Parks Associates Blog

Thursday, February 01, 2007

Parks Associates' Views on Music Industry's Woes and DRM Dispute

Three pieces of news this morning from Digital Music News caught my attention. They are so interrelated that putting them together you can have a bigger picture of what woes and challenges that the music industry is facing during its transition to digital distribution.

News No. 1: After six months of hype about the potential that the record labels will distribute music in unprotected MP3 format, different voices finally surfaced within the labels that just expressed the opposite view. At Music 2.0 Conference, George White, senior vice president of Strategy and Product Development at Warner Music Group, told audience squarely: “I don’t think the wholesale abolition of DRM is a solution.” Universal Music eLabs president Larry Kenswil was equally unenthusiastic about the prospect of MP3 sales. An interesting comment from Larry was about the experiment Yahoo did with a Norah Jones’ single late last year, which I blogged about. Here are his words: “Ask [Yahoo Music executive David Goldberg] how much Norah Jones has sold in open MP3, it might be an interesting answer.”

News No. 2: Also at the Music 2.0 conference, the sentiment about the music subscription service is not optimistic. Again, Larry Kenswil pointedly commented that “No one has figured out how to market it [subscription service], and people don’t know what it is.”

News No. 3: Record labels reportedly become more and more anxious about whether digital sales can ramp up as quickly as they hope to offset the decline of physical sales. CD sales dipped another 7-8% from 2005 to 2006, and sales in the first month of 2007 appeared continuing that trend.

Well, we all know what a dire situation the music industry is facing. And it is time for the record labels not to mourn over bad moves in the past but to acknowledge the fundamental changes in how consumers buy music today and in the future, make adjustments in business strategies, and be not afraid of experimenting with new pricing models and distribution channels.

For one thing, the record labels have to admit the prospect that because consumers now have the option to buy single tracks instead of being forced to buy a bundle (i.e. CD), increase in digital sales will probably never offset decline CD revenues in the next five to six years. They need to extend the payback horizon of the digital sales to farther out and adjust their performance benchmark and business strategies accordingly. Longer term, as the digital distribution improves access and ease of consumption, I, like other record labels, am still optimistic that music sales will top those in the heyday of the CD era.

Next, DRM should not be blamed for lackluster sales of digital music from vendors other than Apple, which I elaborated in my December 6, 2006 blog entry that commented on Yahoo and other music service providers’ experiments with MP3 downloads. The woe today is partly attributed to record labels’ own mistake in the past of adding no content protection scheme on CDs and letting consumers freely rip tracks. Now that consumers have an established expectation on the CD consumption, things cannot be altered anymore. Until CD format is no longer the dominant distribution format will a whole new set of consumption behaviors and consumer expectations be established. During this transitional period, the growing pain must be endured by the record labels and non-Apple music distributors. They have to get realistic about the goals and prepare for another few years of challenges.

And the revival of the music industry still depends on DRM. I agree with George White’s view that labels should try “a number of alternative models, including those that price tracks differently based on factors like popularity, timing, and rights levels involved.” Standing in labels’ shoe, not consumers’, I think they have to change the current universal pricing structure and monetize both their backlog assets and hot properties. Those moves involves standing up against Apple, quickening the pace of digitizing dated catalogs, and a willingness to sacrifice near-term sales in exchange for long-term healthy growth of the industry. It will be a tough choice and a test on the music industry decision makers whether they are short-sighted or more long-term oriented.

As to the subscription service, the music industry must realize that pure subscription service is not appealing at current price level. Parks Associates has done research in the past showing that consumers’ price expectation for the all-can-you-eat service is much lower than current pricing model. Either the labels need to revise the economics of content pricing, or the distributors need to be more innovative. A few brainstorming ideas for distributors: 1) offering a limited subscription service based on genres with a lower price; 2) adopting eMusic’s model of subscription for a fixed number of downloads; 3) offering a hybrid model with both subscription service and a bonus of a fixed number of downloads to keep; 4) scraping the music subscription, replacing it with Internet radio subscription plus a fixed number of music downloads. All these ideas can help lower monthly fees consumers are willing to pay and help encourage adoption.

Last but not least, we have been arguing for music subscription service as a bundling choice in broadband service providers’ service package. As soon as the $10 per-month music subscription fee is integrated into the monthly bill of Internet service, landline phone and wireless service, the amount is not standing out to consumers anymore. In today’s world, young people perhaps will subscribe lifetime to the Internet service, and the music ownership against rent argument is softened under this bundling option. Why not give it a more extensive try? The catch here is, making the subscription part portable so whenever people want to switch providers, the music stay with them.

In any of such experimentations to find out the right business models for the non-Apple music distributors and the music industry as a whole, DRM will be the enabling technology and monetization engine, and cannot be dismissed as holding back the industry. That’s my opinion.

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