Music Business and Trend-Mongering

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!

You are probably already aware of this already, but if not, you might be interested in checking out the activities surrounding this Saturday’s Record Store Day. Details are here.

Some cool events happening nationally, including Bjork’s screening of her new 3-D video “Wanderlust” (complete with 3-D glasses!) at a number of indie stores:

I go in depth into brick and mortal retail in lesson 4 of my Music Marketing 201 course. I’m all about the Future of Music, and I know it might seem counter intuitive to discuss a marketing segment that is clearly struggling on whole, but I think to discount physical independent retail (I’m not talking about the big box retailers here), even if it is not necessarily a growth segment of the industry, is a mistake. There are some amazing independent retailers that can be tremendous partners for developing artists. Josh Madell at Other Music in NYC, Eric Levin at Criminal Records in Atlanta, Mike Dreese at Newbury Comics in Boston, John Kunz at Waterloo in Austin and many other forward-thinking music retail owners still play a big part in “breaking” artists. They are community focused, Internet savvy, and have an infrastructure in place to promote new music. A successful musician needs to have their marketing campaign firing on all cylinders. I still believe that a physical retail campaign, even if it is accomplished through consignment, should certainly be considered as part of the big picture for touring artists that can draw outside of their hometown.

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).

With everything that is happening right now with the Copyright Royalty Board and the new mechanical royalty rate discussions (which will be the first time ever that rates are set for digital products such as digital downloads, subscription services and ringtones - more here from Eric Beall), I thought it might make sense to talk about how you, as an independent musician, can get into the digital music retail game. I did a quick interview for CNN/Fortune last week on the topic of digital distribution, which is a fair enough primer on the basics. Text is below, and shortened interview can be found here.

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The good news is that a lot of what independent labels did for artist in the past can now be accomplished by the artists themselves. Distribution is key among the tasks that in the past were monopolized by labels and are now open to almost anyone through forward-thinking online distributors. Two companies in particular have empowered artists to get their music on iTunes, Rhapsody, eMusic, and the other online retailers: CD Baby and TuneCore. Essentially these online distributors do exactly the same thing – they have direct relationships with the digital retailers and provide a bridge to get your music into the stores. However, they operate slightly differently. CD Baby charges a small fee (currently 9%) for every sale that generates online. Tunecore charges no fee on sales, but instead charges a one-time fee, per store, per album for delivering the music, and one-time charge per song you upload (both charges are currently $.99), plus a $20 annual fee. You’ll need to run the numbers to see which one works best for your particular situation. There are other online distributors popping up all the time, but these two are the most established and have a proven track record of success.

One important factor to note: distribution follows marketing. One does not market their music by getting on iTunes. The key is to generate interest outside of these retailers and to drive folks to the outlet so they will buy your music. This is best done though a fully integrated marketing campaign that focuses on effective traditional outlets, and also takes advantage of the marketing outlets and technologies that are now available to the independent musician (Internet marketing is a big part of this, of course). Quick advice: be sure to have your own Web page to start (do not make the mistake of only having a MySpace page), and tour, tour, tour. Of course, checking out my Music Marketing 201 course wont hurt either. ☺

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.

Transworld (owner of Coconuts and FYE) just posted their dismal third quarter 2007 financials. The company posted a net loss of $14.3 million. Check the full report out here

Interesting quote from CEO:

“We continued to achieve positive comparable store sales in home video, video games, electronics and boutique during the third quarter, however, these results did not offset the decline in music,” said Robert J. Higgins, Chairman and Chief Executive Officer of Trans World Entertainment

No real surprise here. Transworld does not provide niche music products specific to a particular geographic location (all buying is done at corporate), they do not generally support the bands in their local community, and have not been quick to diversify into other lifestyle areas: all hallmarks of successful (mostly independent) retailers. It’s clear that the CD format will fade away over the next few years, but I think some retailers will weather the storm better than others.

Chris Anderson, the fellow who coined the phrase “Long Tail” in 2004, has a great post on his blog about the current state of the music industry. The short of it: every part of the music industry except the sale of compact discs is up.

Here’s an overview from his post:

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* Concerts and merchandise: UP (+4%)
* Digital tracks: UP (+46%)
* Ringtones: UP (+86% last year, but probably just single-digit percent this year)
* Licensing for commercials, TV shows, movies and videogames: UP (Warner Music saw licensing grow by about $20 million over the past year)
* Even vinyl singles (think DJs): UP (more than doubled in the UK)
* And, if you include the iPod in the music industry, as I’d argue a fair-minded analysis would: UP, UP, UP! (+31% this year)

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It’s key to realize that the music business is NOT the same as the record business. This is a fundamental concept featured in one of the courses I’m teaching: The Future of Music and the Music Business, authored by Dave Kusek. People are more into music than ever, it’s just the revenue streams that are adjusting. Great time for entrepreneurs to be sure.

I got this email first thing today:

THANK YOU FOR ORDERING ‘IN RAINBOWS’.

THE LINK BELOW IS YOUR UNIQUE DOWNLOAD ACTIVATION CODE.

PLEASE CLICK ON THE LINK OR CUT AND PASTE INTO YOUR BROWSER TO OBTAIN YOUR DOWNLOAD.
IF YOUR LINK APPEARS AS TWO SEPARATE LINES, PLEASE CUT AND PASTE THEM CAREFULLY INTO YOUR BROWSER.

THE ALBUM WILL COME AS A 48.4MB ZIP FILE CONTAINING 10 X 160KBPS DRM FREE MP3s.

IF YOU HAVE ANY QUESTIONS OR PROBLEMS DOWNLOADING YOUR FILE, PLEASE CONTACT OUR DOWNLOAD CUSTOMER SERVICE TEAM: downloadinrainbows@waste.uk.com

WE HOPE YOU ENJOY ‘IN RAINBOWS’.

—

Well, I do enjoy ‘IN RAINBOWS.’ Very much. And from what I can tell, there’s a whole lot of other folks that are enjoying this record today too. Nicci and I went down to Cambridge 1 for dinner (a hip pizza place in Harvard Square), and they were playing the record to a room full of folks there too.

Over and above anything else, this coordinated experiment shows that it’s still possible to build a huge buzz around a new record (not easy). Radiohead has succeeded in having many people hear their record for the first time, at the same time. If the new music business model involves using a discounted (or free) digital product to corral these folks into creating a word of mouth groundswell that can support a tour, merch, licensing opportunities, ringtones, etc, then it looks like they may have nailed it. They also have 6 other records (now available digitally for the first time on Amazon). Long tail anyone?

First, what the heck is Richard Wagner doing as the #1 artist on Amazon’s new MP3 store?

All signs indicate that the Amazon store will give iTunes a run for it’s money as the most popular online music store. First, all the music is DRM free (thanks in part to a feud between Universal and iTunes), and high quality. The site is incredible easy to use, searching for new music is intuitive, and my Wagner download (”Apostles Mean for Small Choir & Orchestra”, I had to hear what the big deal was!) took no time to appear in my iTunes interface. Songs are also variably priced as opposed to the flat $.99 or album only method that iTunes offers.

Yow!

Radiohead (who fulfilled their Capital Records contract with their last release, and are presently “unsigned”) have apparently set up a Web page where one could purchase their new record in digital form at whatever price one wants to pay for it. A physical release is also available, for 40GBP

Check it out:

http://www.inrainbows.com/Store/index.html

A couple of interesting things to consider:

1) The proper physical release streets in December with tons of bonus material:

From www.inrainbows.com:

[start]

This consists of the new album, in rainbows, on cd
And on 2 x 12 inch heavyweight vinyl records.
A second, enhanced cd contains more new songs, along with digital photographs and artwork.
The discbox also includes artwork and lyric booklets.
All are encased in a hardback book and slipcase.

[end]

The package sounds amazing, but thanks to the weak USD, I’d be paying more than $80 for it.

2) The digital release (with less music) is available two months prior to the physical release.

I love the idea from a band in Radiohead’s position. They make the bulk of their income on stadium shows and merch, and they have the name recognition and reputation to pull off a 40GBP package (which has a much higher margin for them as they do not need to split any proceeds with a label). It takes the Stars experiment of breaking street date with their digital release a step further by dropping the financial component.