year because people were buying fewer and fewer CDs each year. In fact, in 2006, sales declined 10% from the year before. This has been going on since roughly 1999 – 2000. Since the music industry was not offering a product that consumers wanted, they resorted to “sharing” music on peer to peer networks. Apple stepped in and offered an on-line music sales strategy, complete with the distribution and sales. All the music labels had to do is share their catalog of music and sit back to collect the pay checks. The problem is, Apple became very successful at selling music on-line. In fact, Apple has a near monopoly for on-line music sales with the iTunes music store. Roughly 85% of legal music sold on-line is sold through Apple. Apple is now the third largest seller of music, only behind Best Buy and Wall Mart (brick and mortar stores) in sales. Now, companies like Universal realize they don’t have the control they want over Apple as they have become to powerful. So, Universal is attempting to attack Apple and undermine their success by offering products like DRM free music through other vendors like Amazon.com.
Back to the story:
Of course, the crux of the problem is an ego issue for Morris. He makes an analogy to describe his view of the music industry.
“”There was a cartoon character years ago called the Shmoo,” he says in a raspy tenor. “It was in Li’l Abner. The Shmoo was a nice animal, a nice fella, but if you were hungry, you cut off a piece of him and put onions on it, and if you wanted to play football you just made him like a football. You could do anything to him. That’s what was happening to the music business. Everyone was treating the music business like it was a Shmoo.”
Morris is bent on making sure his company isn’t taken advantage of. In principle, there’s nothing wrong with that. However, a leader of a company needs to have a long term strategy and clearly, his ego is preventing him from doing that.
“”It was only a couple of years ago that we said, What’s going on here?’ Really, an album that someone worked on for two years — is that worth only $9, $10, when people pay two bucks for coffee in Starbucks?” Morris sighs. “People never really understand what’s happening to the artists.”
The problem with analogies is that they rarely work as well as people intend them to. This is no different. The value of something is merely limited to the amount someone else is willing to pay. Comparing the price of a cup of coffee to a copy of a music track is not as simple as it seems. That $2 cup of coffee can only be sold to one person. That copy of music can be sold to millions of people if it’s good enough. So, is that album really only worth $9? Also, what about the artists? The music labels have been raping them for years. Apparently, very few artists actually make money from record contracts. Instead, they do it for publicity so they can make their real money doing concerts, etc.
“Morris goes on to rail against criminal-minded college students and low-life punks who steal the music that his artists work so hard to create. He admits to being fairly ignorant about technology and insists that his job is to nurture the creative side of the business — work that’s being threatened by all of this other nonsense.”
Yeah, that’s right; all college students are criminal-minded low-life punks. That’s the attitude that’s going to win them over as customers. The word dinosaur comes to mind here as Morris is out of touch with his potential consumers and their needs. If I were on the board of directors for Universal, I’d seriously have to question why someone with this sort of mentality is in charge.
“The problem is that a strategy based on quick returns is unlikely to pull the music industry out of its morass. After all, it was a reluctance to look farther down the road that got the labels in trouble in the first place. But Morris is much less interested in figuring out how to make digital music work for everyone than he is in not being the Shmoo.”
Too late, he’s a shmoo.
“Morris was as myopic as anyone. Today, when he complains about how digital music created a completely new way of doing business, he actually sounds angry. “This business had been the same for 25 years,” he says. “The hardest thing was to get something that somebody wanted to buy — to make a product that anybody liked.””
Once again, the analogy of the dinosaurs comes into play. As Morris admits, the music industry was the same for 25 years. Morris was very successful in the cassette tape and CD era. That time has passed. Digital music is both the present and future of music. Morris isn’t fully onboard and is reluctant to change. The future doesn’t look good for Universal with Morris at the helm.
“Morris insists there wasn’t a thing he or anyone else could have done differently. “There’s no one in the record company that’s a technologist,” Morris explains. “That’s a misconception writers make all the time, that the record industry missed this. They didn’t. They just didn’t know what to do. It’s like if you were suddenly asked to operate on your dog to remove his kidney. What would you do?””
Sorry, but ignorance is not an excuse. It’s one thing to get caught off guard when times change. That happened to the entire industry. It’s another thing to make excuses why they still are not embracing technology the way they should and to claim there is nothing different they could have done. Considering there are still things they need to do, I find Morris’ attitude rather frustrating. Since he doesn’t know what to do, I’ll offer some free advice.
1. Start by understanding your customers.
a. Why are they stealing music? Is it because “they can” or is it because they are not offered the product they want? In reality, it’s a combination of the two. You will never be able to stop people from stealing “because they can”. No form of DRM has ever been successful in that way. This type is not a potential customer. Instead, the focus should be on selling to customers that are not currently offered the right product.
b. Are you offering the right product? The quick answer is no. Consumers want DRM free digital downloads. You can sell a compressed format (like mp3) for less money (less than $1) and a full CD quality track for more in a lossless format like FLAC, etc.
2. Understand who your partners are and work with them rather than against them.
a. Apple brought the music industry into the digital age. Yes, technically, there were one or two subscription based services prior to Apple’s deal, but none of the subscription services have ever had any success. You’ve had great success with Apple. Use that as the blue print for success and move forward with other vendors.
b. Similarly, don’t bite the hand that feeds. You’re fighting for control with Apple because they have become “too successful”. Does that right? You asked for their help, now you’re upset with them because it worked? The fight is over, Apple has control and they don’t seem to be backing down. Good for them. They better understand what consumers want. Listen to them. Offer them the same DRM free tracks that you are offering their competitors like Amazon.com, etc.
3. Understand that your relationship with consumers has changed.
a. The music industry has become accustomed to dictating the terms to the artists, to the music resellers, etc. Consumers have revolted and resorted to file sharing. That’s not going to change. You can’t just shut down a peer to peer network. As one hole is plugged, another opens. There is no single entity to attack here. Instead, you have come up with a strategy to win your customers over.
b. In conjunction with the RIAA, stop suing your potential customers. Stop referring to college kids as “criminal minded low-lifes”. This attitude makes people want to steal music instead of buying it.
This is just the basics, but everything I’ve listed above should be common sense. There are short term and long term consequences to these actions. Doug Morris is going to have to focus more on the long term goals rather than how to make short term profits.
“And its current moves — DRM-free songs and the Total Music subscription service — aren’t about serving consumers, at least not principally. They’re aimed at taking on Steve Jobs and, specifically, limiting the power of iTunes.”
This is stupid. Apple is successful in the music business because they understand consumers needs better. They have the best music players, the best music jukbox software, the best on-line music store, consistent and fair pricing, etc. They’ve been the most successful ever since they entered the market and have taken on all challengers. In short, their success is not a coincidence or a matter of being at the right place at the right time. That’s not going to change anytime soon. Apple has the better leverage at this point and Universal would be foolish not to continue to cash in on it. There is no amount of “free music” that is going to want to make me put down my iPod for a Zune. The fact that Morris actually thinks he’s in control of this is laughable.
“With the record companies on board, Jobs did something remarkable: He turned the labels’ demand for bulletproof DRM into a way of locking up the retail end of the online market. Jobs argued that in order to make Apple’s DRM software, called FairPlay, effective, it had to be proprietary — and since Jobs won’t license FairPlay, tracks sold on iTunes can be played only on iPods. (Similarly, the iPod won’t play DRM-encoded files purchased through other retailers.) This lack of interoperability, combined with the iPod’s overwhelming dominance, gave Apple a stranglehold on the digital music marketplace. And Jobs got to be the good guy with consumers, blaming the mess on the music industry’s pigheaded insistence on DRM.”
Considering the fact that on average only 3% of every iPod contains music purchased from the iTunes music store, I’d say there is no truth to the paragraph above. There is no real evidence that any significant amount of people aren’t sticking with iPods because of Apple’s proprietary DRM.
“When I suggest to Morris that the labels gave Jobs license to create what was in effect an Apple Walkman that played only Apple cassettes, it’s Caraeff who answers. “Looking back, the best thing we could have done would have been to mandate one format,” he says. So why didn’t that happen? Morris is happy to field this one. “It never crossed anyone’s mind!” he exclaims. “We were just grateful that someone was selling online. The problem is, he became a gatekeeper. We make a lot of money from him, and suddenly you’re wearing golden handcuffs. We would hate to give up that income.””
Two things here… First, the iTunes music store isn’t successful because of the proprietary DRM. That is, it would be equally successful if the songs were sold DRM free in an open format. Second, Universal is making a lot of money from Apple’s sales. These are sales that would have been illegal downloads in most cases. Why isn’t Morris embracing Apple and trying to do more business with them?
“Total Music is designed to unify Apple’s competitors in what amounts to a coordinated attack on the iPod. The details are far from finalized, but in Morris’ conception a Total Music subscription would come pre-installed on devices like the Zune, the Sony PlayStation, or a mobile phone. Universal is well aware of the difficulty of convincing consumers to pay for music subscriptions, so Morris wants the devicemakers to pony up the cash themselves, either by shelling out for a six-month introductory offer or by assuming the cost forever.”
Well, I have no doubt that Microsoft will jump in on this. They are already paying Universal 1$ per Zune sale as it is. They are also desperate enough to try anything they can to knock Apple off its perch. Finally, Microsoft has the deep pockets to do this and sustain a loss for an extended period of time if it suits them. The problem is, this is a strategy based on greed. I can’t imagine other vendors doing this for any significant period of time. Consumers have made it clear enough that they don’t want a subscription model. I’m fairly confident that device makers aren’t going to foot the Universal subscription bill “forever” either. Really, this plan is DOA.
“Unfortunately, Total Music will almost certainly require some form of DRM, which in the end will perpetuate the interoperability problem. Morris likely doesn’t care. He is more committed to Total Music — or any other plan that allows protection — than he is to a future where music can truly be played across any platform, at any time. “Our strategy is to have the people who create great music be paid properly,” he says. “We need to protect the music. I know that.””
In short, Morris’ plan is to continue to not offer consumers the product they want. He doesn’t care about interoperability problems consumers continue to face with DRM. He claims that he’s doing this in the interest of making sure the artists get paid, but in the end, he’s only serving to minimize sales by not offering what consumers want. He could get away with this way of thinking of file sharing didn’t exist. Unfortunately for him, it does. I’m quite certain there isn’t a single song in Universal’s library that isn’t readily available for download, albeit illegally. The industry has tried for years to put a lid on file sharing but by the very nature of the internet, this is impossible. The source and method may change, but file sharing isn’t going away. Worse, Morris’ attitude on the matter is only serving to drive consumers away and seek alternate methods of getting the product they want, even if they do it illegally. Right now, it’s not hard to rationalize file sharing. If the same product (or better) were offered through legal channels, it would be much harder to rationalize.
“The irony is that if he decides to base his plans around DRM, Morris will be missing the larger truth that has propelled his business for the past 30 years. Ultimately, it’s convenience and ease of use that drive new media formats. That’s why cassettes made inroads against records, why CDs killed them both, and why MP3s are well on their way to burying CDs. Morris is right when he says music is more popular than ever, but he’s wrong to assume that will automatically lead to higher profits for the major labels. “Locking things up is actually good for piracy,” says David Pakman, CEO of eMusic, an online retailer that sells DRM-free songs from independent labels. In other words, the more restrictions you put on your files, the more you encourage customers to turn to illegal services to get songs the way they want them.”
“Back in his dining room, Morris is incredulous. He’s once again talking about how his job should simply be finding and breaking new acts. The problem, he says, is that “there’s sympathy for the consumer, and the record industry is the Shmoo.””
Gee… I can’t imagine why there is sympathy for the consumer in these cases.
This was a great article by Wired.com’s Seth Mnookin. It provided excellent insight into the mind of Doug Morris and how the digital revolution caught Universal (and the entire music industry) by surprise.
Unfortunately, for Doug Morris, it also brought to light his level of incompetence. While Morris helped build an empire and that should certainly be recognized, he’s a dinosaur both in age and in his way of thinking about the industry. Also unfortunate is that Universal is paying for his ignorance in the form of steadily declining sales. Consumers are paying for Morris’ ignorance by not getting the product they want. In short, having a dinosaur like Morris at the helm of Universal is a lose / lose situation for everyone involved. Based on the comments in this article, I doubt Morris has the capacity to change and adapt to the digital music era. I’m not sure appointing a buzzword blathering “yes man” in charge of your company’s digital strategy adds any value either.
On a final note, I couldn’t help but read the Wired.com article and come away not wanting to pirate their music. As someone who doesn’t advocate stealing music, this is a bad thing. I can only image how articles like this will only serve to rationalize the actions of the younger generations today (Or, in Doug Morris vernacular, these “criminal-minded low-lifes”).