Steven Masur – Interview on What’s Happening with Music Services Today

Steven Masur – Interview on What’s Happening with Music Services Today

October 2010

Interviewer: Steve Gordon, Steve Gordon Law, Author of “The Future of the Music Business: Music Pro Guides,” (Hal Leonard Music Pro Guides)

In Steve’s interview we would explore his experience working with and his views of digital music music start-ups and new business models.

1. What is it like to approach the major labels? Are they still making it next to impossible to license music without paying huge upfront costs?

The major labels are still asking for advances, but now, instead of the advances being their primary business model, it serves the purpose of weeding out the better business opportunities from the mass of underfunded, under-researched or otherwise unrealistic ones. Also, the majors now see more clearly the value of having a market of sustainable and even successful online, mobile and cloud-based music services. This has made them more collaborative in their approach. However, they still face significant challenges.

The first challenge is that consumer confusion over music distribution technologies has inhibited music promotion and eroded demand for recorded music.

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A smaller percentage of the population identify themselves as hardcore music fans and the typical person on the street is now less identified with their music than in previous eras. Radio has become more generic, fewer people listen to the radio, and from an empirical perspective nothing else has really fully replaced radio as a solid way to identify new music choices (although there are great alternatives in this race, like Shazam, Pandora and MOG). Furthermore, this downward new music exposure spiral is increasing as declining sales of recorded music further limits promotion budgets, and new music is even harder for the typical person to hear about. Quixotically, the counter trend is that because of the internet, music you already know about has never been easier to find, and more people than ever before listen to music on mobile devices. To my mind, this spells only one thing; unrealized economic opportunity.

The second challenge is that consumer adoption of new paid digital music services is not growing quickly enough. To my mind, changing this does not take rocket science, it takes promotion. During previous format changes, there was a huge amount of promotion beckoning consumers to adopt the new formats. Equipment manufacturers extolled the virtues of LPs over 78s and 45s. CD players were relentlessly pushed into hands, homes and finally into cars. Music marketers made you feel compelled to change over your entire record collection into the new format and buy more music on the new format. But now, despite the freely available, already ubiquitous standard formats of MP3 and others, the only music service you regularly see promoted on TV and billboards is iTunes. And the only massively successful one is iTunes. Furthermore, after nearly 10 years in existence, Shazam made it onto an iPhone commercial, and a superbowl commercial, and now everyone knows about Shazam and its one of the most successful apps. Yes, Steve Jobs is brilliant and he is the Henry Ford of our time, but in many regards, he is just doing what’s obvious, promoting Apple’s products well. …and my perusal of the numbers reveals that these services are competing pretty damned well with “free,” at least when measured on the basis of money made per download, so the promotion is definitely worth the money.

The third set of challenges surrounds the law that evolved around music’s previous distribution models. This law has created populations of stakeholders who have a legal right to collect part of the proceeds from music sold, but who play little or no role in selling the music they control. Furthermore, these people are insulated from the real market by the record labels, which must pay them. So in many cases, these stakeholders are the reason that wholesale prices for music are so high, and the record labels take the wrap for their unwillingness to budge on price. This upward price pressure is then passed on to the digital music services, which then can’t make enough of a legal margin to properly promote their service and make a modest profit. This is the position in which music services promoting plain old downloads and streams find themselves. Woe be unto the entrepreneur who comes up with a truly new and novel way to market, promote and sell recorded music. He or she must overcome a poisonous, complicated and ultimately highly expensive nettle of legal issues. If they fail to get deals done and are sued on any of the many bases available to the stakeholders, a judge who chooses not to ignore the precedent must rule in favor of the stakeholders. Even when the labels want to license music to these people, they can’t because of their agreements with the stake holders. In short, the stakeholders are protected by the law at the expense of the market, and the recorded music industry as a whole continues to decrease in size. Any entrepreneur who does a proper due diligence will ultimately reach these conclusions. As a result, prudent entrepreneurs choose other available businesses with fewer problems, so recorded music continues to attract only the most passionate about music, or most disdainful of the law.

Last, but possibly not least, it is actually still possible to download music for free, and the paid download services have still failed to sufficiently differentiate themselves to be perceived as better than the free services, even if they actually are. I think the cure for this is good promotion of these new services, and overcoming the technical problems that make it difficult for the normal consumer to use them in all the places they like to listen to music.

2. Is this something that has stymied development of authorized business models? Are there examples of business models that could have been good for the business that the labels have blocked?

In my opinion, the biggest missed opportunity in the music business was the failure of the first Napster. Yes, it’s true that it was very difficult and expensive throughout the 1990s to get licenses for digital music services and this remains true today. But I watched in disbelief as the major labels blocked the development of the most efficient music distribution service ever to exist. I thought that Napster would continue free for a few months, maybe a year at the outside, and then the labels would license to them, you would have to pay for downloads and that would be it. I just couldn’t believe that they would not want to take over and control this technology, and take advantage of the cost savings and increased margins to be gained migrating off of physical distribution. I think they adhered too closely to an analyst report telling them that the most of the money was being made from physical delivery itself, and I think they might actually have believed they might be able to stop this technology from existing using the law.

And then I couldn’t believe Napster refused to present any viable business model that included paying rights holders. I believe that Napster could have presented almost any business model that paid rights holders, no matter how tenuous, and the courts might have upheld their right to continue developing the business. But to just say, “hell no, we won’t pay and we don’t believe we should have to?” This was unbelievable, and impossible for the courts to uphold. This was match that set off the burning of the library of Alexandria that put us in the dark ages from which we are still trying to emerge today. If Napster had been legally licensed, peer-to-peer technologies would still have been used to distribute music, yes, but they might have stayed on the margins and may not have gained the foothold and penetration they did in the mainstream. Ultimately, a centrally served database is technologically the better way to go, because you can do a lot more to guarantee quality of experience, as the cloud-based services are proving today.

3. What has made Spotify so popular in European countries in which it has been allowed to launch?

Spotify is popular because it works well. I have had the opportunity to demo it to music lovers here in the United States. I have yet to find one who does not become addicted to the ability to call up and instantly play any song or band of which you can think. I’ve had friends report back that they spent entire days listening to Uriah Heep, Gentle Giant, Chico Science, obscure Nigerian rock or New York acid jazz that they might have found difficult to find any other way. Centrally serving music from the cloud, with caching of your most frequently played songs, so you can hear them when your connection cuts out, is the way to go. I’ve been pushing cloud-based streaming and download services since MusicStream, which was the first one I saw that integrated a music service with social networking and playlist sharing. I really do believe that the more music you expose to people, the more music they will want, and the faster the industry will grow. However, there is a lot of work to do around developing new business models and pricing plans. These must be developed through experimentation, not guesswork. The longer rights holders deny digital music distribution companies the ability to experiment with different pricing plans, promotions and product offerings, the longer it will take for new music products to be created and for real money to be made. Although I would never condone or support stealing money from artists and rights holders, there are some excellent lessons to be learned from the short-lived success of regarding effective pricing and viral promotion. A lot of users signed up and a lot of money was made. The only thing that was missing was paying the rights holders. Rights holders should get deals done with digital music companies and support experimentation with different pricing plans and payment structures. These are the future of the recorded music business.

4. What are the chances that the labels will allow it launch in the U.S.?

I don’t know, ask the labels. Spotify is one competitor in a crowded field of great music services. If I were the labels, I would lower advances, license all of these services on a revenue share and let the services spend their money on promoting themselves to consumers. The digital distribution horse is out of the barn. What these services are really doing is expanding the number of people who pay for digital music, not the number of people who use it. That’s already a huge number.

5. Why are the majors tolerating it in Europe?

I have no idea. Ask the majors. But for you, Steve, I’m going to go out on a limb here, and offer suggestions based on culture and technology that I can’t back up with numbers.

The European market is very different than the US and Canadian market. First, people listen to different music, and it means something different to them. The governments in Europe support music much more aggressively than we do, and European music tastes are broader. Europeans adopted playlists over albums earlier than we did. Furthermore, in Europe, mobile digital signal delivery standards were strictly controlled, so most digital delivery to mobile phones uses similar standards. As a result, it is easier and less expensive to roll out digital services to European mobile users, and Europeans have long experienced a much wider range of digital services delivered directly to their mobile phones. As a result, there is less of a learning curve to using these services and integrating them into their daily lives, so widespread adoption can happen more quickly there than here. Finally, and most importantly, Europe is smaller, and more densely populated, so digital signal penetration is almost completely ubiquitous in Europe. As a result, a digital stream delivered to a mobile phone in Europe is much less likely to drop out than it is here.

6. Do you agree with Universal’s suit against Groove Shark?

Universal has the right under existing law to bring these claims, and Groove Shark has the right to defend against them. Groove Shark is an example of the dynamic I described above. It is a new way to market and sell music, run by people who are highly passionate about their music, which the law has left exposed to claims by stakeholders.

MasurLaw advised Groove Shark for a few months during its earliest days. At that time, we advised them that it might be possible (not necessarily legal, but possible), to experiment with new ways to sell music to people, even without having obtained the rights, then hold the money in escrow to use as a budget to cut deals with the rights holders to pay them their share of the proceeds. We came up with this idea because bitter past experience had taught us that we would not be able to obtain the rights on behalf of Groove Shark, without having already demonstrated “traction,” or tangible proof of a working business model. We also advised them that for an unknown start-up company, any PR is good PR, and that getting sued by a large international conglomerate corporation might be a good, cheap and effective way to promote their service to a large number of people. Unfortunately, we no longer represent them and don’t know the particulars of the case, but we hope they use the opportunity that Universal has given them to its fullest advantage, sell more music, and help grow the recorded music industry.

7. His opinion of the case against Limewire — did they deserve it?

During the days of horse-drawn carriages, traffic accidents were rarely fatal, and superhighways were not necessary. The law that applies to copyrightable material today developed during an era of physical distribution. The relevance of these laws to an inexpensive, nearly instantaneous means of distribution should be examined more carefully, and with an open mind to doing things differently.

Limewire is an example of a new way to market and sell music, and its business model has already been proven to make money. I’m just not sure it makes enough money to pay rights holders at the rates they require and the law allows. We would have loved the opportunity to work with Limewire on developing new legal business models. I personally pitched them on this many times. They have a big installed base and a great brand name. In my opinion there is a still a good opportunity here.

8. Revenues from recorded music are down by more than half throughout the world and authorized digital consumption has not made up for lost CD sales, will authorized music eventually catch up with “free”

Absolutely. If you provide good value and promote well, people will pay money. Value competes quite well with free. With music services, you can compete with free on convenience and ease of use, safety, quality of service, stability and longevity (trust), availability on a wide variety of devices, or through music recognition or social media services. Pandora, iTunes and Spotify all prove that people will pay money for value. We’re just in the early days and there is a lot of work left to do. In New York, we have clean, good tasting, efficiently-delivered water available for free all over the city, yet people still buy it in plastic-leaching bottles delivered by trucks that burn petroleum. There is a lesson in this for the recorded music business; promote your product well, and people will buy it, even if they can get it for free.

Also, you can’t compare CD sales to digital distribution. Digital distribution of music is a completely different business requiring completely different business practices. The winners in the old game are rarely the winners in the new game unless they are very smart and agile. To extend my previous analogy, during the 19th century, there were a great many makers of horse-drawn carriages, many of which were custom build shops. The advent of automobiles and mass production changed things a great deal, and very few of the carriage makers survived. A company called Superior Coach survived by continuing its custom builds, and building ambulances, hearses and other special use vehicles. But the real winners were new companies that did things differently. Similarly, everything about the value chain of digital music services is different, and they must do things completely differently. You can still buy a Faith Hill cassette tape at a Little America truck stop on the outskirts of Evanston, Wyoming. This is a completely different sale then selling a Ke$sha CD at the Best Buy in downtown Evanston, Coldplay on iTunes, or DangerMau5 on Beatport.

9. Are mobile subscriptions the answer? That is making “free” music part of your monthly mobile fee. Is this happening already?

Mobile subscriptions are one answer of a great many. There is a lot of marketing and experimentation left to do. A lot of Americans don’t even know what a streaming music service is, or why they would want it, for the same reason they didn’t know in 1972 that they would want the level of Cable TV they now have. In 1972, or even in 1985, they also would not have been willing to pay so much for it. It is very early days for digital music services. We have to work hard, be patient with the difficulty people have adopting new ways of doing things, and sell good services that provide good value.

10. “Free” music is not free at all. ISPs make fortunes from people who need high speed internet to get “free” and people spend fotunes on computers, MP3 players etc so they can hear “free” music. Is the answer to the woes of the music business to put a levy on the ISP’s and makers of the devices that allow people to “”steal ” music.

I don’t think so. ISP licensing is at best a “mop up,” that cleans up the internet free uses of marginal value the same way that ASCAP, BMI and SESAC performance licenses mop up the money that would otherwise be left on the table in bars and restaurants nationwide and around the world. I don’t think there is any single answer to the woes of the music business. First, we have to find great music that people feel compelled to buy just because it is good. Then we have to create new music services that are easy to use and promote them well. After addressing these fundamentals, in the background, we have to retrofit our law to work better with the new distribution paradigms. As part of this process, yes, we can consider new ideas for how to mop up payment for uses that are not otherwise addressed by the market. I edited the 2010 International Association of Entertainment Lawyer’s book, “Collective Licensing at the ISP Level.” This book focuses not on whether ISP licensing is a good idea, but whether it is possible, and how to do it, from the perspective of experts in 22 countries. That’s because I strongly believe we should stop talking about what’s good or bad and instead talk about what might work, and build it.

11. What is the next big thing?

Hopefully, a lot of great new music will be the next big thing. After that, music labels and the stakeholders they have to pay working hand-in-hand with digital distribution services, promoters, and artists to promote music sales, increase demand and provide good value to consumers at a fair price.

That’s what I want. But what do I really think is the next big thing? Disintermediation; or put another way, a lot of entitled people making a lot less money than they used to. That’s what seems to be going around in America today.

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