Archive for the ‘Music’ Category

Universal’s Doug Morris is a “shmoo” in need of a clue

November 29, 2007

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
http://www.wired.com/entertainment/music/magazine/15-12/mf_morris?currentPage=all

“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.”

Exactly.

“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.

Conclusion

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”).

Music Industry: Going to war with consumers

November 28, 2007

Wednesday, November 28, 2007

As readers of this blog may know, I’ve been keeping tabs now and then on updates within the music industry, particularly as it relates to digital rights management (DRM) and other related consumer issues. In a recent article, the head of Warner Music, Edgar Bronfman, confirmed the position the music industry has taken with their own customers.

Previous articles on the topic:
Thoughts on DRM
Thoughts on DRM: Part II
Have the record labels become the new dinosaurs?

Tell us something we don’t know Edgar…

Music boss: we were wrong to go to war with consumers
http://www.pcpro.co.uk/macuser/news/138990/music-boss-we-were-wrong-to-go-to-war-with-consumers.html
Wednesday 14th November 2007

“Speaking at the GSMA Mobile Asia Congress in Macau, Edgar Bronfman told mobile operators that they must not make the same mistake that the music industry made.
“We used to fool ourselves,’ he said. “We used to think our content was perfect just exactly as it was. We expected our business would remain blissfully unaffected even as the world of interactivity, constant connection and file sharing was exploding. And of course we were wrong. How were we wrong? By standing still or moving at a glacial pace, we inadvertently went to war with consumers by denying them what they wanted and could otherwise find and as a result of course, consumers won.””

On the surface, this appears to be an epiphany for Brofman, but in reality, he’s just stating the obvious. He’s stating something that consumers have been telling him for years. He’s stating something that bloggers have been telling him as well. This is not just an issue for Warner music group; this is an issue for the music industry as a whole.

I also take special note of the following statement in particular: “we inadvertently went to war with consumers by denying them what they wanted and could otherwise find and as a result of course, consumers won.”

The question is, does Bronfman believe in what he is preaching? At this point, I’d say no. Consumers don’t want DRM with their music downloads either. The independent labels have dropped DRM, EFI (one of the big for labels) has dropped DRM. What is Warner waiting for? If Bronfman is in tune (pardon the pun) with consumers as he claims to be, why isn’t he allowing DRM free downloads? Actions speak louder than words. Bronfman’s words sounds like typical marketing speak to me.

“Bronfman suggested that mobile companies have much to learn from Apple, despite being critical of and iTunes in the past.”

Again, Bronfman goes on to talk about Warner’s partnership with Apple and how they are now offering bundled products such as full albums with ringtones, videos, etc. Again, it’s clear that Bronfman is in full marketing mode rather than addressing the real issues. If he can learn so much from Apple as he claims, why isn’t he dropping DRM as Apple has been calling for? It would have been nice if someone at the conference actually challenged him on this topic just to watch him back pedal.

Other bloggers have weighed in on the topic with similar opinions. One comment in particular helps bring the “war with consumers” better into focus.

Edgar Bronfman Rewrites History, Has A Pretend Epiphany
http://www.techdirt.com/articles/20071114/151459.shtml

“After all, it was Edgar Bronfman Jr. himself who very actively declared war on consumers who were file trading in the summer of 2000. As the head (at the time) of Universal Music, Bronfman Jr. announced that he was preparing to send “an army of lawyers” after file sharers. That’s not “standing still or moving at a glacial pace.” The “war” wasn’t inadvertent. It was an active decision by Bronfman Jr., which kicked off the entire RIAA war against consumers. “

That sort of distills Bronfman’s role in the music industry over the past years about right. These aren’t exactly the highlights you’d want read at your retirement dinner one day.

Conclusion

It seems to me that if someone were to make a sincere apology / admission of guilt, they would mention the real issues. Bronfman is right when he claims to have “gone to war with consumers”, but it surely wasn’t limited to “standing still or moving at a glacial pace” has he suggests. Bronfman has actively gone to war with consumers. He’s right, customers have won in the sense that they the music industry as a whole is losing money and consumers are getting what they want, albeit illegally in many cases.

I’d like to think this is the first step towards enlightenment for Edgar Bronfman, but I can’t help but doubt it. He half-heartedly acknowledged his mistakes. Not only did he try to spin his mistakes into something much more passive, but he followed up his admission with a bunch of marketing speak. The thing is, nobody really cares. I doubt any significant percentage of people would purchase music or boycott music published by Warner because of anything Bronfman says or does. However, Bronfman does have the power to do the right thing and offer customers the product they want in the form of quality music downloads without DRM restrictions. Apparently, he’s not ready for that yet, but it’s plain to see that this is the inevitable path they must take if they (Warner) are to survive and prosper in the future.

Have the record labels become the new dinosaurs?

October 16, 2007

Monday, October 15, 2007

Over the past 10 years, there has been a paradigm shift in the music industry. The record labels were slow to evolve with the changing times and as a result, they’ve been suffering from a steady decline in revenue. Recent events are only making things worse for the once mighty industry. Like a wounded animal, the music labels are lashing out against potential consumers and business partners without a clear and coherent plan for survival.

Slow to evolve

The problem for the music industry started in the late 90’s, when the .mp3 format became popular. By shrinking the file size to roughly 1/10th the size, it became feasible to store a large collection of music on your computer. The combination of disk storage growing at an exponential rate, broadband internet connections becoming common and a new common music format have the makings for a paradigm shift.

For years, the record companies have been able to force consumers to pay outrageous prices for music. Even if you just liked one song, for the most part, you had no choice; you had to buy an entire CD or simply do without. In some cases, singles were available, but they were never a popular alternative due to price, size, etc.

Peer to peer file sharing services began to pop up which made searching for and sharing content very easy. The first popular service, Napster, was shut down because it was a centralized service. That is, you had to log in to a centralized Napster server before connecting to another peer client to share music. The RIAA was able to shut this down as they were able to prove music was being illegally traded and Napster was never able to control the content that was being shared. This gave way to decentralized peer to peer networks that essentially can never be shut down because nobody owns or controls the networks. You can’t very well sue a gun company when someone uses a gun to kill someone. Just the same, you can’t effectively sue a software maker for making peer to peer client software. It’s just a utility that lets you share files, legal or illegal. It’s no more the obligation of the software company to control how the program is used than it is the obligation of the gun company to control how the gun is used. Additionally, even if the RIAA could sue a particular software company, similar software would pop up with origins in other countries. It’s a pointless battle to fight.

Rule #1: Provide the customer the opportunity to pay for a product they actually want.

When you are the single source of content that people want to buy, you can be arrogant and set your own prices. You can make your customers pay for things they don’t want like forcing them to buy an entire CD instead of a single song. You can dictate the format that your customers will be forced to use.

Of course, when the same product is available elsewhere, now you have a problem. This is what happened to the record labels. Music piracy became very popular, not because there are so many people that want to be thieves. Rather, it’s because consumers were able to obtain exactly the product they wanted, in the format they wanted. The fact that the music was available for “free” probably didn’t hurt. Yes, it was stealing and it is clearly wrong to do so. However, the fact that it happened was unavoidable. The record labels were arrogant. They did not acknowledge their customer’s demands for online music for years. By the time the labels realized they need to do something, they didn’t know what to do. They started offering subscription based services like Rhapsody, etc. However, the music was heavily laden with DRM (digital rights management) restrictions and wouldn’t even allow you to burn it to CD, etc. In effect, if you wanted to obtain music online, you had a choice: pay an on-going subscription fee or just download (steal) the music in an open format like .mp3. Is it really any wonder why piracy was and still is so rampant in the music industry?

The problem has been compounded over time. Because piracy was the only practical way to obtain the bulk of ones music collection, it has become culturally acceptable in our society to some extent. This is especially true with the younger generations. There is a real problem when we have a younger generation that completely doesn’t understand the concept of paying for music.

The online music sales model does work

Apple was eventually able convince the labels to sell their music online through the iTunes music store. This was a great stride in the right direction. It allowed you to own the music and even burn it to CD, etc. Unfortunately it still came with DRM restrictions. Though many people refuse to purchase music with DRM restrictions, Apple has been successful with selling music online. To date, Apple has sold more than 3 billion songs and is now the #3 music reseller, behind Wallmart and Best Buy. Clearly the online model has proven successful.

The only real barrier to sales is the use of DRM. Consumers do not want DRM. Consumers do not want to have to register one computer and not forget to unregister that same computer before they get rid of it. Consumers want fair use of their music. They want the ability to burn it to a CD or transform it to another format, possibly for another music player that they have. These are basic freedoms that consumers have every right to demand. The record labels need to fall in line here, or continue to suffer from rampant piracy.

Seeing the light

Under pressure to open up its DRM scheme to other vendors, Steve Jobs wrote an interesting article back in February 2007 that outlined the problems with the music industry and called for the labels to drop the requirements for DRM.

The independent labels were ready to drop the DRM requirements, but the “big four” (Universal, Sony BMG, Warner and EMI) were not ready to do so. In April 2007, EMI, the smallest of the big four, fell in line and announced that they would sell DRM free music through Apple’s iTunes music store.

This was a huge step in the right direction, but it came with a caveat. The music would even be offered at a higher quality (256bps vs 128bps), but come at a higher price. The DRM free music would be sold at $1.29 per song whereas the DRM laden music would continue to be sold for $.99 per song. This wasn’t ideal for consumers, but it was a reasonable compromise. The record labels wanted to charge more for their music and this was a way to do it. To date, only EFI has “seen the light” and realized that DRM is not an effective means of preventing piracy.

Testing the waters

Universal is “testing the waters” so to speak by offering DRM free music through a few vendors like Amazon.com, etc. However, they are specifically not offering DRM free music through Apple. This seems odd to me. Apparently, Universal is not happy with the agreement they’ve made with Apple. Apparently, Apple gets $.29 for each $.99 song it sells. Considering Apple sets up the store, pays for the storage, pays for the bandwidth to deliver the music, pays for the development of the iTunes software which acts as the jukebox and integrates with the iPod, etc. , they pay for the sales / credit card transactions, etc. The price Apple charges seems reasonable to me.

If Universal is unhappy with the price they get for each song, why not offer their music through the iTunes plus store at $1.29. Surely they’d get more money per song, right? Instead, they are selling their music through Amazon.com who is selling their DRM free music in the .mp3 format for just $.89 per song. So, one has to question what this is all about. Clearly it’s not an issue of how much money per song Universal wants to get. It’s about unseating Apple’s market leading position with on-line music sales. Universal figures that if they can further split the market, Apple will have less leverage then they currently have. It’s a bold move, but Apple clearly has the leverage here and they know it. Universal refused to enter into another long term agreement with Apple, yet, they know they can’t pull their music library from Apple because Apple is the #3 music seller overall and the number #1 music seller online by a large margin.

A recent article in Business week talks about Universal’s recent actions.

Universal knows they don’t have enough power by themselves, so they are trying hard to get Sony and Warner to stand against Apple in an attempt to renegotiate their terms. We’ll have to see what happens. Here are a few quotes that I found amusing:

“Morris and his allies hope to move digital music beyond the iPod-iTunes universe by nurturing the likes of Microsoft’s Zune media player”

The assumption Universal’s Doug Morris is making here is that the iPod is popular because of the iTunes music store. This is just wrong on so many levels. For starters, Apple’s own estimates are that on average, the amount of iTunes music store (iTMS) content on the average iPod is about 3%. The iPod’s popularity existed before Apple even had a music store for iTunes. The iPod is popular because it’s the best portable music player on the market. Period. It’s the best design, it’s easy to use and navigate through the menus. The click wheel design has proven to be very popular and much less cumbersome than what’s being offered by the competition. Additionally, the iTunes software (not the store) is considered by most to be the best music juke box software. The seamless integration between the computer, the iTunes software and the iPod hardware has set the iPod in the dominant position.

“The service, which is one of several initiatives the music majors are considering to help reverse sliding sales, will be called Total Music. (Morris was unavailable for comment.)

This isn’t only about Jobs; Morris badly needs to boost his business, and Apple is the one to beat. The iTunes store has grabbed about 70% of downloads in the U.S. And the iPod–well, what’s left to say about that juggernaut? Plus, music companies have been here before. A few years ago they launched services with the aim of defeating Napster-style file-sharing–and failed miserably. And let’s not forget that existing subscription services have signed up only a few million people, vs. hundreds of millions of iTunes software downloads.”

Getting to the point, Universal, like other big labels, is facing declining sales and they don’t know what to do. Apple has helped them by providing an effective online sales channel in an attempt to curb piracy. With 3 billion songs sold, it would seem Apple has been effective. Now, they are getting greedy and realizing that online sales will eventually eclipse the sales of CDs sold in stores. As such, they want a bigger piece of the pie. The labels are frustrated that nobody has been able to compete successfully against Apple.

“While the details are in flux, insiders say Morris & Co. have an intriguing business model: get hardware makers or cell carriers to absorb the cost of a roughly $5-per-month subscription fee so consumers get a device with all-you-can-eat music that’s essentially free. Music companies would collect the subscription fee, while hardware makers theoretically would move many more players. “Doug is doing the right thing taking on Steve Jobs,” says ex-MCA Records Chairman Irving Azoff, whose Azoff Music Management Group represents the Eagles, Journey, Christina Aguilera, and others. “The artists are behind him.””

Subscriptions? Really, is this their magic plan? Yes, subscription services would be the most profitable for the music labels, but fortunately, consumers have been smart enough to reject this nonsense to date. Now, the plan is to get the hardware makers to pay a subscription fee? Are they kidding? I’m still using a 4th generation iPod that’s now several years old. I can’t imagine any hardware vendor in their right mind actually biting on this one. This is clearly an act of desperation.

Also what’s with the “The artists are behind him” quote? I certainly can’t speak for every artist, but I never hear artists speaking favorably about their record labels. It’s generally understood that most artists make very little from record deals and they generally end up having bad relationships with their labels.

Bad will

Generally speaking, I’ve always understood the artists deal with the record labels as a necessary evil. We know the record labels have made lots of money over the years. There have been countless hard luck stories about how they’ve treated the artists. They’ve charged unreasonable prices for music and as such, are not well liked by consumers.

To make matters worse, the RIAA has been busy trying to sue people for stealing music. Don’t get me wrong, it’s their right to do so. In fact, if they don’t try to fight piracy in some way, they are sort of condoning it.

That said, suing your potential customer base is generally not a good idea. The RIAA is hoping for high publicity from their lawsuits. They are trying to send a message. The problem is, they end up suing teenage kids whose parents aren’t aware of what their kids are up to. In terms of industry image, this has backfired on the music industry. At least in some cases, I’ve seen this provoke some to pirate more. Worse, it’s inconceivable that a jury recently awarded the RIAA a $222,000 lawsuit against a single mother on the basis that she made 24 songs available for download. There apparently wasn’t even any evidence that files were uploaded from her computer. Now, I have no doubt she did illegally share music files with others. However, I’m quite sure the punishment doesn’t fit the crime in this case. I’m also quite sure this publicity being generated from all of this is not working in the favor of the record labels.

Bypass the labels all together

The result of the bad will generated from the labels isn’t just coming in the form of music piracy. One of the biggest upcoming rock artists, Radiohead, has recently decided to release their latest record without a contract from a record label. While I don’t agree with their “pay whatever you like” business model, I do see that cutting out the “middle man” as an obvious conclusion for many.

“Radiohead’s contract with EMI/Capitol expired after its last record, Hail to the Thief, was released in 2003; shortly before the band started writing new songs, singer Thom Yorke told TIME, “I like the people at our record company, but the time is at hand when you have to ask why anyone needs one. And, yes, it probably would give us some perverse pleasure to say ‘F___ you’ to this decaying business model.””

Clearly, there is a larger backlash coming from the current business model.

“Even under the most lucrative record deals, the ones reserved for repeat, multi-platinum superstars, the artists can end up with less than 30% of overall sales revenue (which often is then split among several band members). Meanwhile, as record sales decline, the concert business is booming.”

Is it really any wonder why artists have a problem with the type of contracts they are given? Lesser known artists don’t do nearly as well.

“”This feels like yet another death knell,” emailed an A&R executive at a major European label. “If the best band in the world doesn’t want a part of us, I’m not sure what’s left for this business.””

The labels are starting to be scared about this – and rightfully so.

Artists also have other choices. They could skip the labels and sell directly to on-line sources like iTMS, Amazon.com, etc.

Conclusion

The record labels have built an empire based on what is now considered to be an out dated business model. As times have changed the record labels have been slow to adapt. Changes in technology have made music piracy not only easy but common. The record labels have been slow to offer what consumers want: CD quality music at a reasonable price ($.99 per song for example) in a non-DRM format. The record labels have been slow to even offer music for sale online and are only just now “testing the waters” with DRM free music sales.

I have a few suggestions for the record labels.

#1 – Offer a product people want to buy.

For any business to be successful, they need to offer a product that consumers want. Ideally, it would help if they didn’t treat their customers as criminals. The music can be stolen without DRM restrictions, so why punish your legitimate customers? I’m not aware of a single song that can be purchased and is not also readily available to steal.

#2 – Work with your partners, not against them.

Companies like Apple have brought the music business into the 21st century by offering a solid business model along with the best tools of the trade in terms of online store. It’s the benchmark by which all other online stores will be compared. Don’t work against companies like this, work with them.

#3 – Think about the message you are trying to send.

The RIAA may be acting on your behalf, but they are neither effective in curbing piracy, nor are they helping the image of the music labels. In one of the links above, they’ve already admitted that their legal actions have been a losing proposition. Clearly, they are spending more money on their legal actions then they are receiving from their settlements and lawsuits. It’s plainly obvious that they haven’t made a dent in curbing piracy either. The money they are spending would be better served in educating people why it’s necessary to support the artists and not steal. Make people want to do the right thing. Some people will steal regardless of what you do and it’s unlikely you’ll be able to make a dent in attempting to prosecute any significant number of them.

#4 – Consumers don’t want subscriptions for their music.

Really, is there anything in history that would lead these record labels to think that subscription based sales works for the music industry? Hasn’t this been attempted already with each attempt failing miserably? I realize greed is the motivating factor for schemes like this, but does anyone consider doing a sanity check here? Imagine selling a lower end device for $79. In just over a year’s time, the manufacturer would have to give that much money to the music labels. That’s insane. Equally insane would be to bake that cost into the new products. Let’s see, I could by brand x for $100 or brand y for $300 and have the privilege of downloading free music legally. Really, Universal’s plan is dead in the water before it starts. A healthy dose of common sense is needed here.

The reality is, the music labels are facing a rapidly declining business. For example, it was reported that Universal’s earnings fell 25% for the first half of this year. Much like the now extinct race of dinosaurs, the existence of the music labels is being threatened. They don’t understand their customer’s wants and needs. They are suing their potential customers and they are striking out against their own business partners. Worse, they come up with the most ridiculous subscription based business models in an attempt to go back to the days of fat margins, etc. These are acts of desperation, and it’s sad to see. Not only are consumers rejecting them, but it seems that artists are beginning to reject the labels as well. Time will tell if artists are able to be successful with this business model. I would image that if you cut out all of the middle men, you don’t need to sell as much music to be profitable anyway.

Finally, I know it’s easy to watch this on the side lines and play armchair quarterback. However, the items I mentioned really should be common sense. Perhaps the labels need to take a fresh look at things. If they are able to adapt and evolve, there is hope for their future. If these labels continue to flail about like a wounded animal, they are doomed to extinction like the dinosaurs they emulate.