Future Of Music

For the past 5 years I have been delivering presentations, in a wide variety of contexts including Digital Music Forum, AES, Billboard, IEBA, Music Hack Day, NAMM, Digital Hollywood and at many, many other private consulting gigs.   The essence of the presentation I have been making since 2006 is shown below with a couple of updates, roughly based on the Top 10 Truths described in our Future of Music book.  All along I have been advocating for artists, songwriters and publishers to challenge the way iTunes transactions were accounted for by the labels on the legitimacy of the splits.  The way iTunes royalties have been distributed is just wrong, a scam and a holdover from the accounting practices of the record companies past.

Kusek keynote

Finally someone (Eminem’s production company), challenged Universal Music Group in the way that artists and labels split the money generated by iTunes transactions and won an initial ruling in their favor.  Just this past week Universal Music Group’s inevitable appeal was rejected meaning that the industry giant may now have to split its digital music royalties from money earned from ringtone sales and iTunes.

San Francisco’s US 9th Circuit Court of Appeals decided last month that all royalties made by the record label from such sales must be shared in higher proportions with producers. The recent court rejection will result in this case proceeding in a lower level court which will then determine exactly how much Universal owes Eminem and his producers, taking into account both damages and royalties.

This could be a very significant development for the entire recorded music industry.  When Steve Jobs and his team negotiated the original iTunes deal with the major labels, the economics of what iTunes would receive from transactions was roughly 35% of each download, a similar number as a  distributor/retailer of CDs would receive and the remaining 65% would flow to the labels and be split as with a traditional CD sale.

This was a masterful negotiation by Apple, effectively granting itself amnesty from claims of copyright infringement or inducement to infringe copyright on the part of the major labels and publishers in exchange for the promise of digital cash flow, potentially reigniting the recorded music business for the labels.  Even if most of the music contained on iPods was pirated, now the labels would have a new revenue stream and Apple would be safe from litigation.  This move paved the way for Apple to become the dominant company in the music business and one of the most valuable brands on the planet.  A transformational revenue shift was underway whereby Apple would effectively eat the labels lunch.  The ultimate iCon.

But what artists and writers failed to question at the time, was the way the 65% label share would be split.  The labels assumed that these downloads were “sales” of copies of the songs and that artists would receive their royalties based on traditional accounting practices.  In the early days of payments from iTunes, labels often continued to deduct fees from the artists share for “packaging” and “marketing” and “coop” often when there were no actual costs being incurred.  No one questioned whether iTunes downloads were “licenses” versus “sales” which would have tipped the accounting in favor of the artists.  Indeed Steve Jobs himself referred to his deal with the labels as a “license” in his rare and open “Thoughts on Music” letter posted February 6, 2007.

Now fast forward to 2010.  Although not directly listed in the UMG suit, Eminem could benefit from the results, as he could get a much larger share of the payments. The case is being touted as a landmark decision for the music industry as it could determine a precedent that could see 90 per cent of contracts signed before 2000 change for the benefit of the artists and songwriters.  If this ruling holds up and is widely interpreted, it will destroy the traditional record labels.

The ruling will hinge on the standard record deal contract, which predates the digital era and changes that have come with it. New rulings will most likely govern how digital royalties will be accounted for.

In the most recent decision the court has defined record companies’ deals with such firms as Verizon and iTunes as ‘licensing’ contracts as opposed to music sales, meaning the 50/50 split would apply.  This will be devastating for the labels and great for artists.

When I commented on this issue in an earlier post, one of my readers wrote “if Eminem eventually prevails it will be the end of discovering and nurturing new talent by record companies and will throw the music scene into more disarray that P2P ever did.”  While this may be true, I am completely convinced that the old record company model must change, will change, and will eventually be replaced by something more clearly aligned with the times and the new digital reality.  There is no doubt that these times are truly wrenching for the music industry – but music will prevail and the interests will realign into something sustainable.

Read more here and stay tuned to see how this all turns out.

From Hypebot.  It’s no secret that the amount of money artists are earning from recorded music is declining.  But by how much? And as digital sales replace physical and streaming music gains traction do the numbers shift in the artist’s favor?  Infographic created by David McCandless of Information Is Beautiful from a spreadsheet of data.

“In a digital world there’s no up-front cost to have infinite inventory that replicates itself on demand as a perfect digital copy and it only does that after it’s been authorized to do so, which is usually with a purchase. It has really been a shift from having infrastructure and access to distribution to just having access to distribution.” -Jeff Price

My friend Charlie McEnerney recently interviewed Jeff Price of Tunecore. Here is an excerpt. Listen to the complete interview here.

“As anyone who buys music knows, the way we are finding it and buying it has changed radically over the last 15 years.

For musicians, it used to be that if you wanted someone to release your music, you’d have to get the attention and approval of an artist and repertoire (or A&R person) at a label, work to sign a deal either big or small so that the label would then press up your product and work with distributors to get your vinyl or 8-track or cassette or CD to ship them out to record stores where the music fan could have access to them.

Now, all you have to do it is get some audio files online and instantly be able to have your music available to the current online global audience of 1.5 billion people, which is still just about 23% of the world’s population, so the potential for reaching new audiences continues to grow. As mobile devices get smarter, it’s inevitable that consumers will be downloading more music and playing it without a desktop or laptop computer even being involved, too.

As a result of the rise of digital download stores such as iTunes and Amazon mp3, the need has come for new companies to aggregate songs and distribute them out to all these growing online stores.

That’s where TuneCore comes in.

After SpinArt, Price went on to work with eMusic.com, first as a consultant, then as interim VP of Content Acquisition, and finally as the Senior Director of Music/Business Development. He contributed towards the creation of eMusic’s initial business model and created and implemented the first subscription-based music sales and distribution structure.

In 2005 Price started TuneCore, which is an aggregator which helps get digital music into online stores such as iTunes, Amazon mp3, eMusic, Rhapsody, Napster, Amie Street, Groupie Tunes, ShockHound.com, and lala.

TuneCore has also been in the news in recent months as some very mainstream acts have used the service to get their music direct to consumers, including Nine Inch Nails and Paul Westerberg. Just a few weeks back, it was announced that Aretha Franklin would be using TuneCore to distribute her version of My Country Tis Thee that she performed at the Obama inauguration.

TuneCore’s competitors are services such as IODA, The Orchard, and CD Baby and I discuss with Price about what makes TuneCore different from these services.

This episode includes music from a variety of independent music that has been submitted to be for Well-Rounded Radio.

Listen to the interview here along with some great new music.

Our book is available in various forms.

You can listen to the book on iTunes as a podcast for free. Go to the iTunes store and search “Future of Music” podcasts and subscribe.

You can buy the book on Amazon for $11.53 or less.

You can purchase the audiobook from Audible for $7.49.

Here are a few of the reviews.

Publishers Weekly
Two innovators in music technology take a fascinating look at the impact of the digital revolution on the music business and predict “a future in which music will be like water: ubiquitous and free-flowing.” Kusek and Leonhard foresee the disappearance of CDs and record stores as we know them in the next decade; consumers will have access to more products than ever, though, through a vast range of digital radio channels, person-to-person Internet file sharing and a host of subscription services. The authors are especially good at describing how the way current record companies operate – as both owners and distributors of music, with artists making less than executives – will also drastically change: individual CD sales, for example, will be replaced by “a very potent ‘liquid’ pricing system that incorporates subscriptions, bundles of various media types, multi-access deals, and added-value services.” While the authors often shift from analysts into cheerleaders for the über-wired future they predict – “Let’s replace inefficient content-protection schemes with effective means of sharing-control and superdistribution!” – their clearly written and groundbreaking book is the first major statement of what may be “the new digital reality” of the music business in the future.

5.0 out of 5 stars THE FUTURE OF MUSIC IS NOW
Gian Fiero (Hollywood, California)
This book is so brilliant that it makes the vast majority of music industry books that are being published seem irrelevant. It discusses in detail, the reasons why the future of the music industry is headed into the digital/mobile entertainment era. It also provides statistical information that professionals, marketers, entrepreneurs, and educators can use constructively. Both Dave and Gerd (the books co-author), have their fingers firmly planted on current music industry activities and trends. They also possess and display a clairvoyant eye toward the future that offers beneficial insight and foresight to those who may not be aware of what this whole digital (i.e. independent) revolution is about, and most importantly, what it will entail to prosper in it. The book is easy to read, easy to understand and simply brilliant. If you buy just one industry book this year, this should be THE one. Buy it now!

5.0 out of 5 stars Indispensible
Stephen Hill “Producer, Hearts of Space” (San Rafael, CA USA)
A stunningly candid source of concentrated, up to date insight about the music business and its turbulent transition into the digital era. This book tells it straight and will make the dinosaurs of the music industry very unhappy.

Like Martin Luther’s ’95 Theses’ nailed to the door of Wittenberg Cathedral, Kusek and Leonard drive nail after nail into the sclerotic heart of the old-fashioned music business. Their rational vision of the future of music rests on the idea of unshackling music from the hardcopy product business in a yet-to-be-realized era of open content licensing, facilitating sharing and communication among users, and growing the business to its full potential.

It provides as clear a vision of the future of the music industry as you will find, from two writers with a rare combination: a solid grounding in the traditional practices of the music business, an up-to-the-minute knowledge of the new technologies that are changing it, and the ability to think through the consequences.

I’ve dreamed about a book like this, but thought it would be impossible in today’s hyperdynamic environment where every week seems to bring a breakthrough technology, device, or service. But by digging out the underlying trends and principles Kusek and Leonard get under the news and illuminate it. Along the way they provide a brilliantly concise history of the evolution of digital media.

I can’t think of any book more important for artists to get the full re-orientation they need to survive and prosper in the digital era. It’s no less critical for members of the music and broadcasting industries who need to consolidate their thinking into a coherent roadmap for the future. In a word: indispensible.

Want to know what’s up with new music startups? Read on. Great coverage by Paul Bonanos from The Deal. So good to see mainstream financial coverage of our music industry.

Striking a chord

A decade after Napster, a new crop of Internet startups is challenging the music industry’s dominant companies. Their instruments of choice: social networking, discovery, ad-supported streaming, marketing and other tools that change how business is done.

Source: Tech Confidential

U.K.-based We7 Ltd., which has drawn funding from British musician Peter Gabriel, along with VC firms Eden Ventures and Spark Ventures plc, both of London, offers free songs that contain short advertisements that vanish after a few weeks. We7 recently added songs from a third major label, while SpiralFrog signed up only two of the four majors, meaning that finding free songs can still be something of a wild
goose chase.

Nashville’s NoiseTrade, a bootstrapped startup, provides a way for artists to give away music in exchange for the e-mail addresses of prospective new fans, while angel investor-backed TrueAnthem Corp. of San Francisco connects brand advertisers with musicians, who introduce tunes with short, personalized ads.

Consumers less inclined to possess a virtual copy of a song also have more options. That includes subscribing to libraries of music content and Web sites that allow streaming songs on demand and limited downloading. Publicly traded RealNetworks Inc. of Seattle has emerged as a clear leader among such products with its Rhapsody service, while the existing Napster, which purchased its trademark from the original bankrupt startup, has lost subscribers and remains far from profitable. Both companies offer several tiered plans, ranging from roughly $10 to $15 per month, that provide access to millions of songs from all four major labels, as well as “tethered downloads,” or DRM-restricted files that expire once a customer cancels his subscription.

The market for free music “streamed” on a Web site is more complex, with some startups relying on subscription services to supply songs through their own user interfaces. Most streaming services are married to some other Web utility, whether a social networking site, music discovery service or
paid-download store.

With investment from VC firms Sequoia Capital and Morgenthaler Ventures, both of Menlo Park, Calif., as well as from Universal Music and Warner, social music site Imeem Inc. of San Francisco has built the fastest-growing free streaming service. All four major labels now supply music to Imeem, which lets users play songs on demand.

Imeem’s growth highlights the pressure on “old music” companies, like other old media firms, to change with the times. And the legal battles between upstart music firms and incumbents have been no less intense than the fights in other quadrants of the media industry, such as the ongoing court dispute between Google Inc. and Viacom Inc. over the search giant’s use of protected video on YouTube. Warner sued Imeem in 2007 over alleged copyright infringement, only to later buy a stake in the startup after settling the case.

“Sometimes a lawsuit is foreplay to a licensing deal,” says Norwest Venture Partners principal Tim Chang of startups’ path to legitimacy in the age of free music. “They infringe so that users get what they want and advertisers pay attention, scale so that you have some leverage against labels, get sued and then settle.”

The digital-music business is entering a phase common to many emerging high-tech sectors. The land rush of startups that follows any significant technological shift, such as file sharing, is already starting to thin out as winners stake their claims and losers get consolidated, if they’re lucky, or simply disappear.

For example, Last.fm rival Pandora Media Inc. faces a fight for survival despite having attracted prominent venture investors and a slew of good publicity. The Oakland, Calif., startup employs music experts to create a recommendation “engine” for Internet radio. But an upcoming regulatory change that will result in a doubling of streaming royalty rates for Web radio companies could spell the company’s doom unless it elects to charge users a subscription fee or finds a way to add advertising that its audience will accept.

Like Pandora and Last.fm, music discovery site iLike Inc. of Seattle has become popular, if not consistently profitable. One key to its success in attracting users has been its availability over Facebook Inc. of Palo Alto, Calif., through which more than half of its 30 million users connect to the service. Through a partnership with Rhapsody, iLike allows users to stream as many as 25 songs per month and download selected others for free while examining their friends’ tastes and recommendations. The startup has raised $15.8 million in two rounds of funding from former Time Warner Inc. executive and MTV co-founder Bob Pittman, star venture capitalist Vinod Khosla, and the Ticketmaster unit of IAC/InterActiveCorp of New York.

“There’s a natural propensity for social networking and music to go together,” says MySpace founder Brad Greenspan, who left the social network in 2003. “When you’re surfing people’s profiles and everything starts to look the same, the only way to differentiate among them is their individualization. And if you add an image of an artist on a site, you will bring in people who want to be close to that musician’s energy, whether by blogging, chatting, befriending or following them.”

Drawing on such desires, music-blogging hub MOG Inc. of Berkeley, Calif., wants to tap into fans’ efforts to spread the word about their favorite artists. Universal and Sony BMG joined the Angels’ Forum of Palo Alto in putting $6 million into the startup, which compiles the musings of volunteer bloggers writing on given musicians and bands. MOG, which also offers on-demand music, represents a one-stop version of the musical blogosphere, where songs are commonly shared without compensation for content owners.

Also harnessing the power of the blogosphere are music-focused search engines such as the bootstrapped Hype Machine Inc. of New York and angel-backed Seeqpod Inc. of Emeryville, Calif., which index thousands of music blogs where MP3s often reside for a few weeks so users can sample them.

Another area where Internet startups are encroaching on the record labels’ turf is marketing. Launched this summer, Los Angeles-based Topspin Media Inc. enables artists and fans to communicate directly, offering a sort of customer management technology package for musicians that allows sales of songs, albums and merchandise. Under one subscription option offered through the company, a fan can pay a flat fee for a musician’s entire recorded output over the coming year — income a musician might otherwise have to share with a label. Venture investors are on board, with Topspin having raised funding from Redpoint Ventures of Menlo Park and Foundry Group of Boulder, Colo.

But rampant music piracy continues to dwarf legitimate sales, cutting label revenues by as much as half since the mid-1990s. Meanwhile, work that had long been the province of music companies has been gradually appropriated by newer, fleeter Internet companies or, as with marketing, “disaggregated” out of existence. Other competitors also have emerged. LiveNation Inc. of New York, a publicly traded live music promotion company spun out of Clear Channel Communications Inc. in 2005, has signed top acts, including U2 and Madonna, and has sweetened its deals by letting artists maintain ownership of their material.”

If so, what will the business look like? A dying era of superstar acts may give way to a music scene carved into myriad niches, with proliferating media channels creating room for more voices — the “middle class” of artists, as Rogers puts it. Artists and fans will operate in closer proximity, with more tools in place to help them connect.

How, then, will music derive its commercial value, and where should investors place their bets? The future is likely to include more sponsorship and patronage. Imagine liquor companies, fast-food joints and other advertisers paying the band of the moment for rights to its music before it’s recorded rather than after it hits the charts. Alternatively, rich benefactors — or legions of fans — could support artists in exchange for early access to a new album or even a shout-out in the liner notes. Tie-ins with other media such as video games will also create opportunities: People may not buy the album for $15, but they’ll pay $39.99 for the “Guitar Hero” version.

The old ways, reinvigorated by technology, are made new again.

Read the complete article at The Deal.

Want to know what’s up with new music startups? Read on. Great coverage by Paul Bonanos from The Deal. So good to see mainstream financial coverage of our music industry.

Striking a chord

A decade after Napster, a new crop of Internet startups is challenging the music industry’s dominant companies. Their instruments of choice: social networking, discovery, ad-supported streaming, marketing and other tools that change how business is done.

Source: Tech Confidential

U.K.-based We7 Ltd., which has drawn funding from British musician Peter Gabriel, along with VC firms Eden Ventures and Spark Ventures plc, both of London, offers free songs that contain short advertisements that vanish after a few weeks. We7 recently added songs from a third major label, while SpiralFrog signed up only two of the four majors, meaning that finding free songs can still be something of a wild
goose chase.

Nashville’s NoiseTrade, a bootstrapped startup, provides a way for artists to give away music in exchange for the e-mail addresses of prospective new fans, while angel investor-backed TrueAnthem Corp. of San Francisco connects brand advertisers with musicians, who introduce tunes with short, personalized ads.

Consumers less inclined to possess a virtual copy of a song also have more options. That includes subscribing to libraries of music content and Web sites that allow streaming songs on demand and limited downloading. Publicly traded RealNetworks Inc. of Seattle has emerged as a clear leader among such products with its Rhapsody service, while the existing Napster, which purchased its trademark from the original bankrupt startup, has lost subscribers and remains far from profitable. Both companies offer several tiered plans, ranging from roughly $10 to $15 per month, that provide access to millions of songs from all four major labels, as well as “tethered downloads,” or DRM-restricted files that expire once a customer cancels his subscription.

The market for free music “streamed” on a Web site is more complex, with some startups relying on subscription services to supply songs through their own user interfaces. Most streaming services are married to some other Web utility, whether a social networking site, music discovery service or
paid-download store.

With investment from VC firms Sequoia Capital and Morgenthaler Ventures, both of Menlo Park, Calif., as well as from Universal Music and Warner, social music site Imeem Inc. of San Francisco has built the fastest-growing free streaming service. All four major labels now supply music to Imeem, which lets users play songs on demand.

Imeem’s growth highlights the pressure on “old music” companies, like other old media firms, to change with the times. And the legal battles between upstart music firms and incumbents have been no less intense than the fights in other quadrants of the media industry, such as the ongoing court dispute between Google Inc. and Viacom Inc. over the search giant’s use of protected video on YouTube. Warner sued Imeem in 2007 over alleged copyright infringement, only to later buy a stake in the startup after settling the case.

“Sometimes a lawsuit is foreplay to a licensing deal,” says Norwest Venture Partners principal Tim Chang of startups’ path to legitimacy in the age of free music. “They infringe so that users get what they want and advertisers pay attention, scale so that you have some leverage against labels, get sued and then settle.”

The digital-music business is entering a phase common to many emerging high-tech sectors. The land rush of startups that follows any significant technological shift, such as file sharing, is already starting to thin out as winners stake their claims and losers get consolidated, if they’re lucky, or simply disappear.

For example, Last.fm rival Pandora Media Inc. faces a fight for survival despite having attracted prominent venture investors and a slew of good publicity. The Oakland, Calif., startup employs music experts to create a recommendation “engine” for Internet radio. But an upcoming regulatory change that will result in a doubling of streaming royalty rates for Web radio companies could spell the company’s doom unless it elects to charge users a subscription fee or finds a way to add advertising that its audience will accept.

Like Pandora and Last.fm, music discovery site iLike Inc. of Seattle has become popular, if not consistently profitable. One key to its success in attracting users has been its availability over Facebook Inc. of Palo Alto, Calif., through which more than half of its 30 million users connect to the service. Through a partnership with Rhapsody, iLike allows users to stream as many as 25 songs per month and download selected others for free while examining their friends’ tastes and recommendations. The startup has raised $15.8 million in two rounds of funding from former Time Warner Inc. executive and MTV co-founder Bob Pittman, star venture capitalist Vinod Khosla, and the Ticketmaster unit of IAC/InterActiveCorp of New York.

“There’s a natural propensity for social networking and music to go together,” says MySpace founder Brad Greenspan, who left the social network in 2003. “When you’re surfing people’s profiles and everything starts to look the same, the only way to differentiate among them is their individualization. And if you add an image of an artist on a site, you will bring in people who want to be close to that musician’s energy, whether by blogging, chatting, befriending or following them.”

Drawing on such desires, music-blogging hub MOG Inc. of Berkeley, Calif., wants to tap into fans’ efforts to spread the word about their favorite artists. Universal and Sony BMG joined the Angels’ Forum of Palo Alto in putting $6 million into the startup, which compiles the musings of volunteer bloggers writing on given musicians and bands. MOG, which also offers on-demand music, represents a one-stop version of the musical blogosphere, where songs are commonly shared without compensation for content owners.

Also harnessing the power of the blogosphere are music-focused search engines such as the bootstrapped Hype Machine Inc. of New York and angel-backed Seeqpod Inc. of Emeryville, Calif., which index thousands of music blogs where MP3s often reside for a few weeks so users can sample them.

Another area where Internet startups are encroaching on the record labels’ turf is marketing. Launched this summer, Los Angeles-based Topspin Media Inc. enables artists and fans to communicate directly, offering a sort of customer management technology package for musicians that allows sales of songs, albums and merchandise. Under one subscription option offered through the company, a fan can pay a flat fee for a musician’s entire recorded output over the coming year — income a musician might otherwise have to share with a label. Venture investors are on board, with Topspin having raised funding from Redpoint Ventures of Menlo Park and Foundry Group of Boulder, Colo.

But rampant music piracy continues to dwarf legitimate sales, cutting label revenues by as much as half since the mid-1990s. Meanwhile, work that had long been the province of music companies has been gradually appropriated by newer, fleeter Internet companies or, as with marketing, “disaggregated” out of existence. Other competitors also have emerged. LiveNation Inc. of New York, a publicly traded live music promotion company spun out of Clear Channel Communications Inc. in 2005, has signed top acts, including U2 and Madonna, and has sweetened its deals by letting artists maintain ownership of their material.”

If so, what will the business look like? A dying era of superstar acts may give way to a music scene carved into myriad niches, with proliferating media channels creating room for more voices — the “middle class” of artists, as Rogers puts it. Artists and fans will operate in closer proximity, with more tools in place to help them connect.

How, then, will music derive its commercial value, and where should investors place their bets? The future is likely to include more sponsorship and patronage. Imagine liquor companies, fast-food joints and other advertisers paying the band of the moment for rights to its music before it’s recorded rather than after it hits the charts. Alternatively, rich benefactors — or legions of fans — could support artists in exchange for early access to a new album or even a shout-out in the liner notes. Tie-ins with other media such as video games will also create opportunities: People may not buy the album for $15, but they’ll pay $39.99 for the “Guitar Hero” version.

The old ways, reinvigorated by technology, are made new again.

Read the complete article at The Deal.

Derek is the musician who started CD Baby, the world’s largest online music store for independent musicians. Here are some current stats from the site:

- 242,846 artists sell their music at CD Baby
- 4,574,622 CDs sold online to customers
- $83,590,381 paid directly to the artists

With more than 2 million digitized tracks under management, CD Baby is also the largest provider of independent music for iTunes… and it all started as a hobby. A lot to learn here.

Tim Ferriss is the author of the hugely popular book The Four Hour Workweek.

Here is a recent interview between Derek and Tim. Interesting to see how Derek adopts Tim’s philosophy for CD-Baby. Note that Derek just recently sold CDBaby to Disc Makers and is now a free agent.