Future Of Music

If you’ve ever felt grateful for the list of titles and track lengths that appear when you pop a CD into your player, David Hyman’s Gracenote is the company to thank. It enters all that data so you don’t have to. After Hyman helped expand Gracenote from a tiny metadata venture into the world’s largest database of CD titles and track lists, Sony bought the company for $250 million in 2008. That delivered nice returns for early investors, including Jones and Simon. “I showed them a good time. Then I brought them to Mog,” says Hyman.

Now Hyman has a new vision: fusing portability, social networking and unlimited music streaming at a single site. Mog will deliver this in a new music medium–the smartphone–expected to soon overtake PCs as the prime gateway to the Web. In March Hyman unveiled Mog’s mobile app at the South by Southwest music conference in Austin. With a couple of commands a phone user can segue to a screen offering access to 7 million songs spanning a century. All this to chase an elusive dream: technologically uniting a fractured music market.

His backers are betting Hyman, can succeed in a business that has ruined many a provider of capital. A decade ago a dozen labels dominated an industry drawing $40 billion in annual revenue. It is now half that. Streaming services with cryptic names like Spotify and Pandora now vie for users who listen to music not on CDs but PCs. And what happened to that $20 billion? Some of it was lost to music pirates; some of it to newcomers like iTunes, which takes in $2 billion a year.

Digital disruption of the music industry seemed to offer plenty of entree for new music distributors. Offering its own player and music store, iTunes thrived. But MTV, Yahoo and AOL all tried, then abandoned, selling music online (they now mostly stream it for free). Squeezing profits from online listeners turned out to be dicier than imagined. Smaller operators like Pandora carved out a niche following among “passive listeners.” Type the name of a song into Pandora’s search engine and it instantly produces an entire station around the track. It does this by mapping songs using 400 characteristics, from melodies to orchestration. This musical fingerprint associates one composition with another.

Hyman’s brainchild is a clever hybrid inspired by scrappy competitors. Like Pandora, Mog’s slider bar can be moved to add artists similar to ones you like, building your own playlist. Like Microsoft’s Zune player, it delivers ultrahigh fidelity. Hyman has taken a page from Twitter, too, running feeds from like-minded music fans, allowing users to find new music through “social discovery.”

Can Hyman triumph where bigger brands have failed? He has one edge: Mog’s blog network. Hyman built it by hiring the former top ad salesman at mtv.com, Alex Brough, who integrated content from other blogs with RSS feeds onto the Mog site. Hyman sold ads against this content and split the revenue with bloggers. The site now hosts 1,000 of the largest online music blogs in the U.S. Hyman will tap into this network, mostly using ad inventory, to build Mog’s brand.

To win, Mog will have to score a steep trajectory of subscriptions at $10 per month ($5 more than his PC-based subscription). Mog will also have to deliver “interoperability.” That’s the means by which music in disparate locations, say your laptop and home office, can be married and live together in Mog’s “cloud” (servers back at headquarters). “We’ll be able to add what’s on your hard drive to your Web-based library, grab your playlists and combine all of this legacy data in one place, along with new music from your Mog subscription,” he promises. The streaming service that delivers the best such interoperability should be a big selling point to music junkies.

Of course, if you stop paying, your cloud vanishes. How will that go down with music lovers? “The hard part for people to swallow will be that they won’t own the music they pay to hear,” says Kevin Burden, mobile device practice director at ABI Research. “It’s like leasing a car. You don’t have upfront costs, and you get a new model every two to three years. There’s value to that, but you don’t own it.”

Mog’s competitors think it’s worth the risk. Rhapsody, Catch Media and Spotify all have licensing agreements from music publishers for cloud-based streaming. So does digital music service Lala, bought by Apple last year. Apple recently announced plans to move every iTunes user’s music collection to Apple’s cloud this year. Death of the music download may be at hand.

One burden Hyman shares with his peers is the cost of content. The labels charge up to half a penny per stream per subscriber. European music giant Spotify, now with 320,000 paid subscribers, wants to bring its free service to the American market, but the labels want to be paid more than Spotify can likely afford. That won’t stop Mog’s coming showdown with its larger competitor. Watch for war clouds soon in Europe, as Hyman challenges Spotify on its own turf this summer.

Read more about the difficult work of creating the river of music at Forbes here.

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.

Sometimes it takes a while for ideas to spread and become perceived as good ones. The “Music Like Water” metaphor where for a low monthly fee, people would have access to all the music they want in a kind-of music utility is one such idea.

In a variety of recent announcements, the once mighty major labels have begun to accept the idea that maybe, the old way of squeezing cash out of consumers for music – might need to be replaced with another model.

Emusic has been pioneering a hybrid subscription/download models for many years and is currently the #2 supplier of “paid for” digital music behind iTunes. Now both Sony/BMG and Warner Music are speaking publicly about subscription and utility models that they intend to explore.

Warner has gone so far as to hire Jim Griffin to head up development of a new business to bundle a monthly fee into consumers’ Internet service bills for unlimited access to music. Whoa!

The plan—the boldest move yet to keep the wounded music industry giants afloat—is simple: Consumers will pay a monthly fee, bundled into an internet service bill in exchange for unfettered access to a database of all known music.

Bronfman’s decision to hire Griffin, a respected industry critic, demonstrates the desperation of the recording industry. It has shrunk to a $10 billion business from $15 billion in almost a decade. Compact disc sales are plummeting as online music downloads skyrocket.

“Today, it has become purely voluntary to pay for music,” Griffin told Portfolio.com in an exclusive sitdown this week. “If I tell you to go listen to this band, you could pay, or you might not. It’s pretty much up to you. So the music business has become a big tip jar.”

Nothing provokes sheer terror in the recording industry more than the rise of peer-to-peer file sharing networks. For years, digital music seers have argued the rise of such networks has made copyright law obsolete and free music distribution universal.

Bronfman has asked Griffin, formerly Geffen Music’s digital chief, to develop a model that would create a pool of money from user fees to be distributed to artists and copyright holders. Warner has given Griffin a three-year contract to form a new organization to spearhead the plan.

Griffin says he hopes to move beyond the years of acrimonious record industry litigation against illegal file-swappers, college students in particular.

“We’re still clinging to the vine of music as a product,” Griffin says, calling the industry’s plight “Tarzan” economics.

“But we’re swinging toward the vine of music as a service. We need to get ready to let go and grab the next vine, which is a pool of money and a fair way to split it up, rather than controlling the quantity and destiny of sound recordings.”

Read more from Portfolio here.