Music Business and Trend-Mongering

After accumulating (way too many) CDs since 1987, I’m making the move to converting my collection to digital. The prices of external hard drives have decreased to the point that it makes sense to rip my CDs to a lossless format, and the truth is, while I’m a big fan of liner notes and artwork, I’ve had it with CD storage. And moving the collection is nothing short of a horror show nightmare.

The major problem with digital music for me has been playing my music at home. I’ve been using the Airport Express to wirelessly stream my digital collection to my receiver, which is a huge step up from listening to digital music on tinny computer speakers, but even then it’s still inconvenient to have to control my music selection from my computer using iTunes.

The Slimbox Duet solves this problem for me. The Duet is a two-part (hence the name) digital music solution consisting of a receiver, and the thing that really makes this product special, the remote control device. Modeled after the iPod interface (but with a slightly less responsive scroll wheel), the remote control component hooks up to the digital music library on my external hard drive, allowing me to stream anything from my collection to my home stereo – without getting up from the couch. Also, the system is compatible with streaming radio services like Pandora, Rhapsody, podcasts, and other online resources like the incredible live music archive found at www.archive.org. I’ve had the duet set up for a week, and it’s like a whole new world to me.

While the Slimbox can play virtually all audio formats, it cannot play DRM files – including almost anything purchased on iTunes (which uses Fair Play DRM). All the more reason to purchase from DRM-free online retailers like Amazon, eMusic, or the new Napster mp3 store!

Hot on the heels of Starbucks warning on Wednesday that they expect their earnings to drop to 15 cents a share (down from 19 cents a year ago) in the fiscal second quarter, Starbucks announced Thursday that they were ceding all management responsibilities for its music label, Hear Music, to its partner, Concord Music Group. Starbucks, which cut about 600 positions in February, is clearly looking for more ways to reduce costs.

“As part of our ongoing transformation, we are committed to examining all aspects of our business that are not directly related to our core,” said Howard Schultz, chairman, president and ceo in a press release here. “We have had numerous successes in music and books including eight GRAMMY® Awards and three No.1 books on the New York Times bestseller list. However, now is the appropriate time to restructure our Entertainment business to better align our efforts with our overall business strategies.”

Hear Music, founded in 1990, was purchased by the Starbucks in 1999. In 2007, the company partnered with Concord to release Paul McCartney’s Memory Almost Full, record, his first non-major label recording. Hear Music has also released music by Dave Matthews Band, Joni Mitchell, Paul McCartney, James Taylor, Simon & Garfunkel, and Wilco.

I’m a fan of alternate retail and distribution outlets, and completely targeted niche-marketing campaigns. But I tend to agree with Mr. Schultz in that perhaps managing Hear Music has interfered with Starbucks core market, and the resulting changes are designed to refocus what they’re good at: selling high priced coffee. The fact is that Starbucks/Hear have done some great things for developing artists (including being an instrumental partner in breaking Antigone Rising, whose members are current Berkleemusic students!), but the sales from Starbucks were marginal at best. The New York Times reported last month that on average each Starbucks location sells only two CDs per day!

Well, there’s certainly no shortage of news from the major labels lately. Following recent announcements from Warner (who are presenting a vague idea to charge people a flat fee for all the music they care to download from peer-to-peer sites), and Sony/BMG (who’s head, Rolf Schmidt-Holtz, revealed that he supports the idea of a DRM-free unlimited music service), The New York Times today reported that three of the four major labels (EMI is rumored to join soon) have struck a deal with MySpace to launch “MySpace Music.” The deal will be set up as a joint venture, where the labels will receive an equity stake, and MySpace will control and operate the organization. Reuters news service claims the service could launch in days.

Some interesting points:

• The major’s entire catalogs would be available.
• The labels will stream their music for free, and be paid through advertising dollars (MySpace apparently makes $70 million a month in advertising revenue currently).
• Tracks will be available for download DRM-free, so they can play on any MP3 player.
• The labels will also use the outlet to sell artist’s merch, ringtones, and tickets (which, thanks to the 360 deals the majors are going for now, will provide additional revenue streams for them).
• There is also a possibility of a subscription-based component that would allow users to pay a monthly amount for unlimited downloads (likely through subscription DRM).

It looks to be a real win-win situation for the labels (as well as consumers), apparently made possible through Universal settling their 2006 lawsuit against MySpace for roughly $100 million (which is rumored to be part of the deal).

The only wild card is if folks can be convinced to actually purchase music through MySpace. Shawn Fanning’s Snocap, which folks can currently use to create an online store on MySpace, has not been popular (check out what Derek Sivers, CEO of CD Baby, said about their past arrangement here).

Following hot on the heels of No Depression’s announcement that they were closing up shop, Harp Magazine, another one of my favorites, announced this AM that they too were ceasing publication.

From my old contact there, Jake Flack:

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I am very sorry to tell you that, effective March 20, 2008, I will no longer be the Associate Publisher of Harp. Because of the declining revenues and increasing costs related to print publishing, Harp is discontinuing publishing as of that date. The March/April issue (with Dave Grohl on the cover) will be the last issue printed and distributed. The company is shutting down operations and will not be publishing the May issue.

It’s been my distinct pleasure to work with all of you. For the past five years I’ve been very fortunate to work with so many wonderful people who are dedicated to putting out and promoting great music. I’ve always felt that Harp provided a first class platform for giving independent music a voice that otherwise might not have been heard. We were able to do that because our advertisers shared that vision.

I apologize for the mass email but time dictates this rather impersonal notice. Best of luck to everyone and thank you so much for everything!

Jake

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It’s always a drag to see another positive entity in the music business go down, but I suppose I am not incredibly surprised. When I think of the parties and folks at SXSW that made an impression on me, much of it was online focused: Ioda’s party on 6th and Red River, Imeem’s event, the Ourstage folks, and so on. Similar to mid-level indie labels, I think mid-level music print mags are in for a tough haul, in particular those that are not making a serious push for online business. Online businesses with marketing dollars prefer to spend it on online advertising: certainly keyword buys, but also newsletter affiliation, banner ads, and contextual marketing. With online marketing, you can pinpoint exactly how successful a particular campaign is, and more importantly, online marketing folks know that it is easier to attract someone that is already online than it is to to attract someone that is offline. To survive these days, Harp and others need to monetize their online efforts by creating an online community, that A) folks want to be part of, and B) advertisers see value in.

Those that are not evolving are going to be left behind…

I’ve talked a lot about how TuneCore and CD Baby are great online distribution options for independent bands. The two are set up differently, with CD Baby taking 9% of sales, and TuneCore making money on a $19.98 annual fee plus $.99 per store per record upfront costs. We run the numbers in my course on which is the better option for online distribution, and at low sales, there is very little difference between the two services. But at higher sales figures, there’s quite a bit of difference.

Eliot Van Buskirk at Wired’s great music blog just wrote a quick piece on what Trent Reznor likely paid to distribute his new record, ‘Ghosts I-V’ to Amazon. It’s really pretty amazing:

“Trent Reznor found a great deal for distributing his comprehensive new Nine Inch Nails album to the Amazon MP3 store: going through TuneCore, while keeping ownership of the master recordings and 100 percent of royalties. Now we can see why he was so eager to leave his record label.

This is assuming TuneCore charged Reznor its standard for delivering a 36-song album on the Amazon MP3 store for the first year; I have a question in with TuneCore to try to confirm:

$35.64 ($0.99 per track)

$0.99 to put one album in one online music store

$19.98 charge per album

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$56.61: Total cost to distribute Ghosts I-V to Amazon MP3

That’s not the only efficient aspect of Reznor’s plan. He’s using BitTorrent to distribute the first 8-song volume of the album to fans for free, and the innovative aspect of the release generated lots of (deserved) press attention.”

Trent is using a Creative Commons license with this current release, which I also think is noteworthy

Yes, I was humming the Boyz II Men song when I wrote that title.

I got an email yesterday announcing that one of my favorite magazines is ceasing publication. I’ve been a fan of No Depression, an amazing pub mostly covering the alt-country world (the magazine was named after the debut record from Uncle Tupelo, the band Jeff Tweedy was in prior to forming Wilco) since 1998 when I started advertising there for Rykodisc. The editorial was great, and the folks running it were absolute pleasures to deal with.

We all know the Internet has changed the music and publishing industries forever, and No Depression really was caught in the perfect storm between the two. The editors wrote a goodbye letter of sorts, which laid out their dilemma:

“…advertising revenue in this issue is 64% of what it was for our March- April issue just two years ago. We expect that number to continue to decline.

The longer answer involves not simply the well-documented and industry wide reduction in print advertising, but the precipitous fall of the music industry. As a niche publication, ND is well insulated from reductions in, say, GM’s print advertising budget; our size meant they weren’t going to buy space in our pages, regardless.

On the other hand, because we’re a niche title we are dependent upon advertisers who have a specific reason to reach our audience. That is: record labels. We, like many of our friends and competitors, are dependent upon advertising from the community we serve.

That community is, as they say, in transition. In this evolving downloadable world, what a record label is and does is all up to question. What is irrefutable is that their advertising budgets are drastically reduced, for reasons we well understand. It seems clear at this point that whatever businesses evolve to replace (or transform) record labels will have much less need to advertise in print.

The decline of brick and mortar music retail means we have fewer newsstands on which to sell our magazine, and small labels have fewer venues that might embrace and hand-sell their music. Ditto for independent bookstores. Paper manufacturers have consolidated and begun closing mills to cut production; we’ve been told to expect three price increases in 2008. Last year there was a shift in postal regulations, written by and for big publishers, which shifted costs down to smaller publishers whose economies of scale are unable to take advantage of advanced sorting techniques.”

I get a lot of my music news updates from RSS feeds from maybe a dozen or so outlets, but I love kicking back with Paste, Magnet, Harp and No Depression as well. As Barack Obama says, change is what’s happening, but in the case of No Depression, it doesn’t mean that I have to like it.

The NYT had a great article this AM about Microsoft’s offer to purchase Yahoo. What I found interesting is the commentary on the reason why Silicon Valley is lukewarm on the idea: they prefer innovation from forward-thinking smaller companies rather than acquisitions by major companies trying to play catch up.

Here’s a link to the piece:

http://www.nytimes.com/2008/02/03/technology/03valley.html?hp

I think some parallels could be made to the music industry – the folks that I think will make it are innovators, developing and refining the way we listen to, distribute, and buy music; they are doing something that’s different. I think it’s important to recognize the fact that the music industry is not immune to the same basic economics and trends that affect the technology sector. Building a creative business from the bottom up that fills a defined niche seems to me to be a much more sound approach than creating a business that relies on the traditional industry gatekeepers, particularly given the current state of the music business.

Ten months after Warner Music head Edgar Bronfman said that Apple’s Steve Jobs suggestion that dropping DRM copy protection from digital music was “completely without logic or merit,” Bronfman reversed direction last Thursday by licensing its catalog, DRM free, to the Amazon MP3 music store. Warner joins EMI and Universal in offering higher quality (256 kbps), DRM free mp3s through Amazon’s online store, leaving Sony as the odd man out in the major label circle.

On the surface it would appear that the majors are simply responding to consumer demand and giving music fans what they want. But the fact is, the majors hate the digital monopoly that Steve Jobs has with iPod/iTunes. They understand that the only way to increase their margins on digital music and regain some of the control that Apple has taken from them is to reach the billions of iPods floating around. Their endgame is almost certainly to get customers in the habit of purchasing mp3 files from a place other than iTunes (which currently accounts for 70% of all digital music sold).

DRM (digital rights management) is technology that copyright holders place on a digital file to restrict its usage. It’s a flawed, user-unfriendly tactic, and it will go away. But while it exists, I will continue to do my online music buying with DRM-free retailers emusic and Amazon.

Nothing in David Byrne’s Wired analysis of the record and music industry is earth-shattering, but I like his straightforward definitions of the 6 forms of music distribution that currently exist, as well as his explication of where the money goes for every record sold in traditional stores and on iTunes. Cool interviews with Radiohead and Amy Mann’s managers, as well as Mac McCaughan who founded the independent label Merge Records (who’ve had great success with Arcade Fire).

In my course (which starts on January 7th!) I have a lesson on radio. We go through the opportunities available to musicians at noncommercial radio (the stations that are not funded by advertising, typically located on the left side of the radio dial), commercial radio (those that are broadcasting for profit), and non-terrestrial radio (online and satellite). It’s likely no surprise to hear that the amount of money and resources it takes to get your music played on commercial radio during peak listening times makes it an unrealistic avenue for almost all independent artists and labels. I would argue that there are plenty of more effective outlets for the $250,000 you’ll need to spend on indie radio promoters, $50,000 on the necessary trade ads, and $50,000 on on-air ads that it takes to get considered for non-specialty show radio play on an active rock station in a major market. And even if you do have the money (and really feel that commercial radio is where you want to spend it) the stations have long lasting relationships with the major label promoters that they do not want to hurt, and it’s unlikely you’ll get much support anyway!

That being said, non-commercial radio (community stations, college stations, NPR stations) and some commercial radio (Triple A and Americana / some specialty shows) do have opportunities for independent musicians. But it’s still expensive – to really make national headway you’re going to need independent promoter help.

Which brings me to my point – not only is online radio inexpensive to target (in some cases as easy as downloading a submission form, as is the case with Pandora), but it brings excitement, variety, and most importantly, NEW MUSIC into a medium that has exposed the public to less and less new music for years (I am speaking primarily of commercial radio). Online radio is a medium that is continuing to gain momentum and listeners, which means, of course, that the labels are looking for their cut of the profits. In March, the United States Copyright Royalty Board announced new royalty rates for webcasts, effective to 2010. The CRB endorsed the proposal of the RIAA-associated Sound Exchange royalty organization, which represents the major and some indie labels. The new rates would force webcasters to pay for each song streamed to each user, and increase over the next few years as follows: (details from Wired magazine)

2007: $.0011 to stream one song to one listener
2008: $.0014
2009: $.0018
2010: $.0019

These rates would put the smaller Webcasters that do not have significant advertising revenue out of business. And last week, Bloomberg announced that Yahoo and AOL may abandon Web radio as well with the raise in rates (“We’re not going to stay in the business if cost is more than we make long term,” Ian Rogers, general manager at Yahoo’s music unit, said in an interview). The rate increase is not a done deal, however. Webcasters have launched an appeal of the rates, which begins in February.

I’m all for musicians being paid fairly and taking advantage of all revenue streams, but from a marketing standpoint, does it really make sense to impose rates on a developing outlet like this that will essentially kill all but the largest players? Check out more opinions here.