November 6, 2018

Music Streaming: Risks and Opportunities

Posted in Business Development, Media Analytics, Music tagged , , at 6:40 pm by degyes

For over a century, the recorded music industry was essentially monolithic. This changed around the year 2000, when Napster arrived on the scene in force, introducing ‘free’ downloadable digital music to the industry without affording it any control over its distribution.

No longer vertical

In other words, the distribution model was no longer a vertical one! Up until 1999, the chain of ‘production to distribution to consumption’ had pretty much been set. Pricing, publicity, and usage were unified under the control of several major record labels, and a variety of independent ones, which in any case were well into the process of consolidating.

When so much is suddenly free

Napster introduced the piracy of music on a massive scale, and succeeded in making what had previously been regarded as content theft, normative. No longer did the once mighty record labels have the capability to protect content. This posed a serious public relations problem facing the consumers, who for decades had been compelled to purchase the labels’ proffered recordings, the only real alternatives being to make a non-digital copy (cassette tape recording off of LPs), or to wait patiently for a song to be broadcast on your favorite radio station.

First panic, then adaptation

Those of us who were around at the time remember the clumsy and abortive attempt of the RIAA to address the matter by trying to enforce copyright infringement laws through police raids of college dorms, and the confiscation of students’ personal computers.

Despite Napster being shut down and its executives prosecuted, the industry realized that its prior ill-fated attempts at enforcement were untenable and not sustainable. They ended up distributing music unprotected, instead trying to promote legitimate ways of acquiring music. The idea was to put the genie back in the bottle, so to speak, so that a generation of kids wouldn’t grow up without any concept of actually paying for music.

However, the industry never really came up with a protection solution that was agreed upon by all. As a result, music has since been distributed with an open format, basically screwing the industry, at least from the viewpoint of those whose livelihoods—and profit margins—depended on the top-down, industry-controlled, for-pay model.

Yet the damage didn’t end there.

Between the content owners and end-consumers there emerged corporate behemoths like Microsoft, Apple, Amazon, and other smaller subscription service providers, who intermediated powerful 3rd parties in setting prices and dictating margins to the rest of the industry.

As a long-time industry insider and ex-record company exec stated in a recent conversation, that was “another big blow” further adding insult to injury.

The cost recovery conundrum

Consider that an album traditionally contained between 8 – 12 tracks. The ability to recover the cost—let alone profit—from putting out an album was blown apart by the digital age. No longer was the success of an artist or their album measured by the sale of the full album. Rather, the unit of measuring success became the single, which cut deeply into margins, as the resellers were now operating on a per-track basis.

Executives (and former executives) were asking, how can the industry recover? What profitable and sustainable business model will emerge to replace the top-down, album-based system of selling music?

And yet, the devastation continued.

And then came streaming

Then, music streaming came along in force, and in recent years emerged as the dominant model of consumption. The upshot was that yet more 3rd party technologies and companies (such as Spotify, Tidal, and Pandora, to name but a few) are setting terms dictating what can be sold on a stream. If, prior to 1999 (when Napster arrived on the scene), the recovery ratio for producing an album was 1:1, file downloads made that figure closer to 10:1. Once streaming reached its stride and became dominant, the numbers plummeted to 1500:1. So, the figures are looking rather grim. Not only physical sales but digital sales are down too as streaming replaces the whole model that had previously involved buying a tangible object or music file.

Net neutrality … and a diminishing value proposition

And then there’s the issue of Net Neutrality, the notion that ISPs should be required to enable access to all content and applications, regardless of the source, and without favoring or blocking particular products or websites. The same insider quoted above indicated that if President Trump has his way and legal restrictions are put in place against implementing Net Neutrality, any remaining gateway control mechanisms over music will be removed. Meaning, anyone will then have equal access to the means of distributing any content they want.

Thus, if music isn’t already commoditized enough, Net Neutrality will further diminish the value proposition of any remaining businesses that offer music on a for-pay basis. At least that’s the fear within the industry.

Debt, competition, and thinning margins

Spotify is $1 billion in debt. Despite impressive revenues, it continues to hemorrhage money at a rapid pace. In short, its business model has far from proven its ability to become profitable, because it can’t scale against expenses.

Pandora faces a similar situation, not even coming close to covering expenses. Even Apple Music has seen a decline in sales.

Though other business models that stream music might be lucrative, that isn’t necessarily translating into increased value for artists. Recently launched YouTube Red, Google’s attempt at generating cash from frameworks other than its vaunted search engine, represents an enigma. Why? Because even though Google only expects about 3% of YouTube’s one billion users ever to subscribe to this ad-free for-pay “premium” video and music service, Red’s association with the search behemoth essentially mitigates the need for it independently becoming profitable, while further commoditizing music (and, for that matter, film,) content.

Introduce the loss leader

Amazon Prime, which has implemented its streaming service as a loss leader, is in a way, even worse for the future profitability of music. Amazon’s idea is to exploit Prime as a means of drawing visitors to its site via music, with the ulterior motive of getting them to purchase just about everything else (games, gadgets, clothing, etc.) through Amazon.com. So, Amazon Prime is essentially a means of feeding other product lines, while eroding the profitability model as a free-standing service.

Nevertheless, there are other ways of making money by selling rights to songs. As we know, the music industry relies on royalties generated by the licensing of copyrighted songs and recordings as a primary form of payment for musicians. Despite intellectual property law and licensing systems having gone through significant adjustments over recent years—largely as a result of the rise of digital music—much of the industry’s historical legal framework remains in-tact. Songwriters continue to own a song’s lyrics and melody, while performers continue holding the rights to the master recording of a particular song.

The “360 deal”: a different path to revenue?

Facing falling revenues and diminishing returns from traditional recording contracts, at the beginning of the previous decade, the music industry introduced what’s become known as the “360 deal,” where a record company agrees to provide financial (and other forms of) support for an artist. This includes direct advances as well as support in marketing, promotion, touring and so forth. In return, the artist agrees to allow the company a percentage of an increased number of their revenue streams, often including sales of recorded music, live performances, publishing and more. The 360 deal enhances the artist’s ability to make money on performances, appearances, and on merchandise, providing a cash flow and means of exploitation beyond physical and digital sales, and allowing some measure of compensation for losses incurred through the current business model of streaming.

Critical Threshold and Scalability

Due to the constant and rapidly increasing volume of material today, only a very small fraction (what our insider referred to as “the 1%”) are actually making money in the music industry, at least in a way that’s profitable. Hence, despite the ease of entry and access to promotional tools, the competition for entertainment dollars—often measured in royalties amounting to fractions of cents —is quite intense.

If an artist is to reach financial success (or even just stay afloat!), the key seems to be getting to the critical threshold where enough people are paying for content. This is dependent on the artist having access to a world market, where exposure is global and the costs of distribution are low. Such a model, according to the insider, could possibly work … if it can be made scalable. Because, as mentioned, Amazon doesn’t care about losing money on music. So, huge ratios are needed to reach recovery on an album. If you manage to hit that critical mass, getting to ubiquitous distribution on a 24×7 basis, you can make money. Today, while possible for a fortunate few, this remains no mean feat.

Getting to Saturation

In order to achieve saturation (in the music industry, becoming a household name), you need to contend with the industry-wide erosion in financial returns (margins, royalty rates, etc.). Meaning, there’s a heavy price to pay reaching profitability. Though the hope among the artists and those whose businesses depend on them is that the new model will work out. The insider articulated this as needing to “beat the one percenters in an environment where there’s no trickle down.” This means achieving a worldwide audience (i.e. becoming ubiquitous), global distribution of content, making deals with merchandisers, and getting promoted as a concert attraction.

The Indies

There’s apparently lots of competition on the indie level too. Independents account for 30-40% of the market, and have collectively become a major fourth player in addition to UMG, WMG, and Sony. Big names like Taylor Swift, Adele, Chance the Rapper, and many others are signed with indies. Some artists have even started their own labels (though the origins of that approach extend way back into the age of vinyl).

Challenge and Opportunity

It’s anyone’s guess how the music industry will fare in an environment where despite the ease of entry to the market and readily available, low-cost means of producing music, returns are so low, and competition from a small number of established mega-stars is so high.

In conclusion, this tight and hyper-competitive environment presents Media Analytics companies with opportunities to market their data analytics and customer engagement platforms to businesses striving to reach survival-level objectives. Those goals include increasing market share, growing revenues, raising corporate profile, and gaining an edge against intense and multi-pronged competition.

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May 13, 2011

Where Hip-Hop, Fashion, and Knowledge Sharing Intersect

Posted in Book Review, Business Development, Knowledge Management tagged , , , , at 2:28 pm by degyes

I often find that my deepest insights into life and work come from sources whom I least expect to impact my thinking. When an opportunity recently presented itself to obtain an e-copy of Daymond John’s Display of Power: How FUBU Changed a World of Fashion, Branding & Lifestyle, I followed my instincts and downloaded it, wondering if there was something in John’s story that would speak to me in an inspirational way. I ended up practically glued to this book for the next several days.

Display of Power provides an autobiographical sketch of how Hollis, Queens native Daymond John, along with a few trusted friends from the ‘hood (and a host of advisors and financial backers) launched FUBU (For Us, By Us), one of the premiere African American-owned fashion outfits in North America, and a globally recognized super-brand.

John advocates what I would call a true hands-on management style, based on keeping his ear constantly close to the ground. Essentially, this means listening actively and persistently, and showing no hubris towards one’s customers and critics. Listen not to your gaggle of yes-men, but to your harshest detractors.

Get out of your office. Party with your customers, even those who’ve left your brand. Show that you care about them and they’ll come back. Avoid ivory tower thinking and behavior. Don’t surround yourself with sycophants, lackeys and favor seekers who tell you only what you want to hear. Treat your employees like gold (if you don’t, they’ll anyway vent their resentment on your customers).

So what does this have to do with Knowledge Sharing (KS)? In a word: everything.

Display of Power intersects with KS at so many points. For starters, it provides an excellent example of how a successful business and global brand were built from the grassroots. I have found, almost without exception, that KS initiatives, in order to succeed, require tapping into the energies, talents, and enthusiasm of a cadre of experts who identify with your overall vision, and the goals you’ve established for a KS venture. Making it work can entail going at it day-to-day over the course of years. But it all starts with that groundswell of key supporters.

Some of John’s most strongly emphasized points include:

  • Community building and basing a brand on a communal identity;
  • Listening to consumer conversations and participating in those discussions as an equal partner;
  • Developing frameworks for exchanging usable information (in FUBU’s case, linking its business model to goings on in the hip-hop and rap scene);
  • Making success (at least on the manufacturing and distribution side) a series of repeatable and predictable processes;
  • Bringing about a coalescence of vision where beyond buying a product, people feel themselves participating in a venture greater than themselves;
  • Assembling a staff that’s amazingly talented and smart, takes initiative and works well together, and demonstrates a group identity that extends beyond “conditional” loyalty

In his chapter on hands-on management, John expresses his admiration for (now former) JetBlue CEO David Neeleman, who ran his airline in a way so contradictory to the “cold, impersonal” norm of the major US carriers. John tells how Neeleman made a point of riding at least one JetBlue flight per week. But don’t imagine that Needleman just went along for a joy ride, avoiding contact with fellow passengers. On the contrary, Neeleman, along with his (then) President and COO David Barger, would work the ticket counter, handle baggage, give out snacks, fluff pillows, and walk the aisles chatting with passengers. This “getting the hands dirty” goes almost unimaginably beyond the expectation of “ordinary” business leaders, putting JetBlue management in such close contact with their customers it would be very difficult to ever lose touch.

I enjoyed Display of Power because unlike so many books written by business founders this one was “unplugged,” in the sense that John pulls no punches when it comes to self-criticism and describing openly how he learned from his mistakes, on the business as well as personal level. You can have an ego, as long as you know when to efface it, reach into your heart, and eat some humble pie. I found this book filled with those lessons, told by John through his compelling and entertaining stories about his life and FUBU.

I also particularly liked John’s chapters on personnel management (you’ve got a two-week grace period from the time you hire someone to win their loyalty by showing your care about them), and his tips on running a company whose environment is quite multi-cultural (tells it straight, acknowledging the tensions, though mixing it with humor).

Some further business tips …

Constantly revitalize your brand and keep it contemporary, as doing so is essential to your business’ survival.

Look at how your kids are spending your money. When they’re putting it in someone else’s pocket, if that someone is operating in technologies and products related to your own, take that as a sign that there’s probably something you ought to be doing differently.

While John describes many frustrating—even despairing—moments, on the whole, he and his team seem to have a lot of fun in their careers at FUBU and derive great fulfillment doing what they do. While the kind of music video atmosphere and hip-hop party jaunts that John takes as a routine part of his work probably aren’t applicable to all of us, his overall message remains valid. Stay open and be in love with what you’re doing; and if you can’t, do something else.