Music titans, like European royalty, pine for a bygone era

In reading a summary this morning of the record industry’s latest fight with free streaming services, I was struck how much it’s like the laments of former European nobility in the 19th and 20th centuries. Maybe no one lost their head — or had his family wiped out by Boslehvik bullets — but the loss of power is similarly irreversible.

I first researched the industry economics in 2002 while a consultant to Live365 (the earliest free streaming music service). For my technology strategy class at UCI, I wrote a teaching case on the Napsterization of Hollywood, and how both CD unit sales and revenues peaked in 2000 in the face of MP3 piracy.

At the same time, the big six (later five, now three) recording companies consolidated market share from 79% to 83%. They had a cozy oligopoly, the ability to unilaterally set prices, and (as Michael Porter would say) low rivalry. With their limousines and executive suites they were the capitalist equivalent of the 17th and 18th century royalty of Europe.

This morning’s article in the Wall Street Journal was about how the record labels are trying to phase out the access that free streaming services (e.g. Pandora) have to their catalogs:

One major-label executive said he regretted ever having agreed to allow licensees to offer any on-demand listening features free. “In hindsight we made a mistake,” he said.

But one paragraph perfectly summarized the economics of what has happened to the industry in the last 15 years:

An average user of free, ad-supported streaming services generates revenue of around $4 a year to record companies, according to one label executive, compared with between $50 and $75 a user in the record-buying age. Spotify subscribers currently pay $120 a year, of which about 70% goes to record labels and music publishers. Users of free services such as Pandora Media Inc. ’s custom radio service far outnumber those paying for Spotify and its competitors.

In other words,

• the labels used to have a reliable income stream from the music-buying (teen and young adult) of around $60/year; according to my notes, that totaled $14 billion in the US in 2000
• that has been replaced by customers who listen to free streaming and pay 93% less.
• the labels hope the current generation of customers will be nice enough to upgrade to a membership model that pays as much as their former business model. ($84 in 2014 ≈ $61 in 2000)

One small problem: customers aren’t interested. The WSJ shows the stats for streaming music

• Spotify (global) 12.5m paid, 25m unpaid
• Pandora (US) 3.5m paid, 73m unpaid
• Beats Music (US) < 0.5m paid

In other words, there are about 6 freeloaders for every paid customer. Google’s new YouTube Music Key (at $10/month) will increase the number of paid users, but probably not appreciably change the ratio. Meanwhile, the services say claim that if they lose the ability to provide a 30 day free trial, they won’t get new paying subscribers.

There does appear to be one royalty that is doing well: the elite entertainers. The article reports Taylor Swift asked Spotify to limit her new album (1989) to the paid service, but the company refused. So instead, Swift pulled her album from Spotify and sold 1.7 million copies in its first two weeks — half of those as physical CDs — and perhaps the only album that will be RIAA platinum this year.

Similarly, Garth Brooks (3rd in US record sales after the Beatles and Elvis) created a new download service called GhostTunes — to host his own latest album. (It also has music by Swift, Pink Floyd and the Foo Fighters). The many zombie bands from the 60s and 70s also seem to be able to generate sales — perhaps from price-insensitive geriatric baby boomers — that insulate them from the pressures of the current market.

So — as my class used to conclude 12 years ago — the ability to set your prices without fear of competition is something every firm aspires to. (PayPal alum Peter Thiel has been saying the same thing recently in his new book, Zero to One). The problem is, there’s no way that Hollywood will ever get their monopoly pricing power back — any more than Luke Skywalker will get back his hand, his dad and his innocence, or that the original Beatles will be finally reunited in the flesh.

Viva Vevo

Tuesday was the North american launch of Vevo, the music video site owned by Universal, Sony and money from Abu Dhabi Media

I find it encouraging that the record labels are taking this step. Faced with the decimation of their decades-long revenue model — the sale of tangible music discs — they are making pro-active experiments. If the plane is losing altitude, at least they’re trying to pull up rather than the controlled flight into terrain of so many other industries afraid of cannibalizaiton.

Of course, this is a very mild step — stealing back unmonetized content views from YouTube in (probably forlorn) hopes of gaining meaningful revenues. Still, if it crashes and burns, it’s better than the controlled flight into terrain that most of Hollywood is on.

It’s interesting to see what it does to YouTube, since, — as Wired notes — most of the most popular videos are music related. By my count, before Vevo launched 14 of 24 the videos with 60+ million views were owned by labels or artists.

As the LA Times notes, this is the music industry’s version of Hulu — i.e. yet another Universal anti-YouTube site. The Times is skeptical about claims made Tuesday about how revolutionary it is:

Bono's opening remarks were quoted by Billboard: "Friends, we are gathered here today to mourn the passing of the old model that was the music business."

Perhaps Bono has some inside information on what Vevo ultimately will become. In a quick summary, Vevo offers on-demand streaming of music content with advertisements. YouTube offers the same, without the ads, and more content.

I agree with the Times that the business model is suspect: it doesn’t work all that well for YouTube at monetizing, even if Vevo has less of the drek cluttering up the site (like all the fake videos.)

For now, it also doesn’t have videos from my favorite bands on WEA (or anything else from Warner Music Group.) Perhaps the record cartel has a plan for the firms to take turn swimming against the industry tide to make it seem less cartel-like.

Of course, some of this is correcting the original MTV mistake — giving away music videos as advertisements for the real content, rather than treating them as valuable in their own right. But then that horse escaped the barn nearly three decades ago.

Will the labels offer their content on reasonable terms to other online channels? Or will the other channels decide that the numbers can’t be made to work, long before the labels throw in the towel?

xxxTube shares YouTube flaws

About 1½ years ago, I quoted an article that user generated content was displacing professional content in porn. (Porn had played a central role in the early adoption of VHS, DVD, cable and satellite TV.)

On Wednesday, Oliver Chiang of Forbesreported:

"Tube sites"--adult content Web sites that mimic YouTube in hosting everything from professionally made videos to user-generated clips--have quickly risen in popularity since they came onto the scene a few years ago, and rank among the highest traffic-getters globally.

However, such sites have the same problems as YouTube — lack of a business model and copyright issues.

Not surprisingly, there’s a much smaller list of potential advertisers for XXX-rated sites. On the other hand, the sites are having limited success in their freemium business model — conversion rates from free to paid of 1:200 to 1:10,000 (the self-reported numbers are suspect). I doubt even Hulu will reach this ratio of success.

Chiang notes that the piracy problem is even worse:

Ali Joone, founder of the porn studio Digital Playground, estimates that as much as 99% of content on some tube sites is pirated, much of it uploaded by the tube- site owners themselves.

"They let you believe that there are all these users that are uploading the pirated clips," says Joone of the tube sites. "It's not them, it's the owners."

I’m not an expert in this particular online segment, but I think this suggests that problems of Internet business models (especially freemium) generalize beyond just the few highly-publicized examples of Web 2.0 businesses.

As if GooTube weren't enough

The entire GooTube business model is based on taking other people’s content without paying for it, and then giving it away. Viacom doesn’t like having its content stolen, so someday a higher court will let us know which one is right.

But while attending the workshop Friday, I found out about yet another stolen video content site: SurfTheChannel, which tries to use two loopholes to avoid lawsuits by Viacom et al.

First, SurfTheChannel is based in Sweden and thus claims to be immune to the DMCA. Secondly, it disclaims liability because “SurfTheChannel does not host any content on it\'s Servers.”

YouTube today is 425x344, while 1080i would be 14x as much data. However, storage costs and bandwidth and improving so fast that movie publishers are increasingly facing the same download problems that music publishers have been dealing with for the past decade. These sites are even further examples that fighting IP piracy on a global Internet (given the inherent lack of global IP enforcement) is a Sysiphean task.

When we discussed the problem at the workshop, the conclusion was that content will have to be self-supporting, through approaches such as product placement or mid-roll ads. So if Ford pays all the production costs for a Toby Keith movie or music video with Ford F-150 product placement throughout it, then the producers don’t have to rely on any subsequent revenue streams from selling the views of the video. In fact, if the video gets given away on websites throughout the world, Ford will probably be even happier. (Ignoring for a minute that F-150 sales are miniscule outside the Americas).

Beyond the normal one-off product placement are Sears' sponsorship of the Bob Vila show and Extreme Makeover: Home Edition. These are far less subtle updates of the General Electric Theater and the Texaco Star Theater.

So is this the future of video production, when everything becomes an informercial?

“Louis, I think this is the beginning of a beautiful friendship.”

“Rick, how about a Lucky Strike?”

“Certainly. After all, Lucky Strike means fine tobacco.”

Hulu, GooTube and iTMS

In the battle of free online video, GooTube has been the preferred destination by far for user-contributed videos — some legal, some not. However, some firms have also cooperated by posting their own videos, as with my favorite band, the Eagles, whose publisher has posted official copies (of ten) current and classic Eagles music videos.

The iTunes Store (née iTunes Music Store) tried to get into the business of selling TV episodes, but got into a pissing match with NBC over price discrimination. (A principle iTMS was willing to compromise recently to get hit HBO shows).

Viacom (owner of CBS) is trying to help NBC break the Google/Apple stranglehold, by posting “The Daily Show” and “The Colbert Report” to Hulu. Of course, Viacom sued YouTube over the unauthorized reproduction of its shows, including these two topical shows from Comedy Central.

It makes sense that Viacom and others will band together to try to increase their power over the distribution channel and reduce Apple’s and Google’s. As long as they don’t offer more favorable terms to related entities — or conspire to put Hulu competitors out of business — this is a pro-competitive effort that sustains multiple distribution channels and more choice.

I think the HBO and Comedy Central have something else in mind. Half(?) of the US doesn’t take premium cable channels, or at least these channels. So this is a way to have influence and monetize revenues out of this remainder. Assuming, of course, that the reason we don’t subscribe to pay cable is because there’s nothing there worth watching.

Big game, big ads

I missed most of the SuperBowl, although I did catch most of the 4th quarter and New York’s down-to-the-wire victory over the previously undefeated Patriots. (To the degree that I cared, I was rooting for someone to dethrone the Pats, particularly since they eliminated my Chargers two weeks ago).

However, the reason I normally watch the SuperBowl is the ads: certainly I remember the ads long after the game. For example, the 2000 EDS “herding cats” ad marked the end of the dot-com era but still ranks among the top 10 of all time. B-school profs have been using them to teach marketing for years. This year, the ads have the side benefit that they help us forget the torrent of insipid political ads that have been running on TV for the past month, particularly for the Indian gambling initiatives.

However, technology has changed the one-time nature of the ads. For the last few years I’ve caught the ads and read the articles on the WSJ paid site. But this year with Fox (and last year with CBS) the broadcast network has run them again online. (Presumably the business model is offering extra exposure to the advertisers). The NFL — one of the most vigilant about protecting its IP — is also running the ads on its site.

Of course in this era of Web 2.0, YouTube and even MySpace are getting into the act with their own replays. MySpace has it nicely organized by quarter. Of course, I learned about the MySpace page from the Fox broadcast (presumably since they’re a Fox subsidiary).

Normally, the memorable ads are either gimmicky or genuine. I disliked the Cars.com and E-Trade ads, while many others left me indifferent. (Of course, I’m an annoyed E-Trade ex-customer so I may be biased). The Verizon ad for the LG Voyager managed to make a hot product cold. GoDaddy.com (the once-cheap domain registrar) has milked its sex-sells approach of the past four years (starting with the 2005 “wardrobe malfunction”) to become a lame parody of itself.

On the plus side, the Taco Bell was mildly amusing, with a combination of mild warmth and edginess (rathe than the usual over-the-top campiness of the beer ads). The American Idol house ad was a clever tie-in linking the game, the NFL brand and the network’s biggest hit.

My favorite ad features NFL players Ephraim Salaam and Chester Pitts, talking about Pitt’s improbable path to college and pro football. The spot is heart-warming, an improbable happy ending — and is (mostly) true. It also involves SDSU, the alma mater of my mother-in-law (and my father’s first two years of college). What more could you want?

The ad was selected from 240 submitted by NFL players. It does exaggerate a musical instrument over a handheld calculator, but it’s still touching.

Oddly enough, due to the NFL legal beagles (or is it viewer indifference?) this heart-warming story is not posted to any site other than the NFL’s. The other odd thing is that the Fox ads are posted via MSN but playback is in Flash, not Windows Media.

GooTube as a role model

A friend of mine tipped me off to a new music streaming site, Deezer.com. It’s a relaunch of Blogmusik.net, a streaming site that was shut down by the record labels earlier this year for copyright infringement.

Deezer has an interesting business model: unlimited free streaming songs, paid for by ads and song click-throughs. Other webcast sites also try to do this, but (at least in the US) impose specific restrictions, like you can’t stream an entire album consecutively (so someone could just record it and download it) — companies like Live365 and Shoutcast.

The Paris-based Deezer has a license from the French music licensing agency SACEM – Société des Auteurs, Compositeurs et Editeurs de Musique. The press accounts don’t explain that SACEM only collects one type of royalty — as the name implies, the author/composer royalty (similar to ASCAP in the US).

However, Deezer has yet get a license for the performance of that music — paying the performers (e.g. a rock group). Those rights are usually held by the performers’ label, and thus requires negotiating (as would iTunes or any other service) with the label. Already, one of the major labels — Universal Music — has said non! to the plan. Oddly (given the usual French nationalism) Universal is the only French-owned major record label — having been sold by its Canadian owner Edgar Bronfman to French water company Vivendi.

So why is Deezer going ahead without a license from the record labels? Cofounder Jonathan Benassaya invoked the GooTube business model as his defense:

Asked if Deezer.com should have waited until the agreements were in place to launch the service, Benassaya countered that YouTube launched its service before it signed deals with content owners to distribute their video. He also said that Deezer.com has been operating since April and that only now has Universal raised its objection.

The Computerworld article also notes that Deezer is competing with Neuf (a Universal-licensed download service) which I’ll guess is the big reason that Universal is making a stink.

On this side of the pond, the Deezer launch must be galling (Gaul-ing?) to US Internet radio industry, which (unlike terrestrial radio stations) for the past five years has been paying performance royalties on all music streaming. The US Internet radio performance royalties (that Deezer is ignoring) are far more expensive than the composition royalties — the latest label demands are for 10-35% of total revenues, or potentially 6X that of the composition royalties. The new rates — set by a US copyright tribunal — would be retroactive to January 2006.

The stations (including many local NPR stations) lost all legal appeals, and have been negotiating past the July 15 expiration of their old license in hopes of getting a better deal from the labels. (Their next hope is that Congress will step in on their side — as promised if no deal was reached by Labor Day). Meanwhile, the record labels have asked for as much as 10% of revenues from financially struggling satellite radio companies.

The problem for the distribution of entertainment is that royalty rates are neither set by the market nor by government regulation. For the composition royalties, ASCAP and BMI come in and tell broadcasters how much more they should pay, and then a Library of Congress panel decides what is fair. The same process was used to set the last two rounds of Webcast performance royalties. The pricing of music downloads seems to be set by a small number of labels telling download companies (like Apple) what they will have to pay. Compared to this, the retail price of DVDs (where there is competition for user dollars) seems like perfect market competition.

Technorati Tags: business models, copyright infringement, Internet radio, music industry, YouTube

Good free riders and bad free riders

In the five months since I first wrote about GooTube, the controversies continue over its business model based on using other people’s IP without paying them.

Someone who follows the controversies more closely than I do is Prof. Michael Madison of the law school at the U. Pittsburgh. We met at a conference in January (just I was starting the blog) and compared notes about blogging as a productivity destroyer. His “Madisonian” blog is in my RSS reader because of a high ((quality+relevance)/word) ratio. Other IP Law blogs in my reader are more familiar sites like Groklaw, which certainly have important tidbits but are less succinct in their content.

Catching up with Mike’s blog, I noticed two updates of interest to my readers (whose numbers increased last week by 25).

First, he uses an allegorical tale about “free riders” to put the GooTube business model into perspective. (That the tale happens to be true makes it even better). I’m not sure I agree with his conclusions, but the issues he raises are important (and less obvious) ones to consider as lawyers, judges and politicians try to decide how to balance the rights of GooTube and content owners. (My own view is that so far the market seems to be working — content owners are voluntarily negotiating deals with Google, although success for the Viacom lawsuit would change the prices a little).

Second, he updates the important test of the “fair use” copyright doctrine of law school instructor (and former EFF affiliate) Wendy Seltzer. Seltzer has cleverly designed an experiment (lawyers would call it a “test case”) to challenge the absolute right of a content owner under the 1998 DMCA to demand removal of their copyrighted work from a website (in this case GooTube). (See my March 28 posting for the details of the controversy).

While protecting content owner rights is important, equally important is that copyright law has long provided an exception for “fair use”. I rely on that exception every time I quote a paragraph from someone’s website or news article. Since Seltzer is using the video clip for commentary — and since it has absolutely no commercial value — in my para-legal opinion it seems like this would be an open and shut case in her favor.

Seltzer has gone another round with the NFL, and Madison dissects the NFL’s latest legal manuevering. He is a lawyer (while I don’t even play one on TV) so the value-add is not just in the news story but in his explanation of what’s going on and what the likely consequences are.

Technorati Tags: business models, DMCA, Google, intellectual property, YouTube

Finally a reason to visit YouTube

This morning (bear with me) I read a column in the WSJ by Bush’s former chairman of the Council of Economic Advisers, R. Glenn Hubbard, about macroeconomists have shown that corporations don’t pay taxes, workers pay taxes. Not to take away from its accuracy (of which I have no direct knowledge), but it was about as predictable as the AARP saying they want to raise taxes on productive members of society so their geezer-supporters can have a more comfortable life.

Dr. Hubbard is now dean of the Columbia Business School, where he’s worked (except for the White House gig) since 1988. Little did I know that he would give me the first reason (ever) to recommend YouTube.

OK, so I’m outside the target demographic for YouTube, but even so, I haven’t personally seen any of the attraction that made Chad Hurley and Steve Chen each their first $300 million. But then I’m one of those who immediately flips the channel whenever “America’s Funniest Stupidest Home Videos” comes on, with its staged bicycle accidents, pet accidents and other intentional misfortunes.

Now Hubbard has made a number of appearances on YouTube, doing dry (translation: boring) professorial things like giving a policy speech last week at Google with fellow card-carrying economist Hal Varian. But his best video is the one he never made, that a fellow entrepreneurship professor called to my attention this afternoon.

Instead, a bunch of his students (including a look-alike impostor) produced a music video last year, in which “Hubbard” bemoaned his failure to get the most powerful economics job on the planet, that of Fed chairman. Apparently some guy who’s neither Paul Volker nor married to Andrea Mitchell got the job last year.
Covering one of my favorite songs by Gordon Sumner, the lyrics to the parody were obviously written by someone who at least passed Macroeconomics 101:

Every breath you take
Every change of rate
Jobs you don’t create
While we still stagflate
I’ll be watching you.

Every single day
Bernanke takes my pay
When growth goes away
Inflation will stay
and I’ll be watching you.

I’d quote more, but the fun is seeing how the parody plays out. So it’s interesting to see that YouTube can offer up humor that’s not sophomoric, just like eBay eventually became more than just an e-rummage sale. That’s the power of general-purpose platforms and network effects.

Hat tip to Norris Krueger

Technorati Tags: academia, platforms, YouTube

Using fair use to attack fair use

On Friday, Lucasfilm released clips from its Star Wars movies on Eyespot, a San Diego company that both hosts a website and produces editing software. As I noted in my SD Telecom blog, Eyespot’s cooperation with licensed content is in stark contrast to the GooTube business model.

On his Madison.net blog, Mike Madison added a copyright law wrinkle I hadn’t considered:

Of course, once Lucasfilm blesses the remixing, a couple of things happen. One, the resulting remixes aren’t necessarily examples of “fair use”; so long as the mixers follow Lucasfilm guidelines, their mixes are authorized. Two, Star Wars remixes that don’t rely on the authorized clips begin to look a bit less like fair use than they might otherwise; here again, there is a copyright owner that is authorizing parodies. Under a typical four-factor analysis of fair use, avoiding an authorized “market for parodies” appears to cut against the user.

That’s a really clever angle — don’t know if it took a lawyer to come up with, or only a lawyer to spot it.

The fair use law makes quite clear that anything that diminishes the value of the original looks less like fair use. Since Lucasfilm/Eyespot eventually plan preroll ads to support their website, parodies that bypass the site will be undercutting Lucasfilm’s business, and thus less likely to be considered “fair use.”

Some are whining that Lucas is tightly controlling the clips with possible censorship (e.g. against Princess Leia as a porn star). But if Lucas didn’t exert some control, then it would lose the ability to go after others who diminished the value of the franchise.

As for complaints that Lucas isn’t sharing advertising proceeds for user-generate content, where is this true? Geocities? Yahoo Groups? Blogger? YouTube? Hotmail? I think everyone knows that “free” on the web means “I don’t pay but others sell ads.”

Technorati Tags: business models, copyright, fair use, Web 2.0, YouTube

Content that actually belongs on YouTube

While the 1998 DMCA was intended to limit the threat of Napster, there have been ongoing complaints about its excesses.

One of the major areas of controversy was the (likely intentional) effect of DMCA of swinging back the pendulum against established consumer “fair use” rights. The case law (and policy tradeoffs) around fair use are complex, but two important examples of fair use exceptions are for public policy debates and for scholarship.

The potential of the DMCA to restrict established fair use rights has been highlighted by law school instructor Wendy Seltzer, who deliberately baited the NFL to prove a point. Seltzer used to work for the EFF — a group promoting absolutist cyberlibertarian positions that ignore other equally important public policy goals — but is now affiliated with Harvard’s Berkman Center, which combines advocacy with serious scholarship.

To make her point, Seltzer posted to YouTube a video clip of the now-familiar NFL disclaimer:

This telecast is copyrighted by the NFL for the private use of our audience. Any other use of this telecast or of any pictures, descriptions, or accounts of the game without the NFL's consent, is prohibited.

The NFL demanded that the clip be deleted, which it was; Seltzer sent a Safe Harbor counter-notification provided by the DMCA, and the clip came back up. That should have been the end of it, Seltzer says:

when I sent my counter-notification to the first NFL notice, on February 14, YouTube forwarded it on to the NFL per the DMCA's specification. Since my counter-notification included a description of the clip, "an educational excerpt featuring the NFL's overreaching copyright warning aired during the Super Bowl," it put the NFL on clear notice of my fair use claim.

Instead of seeking a court determination (which Seltzer contends is necessary), the NFL just asked (and succceed) in getting YouTube to pull it again. Seltzer recounts the saga in her blog, as do the AOL sports blog and the WSJ legal blog.

The publicity stunt spotlights that online copyright issues are not just big corporations disseminating commercially valuable content for free. If nothing else, this is helping to bring the policy debate to call attention to the impact on consumer interests.

There are limits to such interests. Many of the 22-year-olds in my classes think they have an unlimited right to download free music forever — not because the law allows it, but because everyone gets away with it so it has become an entitlement (like downloading term papers from the Internet). The opposite extreme is the RIAA suing grandmothers or even the dead.

Right now any business model is at risk if it involves professionally-generated content, either directly or indirectly. As Walt Mossberg observed, legal clarity is sorely needed here for consumers, but this is also something sorely needed by business. The purpose of business regulation is to set rules for fair competition, and right now no one knows what the rules will turn out to be when they are interpreted in a court of law. A lot of litigators are going to get rich off of these ambiguities, an obvious waste of economic resources.

Technorati Tags: Google, DMCA, copyright, YouTube