Category: ad-sponsored music

“Sue em all” Awesome

Techies frequently rag on the RIAA “sue em all” campaign, saying that it hasn’t worked and never will. They’re wrong.

As an example of someone saying Sue Em All is not working, this sober analysis by professional economists describes the situation this way:

A catch-all phrase covering letter writing,
bandwidth throttling and legal action against those who upload and
download files. Whilst understandable as a choice given the current
coordination problems, there is little evidence suggesting the costly
process of pushing down on the black market will indeed raise up the
demand for the licensed market for music. Furthermore, there exists the
real risk of a ‘Whack-A-Mole’ game – persistent reappearance of
unlicensed sources for music upon the closure of any source.

“Shadow
pricing P2P’s economic impact” (Will Paige, David Touve, Keith
McMahon; MCPS-PRS Alliance)

It’s true that individuals in private life are just as free to do filesharing as ever, and that the amount of filesharing isn’t going down. However, it’s not true that businesses can incorporate filesharing.

A business that builds on filesharing creates unacceptable risk for its investors. The investors are about return on investment, and they aren’t ok with giant settlements or big ongoing legal bills. Businesses who need music are usually forced by their investors to cut licensing deals, despite the brutal expense.

Google’s settlement of the lawsuit over the book-scanning program is a good example. They had a pretty damn good legal case if they wanted to fight it out, but they stood to gain more by making up. Fighting meant uncertainty over whether the final judgement would vaporize the entire publisher project in the end. Settling now meant putting bounds on the costs.

Standing on principle is not what businesses do. They exist to make money. Making money means controlling risk. Controlling risk means preventing ruinous legal judgements.

And users gravitate towards experiences supported by business, because business support allows for better usability.

Case in point, the Apple silo. Apple makes it very easy to get music onto the iPod by buying at the iTunes music store. If you’re an iPod user, you’re an iTunes user, and if you’re using that software then it’s often easier to buy licensed music from the iTunes store than to download from a filesharing network and import to iTunes.

Not that users *can’t* do filesharing — that would be a ridiculous claim — but that the usability of licensed commercial suppliers is greater.

And usability is a huge factor. People have a hard time operating computers. They have an easier time when businesses devote resources to helping them. When they have an easier time of one thing than another, they do more of the easy thing.

Again, it’s not that lawsuits against private filesharers have caused private filesharing to go away. For an individual engaging in filesharing the calculation is clearly on the side of doing it. Individuals who are rational actors *will do filesharing*.

It’s that the same calculation doesn’t produce the same result when it comes to support businesses.

I hear you say: what about My Favorite Software, which is still around? What about X-Factor-Gee-Whiz-2000? What you don’t know is that the proprietors of those companies almost certainly are having meetings with the labels. They are making the pilgrimage to Santa Monica to kiss the ring and seek absolution. If they’re still doing what they’ve always been doing, the reason is probably that they can’t get a favorable deal.

Open source software is an exception; without investors, it doesn’t need to control risk. Generic software which can be used for filesharing is the other exception. Nobody thinks it might lose a big court case.

As a result of all this, the record labels are busily cutting licensing deals. It’s simply not true that they have scared the customers away. Now, maybe the companies taking out those licenses are going to go out of business, leaving the labels dead in the water in the long run. But the jury is out on that. We won’t know for a few years whether licensees can survive and under what conditions.

What we do know is that the labels have created a customer base by suing it into existence.

the blogads of music

Hit the “Hello Goodbye” button in this widget, and what you’ll hear is (1) This is Jonathan Clay and you’re listening to a brand-new song called ‘Hello, Goodbye.’ Thanks to Levis 501 Jeans for making this a free download and (2) the song, which makes my skin crawl but what the hell I’m not the target market and that’s probably what it’s supposed to do.


Jonathan Clay TrueAnthem MusicGo to <a href="http://trueanthem.com">the TrueAnthem homepage</a> to check it out, since whatever you&#8217;re using to read this page is stripping out the OBJECT element that this widget needs.

That’s from a company called TrueAnthem (check out their FAQ for a fine intro), which describes itself this way:

an advertising supported, online music promotion and distribution company. We believe that artists should get paid for what they have created; that fans want music for free; and that the best way to reach a targeted audience for an advertiser is through music.

They remind me of blogads in that they’re matching advertisers with independent content producers.

I used blogads way way back when. Another thing TrueAnthem and Blogads have in common is that the HTML they give you to embed doesn’t validate and screws up a web page like this one, so you’ll have to debug it for them. Hint to TA: <BR> has been off the shelf for ten years. Did you mean <br />?

Another thing they have in common with Blogads is that they’re stuck with mid-range to low-range ad inventory. Content producers (bloggers and musicians) that get a really big audience have an incentive and the means to either do their own ad sales or to move to a premium network. In either case they make more money on each incremental bit of traffic once they leave TrueAnthem/Blogads. Or at least that was how the space worked back in the day; it must have changed, though, because I can easily find largish sites that still live on Blogads, like Daily Kos and Perez Hilton. Anybody know why these sites wouldn’t have moved on to a display network like Value Click?

why advertising will win

My reasoning on why recorded music will mainly be sponsored by advertising in the future is that advertising by definition always makes the most money.

CDs and downloads are products which can be associated with plays just like any other product. When you hear a song on the radio and end up buying the CD because you like the song, the song is acting as a promotion for the CD.

But what if other products can have higher returns on that play? What if you can sell ten pairs of jeans for $100 profit instead of ten CDs for $50 profit? The musician who made the song will cut a deal with the jeans vendor instead of the CD vendor, obviously.

Maybe you get a one-song CD in the bag with every pair of jeans. It might be that the rock star wears a patch with the jeans brand on their jeans jacket. It might be that the jeans vendor gets a banner behind the stage at live shows. Or it might be a plain old ad-sponsored stream on a web site.

Which one of these methods you pick doesn’t matter – how the song and product are hooked together isn’t relevant to the basic argument. The argument is that

  1. The business of recording is about using recordings to move products.
  2. The most profitable products will always be able to pay musicians the most for their works.
  3. Advertising” is the word for this kind of relationship between recordings and products.

From this perspective selling CDs based on an affiliation with a song is still advertising in the sense that the product is the CD and the advertiser is the CD vendor. CD sales don’t have to go away for this point of view to be an accurate prediction of how the recording business will shake out. But CD sales do have to become an option rather than a necessity.

For example, a pop star might record a new song specifically for a marketing campaign for a new product. BMW comes out with a new model, and Barbra Streisand comes out with a new recording to be somehow associated with the car. Maybe you can only get a CD at dealerships or can only download a copy at BMW’s web site. The download is free on the site, the CD is free at the dealership. But the car isn’t free. If BMW can make more by converting Barbra’s song into into car sales than EMI can make by converting her song into CD sales, BMW can pay Barbra more, and she will move from EMI to BMW.

What it means for advertising to “win” over unit sales (in the form of downloads and CDs) is for the product associated with a recording to become flexible. The product associated with a recording should be whatever product is the most profitable. There’s nothing intrinsically CD-ish about a song. Sometimes the product should be a CD, but sometimes not.

profitability of iTMS

Per Coolfer:

In the New York Times’ Bits blog, Saul Hansell makes a case that iTunes may be Apple’s best business segment.

Last year, PacificCrest analyst Andy Hargreaves estimated iTunes’ operating margin to be 10% and possibly as high as 15% (it would be better today due to the increases in volume). Earlier this year, Billboard’s Ed Christman estimated $161 million to $390 million of operating profit on revenue of $1.9 billion. That comes out to an operating margin of 8.5 to 20%.

Whatever the true operating margin, we can safely assume iTunes is making money hand over fist. Steve Jobs might downplay its success, but we shouldn’t.

I’ll buy Hansell’s argument that the iTunes music store is contributing a nice chunk of $$$ to the bottom line, but I want to point out that operating margin isn’t the only part of the equation: opportunity cost matters. If Apple could earn more by investing that same money in, for example, a search engine, it’s losing money by accepting the lower rate of return.

Also, I want to point out the subtext of the conversation. Coolfer is generally a conservative on music industry issues, and Hansell’s argument would tend to support the conservative perspective. The trad recording industry is deeply committed to per-piece unit sales as their main line of business. They’re seeing the internet as a new distribution channel for download sales, not as a way to upsell concerts, merch, and whatever an advertiser thinks they can move.

I’ve argued in the past that ad-sponsored streaming is the way it’s all going, and that downloads will become a profitable but small part of the market. I’m supporting that view by not fully accepting Hansell’s argument. (And my perspective is what the tech industry wants to hear, because big internet companies are all about advertising).

While I’m pointing out who has what axe to grind, it’s important to know that Billboard is more or less the house organ of the big record and movie companies. If they’re estimating X profit margin for Apple, and the record companies are feeling bilked, X is probably high. iTMS gross revenues probably reached a big enough scale last year that the proportion of fixed cost to marginal cost probably went to zero; that proportion doesn’t keep improving once the fixed cost is a negligible part of the whole.

On the whole, though, I do buy the argument that the iTunes Music Store is a decent if not great business.

hybrid label+blog economics

After I thought more about RCRD LBL‘s economics, I came to a couple conclusions.

I don’t think they’re selling their spots at the listed rates. I think the ads they are selling might be part of package deals with other sites that I don’t know about, because they can’t deliver enough traffic for major brands to pay attention to them. And I think the actual rates are lower.

I also think that I understand their business strategy. They’re able to put major brands inside the world of way-cool MP3 blogging without risking association with copyright infringement. It’s hip but also clean. The business is relying on their squeaky clean copyright status to charge a premium for ads. So even though I don’t think they’re getting the listed rates, I do think they’re getting much better rates than ordinary MP3 blogs.

This points towards an elegant and innovative business model.

Ordinarily internet music companies are forked between two deaths. If they keep it clean they get killed on royalties for licensing. If they’re fast and loose with copyright, they get killed on legal bills and eventually are forced to license anyway. But either problem assumes that they have to carry a broad selection of everything with cultural presence.

RCRD LBL avoids both forks by doing their own A&R, then packaging the results as a blog. The reason they’re a label is that they do their own research work to find obscure gems. It’s important that these are obscure, because it means that licensing costs can be kept down. It’s important that they do their own research, because there aren’t yet strong discovery tools for digging out the gems in the mountain of unknowns. The reason they’re a blog is that they aren’t expected to carry everything everywhere. If they were a search engine like Seeqpod or an encompassing content browser environment like All Music Guide, they would need to carry music that they couldn’t afford to license. The blog format puts them in position to limit what they release.

Note that the importance of lowering royalty costs doesn’t imply that the musicians are getting screwed. If the musicians earn exactly the same as they do on a traditional label, RCRD LBL can still have a winning cost structure by keeping royalties that would normally go to label and publishing bills.

Will it work? It depends on execution. They need to get their traffic up enough to do business with the brand advertisers who will pay a premium for RCRD LBL’s clean but edgy product line. This range is about a million uniques a month.

RCRD LBL economics

RCRD LBL is a music blog. Or a label. Or a webcaster. Hard to say exactly, but those are the times we live in.

Here’s how they explain themselves to advertisers:

Launched in November of 2007, RCRD LBL is an online record label releasing exclusive and completely free music from emerging and established artists to an audience of over 125K unique visitors each month. In addition to our in-house label, our network includes a roster of independent record labels such as Warp, Modular, Kompakt, and Dim Mak offering free MP3 downloads and multimedia content. The site is a joint venture between Downtown Records (Gnarls Barkley, Cold War Kids) and online media pioneer Peter Rojas (Engadget, Gizmodo, Weblogs, Inc.), and combines the allure of downloading services with the resources of a great independent record label and the editorial credibility of a trusted music blog.

Lots of interesting stuff there, but the one that strikes me is 125K uniques, which is good but not massive. I imagine that the three biggest MP3 blogs do about 250K apiece. They can’t monetize like RCRD LBL, though — what makes RCRD LBL special to advertisers is that it is impeccably legal.

Now jump over to the ad rates:

Widgets Size (px) Price/month
Streaming Radio Player 234 × 60 $35,000
Photos 234 × 60 $20,000
Most Popular Tracks 125 × 125 $17,500
Fans 125 × 125 $17,500
Tour Dates 125 × 125 $15,000
Sponsorship Price/month
Podcast $10,000
Newsletter TBD

It looks to me like the inventory does move because I usually do see the slots filled.

Add up all the inventory and you get 175K a month gross, or 2.1MM a year. Knock off 50% for sell through; I imagine they beat that number, because otherwise they would lower prices, but we might as well be conservative. That gives about $1MM a year in gross revenues. I’d guess 500K in personnel and 100K in bandwidth, office space, etc. These numbers are wild guesses.

I doubt the difference is profit. Most likely there’s a good chunk going to royalties, but even so it looks to me like this is a viable business built on a pretty radical product.

reactions to ad-sponsored music

My earlier blog entry on the economics of ad-sponsored on-demand music was reblogged on Silicon Alley Insider.

One thing that I should point out is that SAI did some rewrites and though these were mainly improvements to tighten up and clarifying the writing, the new headline is something I would never say: Ad-sponsored music won’t work. Blame the labels. I don’t think either of those statements is true. I think that the future size of the recording industry is determined by how much of the online ad industry it can slice off, with a bit of upside for soundtracks and per-unit sales. I think that the labels are caught in their own very real economics and contractual obligations and are making plausible business decisions within their constraints.

The comments over at SAI are an excellent in-depth discussion from industry notables, and are worth reading through to get a more detailed view of the situation. There were two that I want to respond to here.

Michael said: If an ad supported music business wants to experiment they should pay for that, otherwise plenty of time for labels to wait until a viable business emerges. So really no pressure there to make a deal.

This is a very significant consensus within the recording industry. It means that the labels are just waiting for some internet music business to survive the gauntlet. They cash in here and there, losing value in tandem, and patiently working through round after round of dead internet music startups until one is hardy enough to last. What this means for on-demand ad-sponsored music is that, as I said in the comments at SAI, I think that iMeem etc can’t sustain at the current rates, and we’ll have to wait for the next generation of royalty rates (and possibly startups) before ad-supported streams are an important business.

Devon Copley said:

In the near term, though, I think the relative “success” of iTunes — in Western markets, anyway — makes it difficult for the majors to embrace such a model for on-demand. There’s just too much likelihood of cannibalization. How many of those 700 plays actually substitute for an iTunes purchase? If that number >1, then they’re going to need to see more than 700x revenue per play — maybe much more.

The issue of volume is crucial. Two things have to happen. One, an internet music product has to be cashflow-positive on plays, so that growth doesn’t kill it. Two, listeners have to embrace ad-sponsored on-demand plays for catalog that they wouldn’t pay for at all, so that completely unmonetized listening becomes monetized. (For example, by doing on-demand plays of weaker album cuts that nobody is buying at the iTunes store).

song page manifesto

The place for a dedicated song page is in the media player. Media players need to be extended to have the ability to show a web page associated with a song; they should always show the web page, and shouldn’t require the user to take action. Listening to media in a media player should come with a series of auto-loaded web pages, one per song.

Manifesto

Bare audio files are pretty crappy. All they have room for is bytes describing waveforms. Waveforms are part of music, but not all of it by any means. To come alive a piece of music needs a lot more.

Of course, a song needs a title, and the name of the musical act, and some more facts like the name of album and the length of the song. But even though these facts are part of music, they also aren’t enough to bring it alive.

What every song needs is a web page.

The web page might be anything. It might be a single graphic, similar to how album art is currently used. It might be a series of images, like a slideshow. It might be song lyrics. It might be guitar tab. It might be a list of Myspace friends. It might be Creative Commons licensing information. It might be a pledge drive for future releases or a tip jar for this release. Who the hell knows that the web page is; what’s important is that a web page is powerful and flexible enough for the demands of the music.

Application flow

So what does the software look like?

There would be a chunk of HTML associated with an audio file. It could be saved for offline usage or — easier to implement in the first generation — it could just be a link that was loaded when the user was online.

The HTML would be used everywhere album art is used. In offline media players like the iTunes client-side software, here would be a pane in the media player which displayed it while the song was on. iTunes cover flow would display a screenshot of the page while you’re flipping through your collection and switch to a live grab while the song is playing.

Non-graphical offline media players like VLC would have a button to open the web page in a browser window. They might also be able to enslave a browser window which would be constantly updated during the course of a playlist. Console mode players would display the link for easy copy and paste.

Online media players (in the browser) would give a section of screen real estate to the page. A player like FoxyTunes would give the entire document window over, while a player like XSPF Musicplayer would only give a badge-sized portion of the window. The JW FLV player, for example, would put an HTML window where the video is.

How would the HTML be associated with the audio file? The easiest way to start is with an ID3 tag in MP3 files. (Leaving the issue of how to do it in other media formats aside). There already exists a standard tag designed for this purpose — the WOAF field, which is defined as The ‘Official audio file webpage’ frame is a URL pointing at a file specific webpage. This is very easy to implement, adoption is the only hard part.

What would be in the page

Romancing the music. Providing esthetic context with imagery and text, poems, animations.

Factual information. Song title, copyright data, album name, a list of performers.

Social features. A friend list, a signup for the mailing list, fan chat.

Advertising. Musicians could release a free download and earn ad revenues on a page view per play.

Performance resources. To play along, sheet music and tablature. To sing along, lyrics. To remix, source files. These would encourage listeners to pull the music into their life.

Upsells. Concert listings, merchandise like t-shirts and hoodies, ability to purchase a high-res version of the audio file, ability to purchase the entire album. (Imagine how the ability to purchase the whole album would work: you grab a single song from a filesharing network or pay per download site; you’re listening and digging it; there before your eyes is a big link to get more music from the same artist — go!)

It matters

There is a lot to gain.

Listeners would enjoy the music more because the musical experience would be better. They would have better metadata; for example, context-specific data like the featured soloist in a concerto could be given. They would have a ton of artwork, rather than a little postage stamp. They would have interactive and social features. They would be able to see concert listings auto-generated by geolocation. Rather than a media player that is a spreadsheet for metadata, the media player would an explosion of web experiences.

Commercial musicians could turn free downloads into money much more easily. Right now they rely on a user noticing a song, taking action to do a search, and following links in search results until they came to one that could convert the listener into a customer. With the new way, the user would just have to notice the song and glance over at the web page being displayed. The old way is ten clicks, the new way is zero clicks.

Record companies could develop branding for baby bands, and they could own the URL for their artists rather than letting Myspace have it. They could turn casual listeners into customers by making sticky services like a mailing list one click away from the listening experience.

Avocational musicians could get connected to lead sheets and remix sources more easily.

Developers could extend the musical experience much more easily and to much better ends. It is nearly impossible to extend MP3. It is easy to build on web pages, and the frontiers are being extended every day.

What next?

In the comments on the post that started this, Ian asked: where does this go next? And how do I package/distribute the end result? The answer is to start working on broad adoption of the WOAF ID3 element in MP3.

  1. You could sketch out wireframes of application flow. Help to visualize the user interface. Help create the conventions of this new functionality.
  2. You could do a Songbird plugin which loaded the contents of the WOAF field into the document window. Songbird was frakkin born to do this job and would excel at it.
  3. You could do a VLC extension which opened a browser window to the URL in the WOAF field.
  4. You could document how to do this functionality in the Ogg container format.
  5. You could figure out how to get the contents of the WOAF field in an AJAX app without needing standard media plugins to be changed.
  6. You could evangelize this method to the developers of standard media plugins like Flash, Quicktime and Windows Media Player, and convince them to expose the WOAF field to AJAX developers.
  7. You could evangelize this method to leaders in the recording industry, and get them to help apply pressure to vendors of leading media players.
  8. If you’re on the artist development side, you could make sure that the WOAF field is set in your free downloads.
  9. If you’re a client-side software developer, you could make an easy tool to set the WOAF field.
  10. If you’re a blogger who knows why this is retarded, you could spell it out and help to fix the problem.

To summarize: a web page for every song, a page view for every play.

Background conversation

Here is relevant conversation from the comments on my post about a dedicated page for a song.

Jay Fienberg:

Someday, I’d like to be able to just put http://soupgreens.com/froginthewell/ in my “music player” and have it all in my library–which needn’t be just a collection of music files on one computer, but could be a very multi-medium, multi-source, multi-network, multi-device interlinked library of and about music.

[…snip…]

For Err or Man, besides album covers and the lyrics for each song, each song itself also has 2+ pieces of visual art. And, more a/v may come in the future. So, for each of these songs, I need to create not only a song “page,” but a song “(mini) site.”

But, this is the web, so it’s straightforward to create these kinds of multifaceted / relational collections of the mixed-medium info that make up what we call a “song.” What’s missing is the music player / web browser hybrid that understands the song as existing in this kind of interconnected context.

Crosbie Fitch said:

Let the page be the AUTHORITATIVE source for that work. Ensure the URL has the ISBN, or if that isn’t relevant, the MD5 digest of the FLAC (for integrity checking). Would be good to have a standard for indicating authoritative URIs for digital works.

Make the page the PermaLink for the work.

That page (with the artist’s domain in the URL) is gospel for the work. Encode the page’s URL in all metadata for all files.

Bung metadata in the page’s HTML.

As for a tip jar “I would have gladly paid $n.nn for this, let me rectify that now”, yes, you could put that on this page.

Pledging is a matter of chipping in a small amount contingent upon the production and release of future work, either any work or a specific work. So you could have a pledge button on the artist’s page “I’d like to pledge a quid to you for your next work, hopefully to be released soon” (qv http://www.quidmusic.com). You could also accept requests, and create pages for frequently requested works not yet embarked upon “I think you could do a great rendition of song X, there’s $N from me upon that fine day”, or for your suggestions of things you could do “Yup, I think your ideas of doing work along those lines would be worth exploring, I’ll chip in 50 cents for that”.

NB Pledges are not tips or charitable donations, but commissions/bargains/purchases/patronage, the new deal: art for money, money for art.

Your audience wants to pay you – you do not need to charge them for ‘possession with intent to supply’ on penalty of copyright infringement with 5 year jail terms and million dollar fines.

ad-sponsored music and the major labels

What are the economics of ad-sponsored streaming music services like iMeem? Labels want some amount, most commonly quoted as a penny a play, and the question is whether this price makes sense, or if not what the price will have to be.

A song lasts 3.5 minutes. The majors have been asking $.01 for it. The site pays for the play by selling advertising. Let’s say the site shows a new ad every time the song changes. To break even the site needs to sell one ad per song at the rate of 1 penny a song, which gives you an effective CPM (“eCPM”) of $10.

A $10 eCPM isn’t feasible. Sites don’t earn that kind of rate with 100% sell-through. Even if were feasible it leaves no room for the rest of the business. They have other costs. They need to earn a profit, and it has to yield a return on investment comparable to web businesses that don’t pay music royalties; otherwise investors will move their money out of music-related products into royalty-free products like search engines.

A $1 effective CPM is closer to the mark, meaning that Myspace, Google, Facebook, etc need a 10X price reduction from the labels to make this business work. The labels see this as unreasonable. They’re already lowering prices from what they earn at the iTunes store — why should they keep going to accomodate third party businesses at their own expense?

The alternative business for the labels to be in is selling music by the piece. The majors gross about $.70 on a download at the iTunes store, 70X what they are proposing for an ad-sponsored play; $.01 is only 1/700th of that! So naturally the price change is freaking people out.

Volume

But of course price is irrelevant by itself. Profit is a function of price, marginal costs, and volume. In the recording industry marginal cost is close to zero, and fixed costs like studio time don’t go up with volume, so the basic equation is price*volume.

Music plays which feel free because they are sponsored by advertising should get a lot of plays. If you could search for a song and play it right there, without all the friction of paying for a download or even downloading at all, you’d be more likely to go through with the transaction. Price would be lower, but there would be more transactions. And the only question that matters is whether the number of ad-sponsored transactions would be high enough to make up for the lower revenues per piece.

If the price is 1/700th, there needs to be 700X more transactions. A gold single with 500K sales would need 500K*700 = 350 million plays to get into the black if all those sales were converted to ad-sponsored plays paying a tenth of a cent per play.

What’s the likelihood of this working for the labels? Will ad-sponsored plays be at least 700X more popular than sales at the iTunes music store?

Almost nobody buys CDs; only 15% of the population; and the number of people who buy singles from iTunes is miniscule. But almost everybody listens to the radio. Ad-sponsored plays would extend the reach of monetizeable events to people who don’t buy CDs and to people who aren’t committed enough to a particular release to buy it. For the fan club members who listen to a CD over and over again, every play would be monetized. Plays in an incidental context like background music in a sports site would be a worthwhile business. Ad-sponsored plays in the browser would replace much filesharing, because they would be so much more convenient, and this is a gargantuan pool of monetizable events.

So the volume is indeed likely to be very high. Because these numbers are very fuzzy there’s no way to say whether the volume growth will be 350X, 700X, or 1400X. Still, they’ll easily get into the right range. The necessary volume isn’t guaranteed but it is realistic, and there is plenty of upside because of the possibility that volume growth will blow way past 700X.

Internet strategy

But there’s one other issue in addition to volume: compatibility with the web. The web is almost everywhere, and it needs music to be able to flow with no more friction than any other content. It can do this with or without the majors on board, and unless they choose to get on board it will leave them behind.

Sites that try to comply with label requests repel users and soon go out of business. There is no way users are going to stop for a paid download whenever there’s a need for a song. First of all, acceptable page load times are in the range of a few seconds, and when you add on the time to acquire a download the load time goes up to minutes. Monetizing via ads is the only way for the labels to support acceptable load times. Second, interrupting the user to incorporate a paid download into page rendering creates fatal usability problems. Users will get confused and leave the site. Third, there’s no way to enforce the use of paid downloads without restricting available music to what the iTunes store will carry, and this is not a web-scale design. Because these are fatal problems, successful sites route around the labels by having users of music-related features fall back to filesharing for provisioning.

Can labels counter filesharing networks without moving to an ad-oriented revenue base? It depends on how advertising compares to other revenue sources. Labels can sell complementary products like concerts and merch, but other businesses already occupy those niches. They can earn a cut of a music tax to cover filesharing, but that’s a wildly speculative idea which the labels don’t support because it would undercut their per-unit sales. They can take part in other experimental blanket licensing schemes, but they don’t support those because they undercut per-unit sales. Labels can get paid for subscription services like Rhapsody, but these are and will always be a small niche. They can earn a living on CD sales, but these won’t support a very big recording industry. They can earn a living on download sales, but these aren’t growing fast enough to replace CD sales.

The only bright spot in this picture is that online advertising is thriving. It can generate the revenues the labels need. In addition it makes technical sense, since ad-sponsored music can flow as easily as ad-sponsored text, and ad-sponsored text is the majority of the web. This model works.

I don’t mean to say that per-piece sales will go away: fans will keep buying them here and there. Providers like eMusic will continue to exist. But this business will be an adjunct to the ad business, just like all premium services on the internet. The only thing that will save the major labels is to embrace ad-sponsored plays as their primary revenue source, and that requires them to drastically lower the royalties they’re seeking.