Future Of Music

“There’s a set of data that shows that file sharing is actually good for artists. Not bad for artists. So maybe we shouldn’t be stopping it all the time.”

–Douglas Merrill, EMI’s newly appointed president of digital

As reported earlier this week, EMI has hired Douglas Merrill from Google to head up its overall digital music group.

“I’m passionate about data,” Merrill said during a phone interview Wednesday with CNET News.com. “For example, there’s a set of data that shows that file sharing is actually good for artists. Not bad for artists. So maybe we shouldn’t be stopping it all the time. I don’t know…I am generally speaking (against suing fans). Obviously, there is piracy that is quite destructive but again I think the data shows that in some cases file sharing might be okay. What we need to do is understand when is it good, when it is not good…Suing fans doesn’t feel like a winning strategy.”

The hiring of Merrill, Googles former CIO, who has no background in music sales, represents an acknowledgment of how important digital distribution and technology is to the future of the music industry, and to EMI in particular. Merrill says he’s all about applying what he learned from Google about the Internet, digital distribution, and innovation. Expect to see EMI experimenting with different business and distribution models.

“You must do experiments and follow the data,” Merrill said. “That’s often hard because we all have intuitions. The problem is our intuitions aren’t always right and Google has shown that over and over again. We’ve had internal discussions about ‘Oh I believe the site should work this way.’ We go into the experiment and we’re wrong. And you have to be willing to say ‘I thought it was X, I was wrong. It was really Y. That has to be OK. You have to be OK failing because most of the things we try won’t work. That’s why it’s called an experiment. Those things are very deep in my soul.”

More specifically, Merrill said he would see whether a Google ad model will work for music. But he’s willing to try music subscriptions and even an ISP fee. Certainly, what came across about what strategies Merrill intends to use is that he’s not married to any one idea.

“I think there is going to be a lot of different models,” Merrill said. “Those are two (subscriptions and ISP fees) you can imagine. I’m not sure that either one of those will be the most dominant model. But they are both interesting. We should try them and see what the data says. Other options will be things like you can imagine supporting music through relevant targeted ads, the Google model. There is a dozen of other things…we should try them all. We should see what the data says and whatever it says, we should follow the data, and follow our users and let them help guide us. We should engage in a broad conversation about art.”

“I think it’s important to figure out where can record labels add value,” Merrill said. “I don’t know the answer. I think Nine Inch Nails’ experiments have been really interesting and enlightening. We need to step back and say what is the process of artist creation and helping fans find what artists create.

“Given that as a system we need to understand how record labels fit in there,” Merrill continued, “I think the Nine Inch Nails’ release of Ghosts experiment was fascinating. What a great problem to have: people are trying different things. If everyone tries the same thing you’ll never learn anything new. Instead we’re in a situation where people are trying things. How cool is that? Some are going to work. Some aren’t going to work. But we need to try them.”

It’s not often that you hear the word “data” come from the mouth of a record company executive. One thing for sure is that Merrill will either have a significant impact on the way that EMI proceeds to develop it’s overall music strategy moving forward, or he will be ejected from the Capital Records building in a few months. The clash of culture and thinking between an ex-Google exec and the traditional music industry mavens will surely be entertaining to watch and learn from.

As my friend Gerd Leonhard has said many times, “when the pain becomes great enough, the labels (if they are still in business) will have to change their path.” Apparently the pain at EMI is considerable. Lets wish Mr. Merrill the best of luck!

People should pay for their music the way they pay for gas or electricity.

More people are consuming music today than ever before, yet very few of them are paying for it. The music recording industry blames file sharing for a downturn in CD sales and, with the publishing companies, has tried its best to litigate this behavior out of existence, rather than try to monetize the conduct of music fans. These efforts are fingers in a dike that is about to burst. Digital media are interactive, and people want music that they can burn to CDs, share and use as they wish. The music industry should instead look at turning this consumer phenomenon into a steady stream of cash–lots of it.

The industry ought to establish a “music utility” approach to the distribution and marketing of interactive digital music, modeled after the water, gas and electricity utility systems. It should be done voluntarily to work best for all parties, or it may eventually be legislated through a compulsory license provision.

Under a plan colleague Gerd Leonhard and I propose, consumers would pay a flat music licensing fee of $3 to $5 a month as part of a subscription to an Internet service provider, cellular network, digital cable service wireless carrier or other digital network provider. This fee would let people download and listen to as much music as they care to, from a vast library of files available across the networks.

These fees would result in a huge river of money. With approximately 200 million people connected to a digital network in the U.S., the potential annual revenue stream for a music utility model could be somewhere between $7 billion and $12 billion for the basic service. That is already comparable in size to the existing U.S. recorded music market, which in 2003 was $12 billion at retail, according to the Recording Industry Association of America. This basic service would be augmented with various opportunities, including packages of premium content, live concerts, new releases, artist channels, custom compilations and more. The revenue potential of these premium sources is enormous, too.

How would this money be divvied up? We propose that the industry voluntarily establish a “music utility license” for the interactive use of digital music. This license would compensate all rights holders, including the record labels and artists (for the master recording) as well as publishers and composers (for the underlying composition), with the license fee to be split in half between the owners of the sound recording and the owners of the composition, after deducting a percentage for the digital network providers. This license would be available to anyone willing to implement its terms. The digital network companies would be required to track and report which music had been used, by employing existing digital identification and tracking technologies.

There is already precedence for such a flat-fee system in cable television and in the utility-like models of public broadcasting in Europe. Streaming digital music is already provided in basic cable plans. Cable television itself at first resisted this model, but its economics eventually led to a larger market, providing more consumer choice and more revenue streams overall. Old media almost never die. Cable television did not replace broadcast television; instead, it expanded the market dramatically, by letting video flow like water into new revenue streams–instead of down the drain.

Certainly a music utility would be a radical and complex undertaking, and there are many important details to negotiate, such as the exact nature of the license, how the funds would be administered, the specific tracking method, what collection of technologies would be employed and others. Yet there are inventors and technologists outside the mainstream music business hard at work trying to figure out how to make this happen. It’s time for the main players in the music business today, namely the large record publishers, to cooperate with the inventors and jointly create a future for music where the money really flows and the global market for music can grow from $32 billion to as much as $100 billion.

Originally published in Forbes on January 31, 2005.

The current issue of Rolling Stone includes some interviews with artists on the future of music. Here are some excepts:

Adam Levine - Maroon 5
How do you think the music business will change in the next decade?

It’s a very greedy, artist-exploiting business, and I think it will fall hard so it can rebuild itself with a better business model that is slightly more fair to everybody involved. But, yes, I do think that right now the music business is crumbling. Artists are starting to take back control from the labels, which is great. We have record labels to thank for a lot, but we also have them to blame for a lot. The major labels are scrambling right now and trying reactionary measures. Like, if you sign a record deal now, they take a percentage of your touring revenue. Bands are getting grabbed by the balls before they even sign a record deal and the grip on their balls is even tighter than it used to be. I think it’s only a matter of time before everyone is on an indie label. Because music isn’t going anywhere and the business is being forced to take a look at itself. It needs to go through this phase: Eventually, the scale will calibrate and the business part will ultimately survive, but I think artists will end up in a better position than they’ve ever been.

John Legend
Are you optimistic about the future of the music business?

I don’t really care that much about the overall business. What I care about is, “Am I creating something great for the fans, something that they want to pay for?” Fans might not buy as many albums as they used to, but as long as you make something special, they’re going to keep coming back to you. There are ways to succeed outside of just selling actual units. There’s touring and merchandise and corporate partnerships and all kinds of other ways to make money. I think I’ll be fine, as long as I’m making music people want to buy.

Jack Johnson
What advice do you give to young musicians?

It seems like a really good time to get into music, as far as trying to get your music heard. You don’t really need to have the backing of a major label anymore, you can do it, get your music on the Internet, and that word of mouth thing can happen. That was a huge part for me before I even had a record out. People started trading our stuff online. Once we had a record, people would have me sign a burned copy and say, “Sorry it’s burned,” and I didn’t really care. If people were getting the music, I was cool. I thought technology was helping spread it around. I always hear people say the music industry is in trouble, and it probably is, but as far as getting your music heard, it seems easier nowadays.

Wyclef Jean
What changes do you see coming in music?

I feel like we’re going into a very eclectic mode now, where the strong will survive. Kids can create beats now through their computer in two hours, so to last in the long form, you have to bring a musicianship to it. If you’re hearing the track I did on the CD with me and Serj from System of a Down, you hear how the movement is syncopated, then I stop the record at two minutes, screw it up, then I pick it back up with a classical part, go back into the groove. A kid goes, “Damn, how did he do that? I can’t really do that on my computer. On these Fruity Loops [software], I’ve got to keep it a certain way.” I think this will inspire kids to say, “Man, I’ve got to learn more music and put more arrangements in the music.” People are making music and they’re getting it out there, but we’re losing a sense of the live elements inside their music.

Good reporting from the NYT, as usual. 

Some of my favorite morsels are below, plus my comments.

Link: Music Labels - EMI - New York Times.

NYT:
"Despite costly efforts to build buzz around new talent and thwart
piracy, CD sales have plunged more than 20 percent this year, far
outweighing any gains made by digital sales at iTunes and similar
services. Aram Sinnreich, a media industry consultant at Radar Research
in Los Angeles, said the CD format, introduced in the United States 24
years ago, is in its death throes. “Everyone in the industry thinks of
this Christmas as the last big holiday season for CD sales,” Mr.
Sinnreich said, “and then everything goes kaput…”

Gerd says: guess there IS hope: once the pain is big enough, changing
seems like a real option, all of a sudden - that is what we are seeing
now. Maybe this ship really has to be steered into the cliffs first,
after all?  Call me an optimist but I used to think there were
other options ;). My 2 cents: if you have the guts CHANGE NOW, you can
still own a good chunk of the market, and prosper.  But: band-aids are
over - it’s time for real, hard-core changes. Drop copy-protection (at
least for now - until something can be used that is of super-value to
the USER!), tell the users, fans & artists that you screwed up, go
for flexible pricing and bundles, package music into other media, offer
agency-type deals to artists, become completely transparent and drop
the ’secret sauce’ antics, and start using syndication as the prime
vehicle of promotion, marketing and distribution. It’s not the COPY - it’s the ACCESS. It’s not Prevention - it’s Participation.

NYT: "For the companies that choose to plow ahead, the question is how to
weather the worsening storm. One answer: diversify into businesses that
do not rely directly on CD sales or downloads. The biggest one is music
publishing, which represents songwriters (who may or may not also be
performers) and earns money when their songs are used in TV
commercials, video games or other media…"

Gerd says: ok, now, I have talked about this until the cows came
home, but here is again: switch to music as a service. Again: never
mind the copies - the next big thing is offering ACCESS. Brands.
Experiences. Added Values. Stuff that only you can provide - together
with the artists. Values and experiences can’t just be downloaded.

NYT: "But very few albums have gained traction. And that is compounded by the
industry’s core structural problem: Its main product is widely
available free. More than half of all music acquired by fans last year
came from unpaid sources including Internet file sharing and CD
burning, according to the market research company NPD Group. The
“social” ripping and burning of CDs among friends — which takes place
offline and almost entirely out of reach of industry policing efforts —
accounted for 37 percent of all music consumption, more than
file-sharing, NPD said…."

Gerd says: sounds like an obvious problem - it’s all out there for
free so they stopped buying. But the thing is that this is not the real
problem. ‘Free distribution’ is a blessing not a curse, and P2P /
Super-Dustribution will emerge as the main mechanism for digital
distribution in the next 3 years (and not just for music). Rather, it
is - still seriously counter-assumptive, and beyond grasp of
most of the incumbents of ‘music1.0′ - the unfailing desire to, at any
cost (including self-destruction), want to control the ecosystem that
the large music companies must keep in check - and then we can understand and monetize what people actually do
with technology. They are doing this because they like the music and
the artists, not because they want to  do as much damage as they can -
YOU simply have not given them good enough options to act differently.

If the model of uber-control over music distribution isn’t working
any longer, wouldn’t it make sense to try to come up with a new model?
Lesser control does not mean zero revenues. There is life after selling
expensive copies of plastic, or indeed of 0s and 1s. Trust me.