Category: business

Per Reuters, Universal cements music publishing lead:

Two interesting points in this article.

One, UMG has grown their publishing business very substantially.

Universal Music’s publishing division has overtaken EMI as the world’s leading major music publisher, according to market research on Monday.

Music & Copyright (M&C), which is published by Informa said Universal’s market share among major music groups rose to 24 percent in 2007 from 11.9 percent a year earlier.

From 12% to 24% is a huge rise. There’s a lot of thrash in this market — it’s not acting like a mature market.

UMG’s share of the recording industry has also grown in the recent past. These guys are firing on all cylinders, and no doubt emphasizing publishing deliberately to offset shrinkage of the recording market. They used to be a 600 pound gorilla, now they’re a 900 pound gorilla.

Two, the combined publishing and recording industries are no smaller than they were in 1996, around the historic peak of the CD industry:

“According to M&C the value of music publishing has risen in Europe from $3.6 billion in 1996 to $5.2 billion in 2006 while recorded music sales have fallen from $9 billion to 7.5 billion.”

5.2 – 3.6 = +1.6 growth. 9 – 7.5 = -1.5 shrinkage. 1.6 – 1.5 = .1 billion increase.

In other news which does not in any way suggest a pattern:

Due to increased demand for its products, Gibson Guitar plans to increase its general labor and manufacturing workforce by approximately 200 people.

So if you added gains in instrument sales and teaching to the overall picture, wouldn’t you find that the music industry is actually healthier than before the internet? Too bad Guitar Center is now a private company, because it’s the bellweather of the instrument business and now we don’t know their numbers any more. But Best Buy, anyway, is growing it’s instrument business:

Best Buy Co. Inc. is announcing a massive new initiative that sets aside store space for an array of musical instruments and gear in dozens of sites nationwide.

Judge OKs Tivo-In-The-Clouds: Hosted DVR services — which allow cable companies to create “virtual” Tivos that live in a datacenter somewhere, not on a hard drive in your living room — are legally sound. Specifically, network-based DVRs “would not directly infringe plaintiffs’ exclusive rights to reproduce and publicly perform their copyrighted works,” says the U.S Court of Appeals for the Second Circuit in New York.

As a policy issue, the right thing is for it to be legal to move technology from hardware devices to the cloud. Anything the user could do by pressing a button the user should also be able to have a cloud service provider do on their behalf. The principle has to be that an individual can delegate, and once they do the service provider has proxy access to their rights.

As a business issue, it makes no sense for labels and studios to try to turn this into a licensing revenue source. Each and every service provider isn’t going to negotiate with each and every rights holder for works in any medium. Trying to make that happen is a waste of time.

And this is exactly what is happening. What the Cartoon Network wants is for Cablevision to pay for licenses. And Joe’s Garage Startup. And Gmail. And each of these service providers would need to work out a deal with EMI, Disney, Sub Pop, etc.

If that was the normal state of things, technology would choke to a halt. Nobody would get anything done. Everything would be more expensive. Only huge companies would be in business, because negotiation with lots of small companies is too much overhead.

Some indies are selling more records than ever while the majors limp along:

Major labels struggle to keep platinum sellers (acts that sell a million units) from backsliding to gold (500,000 units) or worse. But some smaller labels—among them Sub Pop, Merge, and Matador—have hit a pocket of relative prosperity, with many of their top stars selling more records than ever.

A comment there by Eric Phillipson:

Having worked with both the majors and independent labels, I have seen first hand the reason why Independent labels are thriving at a time like this. Independent artists generally are able to connect with their fans more easily creating a more label fan base.

It’s like the transition from silent films to talkies, where many actors who rose because of their looks turned out to lack a good speaking voice.

Musicians in the indie circuit have always had a warmer and more intimate style than musicians on the majors, and on the internet that’s what’s called for.

Elemental Consulting on pay-per-download songs:

If Amazon has a hard time making money on music priced a little below iTunes standard pricing, how can downloads priced at a fraction of the cost be profitable for indie labels and musicians?

Applying the concept of loss leaders … it logically requires that the download is then just the gateway to other products that the musician will be selling for more money – concert tickets perhaps? Merchandise? These are probably the most common supplemental sales, but the fact of the matter is that the digital song is the most viable sale – possibly the cheapest and easiest to manufacture and distribute. The cost is unaffected by geography, unlike concert tickets where an artist has to physically be somewhere and must pay for his/her travel expenses and that of the band. So I’m not seeing how cheap downloads as a loss leader would really work for the individual artist or small label. I can see cutting the cost of a particular track or album in order to provide the gateway to buy other albums at a higher cost but I just don’t see how a viable business for indies can be made from cut-price downloads.

The use of music as a loss leader is about truly profitable products. Bands selling tracks on Amazon should seek to get a piece of anything the user buys, not just CDs. Taking this to the real world, a comparable deal would be to ask Best Buy for a percentage of the final sale.

So let’s say you’re Michael Jackson and Best Buy is doing a promotion where they give away a copy of “Thriller” to anybody who buys a Halloween costume. You’d ask for a piece of the costume, which has a decent markup, rather than a higher price on the CD.

You’re looking for stuff with a big markup that would move better if it were associated with cultural items like songs. The “Baby You Can Drive My Car” Beatles giveaway at the BMW dealership. Defense contracting. Pharmaceuticals. Software. Dating. Gourmet food. Liquor.

Unauthorized distribution has already been factored into the music economy. Valuations have been adjusted. The economic impact of filesharing is complete.

When Napster happened, it was a surprise to the music industry. The techies saw it coming but the music people didn’t. This hurt many people with investments in the music business. Highly successful musicians, who are especially loved by the public, took an especially big hit.

Then something normal happened: people adjusted their investments to accomodate the changed environment. Investors sold stock in CD stores and bought stock in guitar stores. The concert business grew. Musicians stopped doing expensive studio recording and put their money into home studios, a move from an ongoing investment in services to a one-time investment in capital. Players redirected their economic efforts from CD sales to merchandise, concerts, advertising, soundtracks and other products which benefitted from the changed environment.

It has now been nine years since Napster. The music industry has been steadily reconfiguring itself, and while the transformation to a new configuration isn’t complete, the valuation of the recording industry has already dropped to take napsterization into account.

Money lost to napsterization is already gone. There is no more to be lost.

If record labels make less money now than before, it’s not a surprise to anyone. Somebody who puts money into a recording business that is affected by napsterization does it with full knowledge of the situation. Therefore, they don’t stand to lose money on it.

It’s like buying a house in an expensive neighborhood and losing money when the neighborhood becomes less popular. If the expensive house loses value as a result of the neighborhood becoming less popular, money is lost. But once that change has happened, the transformation is over. If somebody buys the devalued expensive house at the new market rate and the house stays at the lower value, no money is lost.

Which is to say that unauthorized distribution is having no further impact on the recording industry now that it is simply a basis part of the environment. Piracy is dead.

In the upcoming Myspace Music launch, Amazon is likely to be the provider for paid downloads. This is per TechCrunch:

The as-yet unlaunched MySpace Music will likely partner with Amazon to handle all music ecommerce transactions, we’ve heard from multiple sources. Apple and Rhapsody are also bidding for the business, however, and one source says a final decision hasn’t yet been made.

This is a wise decision on Myspace’s part. Rather than building out the entire ecommerce setup, which includes page development, label negotiations, customer support, and transaction handling, they’re offloading it to a partner. It’s a sign of Myspace’s growth as a development organization that they know when to avoid work.

TC also says that:

Music download sales are just one revenue stream for the property. … But downloads are going to be a big part of total revenue, and while margins on music sales are low, the volume could be massive as MySpace directs its traffic to the new site.

I’m skeptical that downloads will ever be a non-trivial revenue source for Myspace. The margins are too low.

Amazon itself doesn’t make anything on them; it makes money on downloads by using them to attract shoppers, and then upselling products with a real margin. For example, a user will click into Amazon to buy a download, see a recommendation for an MP3 player, and buy the MP3 player.

This is the same music strategy used by physical retailers like Best Buy. They sell CDs at close to cost in order to attract shoppers. The shoppers come for the cheapo Guns N Roses and pick up a barbeque, linen set, etc while they’re at the store. And it’s the same strategy used by clubs that do live music. The band gets the door for good or ill, while the club gets the liquor sales.

A smarter band would drop the door charge to maximize their draw and take a piece of the bar instead. And if Myspace gets affiliate revenues on the entire purchase at Amazon rather than just the download sales — which I assume they do — that’s exactly what they’re doing.

Except that the downloads aren’t free, so the funnel into Amazon isn’t as good as it could be. They can’t be free because that’s how the labels and musicians get paid. On the door.