Future Of Music

Music2.0 is a hard-hitting, provocative and inspiring collection of essays and blog posts on the future of the music industry from my co-author Gerd Leonhard. The book continues and expands on the ideas and models presented in our book “The Future of Music”, which has become a must-read work within the music industry, worldwide, available in English, German, Spanish and Italian.

Music2.0 describes what the next generation of music companies will look like and the new principles that will define the next iteration of the music business.

Music2.0 presents the best of Gerd’s writings from the past four years. As you move from 2003 to 2007 in the book, the evolution of various ideas and expressions can clearly be observed.

Check out Music2.0 here!

The full script of the speech everyone is talking about in Cannes, as made by U2 manager Paul McGuinness at Midem.

McGuinness: “Good afternoon and thank you for giving me this opportunity. I don’t make many speeches and this is an important and imposing occasion for me. What I’m trying do here today is identify a course of action that will benefit all: artists, labels, writers and publishers.

I have been managing the best-known of my clients, U2, for exactly 30 years. Sure we’ve made mistakes along the way but the lineup hasn’t changed in 31 years. They are as ambitious and hardworking as ever, and each time they make a record and tour, it’s better than the last time. They are doing their best work now. During that time the music business has been through many changes.

At the beginning U2’s live appearances were loss-making and tour support from our record label was essential for us to tour and that paid off for the label as U2’s records went to No.1 in nearly every international territory starting in the mid ’80s and I’m happy to say that continues to the present day. They have sold about 150 million records to date and the last album went to No.1 in 27 territories.

U2 own all their masters but these are licensed long-term to Universal, with whom we enjoy an excellent relationship. With a couple of minor exceptions they also own all their copyrights, which are also licensed to Universal. U2 always understood that it would be pathetic to be good at the music and bad at the business, and have always been prepared to invest in their own future. We were never interested in joining that long, humiliating list of miserable artists who made lousy deals, got exploited and ended up broke and with no control over how their life’s work was used, and no say in how their names and likenesses were bought and sold.

What U2 and I also understood instinctively from the start was that they had 2 parallel careers first as recording and songwriting artists, and second as live performers. They’ve been phenomenally successful at both. The Vertigo Tour in 2005/2006 grossed $355m and played to 4.6m people in 26 countries.

But I’m not here to brag. I’m here to ask some serious questions and to point the finger at the forces at work that are destroying the recorded music industry.

People all over the world are going to more gigs than ever. The experience for the audience is better than ever. This is proved by the upward trend in ticket prices, generally un-resisted. The live business is, for the most part, healthy and profitable. Bands can gig without subsidy. Live Nation, previously a concert and venue company is moving into position with merchandising, ticketing, online, music distribution as one of the powerful new centres of the music industry.

So what has gone wrong with the recorded music business?

More people are listening to music than ever before through many more media than ever before. Part of the problem is that the record companies, through lack of foresight and poor planning, allowed an entire collection of digital industries to arise that enabled the consumer to steal with impunity the very recorded music that had previously been paid for. I think that’s been a cultural problem for the record industry — it has generally been inclined to rely for staff on poorly paid enthusiasts rather than developing the kind of enterprise culture of Silicon Valley where nearly every employee is a shareholder.

There are other reasons for the record business’s slow response to digital. The SDMI (Secure Digital Music Initiative) of the ’90s pan-industry, was a grand but ill-fated plan to try and agree rules between the content and technology industries. It went nowhere. SDMI, and similar attempts at cooperation by record companies, have partly been thwarted by competition rules. The US government has sometimes been overzealous in protecting the public from cartel-like behaviour.

I love the record business, and though I may be critical of the ways in which the digital space has been faced by the industry I am also genuinely sympathetic and moved by the human fall-out, as the companies react to falling revenues by cutting staff and tightening belts. Many old friends and colleagues have been affected by this. They have families and it is terrible that a direct effect of piracy and thievery has been the destruction of so many careers.

Nonetheless there is one effective thing the majors could do together. I quote from Josh Tyrangiel in Time Magazine: - “The smartest thing would be for the majors to collaborate on the creation of the ultimate digital-distribution hub, a place where every band can sell its wares at the price point of its choosing”. Apple’s iTunes, despite its current dominance, is vulnerable. Consumers dislike its incompatibility with other music services, and the labels are rebelling against its insistence on controlling prices. Universal the largest label in the world has declined to sign a long term deal with iTunes. “There’s a real urgency for the labels to get together and figure this out,” says Rick Rubin of Columbia Records.

There is technology now, that the worldwide industry could adopt, which enables content owners to track every legitimate digital download transaction, wholesale and retail.

This system is already in use here in Cannes by the MIDEM organisation and is called SIMRAN. Throughout this conference you will see contact details and information. I recommend you look at it. I should disclose that I’m one of their investors.

Meanwhile in the revolution that has hit music distribution, quality seems to have been forgotten. Remarkably, these new digital forms of distribution deliver a far poorer standard of sound than previous formats. There are signs of a consumer backlash and an online audiophile P2P movement called “lossless” with expanded and better spectrum that is starting to make itself heard. This seems to be a missed opportunity for the record industry — shouldn’t we be catering to people who want to hear music through big speakers rather than ear buds?

Today, there is a frenetic search for new business models that will return the record business to growth. The record companies are exploring many new such models — some of them may work, some of them may not.

Sadly, the recent innovative Radiohead release of a download priced on the “honesty box” principle seems to have backfired to some extent. It seems that the majority of downloads were through illegal P2P download services like BitTorrent and LimeWire, even though the album was available for nothing through the official band site. Notwithstanding the promotional noise, even Radiohead’s honesty box principle showed that if not constrained, the customer will steal music.

There is some excitement about advertising-funded deals. But the record companies must gain our trust to share fairly the revenues they will gain from advertising. Historically they have not been good at transparency. Let’s never forget the great CD scam of the ’80s when the majors tried to halve the royalties of records released on CD claiming that they needed this extra margin to develop the new technology even as they were entering the great boom years that the CD delivered. It’s ironic that, at a time when the majors are asking the artists to trust them to share advertising revenue they are also pushing the dreadful “360 model.”

As Allen Grubman, the well-known New York attorney said to me recently… “God forbid that one of these acts in a 360 deal has success. The next thing that will happen is the manager gets fired and the lawyer gets sued for malpractice.”

Maybe it would help if they were to offer to cancel those deals when they repair their main revenue model and the industry recovers, as I believe it will.

But that’s an issue for the future, when we’re out of the crisis. Today, there’s a bigger issue and it’s about the whole relationship between the music and the technology business. Network operators, in particular, have for too long had a free ride on music — on our clients’ content. It’s time for a new approach — time for ISPs to start taking responsibility for the content they’ve profited from for years. And it’s time for some visionary new thinking about how the music and technology sectors can work as partners instead of adversaries, leading to a revival of recorded music instead of its destruction.

It’s interesting to look at the character of the individuals who built the industries that resulted from the arrival of the microprocessor. Most of them came out of the so-called counterculture on the west coast of America. Their values were hippy values. They thought the old computer industry as represented by IBM was neanderthal. They laughed at Bell Telephone and AT&T. They thought the TV networks were archaic. Most of them are music lovers. There are plenty of private equity fund managers who are “Deadheads.”

They were brilliantly innovative in finance and technology and though they would pay lip service to “Content is King” what many of them instinctively realized was that in the digital age there were no mechanisms to police the traffic over the internet in that content, and that legislation would take many years to catch up with what was now possible online.

And embedded deep down in the brilliance of those entrepreneurial, hippy values seems to be a disregard for the true value of music.

This goes back some decades. Does anyone remember Abbie Hoffman? He was one of the “Chicago 7,” the ‘Yippies” of the Youth International Party who tried to disrupt the 1968 Democratic Convention in Chicago and got beaten up and put on trial by Mayor Daley’s police. He put out a book with the title “Steal this Book”. I think he has a lot to answer for.

I’ve met a lot of today’s heroes of Silicon Valley. Most of them don’t really think of themselves as makers of burglary kits. They say: “you can use this stuff to email your friends and store and share your photos”. But we all know that there’s more to it than that, don’t we? Kids don’t pay $25 a month for broadband just to share their photos, do their homework and email their pals.

These tech guys think of themselves as political liberals and socially aware. They search constantly for the next “killer app.” They conveniently forget that the real “killer app” that many of their businesses are founded on is our clients’ recorded music.

I call on them today to start doing two things: first, taking responsibility for protecting the music they are distributing; and second, by commercial agreements, sharing their enormous revenues with the content makers and owners.

I want those technology entrepreneurs to share their ingenuity and skill as well. Our interests are, after all, steadily merging as lines get more and more blurred between the distributors of content, the makers of hardware and the creators of content. Steve Jobs is now in effective control of the Walt Disney Studio and ABC Television so his point of view may be changing now that he owns content as well as selling those beautiful machines that have changed our world. Personally I expect that Apple will before too long reveal a wireless iPod that connects to an iTunes “all of the music, wherever you are” subscription service. I would like it to succeed, if the content is fairly paid for. “Access” is what people will be paying for in the future, not the “ownership” of digital copies of pieces of music.

I have met Steve Jobs and even done a deal with him face to face in his kitchen in Palo Alto in 2004. No one there but Steve, Bono, Jimmy Iovine and me, and Lucian Grainge was on the phone. We made the deal for the U2 iPod and wrote it down in the back of my diary. We approved the use of the music in TV commercials for iTunes and the iPod and in return got a royalty on the hardware. Those were the days when iTunes was being talked about as penicillin for the recorded music industry.

I wish he would bring his remarkable set of skills to bear on the problems of recorded music. He’s a technologist, a financial genius, a marketer and a music lover. He probably doesn’t realize it but the collapse of the old financial model for recorded music will also mean the end of the songwriter. We’ve been used to bands who wrote their own material since the Beatles, but the mechanical royalties that sustain songwriters are drying up. Labels and artists, songwriters and publishers, producers and musicians, everyone’s a victim.

For ISPs in general, the days of prevaricating over their responsibilities for helping protect music must end. The ISP lobbyists who say they should not have to “police the internet” are living in the past — relying on outdated excuses from an earlier technological age. The internet has moved on since then, and the pace of change today means a year in the internet age is equivalent to a decade in the non-internet world.

Remember the 1990s, when the internet was being called the Information Superhighway? At that time, when the U.S. Digital Millennium Copyright Act and the EU Electronic Commerce Directive were drawn up, legislators were concerned to offer safe harbours restricting the responsibilities of ISPs who acted as a “mere conduit”. This was a different era: only a few hundred thousand illegal files could be accessed from websites. There was no inkling
at that time of the enormous explosion of P2P piracy that was to follow. If legislators had foreseen that explosion, would they have ever offered immunity for so-called “mere conduits” and, in doing so, given ISPs a decade of excuses for refusing to protect our content?

And as it turned, the “Safe Harbour” concept was really a Thieves’ Charter. The legal precedent that device-makers and pipe and network owners should not be held accountable for any criminal activity enabled by their devices and services has been enormously damaging to content owners and developing artists. If you were publishing a magazine that was advertising stolen cars, processing payments for them and arranging delivery of them you’d expect to get a visit from the police wouldn’t you? What’s the difference? With a laptop, a broadband account, an MP3 player and a smartphone you can now steal all the content, music, video and literary in the world without any money going to the content owners. On the other hand if you get caught stealing a laptop in the computer store or don’t pay your broadband bill there are obvious consequences. You get nicked or you get your access cut off.

It is time for ISPs to be real partners. The safe harbours of the 1990s are no longer appropriate, and if ISPs do not cooperate voluntarily there will need to be legislation to require them to cooperate.

Why does all this matter so much? Because the truth is that whatever business model you are building, you cannot compete with billions of illegal files free on P2P networks. And the research does show that effective enforcement — such as a series of warnings from the ISP to illegal file-sharers that would culminate in disconnection of your service — can address the problem.

A simple “three strikes and you are out” enforcement process will see all serial illegal uploaders who resist the law face a stark choice: change or lose your ISP subscription.

Fortunately, there has recently been some tremendous momentum to get ISPs engaged — notably in France, the UK, Sweden, Norway and Belgium. President Sarkozy’s plan, the Olivennes initiative, by which ISPs will start disconnecting repeat infringers later this year, set a brilliant precedent which other governments should follow. In the U.K., the Gowers Report made it clear that legislation should be considered if voluntary talks with ISPs failed to produce a commitment to disconnect file-sharers. I’d like to see the U.K. government act promptly on this recommendation.

In Sweden, the Renfors Report commissioned by the Ministry of Justiceg ISP cooperation. And in the courts, the Sabam-Tiscali ruling spelt out, in language as plain as could be, that ISPs should take the steps required to remove copyright-infringing material from their networks. The European Union should now take up the mantle and legislate where voluntary intra-industry agreement is not forthcoming. This is the time to seize the day.

ISPs don’t just have a moral reason to step up to the plate — they have a commercial one too. IFPI estimates say illegal P2P distribution of music and films accounts for over half of all ISP traffic. Others put the figure as high as 80%. This is traffic that is not only destroying the market place for people who are trying to make a legitimate living out of music and films, it is hogging bandwidth that ISPs are increasingly going to need for other commerce, especially as a legitimate online market for movies develops.

I think the failure of ISPs to engage in the fight against piracy, to date, has been the single biggest failure in the digital music market. They are the gatekeepers with the technical means to make a far greater impact on mass copyright violation than the tens of thousands of lawsuits taken out against individual file-sharers by bodies like BPI, RIAA and IFPI. To me, prosecuting the customer is counter-intuitive, though I recognise that these prosecutions have an educational and propaganda effect, however small, in showing that stealing music is wrong.

ISPs could implement a policy of disconnection in very quick time. Filtering is also feasible. When last June the Belgian courts made a precedent-setting ruling obliging an ISP to remove illegal music from its network, they identified no fewer than 6 technologies which make it possible for this to be done. No more excuses please. ISPs can quickly enough to block pornography when that becomes a public concern.

When the volume of illegal movie and music P2P activity was slowing down their network for legitimate users recently in California, Comcast were able to isolate and close down BitTorrent temporarily without difficulty.

There are many other examples that prove the ability of ISPs to switch off selectively activity they have a problem with: Google excluded BMW from their search engine when BMW started to play games. This was a clear warning to others not to interfere. Another show of power was Google’s acceptance of the Chinese Governments censorship conditions. The BBC has spent a fortune on their iPlayer project and the ISPs are now threatening to throttle this traffic if the BBC doesn’t “share costs of iPlayer traffic.” All this shows what the ISPs could do if they wanted. We must shame them into wanting to help us. Their snouts have been at our trough feeding free for too long.

Let’s spare no effort to push the ISPs into taking responsibility. But that’s only one part of the story. There’s a huge commercial partnership opportunity there as well. For me, the business model of the future is one where music is bundled into an ISP or other subscription service and the revenues are shared between the distributor and the content owners.

I believe this is realistic; the last few years have shown clear proof of the power of ISPs and cable companies to bundle packages of content and get more money out of their subscribers. In the UK, most ISPs offer different tiers of services, with a higher monthly fee for heavy downloaders. Why are there “heavy” downloaders? Isn’t that our money? News Corporation offers free broadband to light users if they take at least a basic Sky Television package for £16 [$31.78] a month.

Looking at the events in the last year, this revenue-sharing model seems to be taking hold in the music business.

Universal — U2’s label — recently struck a deal with Microsoft that sees it receive a cut of the revenues generated by sales of the Zune MP3 player. It’s unfortunate that the Zune hasn’t attracted the sort of consumer support that the iPod did. We need more competition.

Under the agreement, Universal receives $1 for every Zune sold. When you consider Radio Shack sells Zune players for $150, you’ll see that Universal has asked for less than 1% of revenue — for a company that is supplying about a third of the U.S. market’s chart music at the moment. This isn’t really enough, but it’s a start, I suppose, and follows from the U2/Apple deal, the principle that the hardware makers should share with the content owners whose assets are exploited by the buyers of their machines. The record companies should never again allow industries to arise that make billions off their content without looking for a piece of that business. Remember MTV?

Nokia has announced it will launch “Comes With Music,” a service that effectively allows consumers to get unlimited free downloads of songs for 12 months after they buy certain premium Nokia phones. At the end of the 12 months consumers will be able to keep the songs they download. Nokia gets to supply premium content and Universal gets to boost competition in the digital marketplace, to make it more competitive and open new channels to customers. A proportion of the revenue generated by sales of the handsets will flow back to Universal. The question must be asked; will they distribute that revenue fairly? Do artists trust the labels? Will artists, songwriters and labels trust the telcos and handset companies?

These are obviously commercial deals driven by self-interest. But there is a moral aspect to this too. The partnership between music and technology needs to be fair and reasonable. ISPs, Telcos and tech companies have enjoyed a bonanza in the last few years off the back of recorded music content. It is time for them to share that with artists and content owners.

Some people do go further and favour a state-imposed blanket licence on music. Let me stress that I don’t believe in that. A government cannot set the price of music well any more than a rock band can run a government. The market has to decide. The problem with the global licence proposed in France two years ago was that it would not have worked in practice. But it is in France recently that legislators have been most innovative and have shown most willingness to act to support recorded music rights. France leads the world on this.

So far I’ve focused mainly on the role of ISPs. But there are similar issues in mobile too. The mobile business accounts for half the world’s digital music revenues and, crucially, is starting out from a much better position than the internet music market. You only have to look at a market such as Japan to see the amazing potential of mobile music for getting to the young demographic.

I believe that in mobile music we have the chance to avoid the problems that have bedevilled the recorded music industry’s relationship with ISPs: and I’m not talking just of their tolerance of copyright theft. Other problems, like the lack of interoperability between services and devices; the lack of convenient payment mechanisms except via credit cards — which of course are not available to all music users; the hacking and viruses that have undermined people’s trust in online payment. All these problems can be avoided in the mobile sector, this is a task that should command the support and cooperation of labels, artists, publishers and writers. We’re all in the same boat here.

That’s a lesson for the mobile industry internationally. Don’t go the way that many of the ISPs have gone. Mobile is still a relatively secure environment for legitimate content — let’s keep it that way.

So, to conclude — who’s got our money and what can we do?

I suggest we shift the focus of moral pressure away from the individual P2P file thief and on to the multi billion dollar industries that benefit from these countless tiny crimes — The ISPs, the telcos, the device makers. Let’s appeal to those fine minds at Stanford University and Silicon Valley, Apple, Google, Nokia, HP, China Mobile, Vodafone, Comcast, Intel, Ericsson, Facebook, iLike, Oracle, Microsoft, AOL, Yahoo, Tiscali etc, and the bankers, engineers, private equity funds, and venture capitalists who service them and feed off them to apply their genius to cooperating with us to save the recorded music industry, not only on the basis of reluctantly sharing advertising revenue but collecting revenue for the use and sale of our content. They have built multi billion dollar industries on the back of our content without paying for it.

It’s probably too late for us to get paid for the past, though maybe that shouldn’t be completely ruled out. The U.S. Department of Justice and the EU have scored some notable victories on behalf of the consumer, usually against Microsoft. They have a moral obligation to be true, trustworthy partners of the music sector. To respect and take responsibility for protecting music. To work for the revaluation, not the devaluation of music. To share revenues with the community fairly and responsibly, and to share the skills, ingenuity and entrepreneurship from which our business has a lot to learn.

And the message to government is this: ISP responsibility is not a luxury for possible contemplation in the future. It is a necessity for implementation TODAY — by legislation if voluntary means fail.

There’s more exciting music being made and more listened to than at any time in history. Cheap technology has made it easy to start a band and make music. This is a gathering of managers; our talented clients deserve better than the shoddy, careless and downright dishonest way they have been treated in the digital age.”

(Paul McGuinness delivered the above speech January 28 at Midem, Cannes.)

Wired has some great articles on music in the current issue. Mike King already posted on David Byrne’s music models, ground that has been covered here and in the Future of Music book.

But Byrne also did an interview with Thom Yorke from Radiohead about the In Rainbows experiment and his views on the music biz. Here’s an excerpt:

“Byrne: What about bands that are just getting started?

Yorke: Well, first and foremost, you don’t sign a huge record contract that strips you of all your digital rights, so that when you do sell something on iTunes you get absolutely zero. That would be the first priority. If you’re an emerging artist, it must be frightening at the moment. Then again, I don’t see a downside at all to big record companies not having access to new artists, because they have no idea what to do with them now anyway.

Byrne: Are you making money on the download of In Rainbows?

Yorke: In terms of digital income, we’ve made more money out of this record than out of all the other Radiohead albums put together, forever — in terms of anything on the Net. And that’s nuts. It’s partly due to the fact that EMI wasn’t giving us any money for digital sales. All the contracts signed in a certain era have none of that stuff.”

Pretty interesting interview.

A study by Nokia predicts that up to a quarter of the entertainment consumed by people in five years time will have been created, edited and shared within their peer circle rather than coming out of traditional media groups. This phenomenon, dubbed ‘Circular Entertainment’, has been identified by Nokia as a result of a global study into the future of entertainment.

The study, entitled ‘A Glimpse of the Next Episode’, carried out by The Future Laboratory, interviewed trend-setting consumers from 17 countries about their digital behaviors and lifestyles signposting emerging entertainment trends.

“From our research we predict that up to a quarter of the entertainment being consumed in five years will be what we call ‘Circular’. The trends we are seeing show us that people will have a genuine desire not only to create and share their own content, but also to remix it, mash it up and pass it on within their peer groups - a form of collaborative social media,” said Mark Selby, Vice President, Multimedia, Nokia.

Selby continues, “We think it will work something like this; someone shares video footage they shot on their mobile device from a night out with a friend, that friend takes that footage and adds an MP3 file - the soundtrack of the evening - then passes it to another friend. That friend edits the footage by adding some photographs and passes it on to another friend and so on. The content keeps circulating between friends, who may or may not be geographically close, and becomes part of the group’s entertainment.”

Tom Savigar, Trends Director at The Future Laboratory added, “Consumers are increasingly demanding their entertainment be truly immersive, engaging and collaborative. Whereas once the act of watching, reading and hearing entertainment was passive, consumers now and in the future will be active and unrestrained by the ubiquitous nature of circular entertainment. Key to this evolution is consumers’ basic human desire to compare and contrast, create and communicate. We believe the next episode promises to deliver the democracy politics can only dream of.”

Of the 9,000 consumers they surveyed:

- 23% buy movies in digital format
- 35% buy music on MP3 files
- 25% buy music on mobile devices
- 39% watch TV on the internet
- 23% watch TV on mobile devices
- 46% regularly use IM, 37% on a mobile device
- 29% regularly blog
- 28% regularly access social networking sites
- 22% connect using technologies such as Skype
- 17% take part in Multiplayer Online Role Playing Games
- 17% upload to the internet from a mobile device

As part of the research they identified four key driving trends; Immersive Living; Geek Culture; G Tech and Localism. As these trends become more mainstream, they predict that they will have a collaborative, creative effect on the way people consume entertainment and, we predict, will lead to the Circular Entertainment phenomenon.

Immersive Living
Immersive Living is the rise of lifestyles which blur the reality of being on and offline. Entertainment will no longer be segmented; people can access and create it wherever they are.

Geek Culture
This triumph marks a shift as consumers become hungry for more sophisticated entertainment. Geek Culture rises, consumers will want to be recognized and rewarded - the boundaries between being commercial and creative will blur.

G Tech
G Tech is an existing social force in Asia that will change the way entertainment will look. Forget pink and sparkly, it is about the feminization of technology that is currently underway. Entertainment will be more collaborative, democratic, emotional and customized - all of which are ‘female’ traits.

Localism
The report uncovered a locally-minded sprit emerging in entertainment consumption and Localism will become a key theme of future entertainment. Consumers will take pride in seeking out the local and home-grown.

Now all that is great, but presents significant challenges to the notion of intellectual property, copyright and ownership - all subjects that have been discussed here before. It is one thing for young hipsters to want to create and mash-up their own material, and an entirely different matter to do so with other peoples property. How this will all shake out remains to be seen.

While I generally agree with the trends they are highlighting, I still wonder how this all plays into the business of music and the opportunities for careers in the music industry if everything is free and can be readily absorbed, modified and regurgitated without any concern for commerce or rights. This would be great for device makers like Nokia and others, but not great for the producers of art seeking to make a living off of that activity.

We have already seen how Apple has benefited dramatically at the expense of the artists, writers and record lables - and shifted the income stream out of their hands and into Apple’s own. Powerful motivation for Nokia to follow suit with an even bigger world view of media and their place in it.

Watch the Nokia Videos:

Overview

Future of Mobile

Future of Wikis

Future of Music

Future of Blogging

My co-author Gerd Leonhard has just published a new work entitled “The End of Control”. Here is an excerpt from the introduction. Enjoy.

“This book is about the most important issue the media business is facing as it tries to move forward: control.

In my work as speaker and advisor, the tough issue of control emerges, again and again, as the key contention point within TV companies, publishers, record labels, and broadcasters: How can a commercial venture that is based on so-called “intellectual property” thrive and prosper in an environment that seems to continuously and progressively remove control from the creators/owners/providers of content, and hands it over to the people formerly known as consumers (aka the users), effectively making them more powerful every single day?

But the reality is that every click inadvertently makes another case for the consumer’s ever-increasing rise in importance. Within all the conversations I have had about things like commercial content versus shared content, about the read-only or the read-write web, and about copyright versus Fair Use, the crucial question always seems to boil down to WHERE IS THE CONTROL HERE, i.e., questions such as “Who will control this new media universe” and “How much control do I need to run a revenue-generating business?”

Network_to_networked

Ever more devices, ever faster broadband, more channels, more platforms, faster processors, endless storage, better search — and still, we have only 24 hours in a day. The real barrier is attention! For many content creators or providers, it may often seem that one’s power to monetize stands to be inadvertently diminished every time some geek in some garage publishes a new piece of code. Today, those digital natives (i.e., the 10–25 year olds who were born as the Net Generation) increasingly self-assemble or pull media, controlling and sharing their own collections — and thereby making the companies that usually purvey their mass-media less crucial in the process.

Seven years after the explosion of the dot-com bubble, the future of media once again seems to be up for grabs. Bloggers and Web 2.0 entrepreneurs; social media and UGC (user-generated content) startups; mobile filesharers and P2P software developers; teenage inventors; hungry telecoms; operators and cellcos; mobile phone makers; worried governments and industry organizations; exasperated venture capitalists and their latest and greatest offspring, search engines and online communities — they all want a nice, juicy piece of the anticipated $ 1.6 trillion entertainment economy of 2010. And they all are hell-bent to take control away from the people who used to have it: the studios, and the titans of content.

This book will offer a counter-intuitive theory of we will get there: Give Up on Control.

Old-media veterans, be they music moguls or newspaper, radio, or TV executives — those who have cherished and at all cost maintained their absolute control over the marketplace — are now howling with disgust as those People Formerly Known as Consumers are becoming their de-facto bosses. They have suddenly lost their Monopoly on Attention. Yes, it’s happening everywhere, in all industries, but it is in media where we are most awestruck by its implications: We will now have to work much harder at getting people’s attention, and to gain and keep trust, rather than just use distribution monopolies to send more stuff they should watch down the pipeline.

What’s more, convergence is no longer just an idea, or a PowerPoint tagline. It’s naked reality for every media company, discussed in every boardroom. And many convergent products are relying on a substantial loss of control by all involved parties. Can we offer converged media services without giving up control? Highly unlikely.

The bottom line is that in the future, we will need to learn how to live and prosper with relative control.

Let’s face it: in a world where digital content is ubiquitously created and made readily available to everyone, everywhere, anytime, we simply will not generate enough revenues by attempting to control the copies (or the access to those copies). Throttling distribution and monetizing scarcity — an operating mode that most media conglomerates have enjoyed since the invention of the printing press, the phonograph, the TV, and the CD — is no longer a viable option. Rather, access to media content will simply be a universal, default, built-in status — and therefore, media will first be a service and only then a product.

Value will be generated by being and remaining the trusted context (formerly known as being ‘the networks’ but now becoming known as ‘being networked’); by becoming the unique purveyor of a particular media experience; and by providing added values, again and again, every time the user shows up — real-life, virtually, or both.

Here and now, the people formerly known as consumers are becoming fully empowered Netizens, and it is the Net Generation that will quickly become the default audience for our content, rather than an aberration. The Digital Natives are taking over everywhere, and they will not play if they, in the aggregate, don’t feel like they control the game, or if they get even the slightest whiff that the game may be rigged.

Social networks are quickly becoming the new radio and stand to have more influence over music trends (and commerce) than MTV ever had; (digital) radio is fast turning into a music retailer and distributor; and smart, software-based taste-making agents are set to become a standard in digital music. Mobile phones are becoming powerful media players, and remix devices, and super-distribution nodes — by default. Ubiquitous Wi-Fi and Wimax will soon mean that online and offline cease to be meaningful terms of distinction.

All of this can be summarized in one conclusion: It is now becoming utterly impossible to control the people formerly known as consumers. Instead, they control the media purveyors — by virtue of millions of mouse-clicks and the power of their combined click-streams.”

Music2.0 and the Future of Music is yours – if you can resist the temptation of becoming just another music cartel.

On June 29, 2007, while at London Calling, I was invited to speak to a small group of indie record label leaders at the annual AIM / WIN
gathering in London. I took this opportunity to take a good look at
what needs to happen in order for the independent music companies to
actually take advantage of the new music economy that is unfolding
right now.   So… some of my thoughts are shared below.

 Today I want to present my views on what I like to call “Music2.0”
– the next generation of the music industry that is being created as we
speak. This new model is dramatically different: many old ways of doing
things, many old relationships, and many outmoded traditions cannot and
will not survive.

I want to seduce you, the leaders of the independent music
industry, to go down this new road with me, to take a leap, to leave
some of your assumptions and your ‘religions’ aside, and to make bold
moves – because this is required to turn this ship around.

Scott Fitzgerald, the famous novelist, said: “The
test of a first-rate intelligence is the ability to hold two opposed
ideas in the mind at the same time, and still retain the ability to
function”.  This will clearly be the music industry’s challenge going forward!

Technical and economic innovations have, for the past 10 years,
stripped away many traditions, social and economic hierarchies and
monopolies in the music industry, and if there is one thing we can say
for sure I guess that would be that it’s now show-time:
the music industry is finally reaching a major inflection point; 10
years after the first .com ventures shook the ground. It took a lot
longer than we all thought but it’s hitting much harder now: CD sales
are down between 20 – 40% YTD, and digital sales are not making up the
difference, any time soon – and the one-horse race with iTunes clearly
is a dead-end.

We are very quickly nearing a point to where we are forced to dive
into what I like to call “Music2.0” – a new ecosystem that is not based
on music as a product, but music as a service: first
selling access, and only then selling copies.  An ecosystem based on
ubiquity of music, not scarcity.  An ecosystem based on mutual trust,
not fear.

As Don Tapscott says, in his great book “Wikinomics” ,
we can think of Web1.0 – the ‘old’ web - as some sort of digital
newspaper, while Web2.0 is a canvas that allows information to be put
up, shared, changed, and remixed. It’s about the interaction, the
send-and-receive options that make it useful and ‘special’.  And in
music, it’s always been about interaction, about sharing, about
engaging – not Sell-Sell-Sell right from the start.

Stop the sharing and you kill the music business –
it’s that simple. When the fan / user / listener stops engaging with
the music it’s all over. Today, you urgently need a canvas for music
not a one-way product (such as the CD).

Let’s face it: most ‘leaders’ of the major record companies as well
as some independents are, by and large, still in denial about the fact
that their unit-sales-based model is utterly broken and crashing
quicker than they can fathom, and many still hope for some magical technology solution to solve a business problem.

Billions of $$ have already been lost due to misguided strategies,
outdated policies, and lack of true leadership. Forgive me, but it’s
time to get your act together and do whatever it takes, not just what
fits comfortably into your current landscape – this is a make-it or
break-it moment.

How come many societies and PROs / MROs are still at a total loss when
it’s about ‘licensing the un-licensable’ (as my dear friend and
colleague Jim Griffin
puts it)?  1000s of companies with innovative business models are left
unlicensed, by default (or shall I say by design?), and most of them
have given up on even trying. Major money is left on the table due to
tardiness and internal squabbling.  Many of the traditional music
licensing organizations have utterly failed in their mission of making
music available – in fact, they have, by non-action, succeeded to make it unavailable. What you need now is action not continued excuses.

Today, we have the paradox situation that any startup that wants to
use music will not even try to go legal right from the beginning, since
there is no reasonable way of doing so. Look at the biggest exits in
this turf, during the past 2 years: myspace, youtube, last.fm – either
they did not bother with proper music licenses, or it was unclear if
and where and when they would even need one. Non-compliance succeeded
and was handsomely rewarded.

The music industry must admit that it has failed to act. Their
leaders’ clueless-ness, incomprehension and general lack of willingness
to embrace true change allowed the paying for music to become
voluntary. Congrats.

Don Tapscott points at the year 2006: the losers built digital music
stores, and the winners built vibrant communities based on music. The
losers built walled gardens while the winners built public squares. The
losers were busy guarding their intellectual property while the winners
were busy getting everyone’s attention.  Warner Music Group’s stock
nose-dived from $30 to $14 in less than one year; Google rose from $323
to $526, Apple went from $50 to $127.

For the independent music industry, the question is: which side do
you want to be on? Do you want to become another ‘major player’, and
stay stuck in music1.0, or do you want to lead the way into music2.0?

In this context please allow me give you a glimpse of the future, so that you can make some decisions based on what is coming.

1.    Within 18 months, in many key music territories around the
globe, wireless broadband networks and device-to-device ad-hoc networks
will connect every conceivable device with each other, as well as with
gigantic online content depositories – or shall I say switch-boards -
that will contain every imaginable song, film, or TV show.

If you think ‘sharing’ is a big deal now, wait another 2 years – it
will be 100x as fast and enabled on every single device (not just
computers). 3 Billion+ cell phones and 1 Billion+ music players will
connect seamlessly to each other.

Wireless broadband access and devices will become so cheap,
super-fast and ubiquitous that sharing content will become the default
setting, at very high speeds and with anyone that is close by. Search – Find – Select – Exchange. Click and get.

How can you monetize this? By licensing participation –
and the networks and the devices that enable it.  You must license the
use of any and all music on these networks, and make irresistible,
irrefutable and compelling blanket offers to those that run it. These
license deals must be conversations not monologs. Not a stick to the
ISPs but a huge, shining and attractive carrot.

2.    10s of 1000s of new TV, online video, and gaming channels will
be born in the next 2-3 years – and all of them will need music to go
with the visuals. Millions of songs will be synched to video – this
market will positively explode. It may well be that those B2B licensing
revenues end up being more than 50% of your future income.

However, exploiting these opportunities will only be possible if an
efficient and frictionless system for transactions is available – this
is, imho, where the huge opportunity for the Merlin initiative (where AIM is a member) lies.
Think ebay+ chemdex +ricall + pumpaudio+.  Every $ invested in better
B2B processes will make 10s of 1000s for music rights holders… while
they sleep, or better yet, make more music.

3.    Streaming music, on demand, will be everywhere. On every website,
every widget, every mobile, every device – supported by ads,
sponsorships and commissions on transactions. Performance-based income
will surge beyond your wildest imaginations, But again, only if you
finally chose to play ball, to participate, to make irresistible
license and rate offerings, create reliable standards and go flat-out
for liquidity not try to maintain artificial scarcity.  BMI’s revenues
have grown from $630 Million in 2003 to $779 Million in 2006 – not bad
considering the overall demise of the recorded music market, at the
same time!  So read my mouse: It’s not the copy of the recording that makes all the $$$, it’s the use. In fact, the use of your music is the next big format you have been looking for.

4.    Rich media (i.e. ads with music, video, animations, audio etc)
will become the default advertising format for online advertising,
representing yet another huge growth opportunity for music. Soon, 10%+
of all ad-spending will be on the Internet; and 16% of all Internet ads
in 2009 will be rich media. With an estimated $ 700 Billion of global
ad spending by 2009, that means $70 Billion for online ads, and over
$10 Billion spend for rich media ads. 100s of millions of $$$ for music
licenses!

5.    Digital radio will deliver 100% time- and place shifted music
experiences, stopping only a tiny bit short of becoming another iTunes.
The reality is that net radio is just another Tivo for music. Radio
will indeed become the feels-like-free, on-demand music box, once
again: the only remaining ‘Radio1.0’ factor will be that it will
continue to be curated and expert-produced, as well as taking in social
recommendation and smart technology agents. The best radio stations
will become very strong brands (Radio 1, KCRW etc), out-doing what used
to be record labels. How will you license Radio2.0 if you insist on
staying with a per-copy model?

6.    All music companies will become video companies, too – music
will be multimedia, by default (music + video + audio + text + games).
If you aren’t already diversifying into video and TV you really should.

7.    China, India, South America and Africa will explode with new
models of usage rights – bundles and flat rates based on access. And
guess what: they will indeed have those $100 computers that Negroponte is trying to bring to them!

But again, you will not have truly liquid (i.e. efficient,
low-friction, vastly scalable) markets until you allow, support, and
enable them.  You must swing this ship around, because right now, the
music industry is failing miserably: failing on technical and on
licensing standards, on flexible pricing offerings, on competitiveness,
on compatibility, on being trusted, on transparency.

The music industry’s past was based on:
•    Control
•    Exclusivity
•    Monopoly
•    Closed-ness
•    Guarding / Protection
•    Secrecy / Non-Transparency
•    Territoriality

Your future – if you chose to go there – is based on:
•    Openness
•    Total transparency
•    Peering
•    Sharing
•    A truly global outlook
•    Liquidity

I predict that as much as 60% of this new music business -  and with
that I mean a $100 Billion music business - will be independent within
3-5 years –  but only  if their leaders don’t follow the major labels
into LIKING CONTROL MORE THAN INCOME.   Update: watch this movie clip for more details

Here are a few of my favorite bottom lines:

1)    The media ecosystem of the future is frictionless. That means
music anytime, anyhow and anywhere, ranging from free and ‘feels like
free’ to bundled, up-sold and premium’ed. Your job as a music company
is to do away with the friction, not to add to it, or even to re-insert
it: on the Internet, every hurdle is treated as damage, and the traffic
is simply routed around it.  Create friction and be side-stepped.

2)    It’s all about participation not prevention. Because of the
utter impossibility of maintaining any real hurdles, it is absolutely
crucial that you find ways to participate in any and all forms of
commerce that use music. Charge smartly for access but make music
available the same way that cell phone operators make cell phones
available: a very low-cost, irresistible way of engaging people… and
sell-up from there. Whether it’s streaming on demand, remixes and
mashups, play-listing and social network music applications, to
add-music-to-video, to digital radio – being part of it is what it’s
all about.

3)    Let’s face it: the web is like a giant Tivo, a huge recorder
or DVR - all performances are or can be recorded, all broadcasts really
are deliveries. You need to stop distinguishing between music ‘to keep
/ own’ and music ‘to listen to’ – our users have done this a long time
ago! License the USE. Share revenues. THEN upsell to ownership.

4)    Copyright is the principle, usage right is where you monetize.
Usage is where you need to focus your energies, not the ‘protection of
Intellectual Property’. This is a tough spot but again… do you want
total control, or do you want revenues?

5)    Very few things end completely when new inventions are taking
hold – usually, the market just grows larger. And it will be no
different here. Yes, the fax machine and the Internet killed the Telex
and telegraph, but we still have books even though we have Xerox
machines. CDs will decline, and may fade out  completely, eventually,
but nothing you do in digital music will completely wipe out physical
media. This is just another format, and it’s called ACCESS. And even
better: after you provide access, you can sell ownership again, too
(think HD!)

6)    Remember that the only real limit to growth, in music and in
media, is TIME. Media consumption will rise and rise and rise, as the
offerings become cheaper and more ubiquitous, and as more of the “Digital Natives”
consume multiple media at the same time. You are now engaged in a
battle for the wallet and the clock – but the clock comes first.  Mind
share means time-spend means money spend!  Again, this is where
attention translates into money, and this is why the first objective is
to get attention, and only then to get money. The biggest problem for
most artists (and their labels) is obscurity not piracy!

7)    Engage not enrage: stop anything that enrages the users. And do it now.

8)    Guess what: you can compete with free because what
you can offer is not free. Yes, a copy of a file is free. A CD burned
from another CD is free, a USB stick’s content copied to my computer is
free. But the real-life connection to the artist, the experience that
is happening around the music, the added values such as videos, films,
games, chats, books, concerts and merchandising, the context (!!!) -
all of that must not be free. You must stop the obsession with trying
to make money merely from selling copies, and instead provide access,
because only the legitimate and authorized source (i.e.
agent-label-manager) can provide the whole bundle of values that the
users, fans, the people formerly known as consumers, will buy.

Music2.0 is an unprecedented opportunity, very much like when music
when from acoustic to electric. Everyone wants music. More music is
used on more platforms, all the time. An unprecedented hunger for music
that you need to fulfill!

Finally, here are some challenges that I believe a music industry led by Independents must embrace.

1)    Once released, a recording becomes, in reality, available by
default and must be made ‘usable’ under a default license – all else
equals tacitly conceding that it’s free to use without permission. As a
result of such a new ‘default license’, some rights
principles that we have gotten used to probably won’t translate in this
environment – such as the moral right of deciding where you music is
being performed or maybe even otherwise used. However, I don’t think
this will apply to commercial use in films or ads - unlike the private
or semi-private use in UGC and web-generated content, and of course, to
public performance.

2)    The traditional definition of ‘copyright’ and ‘intellectual
property’ can, for the time being, not be the sole key to monetizing
your creations. Because it is no longer about copies, it’s no longer
about the right to copy, it’s no longer about reproduction – it’s about
how music is being used and how to participate in those much larger
revenues.

Call it ephemeral copies, tethered downloads, rented media,
streaming, buffering, caching, storing, time-shifting, downloading,
ripping or whatever – the fact is that digital technology has done away
with the distinction of a so-called performance being different than a
so-called DPD (digital phonographic delivery). All computers - and that
means all cell phones, too ! – are by definition copying machines. As
overwhelming as this may sound, you must therefore discard the idea of
charging more to ‘keep’ music, as opposed to just ‘listening’ to it as
in radio. Instead, you must focus on charging for added values (such as
a better way to keep the music ;), and on collecting revenue at every
point of access, and then go from there. I don’t want to get into my
good old ‘music like water’ rant again, but charge for music like
utility companies charge for basic water & electricity service, and
then charge more for all the other options. The bottled water business
is a $100 Billion industry!

3)    Your revenues from selling ‘copies of songs’ will soon dwindle
down to maybe 30% of your total income – the rest will be revenues from
licensing, sync, performance, bundling, flat rates… revenue sharing and
the many other streams that are yet in their embryonic stages. Get busy
creating and supporting those new revenue streams!

4)    You can’t afford exclusive rights representation at high rates
any longer, unless these institutions give you 100% coverage and a
flawless solution.

5)    Forget territories except for when serving local repertoire
(which is on the rise, too). Most talent is global, and your audience
is global, or at least virtually local. Internationalize right from the
start and build systems that will support that. Build a worldwide
licensing and B2B-transactions system that makes all repertoire
available for all types of use, and build it quickly.

6)    Resist the temptation to do as the major labels have done
(e.g. extract huge one-off payments, extort equity shares, license at
unreasonable rates, refuse access for no reason but for market control
concerns, sue their own customers etc) – that is a certain death wish.
In fact,  now you can force them to follow you!

7)    Resist all attempts at locked / protected formats, and go for open systems.

)    Bundle and package music in new ways: with other services, with
other products. And prepare for the Flat Rate because this is certainly
coming.

9)    Remove any and all hurdles to complete market liquidity:
pricing inflexibility, lack of standards (technology), lack of
licensing transparency, territorial differences, monopolies.

10)    Embrace outsiders to jumpstart the music business. Niklas
Zennstrom disrupted the telecom business, Hotmail changed email,
Stanford dropouts started Google – the innovation often comes from the
outside.

Call me a Utopian, call me a Dreamer, call me a ruthless Optimist, but I think this is the Future of Music.

Gerd Leonhard, Basel, Switzerland, July 1, 2007

See lots more from Gerd at his Blog.

Watch a fascinating social commentary on the state of affairs in copyright and the internet.

See the whole hour long movie here.