Record Companies, Bands and the concept of value

(Image used with thanks)
I've never really believed that telling people not to do things was a good way to stop them doing them. The War On Drugs for example has been pretty comprehensively won. By drugs. We are not a logical economically minded species, so changing how we behave changes how we think, not vice versa. And the simplest and most effective way to change how people behave is to make it worth their while - to give them something of value in return.

The idea of enforced behaviour change is in the news at the moment as the Digital Economy Bill has among its aims the toughening of copyright law online. In fact, this is seen as such a significant issue for the British economy that the government is willing to sacrifice on our behalf such seemingly useful things as Wifi (which will be too great a risk for any business to operate), fast broadband (which ISPs will be disincentivised from investing in as their focus will be on steaming open our digital mail), and internet access as a human right (as anyone who doesn't have a decent understanding of home network security can be disconnected from the internet in punishment for what their children or neighbours do). The opposition agrees that although there are parts of the bill that are even worse, they will let the copyright law stand because of its importance to the UK creative industry.

So let's ignore for a minute the fact that large parts of the UK creative industry, particularly those involved with music, don't agree, and have a look at the value transaction in a music purchase.

Record companies developed their business model through the scarcity of resources required to create and market recorded music: recording studios, musicians, pressing plants, distribution, access to radio stations to promote. These scarcities have changed beyond recognition since 1999. With a few $$s investment in software, any computer made in the last 5 years is a fully equipped recording studio (no extra software needed if it’s a Mac). No music now needs to be recorded onto anything. Myspace and a bit of talent can break a band far better than any radio promotion (not hyperbole – the Arctic Monkeys are the fastest selling week 1 debut in history). The scarcity problems that the record industry fixed no longer exist. Clay Shirky talks about this disappearance of scarcity problems in answer to Murdoch's claim that "Web users will have to pay for what they watch and use" by pointing out that this is only half of the equation:

“Web users will have to pay for what they watch and use, or else we will have to stop making content in the costly and complex way we have grown accustomed to making it. And we don’t know how to do that.”

In the record industry things are slightly different: most people know how to stop creating in the costly and complex ways of the past, but they still want to charge the same amount of money for the product. Which, like the newpaper industry is freely available elsewhere. But while we are left with a near perfect distribution model, there is still a healthy supply and demand. It's just that the intermediaries, the industrial organisations who previously matched supply with demand, are no longer necessary. Supply and demand in recorded music still have two important discriminators: on the side of the vendor, talent to produce music better than the alternatives, and on the side of the purchaser, convenience to consume that music in the way they want.
(Image by Flickr user Mick Yates - used with thanks)
Talent has always been a scarcity: in fact that is why recorded music was developed - because it was more convenient than using actual musicians. That is a compromise, as having actual musicians play for you is a better experience. But the convenience makes it a worthwhile compromise. However as the creation and distribution of recorded music has become next to frictionless, more people are exposed to more music and demand grows for the scarce experience of live music (witness the growth of festivals - pre-Napster the UK had 2 or 3 major festivals each summer: now we have 2 or 3 major ones each weekend of summer). Now this is crucial in the search for music value, as the musicians who are distributing the most recorded music will be in highest demand for the extremely scarce/valuable live music market. So recorded music is essentially advertising the bit that makes money for performers (with the potential to charge for it if it adds to convenience).

Convenience means portability between devices, and it means always available, and crucially it means participatory and recombinant. Those same computers that record music for free also remix it. So that's another element of value: status ("I created this").
Of course, what that all means is that DRM is the antithesis of value in recorded music. Well let's face it, we knew that anyway, but it is worth bearing in mind as music moves to the cloud (convenient). As Techcrunch pointed out this week, many online music retailers are embedding personal identification in the file so that there is the potential to block cloud uploads of anything that was not purchased online (ripped CDs for instance).

So obviously free music downloads harm record companies, and record companies don't want to be harmed. But no-one cares about the intermediary so much of the BPI PR focuses on the artists themselves. This is all based on the premise that if record labels aren't making as much money then that is bad for the industry. The Guardian have been tracking this closely, and this article lists a range of companies profiting from music even while album sales are falling. While they include Spotify, We7, Nokia, Shazam and Apple, they also miss the more obvious ones: Live Nation, Ticketmaster and O2. What all these have in common is that they are not traditional players in the music market. What they don't all have in common is passing their profits on to musicians. Spotify is useful case study: aside from the slick interface the real stroke of genius that allowed Spotify to scale quickly was to avoid the endless legal wranglings with record labels over payments (at least in Europe - they are still bogged down in the US). This allowed them to quickly access most of the music that you might want to play on the service. And they accomplished this by making sure that those payments went to the record labels rather than the artists, by effectively paying in Spotify stock. This is a cap table for Spotify (from this piece on Techcrunch, which also investigates what price the labels paid for their stock)

Shareholders in Spotify on 10/7 2009
Bolag Andel
Rosello (Lorentzon) 28,6%Instructus (Ek) 23,3%
Northzone Ventures 11,9%
Enzymix Systems (F. Hagnö) 5,8%
Sony BMG 5,8%
Universal Music 4,8%
Warner Music 3,8%
Wellington IV Tech 3,8%
Creandum II LP 3,5%Swiftic (Strigéus) 2,6%
Creandum II KB 2,4%
EMI 1,9%
Merlin 1,0%
SBH Capital (B. Hagnö) 0,8%

Helienne Lindwall in The Guardian suggests that the labels paid roughly 1/1000th of the price that other investors in the service paid. This would certainly have made negotiations on the price per stream simple - they would be kept artificially low to minimise the amount that had to be paid out to artists. Spotify has been removed from the Guardian's Fair Trade Music Business list
So there are grey areas even in the proposed saviours of the traditional music business. And 'value' is very different for fans and artists than it is for the intermediaries. And back to my original point, why won't artificial scarcity (of the kind supported by the Digital Economy Bill) work? Well, apart from it being counter to the way the internet works? The internet (in its earliest guise as ARPANET) was developed as a peer to peer system. One of its early benefits was the potential to maintain government communications in the event of a nuclear attack on the USA. This is because P2P systems route around blockages (an inexact analogy might be to say that they treat blockages as wounds, which they are able to heal). Although consumer access is nowadays based on a server/client relationship mediated by ISPs, the internet remains a global P2P system.

Other than that it won't work because telling people to change their behaviour doesn't work. It's currently not working in France, where total free downloading is up by 3% since the introduction of strict HADOPI laws last year(chart from Arstechnica, stats from M@rsouin, CREM, Universite de Rennes).

and because potential of the internet combined with the creativity of musicians and developers means that there is plenty of value for anyone who has good ideas and talent. So after this little rant I'm going to quit whinging about the record industry, and celebrate great marketing ideas from those creative folks.

Last.fm - a slight return

I've written a lot about Spotify on here, because it's a great concept that (seems) to have a long term business model. But let's face it, there is a big hole in the model around socialised discovery of new stuff to listen to. While sites like Spotifylists.com make sharing possible, possible is a long way off where a brand like Spotify should be.

(Spotifylists also looks like it has attracted the same spam pollution that seems to mark anything that is becoming genuinely popular - check the 'small claims filing' playlist).

Of course there is a perfectly good way to find find what other people who share your taste in music like, on Last.fm. I deleted my Last.fm account back in 2007 when they were taken over by CBS, as I personally didn't want to give a record label access to my hard drive, and I didn't know just how much access Last.fm's scrobbling function would give them. So two and a half years on there don't seem to have been any prosecutions for whatever it is that constitutes 'things that record labels can prosecute you for' these days, and I'd largely forgotten about Last.fm. I was bemoaning Spotify's lack of sharing features a few weeks ago and someone pointed out that all the things I was after from it were so 2006, and I decided to give Last.fm another go - lets face it, it was a bit ahead of its time.....

Ok, so I was wrong. And my Last.fm profile is a bit lonely. If you're passing that way then look me up, and if you share similar tastes, I'm a little behind the curve on friends over there!

Are brands the new record labels?

There's a few things I've seen this week that reminded me of this Media Week article from a couple of months back. Firstly the Nokia Comes With Music campaign launching (actually there's a Comes With Music blog that looks like it is Nokia's work as well - including a Blogger video widget that should play the TV ad, but doesn't work. I would play it here, but there doesn't seem to be an easy way to embed it. To be honest, it isn't good enough to bother actually spending time adding, so I guess it is an example of why all content that a brand creates should be easily shareable). Now there's no surprise that mobile brands are positioning themselves as music curators with ever increasing desperation... after all, if your marketing is so far removed from your R&D that you have to rely on it to create artificial product differentiation, you are in a pretty bad place as a brand. If you are in that position (which I'd suggest that Nokia are) and your main competitor is Apple, who wrote the book on designing products that market themselves, then you really are in trouble. Anyway, it is another step in the erosion of value in music content.

02 are also raising the stakes in the battle for control of the live music scene, announcing their sponsorship of the Academy venues across the country, giving O2 customers priority ticketing and content access to the main mid size gig venues in London, Birmingham, Bristol, Glasgow, Liverpool, Newcastle, Oxford, Sheffield & Leeds, to add to the existing O2 Arena and Wireless Festival. This one makes sense to me, as it is more about the brand facilitating experiences (gigs) that are hard to access (as Academy size gigs sell out in hours. Well, Brixton certainly does) than abount positioning O2 as an aggregator of musical content.

That isn't too say that branded content is a bad thing in music, rather that Nokia's approach seems a bit desperate! What really interests me is the work that Intel are doing at the moment.

All of the bands mentioned in the Media Week article were established artists who wanted more freedom than they could expect from the major labels who had built their careers. Neither Groove Armada/Bacardi or McFly/McDonalds is a particularly cutting edge choice of partner for either party. Likewise neither Paul McCartney nor Starbucks had very much to lose when cosying up for an instore release. What Intel are doing is interesting because it focuses on the unsigned acts, where there is a much bigger potential payback for the brand investing. Bedroom bands are of course the natural territory for Intel, whose processors power demo recording across the world, but unsigned bands don't cost much compared to Paul McCartney or Groove Armada and there is far more kudos to being seen to support one.

Of course, this is not really any more radical an idea than a battle of the bands for the X-Factor era, with added advertising support from Intel's deep pockets. However, it raises the interesting question of what Intel will do with the winning band. If this develops into a crowdsourced talent scouting operation for the first signing to their label, then we could be seeing the first move towards brands as record labels in the traditional sense - ie. not just marketing music, but supporting the artists that shape popular culture.

There are still plenty of rumours that Red Bull are going to do this properly (still surprises me that they haven't, after having run the Red Bull Academy for 10 years now). However, it is the agency holding companies that really seem to be slow off the mark. Global agencies, whether creative or media, still seem to think in terms of audio-visual. Fair enough, that is what made their fortunes, but surely branded content divisions should be employing the A&R people who get pushed out as the economic crisis starts to hit the already contracting major label market. Agencies have always had the power to make artists' careers (hello Moby, Dandy Warhols, etc), but the real potential for client brands lies in discovering acts at times in their careers when they most need to trade.