Long But Interesting Piece on Streaming

[Anderton]

This was written as a response to a column Bob Lefsetz wrote, and I think it's pretty thoughtful. I have permission from Bob to reprint material from his blog so the following is presented in its entirety.

 

 

From: Roger McNamee

Subject: My thoughts on the opportunity in music

 

Dear Bob,

As a follow-up to the conference in Santa Barbara, I want to summarize the thoughts I shared in our conversation about the opportunities in music. With your permission, I would like to send this to the email list from the conference.

The industry has been in a defensive crouch since the mid-90s, as its share of entertainment revenues and business model eroded. But the defensive crouch is no longer appropriate. Eight and half years after the launch of Spotify, streaming has transformed the industry, creating a new equilibrium that justifies a positive outlook about the future. With more than 100 million paid customers around the world, streaming is now established in China and India, as well as North America and Western Europe. The time has come to be optimistic about the long term penetration of streaming. It is not crazy to imagine that half of all smartphone users might eventually pay something for streaming services. Given that penetration is 10% or less today, the industry is likely to benefit from a major tailwind for at least the next ten years. Many people will choose streaming plans that cost less than today’s $10 monthly standard, but aggregate revenues are going to rise … a lot.

The success of streaming transforms the industry’s revenue outlook, and it will provide a safety net for addressing two other problems plaguing the music business: culture and loss of engagement.

The culture problem is the persistent conservatism/pessimism that were the inevitable result of a long, brutal downturn. From where I sit, it is time to trust the success of streaming and take advantage of the growing cash flows it will produce. Don’t harvest streaming! Use a portion of growing streaming revenues to ramp up experimentation with new platforms and technologies. Sow seeds for future growth.

The other big problem for the music industry is loss of engagement. In the era of LPs, consumers actively engaged with recorded music. They put an album on the turntable, read the liner notes, rolled a doobie, and focused on the music. Engagement declined with transition to CDs and evaporated with MP3, as music became a soundtrack for other activities. There is nothing inherently wrong with being a background activity, but it is less valuable than being front and center. This helps to explain why concert ticket prices have risen so high in recent years. Concerts are the last area where music demands and rewards deep engagement.

Rising revenues from streaming creates a safety net that should empower the industry to experiment with new products that compel the full attention of consumers … and reward artists and their teams with incremental revenue streams and valuable intellectual property. This is a particularly good time to do so, as the industry’s former nemesis, Silicon Valley, is in the early stages of a correction. The much publicized Unicorn cycle is not working out according to plan, which is likely to produce business failures, layoffs, and increased openness to new ideas. Silicon Valley has plenty of capital … and at least two emerging platforms whose success will depend compelling content that does not yet exist: virtual reality (VR) and augmented realized (AR). In VR, Facebook’s Oculus division, Sony’s Playstation division, HTC and some start-ups have collectively invested hundreds of millions of dollars in new platforms that are still a year or two away from commercial viability. VR is positioned to take a large percentage of the $30 billion video game industry, but to do so, it needs compelling content. I am confident that they will eventually crack the code, but they have not done it yet. And they need some new ideas. In AR, Microsoft and Magic Leap have spent hundreds of millions on new platforms that, like VR, are still a year or two away from commercial viability. Both AR players were blindsided by Nintendo’s Pokemon Go, which used smartphones (instead of specialized hardware) to create the most successful video game launch in history. Having broken Apple’s AppStore during the first week, Pokemon Go has had half a billion downloads in 9 months. This raises the stakes for Microsoft and Magic Leap, who need really compelling content to justify the cost of their hardware. As in VR, the content formula is “to be determined.”

VR and AR are two platforms that will enable the music industry to create new products for active, rather than passive engagement. To be successful in this endeavor, the industry must be open to two changes in its business practices. First, the industry has to stop its practice of forcing every new initiative into is standard license model. It must be willing to work with outsiders as partners, with a business model that maximizes the probability of success. Second, it must view new platforms as new media. You can slap songs on just about anything, but the economic value of doing so will generally be modest. A better strategy would be to empower artists to create new art forms on each new platform. What Bjork did on iOS was a step in the right direction. As with all experiments, there is lots of risk in any individual project. To be confident of success, you need to be prepared for failure and persist through it. The first experiments are unlikely to be the ones that create the most value. The beauty of VR and AR is that the categories are brand new; the playing field is level … and it is easy to imagine compelling products based on music. The cost of experimenting today is far less than it will be once the platforms are established. The people backing the new platforms cannot succeed without compelling content, and will almost certainly invest big dollars to improve their content portfolio. They will pay even more for exclusives. Whether they will do so with musicians is unknown, but I suspect you can influence the outcome.

There is one other way the music industry can leverage the tailwind of streaming: re-imagine the scarcity model. The industry still works on a cycle of big events; an album every few years, with a supporting tour. Step back for a minute and think about that. Many artists are only in the market every three years. In a world dominated by real time news feeds on social media, how much sense does that make? I am not recommending more frequent recording cycles or tours, although they will be good choices for some artists. I am recommending aggressive experimentation with new platforms, new media and new forms of engagement on cycles unrelated to albums and tours.

When I worked with the Grateful Dead, I came to appreciate that every band has a pyramid of fans with three tiers: drive-by, standard, and fanatics. The drive-by fans the most numerous. They are the ones who like all kinds of music and develop their tastes from radio, Pandora or Spotify playlists. Drive-by fans have been the bread and butter of the music business for decades. Standard fans like the band, buy the album and generally go to a show when the band tours. Bands like the Rolling Stones, Paul McCarty, Bruce Springsteen and U2 have millions of such fans. At the top of the fan pyramid are the fanatics. They go to multiple shows on every tour. They sport a tattoo. They buy everything the band puts out … and they can never get enough. The Grateful Dead built a monster business on fanatics. Bob Dylan, Pearl Jam and others have followed suit very successfully. It’s time for the rest of the industry to identify and engage with the fanatics. They are few in number, but can account for a majority of a band’s revenues. There are tons of marketers who would gladly pay for access to every artist’s fanatic fans.

There is another opportunity for artists and managers … learn from Marvel Comics and Major League Baseball Advance Media. Marvel Comics was a relatively small media company, with sales substantially less than $1 billion, that sometimes licensed its content to film makers. Then it made a series of moves that allowed it to move up the value chain and dominate Hollywood for a decade. MLB Advance Media created a proprietary streaming platform that is exceptionally good – with more than 3.5 million paid subscribers. They get $25 per month per subscriber during the baseball season. MLB Advanced Media just sold one-third of their technology platform to Disney for $1 billion. Think about that for a moment. A relatively small subsidiary of a sports league sold technology to media company. That’s not how it’s supposed to work. Media companies exist to provide technology and distribution platforms to content owners, not the other way around. But Marvel and MLB Advanced Media turned the model on its head, with huge economic rewards.

This kind of thing used to happen in music. United Artists, Reprise and A&M are examples. There are more opportunities for artists to control their destiny today than ever before. Examples include the new media I described above, as well as some aspects of traditional music operations.

The good old days have returned to the music industry. Newspapers would kill to be where you are. In a few years, more than a few participants in television and film may feel the same way. Good luck.

[Phil O'Keefe]

Don’t harvest streaming! Use a portion of growing streaming revenues to ramp up experimentation with new platforms and technologies. Sow seeds for future growth.

 

I think that's a good idea.

 

Here's another idea: why not take some of that money and reinvest it into artist development? Even with that huge historical catalog, without new artists and new, engaging material that really connects with people on an emotional level, the industry can not continue to function forever.

 

 

[MikeRivers]

There was a related segment of the Marketplace Tech Report today regarding who can make money with music on the Internet and who can't. Relevant here is that if Bob Dylan started out on the Internet with what was on his first record, he wouldn't be able to make it. "Beyonce and JZ are doing fine, but there are no middle-class musicians who are making money with streaming."

 

Here's a link to download the short program. This segment is within about the first four minutes.

 

http://play.publicradio.org/edit/d/podcast/marketplace/tech_report/2017/04/19/tech_20170419_pod_64.mp3