I am going to try not to suggest blame, but a topic I speak about quite a bit is the poor job the majors do in building long and cordial relationships with its partners.
I look at eBay as an example of a company that plays well with others. They have created an ecosystem where, at least in theory, everyone wins. eBay, its sellers, its buyers, the insurance companies, the automatic bid software and it’s retailers are all aligned (at least within degrees). The reason is that if expressed this way or not, they all are making money (or getting good deals) by reducing friction for auctions/pawn shops. I guess, pawn shops don’t love ebay, or the salvation army, but their little (big) world does. The reason – said differently – is that they all have the same end goal.
The majors have had problems because this is NOT the case for them.
It begins with their artist relationships and lack of cohesion in their respective business models. Not to belabor a mostly known point – but. The label traditionally makes money from master recordings and derivatives. Artists make money from master recordings, shows, merchandise, acting – whatever they want and are able to do. This by the very definition of capitalism creates an inbalance and a problem in the relationship EVEN if people are dealing with integrity and honesty (which many times is not the case). The incongruity of this situation is horrendous to the industry and can be best illustrated through an example:
If a VC invests in Xingtone, they invest in Xingtone corp – NOT an individual product line. Again, assuming honesty and integrity, Xingtone and our VC will be on the same page. If a year from now we kill product line ‘A’ to focus on product line ‘B’ – we are all aligned. If however a VC, when they invest in Xingtone only invest in ONE product we, by the very definition will be focused on different value drivers. So, if our VC owns a piece of product ‘A’ but not ‘B’ and for the good of the COMPANY we decide to kill product ‘A’, we are screwing the VC and of course they will not let that happen – so we are at an impasse.
The music industry has to deal with this everyday. If an artist wants to give away CDs to promote its tour, merchandise, ringtones, etc… THEY CAN’T. They and the label are not on the same page.
So one lesson, in all business dealings, make sure you and your partners are aligned.
But this issue is just the beginning. Music is rarely the primary driver for a partner – it is a secondary value propostion – this leads to great relationships up front and significant problems down the road.
A number of examples:
MTV: MTV helped build the music business by taking videos and playing them for the world to see. This was a boon to the music business – no cost advertising and marketing. At first, this relationship was great – MTV wanted to build a cable channel and they needed content. For the content owners it was, at the time a no brainer, let’s GIVE MTV content to play and we will sell more music. But over time, the music companies started hating MTV because they had to beg MTV to play their videos – paying money to get into the rotation. Over time, MTV has played less and less video and are now the poster child for building their business off the back of the music industry and ‘screwing’ them in the process. The problem defined for purpose of this blog: MTV never cared about music or selling music, they cared about aggregating an audience WITH music.
Radio: See above.
Wal-mart/big box retail: Everyone wants floor space at Wal-mart so you can move units. But overtime, wal-mart gets too much control over your business because you get dependent on the numbers they generate for you. With music it was worse. Wal-Mart sells CDs for cheap to drive foot traffic – they do not VALUE music, they value people in their stores. Additionally, one of the reasons the majors were slow to license digital was out of fear of pissing off big box retailers.
iTunes: Everyone’s darling, at first. The digital market was crashing the music business, no one knew what to do and here Steve Jobs comes to save the day. He was going to sell music and give close to 70% of the revenue to the labels. WOW, what a deal. He wanted to sell content without DRM, but of course that would not be acceptable, so he built his own. Now look, they own 70% of the market, they have sold a billion songs, and the music industry is praying that someone can break their monopoly like stranglehold. They won’t license their DRM – their stock price/halo effect are everywhere and iPods are dominating. The music industry is even looking to MTV and MSFT (two companies that they have had significant issues with) with the new product called Urge to save the day. So what happened, Apple never valued the music or the industry, their primary goal was to sell iPods – NOT music. Net to iTunes on a billion songs, just with the music licensing, is about $300 million, with transaction costs, their infrastructure, head count, legal, etc… even Steve Jobs says they ‘break even’ selling content. It is about the iPod.
So the problem here in all of these examples is that the music industry out of desperation, short sightedness, lack of the right people in the right position, bad luck or just an overall lack of understanding in building relationships – CONTINUES to fight with their partners.
My predictions – Napster, Rhapsody and any other services that are about the MUSIC will fail or just be bit players in digital media. Yahoo is struggling now (arguing that DRM should be pulled off) but when/if they switch to an ad driven business – look out. The lesson here is the winners in this space, will NOT use music for a primary goal, and music will have to be happy to have secondary value.
Additionally, we are going to see this rear its ugly head with:
1) myspace – who does not care about the music (especially under fox) but are utilizing music to drive traffic and aggregate eyeballs.
2) mobile carriers – care about ARPU (Average Revenue Per Subscriber) NOT music/ringtones.
A wild card to me is Amazon – I don’t think they will do much damage one way or the other BUT until we see their offering, I am not sure what their strategy is and what it result in.
So trying to sum this up. My belief is that the only companies in digital music who will succeed will USE music to drive primary value elsewhere and the music industry should accept and embrace this – the past has proven the future – if you accept it or not is irrelevant.
