Sunday, March 05, 2006

2006 Billboard Money & Music Symposium

The annual Billboard Money & Music Symposium was where top industry leaders gathered last week in NYC to mingle and discuss the current health and future growth of the music business. Traditionally known as a "power player's conference", this year's event had a consistent and honest theme of "I don't knows" from the panelists regarding future music consumption and buying habits.

The keynote was given by Robert Sillerman, a Wall Street operator with a long history in the media business. Sillerman's latest publicly traded company is CKX, Inc. Besides buying Elvis Presley Enterprises last February, Sillerman and his team have also purchased 19 Entertainment Limited, which owns the rights to the smash-hit TV show American Idol.

According to Sillerman, "While the industry is being repositioned for dynamic growth, we really don't know how people are going to consume their music in 3, 5, or 10 years from now." The industry has to redefine the term "music business" as it is inevitable that selling music will replace selling recorded music. The democratization of music distribution has been significantly enabled by technology and the industry's old business model just doesn't make sense - or is it necessary or relevant as content creators start recapturing revenues previously fed into the old model. "In the past, artists needed a distributor to be compensated for CD sales, but moving forward, independent artists may not need, want or accept a distribution contract."

Interoperability was also a main topic of discussion as the industry figures out a way to compete with Apple's gorilla grip. Brian Taptich, V.P. of Business Development for Bit Torrent, thinks that for the explosion to happen that everyone is waiting for, the Apple platform needs to be opened up and different price points need to be met. In terms of Apple's DRM effectiveness with Fairplay, he reminded the audience that it only takes 4 lines of code to break Apple's DRM - which makes Microsoft's DRM look strikingly stronger. However, it's naive to believe that Janus in WMP 10 won't also be eventually cracked. The stronger argument to be made is that DMCA-backed DRM technology will most likely never solve the problem of piracy, as all schemes will likely be crackable in perpetuity. (It's common knowledge that ripping a redbook audio CD of previously purchased DRM'd songs allows the user to easily strip off the copy protection, so DRM is really only a roadblock to the average consumer.)

Greg Scholl, CEO of The Music Orchard, also pointed out that "indie music" (music not distributed by a major label) comprises roughly 30% of the entire market and often offers more bang for the buck. For example, independent online retailer eMusic currently sells 4.9 million tracks a month and has successfully crossed the deep chasm of device and platform interoperability by simply choosing to sell unprotected MP3 files. However, unlike Rhapsody, Napster and Yahoo!, eMusic might have a possible long term competitive advantage as its music files don't disappear once you cancel the subscription service. With the recent explosion of online music, the barriers to entry that have customarily kept independent music out of consumers' hands are falling down and that simply equates to more sales.

It was also suggested that releasing unprotected or "open format" back catalogue and niche content (i.e., jazz and classical) from the four major labels would be a worthy experiment and perhaps an easy path to new short term revenue growth. Others in the audience offered similar solutions by expressing support for cross platform wave files, which yield added consumer value as well as offer the ability to reach a new fidelity-centric audience.

Not surprisingly, one major label executive disagreed with those types of strategies, which ultimately loosen control of the content, and thinks that DRM's generous usage rules (i.e., plays on up to 5 computers, allows unlimited CD burns and transfers to portable devices) should be sufficient to the average music fan. "What more do you need as a consumer, unless you're trying to resell the file?" (Those in the anti-DRM camp referred to the acronym as Digital "Restrictions" Management.)

A recurring theme potentially enabling quicker growth trumpeted by Jim Griffin of Cherry Lane Digital was that the industry needs to get past the reliance on the buying and selling of music "units" and instead focus on the evolution of music as a service. Compared to the past, the overall value of music is no longer primarily found in the shrink wrapped units being delivered by trucks from warehouses. In other words, the industry needs to price the 'service of music' better because music as a 'product' will soon be a thing of the past. In addition, if you look at history, licensing is the industry's lifeblood and could be the key impetus to opening the floodgates if the four major labels would just digitally offer their entire catalogues online. Imagine what would happen to overall sales if the last 100 years worth of recorded music were suddenly available at the click of a button. In addition to being free, consumers admittedly flock to P2P networks because that's the only place where they can find exactly what they're looking for.

With Apple recently crossing the one billionth mark and taking a commanding lead with 83% of all downloads, the iTunes model is obviously gaining traction with today's consumer, but the ad-supported model with respect to new media has enormous untapped potential. Despite all the hype of different ways to sell music as a tangible object or an unlimited subscription service, making access to music inexpensive and easy for the consumer rang the loudest as a viable strategy. The last two quarters have seen huge digital sales increases way beyond the holiday effect, so it's hard to overlook the fact that music consumption is rising and the digitalization of intellectual property is the future.

In the mobile music space it was noted that polyphonic ringtone sales are flat and most of the recent growth (due to newer handsets) is in mastertones, which is good news for the labels as royalties are being paid for both the underlying composition and the sound recording. Barriers to future growth were discussed on the mobile side as well. The carnivorous fact that mobile carriers are double dipping by forcing consumers to buy a ringtone after he/she has already bought a full length download of the very same song was made painfully clear. Ted Casey, Head of Mobile Music for Verizon Wireless admitted to not knowing about viable solutions to this widespread dilemma, such as Xingtone. As recorded music sales have continued to drop year over year, publishing revenues have steadily increased, with mechanical royalties currently at $.091 cents per song per use. The carrier-centric value proposition mentioned above is somewhat analogous to music publishers wanting to get paid mechanical royalties twice for an OTA (over-the-air) handset download - which also includes a DRM'd compressed audio download to your PC, which Verizon and Sprint both now offer.

Doug Morris, Chairman and CEO of the Universal Music Group (which currently has 34% of the U.S. market), attributed Universal's record 2005 profits partly to putting the right people into the right positions. "It's all about getting great people and allowing them to fly." Digital margins are clearly better than physical ones and in his view, nothing has really changed since he entered the business. "The only thing changing is how you deliver the music." In the next five years he sees continued erosion of the physical CD and increased digital adoption and migration. The goal is to grow the digital market so that it at least offsets the inevitable decrease in physical sales.

When asked about how much interoperability issues are impacting the overall digital transition story for the industry, Hilary Rosen, former head of the RIAA, stated that, "it's a lot and it's probably in the digital space the biggest single barrier to an explosion on music, and in my view with licensing, maybe a close second." Rosen thinks we're also heading down the same road on video where iTunes and the Apple proprietary system is becoming such a dominant video distributor as well. "This is a place where it seems to me we're in a different world than we used to be. The burden used to be on the music industry to figure out how to grow this market, whereas now there are so many more players here that sort of have an obligation and an incentive financially to grow this market." Since she's been on the other side of this argument as a consultant, she's noticed how few companies think about the bigger picture in terms of their own business. "How little it would take for Microsoft or a coalition of Windows-based companies to be investing in a real consumer alternative to the iPod." She doesn't see anything wrong with the iPod, but it aggravates her that she can't buy anything at Yahoo Music and put it on her iPod. What's the incentive?

When asked if the major labels on a straight dollars and cents basis have shot themselves in the foot more than anyone by not releasing any content without DRM, she thinks the record industry has spent too much time focusing on copy protection and not enough on interoperability. "But the DRM issue doesn't necessarily go away... Ok, you can go to an MP3 model, but MP3 as a audio quality we all know now is so far surpassed by other codecs". For the labels it's still about protection rather than audio quality, but "Apple still, is going to have a proprietary system even if there was no copy protection restrictions on their things. They would still have an interoperability issue with a Windows based system because that's what furthers their sale. So, the only way you can do it is to strip everything out and go to an MP3 model and I'm just not sure that's the best from a quality perspective and I do think that audio quality matters. I think you can get to interoperability with windows media, with an Apple codec", or as an audience member suggested - a wave file.

Harold Vogel, president of Vogel Capital Management, thinks that there are problems with the media industry's general DRM focus. "They have not coordinated... they are missing a great potential by not making it easier. The valuations in the entertainment business in general stocks (private or public) reflects a tremendous uncertainty about how soon we'll be able to see a real offset of downloaded versus physical and that's still unknown. It could take a year or two, it could take 5 years and I think that uncertainty feeds back onto the valuations of the various securities or the companies that are thinking of selling."

Vogel also shared his bantam belief that if you download music off of P2P networks - it's more of a "free-ridership" in economic terms rather than piracy per se. It was also suggested during the same panel that introducing content restrictions probably pushes consumers away and may actually encourage them to steal music.

Another unique aspect of this year's event was the fact that audio Cd's were available immediately after each panel for attendees to take home. This service was provided by DiscLive and was a nice touch.

In closing, the overall mood was markedly upbeat and positive, even though 2005 was considered by many a miserable year. The enthusiasm was due in part to the industry's knowledge that it historically enjoys tremendous sales explosions each time technology significantly advances and we're really only in the 1st inning of this phase of the digital revolution cycle. From a macro perspective, the music industry is doing much better than other industry transitions to digital, but much more can still be done to increase legitimate sales. The reality is that there are still a lot people (i.e., middleware and software including DRM) involved with getting the content from the creator to the consumer and the sooner we learn how to license complete catalogues and collect from all the resulting transactional activities, the sooner the industry as a whole will replace lost revenues from physical sales and prosper again. The writing is on the wall. The new game is about selling music - not CD's.

No comments: