Listening Room,, Pandora

The hype machine is all a-flutter about, which isn’t totally unreasonable because it’s a great app. But there are a couple reasons to calm down.

First, it is not the creator of the idea. is a clone of Listening Room. LR was too buggy to use when it was first released, and the folks took their copy from zero to better-than-the-original before the original could get up to snuff. Credit is due for being a really fast follower, but let’s not forget the original.

But the big reason for tamping down the euphoria is that the economics are no different than ever. Turntable is a webcaster, paying the same royalties as Pandora and other non-interactive streamers. This is a break-even business.

Back in the day when Pandora was number #3 behind AOL and Yahoo, what got it into first place was that AOL and Yahoo both exited the radio business. Just walked out the door and didn’t come back, like holders of underwater mortgages in one of those foreclosure ghost towns. These companies had no problem finding listeners, they had a problem justifying their investment.

A break-even business has to compete for investment capital with lower risk investments like savings accounts and bigger upside investments like Groupon. It is high risk like Groupon but has growth potential like a savings account.

But is in an even worse position than Pandora, in a way, because Pandora has a smaller catalog. users can call for any song at any time, which means pretty much every song at one time or another. Pandora only has about 800,000 songs in its catalog. That enables it to pursue direct licensing of some tracks. Direct licensing means that Pandora cuts a deal with a label to pay less per track in exchange for playing the track more often. This is one of the very few tricks Pandora has up its sleeve, and doesn’t have it.

Maybe has tricks up its sleeve. It could be that something new about creates a way to charge higher ad rates or pay lower royalties. Cross your fingers.

why Myspace is giving Project Playlist the heave, and Facebook isn’t

TechCrunch reports that Myspace is giving the heave:

We first got word from MySpace users that their Playlist widgets are simply vanishing from their MySpace profiles earlier today. When we contacted MySpace they confirmed the ban, noting that they have received infringement notices from “major music companies”

The single most important part of the back story is that, aka Project Playlist, is in licensing negotiations with the labels. Playlist gets a lot of traffic via Myspace. Traffic is life itself for ad-sponsored sites. The labels can put a lot of pressure on Playlist by killing its traffic.

As far as Playlist is concerned, the legality of its widgets on Myspace is pretty great. Playlist doesn’t host the music files, just point to third parties (modulo the outstanding need to explore the DMCA and define the limits on linking to infringing parties). When Playlist is used via a widget embeded in a Myspace page, Playlist doesn’t even host the linking pages. There’s a distant chance that Myspace could lose in court. There’s zero chance that Playlist will.

It’s not likely that anybody’s liable for those links, but the labels are bruteforcing that issue in litigation and forcing link sites to spend a shitload of money exploring the DMCA with them. Another day, another fishing expedition, another $bundle in legal fees. That’s why Mixwit just said fuck it and shut down. If Playlist is in negotiations to license, it means that they prefer to get out of that game. And if the labels want to go balls to the wall on this Myspace jazz, it’s because there’s some contractual weirdness to explore.

Myspace has no incentive to have a confrontation with the labels. They’re partners with the labels in Myspace Music. The staff lawyers handling label complaints probably used to work for labels, and probably will again. They run into the nice RIAA fellows at the Starbucks. They’re paying crippling fees to license music, and they can’t compete with if it’s not doing the same.

And that gets to the real problem, which is the same as with webcasting. Linking to free-range MP3s under the DMCA safe harbors, like webcasting under the compulsory license, is an alternative to negotiation. Not having to negotiate is a negotiating advantage, giving sites like Pandora and leverage against the labels. The labels will get better royalty rates if they keep free range MP3s from competing with their own offerings.

What’s happening in the negotiations might be that is blocking on the right to mix free-range MP3s in with licensed streams. They might be trying to mix in non-interactive webcasting (aka CARP) plays, which pay lower rates than on-demand. Or maybe they’re just taking their time getting to yes because free range MP3s give them an alternative in the meantime.

And even worse, Myspace might be using widgetized streams from Playlist to supplement their own musical abilities. The question would be who pays for the license — Myspace or Playlist? And at whose royalty rate? In a way it’s good for Myspace to have Playlist taking the heat, though I suspect they actually –want– to cover the royalties themselves because it supports their current music strategy.

Myspace doesn’t have an incentive to play this all out. They benefit more by avoiding a fight with their partner and weakening their competitor.

Before going to the tape and seeing what Myspace has to say about all this, there’s one more crucial piece of ground. It’s Myspace hosting the links, not Playlist, so if anybody is infringing, **it’s Myspace** and not Playlist. Notice how carefully parsed Myspace’s statement is — they don’t say who or what is doing what if anything is happening.

MySpace has received notices of infringement about Project Playlist at different times from several of the major music companies currently suing Project Playlist. Per our policy of taking very seriously the requests of rights holders to block access to third party sites that are believed to be infringing, we have evaluated the requests of the major music companies and determined that it is in our best interest not to allow Project Playlist widgets on MySpace, and effective immediately, we will no longer be allowing these widgets within the MySpace platform.

Given what a complex ball of positioning that is, no wonder that Facebook denied the same request:

An industry source also confirms that Facebook has been served with the same notice of infringement. As of now, Playlist is still live on that site.

Amazon MP3 #3

I got a viral email about free Christmas MP3s on Amazon this morning. They’re doing a giveaway song every day, cheesy things but free is free so I clicked through to the promotion.

The song didn’t impress me enough to bother downloading, but while I was looking at the page I realized that their recommendation engine had coughed up something that I really was interested in. I clicked through to the recommendation. After ten minutes I had a $40 book in my shopping cart for later and a $8 album download on my hard drive, and not a Christmas song in sight.

Peter Kafka reads the math on the Amazon store to mean that same math means that Amazon grossed all of $39 million from its music store.. This is correct but misleading.

It’s a decent ballpark estimate of how much direct revenue Amazon made on download sales, but that’s not how Amazon makes money on the MP3 business. Its business model is about upselling to transactions big enough to matter. The download business isn’t necessarily a loss leader, but the point is mainly customer acquisition.

Note that this is a very different business for Amazon and Apple than for a pure-play like Rhapsody. Rhapsody makes a living on music sales, while Amazon and Apple do fine as long as the music downloads don’t become a big cash suck.

I doubt very much that the customers are, as Peter says, a handful of dedicated MP3 fans/anti-DRM zealots who are actively shunning Apple. Ideologues will go to eMusic and filesharing networks. These are mainstream users who find Amazon’s offering a compelling product.

Amazon works in a regular browser, while iTunes requires their client software to be able to browse. Amazon can recommend MP3s while you’re shopping for CDs. Amazon has great SEO, while iTunes has zero SEO. Amazon works on Nokia, SanDisk, and Zune players. Etc.

Amazon grew PPD business ~ $82 MM

Amazon’s MP3 store was about 8% of the pay-per-download market in its first year of operation, and only about 10% of that business was taken from the iTunes music store. So Amazon made the PPD business as a whole about 7% bigger.

This info is per Reuters on Yahoo News, which positions the story within the iPod narrative — Amazon as a failed iPod killer.

Amazon’s moved about 130,000,000 tracks. Assuming the labels get the same $.70 price (rule of thumb, anyway) as at the iTunes store, and subtracting 10% for business that moved over from one store to the other, that means Amazon injected $82 million into the record business. About half of that probably went to Universal.

After other costs Amazon’s net was probably pitiful. But, just like Best Buy’s deal with Guns N Roses, the point for Amazon is to get customers into the store and then upsell to more profitable stuff, like electronics. The key to whether or not these numbers are winners from their perspective has absolutely nothing to do with whether they are killing the iPod.

Eyeballing the 8% figure, I see rough parity between non-iTMS downloads and non-Apple portable MP3 players. If you own an iPod you’re buying downloads at the iTunes music store, if you own a Zune you’re buying downloads at Amazon. So what Amazon has accomplished is to get (some) owners of non-Apple devices to enter the PPD market.

chart of market share of music player Music device market share numbers show 20% disparity between Amazon’s store and non-Apple devices. That’s probably upside waiting to be captured by Amazon.

postapocalyptic visions of the record industry

From the comments on sue em all not good for labels, here’s Greg on the prospects for the music industry:

It’s kind of like Dr. Bloodmoney or one of the other good Phil Dick post-apocalyptic novels: most of civilization may have been destroyed, but some industrious tinkerer out there can probably put together a wood-burning car, the kindly kid in the radio shop turns out to be telekenetic, and the small rodents evolve high intelligence.

On my optimistic days, I find this state of affairs exciting and stimulating — you never know what weird creature could come along mext — but just as often it seems dreary and near hopeless: there is, after all, a lot to mourn for.

And Victor’s response:

it does seem that taking something away as fundamental as charging per “copy” would be wrenching under the most visionary, forward thinking authority.

Meanwhile, the death of “my favorite band” seems to me a cultural phenom almost separate from sue-em-all and more a by product of other forces. Kids don’t seem to pin their parental-anxieties on celebrity rocks stars like they did in past generations. I don’t mourn that.

Unlike most, I don’t think things are over for the labels. I think that they are going to shrink to the size of the licensing opportunities, for example in helping jeans, cars, and games to sell. But once they get there they’ll stop shrinking, because the recordings they own will stay cultural milestones. If the song publishers — an industry rooted in the 19th century — can remain a big deal in the 21st century, the record companies can find a durable niche as well.

mini-talk at CC Salon tonight

I’ll do a shorty talk at the Creative Commons salon in Silverlake, in LA, tonight. My topic is going to be the role of permissive licensing in the business of internet music. I’ll lay out a map of the industry as a whole and situate copyleft within it.

Flavorpill describes the event this way:

Creative Commons is at the forefront of the progressive copyright movement, seeking arrangements that allow the free flow of artistry and ideas while at the same time protecting intellectual rights and freedoms. A group taking the middle road, its efforts have been invaluable in the face of technology’s rush into the future. At tonight’s salon, Mark “Frosty” McNeil — founder of noted DJ and multimedia collective Dublab — and XSPF developer Lucas Gonze tackle the ramifications and opportunities that could result from current and proposed copyright policies and discuss their larger effect on the music industry.

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“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.

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.

slot music

the listenerd on the Slot Music plan:

this nearly universally maligned plan is to sell albums not as CDs or MP3s, but on SD memory cards. The idea may well not be a good one at all, however, the attitude and authority with which so many people claim to know the music business and what’s good for it is appalling and depressing.


Selling physical music media in a cell-friendly format is a no-brainer. It’s plainly a good idea. This isn’t like DAT or Minidisc, where a new format had to be accepted, because so many cell phones already have SD slots. It’s not like selling audio files in a new type of encoding (like WMA, AAC, or FLAC). It’s just making media available in a convenient form factor for listeners who are already using their phones for music.

Does anybody have a simpler and more widespread approach to loading music directly onto cells, one that will work at the checkout counter at any convenience store? Bluetooth? Wifi? Over the air? Nope. The buyers don’t keep the card, they throw it away (or put it away for backup) once they make a copy. It’s just like delivering software on a floppy.

What’s up with the dumb negativity of internet opinion? Everybody rags on everything the recording industry does, and the less they know the harder they rag. Selling music as files without DRM on physical media designed for cell phones is creative and rad, and if Apple or Google had done the exact same thing the peanut gallery would be loving it.

Ok, maybe this idea won’t set the world on fire. I’ll buy that. But so what? It’s a fine business decision with a plausible chance of success.

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.