Greetings,

I’ve been asked to write a blog on digital music, which I thought would be fun...my first topic is about last week’s Plug-In, which the Jupiter folks always do a good job in putting together and running making it one of the ‘must-attend’ shows of the year for our space. Attendance seemed to be about the same as from the previous year, although I felt the mood to be a bit subdued making last year look positively euphoric in comparison. Maybe it’s because last year's show happened a few months after Apple had goosed the market with the successful launch of the iTunes Music Store. That led to optimism that the labels would be doing more such licensing deals, that there was movement in the space. Whereas this year people realize that there are a lot of players vying for the consumer’s digital media dollars and lots of work to be done to solve the balkanization that has happened (google “real apple” for details). Or maybe it was because Jupiter started off the conference by pouring cold water over everyone with their projections for the space. David Card almost apologetically went over their projections…basically digital music will continue to grow, but the CD isn’t going away anytime soon. If I recall correctly they predicted that downloads and subscriptions would each amount to less than a billion dollar business 5 years from now, or about $1.7 Billion combined. I think the pendulum may be swinging the other way with Jupiter given the flak they got for their rosy predictions in the 90’s. True there’s a long way to go from where we are today, but it’s hard to believe that downloads will amount to less than a billion dollars given all that’s going on out there.

What do you think? Is Jupiter going the other way in its projections or are they being a bit conservative?

Roxio just announced the divesting of their non-music assets to free up cash and management focus on their Napster/digital music business. It is simply the latest in a trend of deal making, M&A and financing that has made things seem like a game of musical chairs. For a quick recap, let’s see…Real bought Listen.com, Roxio bought Napster assets & Pressplay, and now divests their software biz, Circuit City bought MusicNow, Walmart bought Liquid Audio assets via their distributor, Dimensional Associates bought eMusic, Digital Club Network (renamed eMusic Live) and the Orchard (wonder what they have in mind?), LightningCast recently raised $5 Million, CNET bought MP3.com assets, Zingy was bought by a Korean firm…and those are the ones that I can tell you about! Then there are the private equity and VCs looking to put some of their "dry powder" to use (which is how nearly every VC I've talked to has referred to the unspent amount of their Fund).

Speaking of dry powder, if you were Chris Gorog and had $100 MM worth of it, what would you do? Send a Napster CD-ROM to every consumer in the country (a la AOL)? Go buy yourself a media player with an installed base? Do an iPod-like advertising blitz? Who knows...but I do know that, having seen Gorog aggressively enter and play in the space, it will be interesting to see what he has in mind.

The subtitle of my forthcoming book on the Future of the Music Business (Backbeats 2005): is a A Guide to How Artists and Entrepreneurs Can Succeed by Using New Digital Technologies.

Here's a breakdown of where I am going with this:

Part 1: Rules of digital music (law, business practices)

Part 2: History of a Crises and a Proposed Solution (the labels & the new technologies)

Part 3: How to and why (build a website, provide samples, build mailing list, etc.)

Part 4: Business models focusing on indie artists and entrepreneurs

I am looking for interesting new business models to write about for Part 4. One example is Magnatunes.com, the indie on-line record company. I will also write about CD Baby's new way of connecting artists to the download services including iTunes. But I do not want to write about iTunes, Microsoft, etc. What they are doing on October 1(when I must deliver), may be totally different by April or May when the book is released. So I am looking for non-(big)corporate business models. Does anyone know of any good ones?

I recently attended a conference on digital music and was not surprised to learn that prominent industry experts disagree about the future of downloading and interactive streaming. I was surprised to learn how many times a participant would invoke the purported tastes of “the consumer” in asserting which of the two business models would eventually prevail in the music industry.

There are some hard economic truths for anyone who believes he can predict what “the consumer” wants. First, there ain’t no such thing as “the consumer”. All we have are CONSUMERS. And the tastes of consumers may VARY considerably.

With regard to music services, some people may favor permanent ownership, while others actually prefer the ease of immediate access and full sampling. Consequently, we should avoid predicting what “the consumer” wants and start preparing the market for even competition.

In this regard, service price matters. Every person is affected to some considerable degree by the prevailing prices of competing goods. To distort the price of one with higher sales taxes, while leaving the other untouched, obviously hinders fair competition. True of taxes, the same concept is also true of disproportionate royalty payments.

We are then left pondering what to do about copyright royalties generally paid to songwriters and publishers for use of their compositions on download and interactive streaming services that vie for the same basic customer base. Download reproductions of musical compositions now are generally compensated at full royalty rates that are established for tracks on CDs. This is somewhere in the vicinity of 6 to 8 cents per individual download.

But how should streaming be compensated? 8 cents per shot??? Surely a stream is not the same as a download reproduction. Any ideas??

I will offer my thoughts in my next writing.

I'm friends with a married couple whom I consider a bit of a guinea pig in terms of the post-early-adopter phase of digital music. They’re a married couple living in NYC (he works at a financial institution, she at an art gallery) and both got iPods last Christmas (so they’re into this whole digital music thing about 1 yr). Observations are:

-They’ve hooked the iPod base directly into the stereo in their apartment using A/V cable. So they use the iPod as the UE/UI to select and play music and only use the stereo to amplify the music.
-She loves purchasing and listening to playlists. She’s purchased Kevin Bacon’s playlist and others from iTMS.
-He still prefers listening to albums.
-Neither had heard of on-demand jukebox services. After describing these to them, she thought it a great idea because she hates having to purchase a track from iTMS after only being able to listen to 30 seconds of it. He felt more comfortable with the notion of owning one’s music.
-Since the beginning of the year, they’ve purchased about $250 worth of downloads from the iTMS (having spent much more on music than they used to).

So, my takeaway given this very unscientific survey is that there is room for various models of music consumption, that the subscription services have a lot of marketing to do, and that the convenience and access of digital music tends to increase one’s “music metabolism” (to use a phrase first heard from Brian Cullinan of Sony).

This reminded me of Strauss Zelnick’s take on all of this during his Jupiter Plug-In keynote. As I recall, he thought that subscription services would have a hard time because $10 to $20 / mo is a lot in terms of discretionary income for most mainstream music consumers, especially if “their music” goes away if they stop their subscription. Do you agree?

[Note: I'll be on out on vacation until 9/8...see you on the other side]

Thursday will be a huge day for the digital music space, with Microsoft finally entering the game. Here is some of the chatter...

1. The store will feature $0.99 downloads.
2. Microsoft's catalog will likely be on par with services like Napster and Sony Connect but may be below Apple's 1 million total track count.
3. A subscription aspect will not be layered into the first phase.
4. DRM rights will allow tracks to be played on five different computers, and restricts burning the exact the same playlist to seven times.
5. Downloads will not be iPod-compatible, though Microsoft reportedly did make overtures to Apple.
6. There will be heavy integration into the Windows Media Player 10 upgrade, as well as throughout the MSN site.
7. It sounds like The Beatles will not be showing up to the party.

There may also be a surprise or two, like a "a high-profile short-term alliance" as noted by the New York Times. In fact, that probably merits another number on the list.

9. A surprise....
10. or two

Let’s see how accurate the above list actually is. Anyone else hearing other details? Conflicting reports?

I wanted to focus on the last line of Eliot's great article "When Microsoft Attacks" (http://mp3.com/story/feature_attacks.html): "On the other hand, people tend to associate music with "cool," and Apple is clearly perceived as cooler than Microsoft. Will consumers feel cool about buying music from Microsoft? We'll just have to wait and see. "

So, now that Microsoft is in the game, I guess anyone and everyone can and should sell music... right? I dunno - forget the business reasons, but just from a gut feeling standpoint - does it make sense for every possible "e-tailing" outfit to sell music just because they can?

A lot of us still go to our local record store, because they add value for us. They help us artistically and emotionally. Sometimes they have to be cruel to be kind... "No, Tim - you don't need another record by that artist - you already have their entire discography and they started sucking like 5 years ago... try this - its new, it may take a while to grow on you, but you will thank me later"... you know, that kinda’ thing. Its not that direct, of course, its subliminal. The great example in San Francisco is Aquarius Records (http://www.aquariusrecords.org/), which, thankfully, is in my neighborhood. It is the only place in the world where I will blindly buy something. Sometimes I'm disappointed, but what the hell... I took a chance, I gave it a go. I still think music is about feelings and illogical decisions, and while I am definitely throwing stones from my glass porch, I still don’t know if I like the idea that the Gap and Starbucks sells music. This is my personal feeling… but this is a Blog, right? Most people think that the best recommendations come from your friends who you trust… I tend to agree. If you agree as well, check out some new stuff here (SHAMELESS PLUG ALERT!) http://www.mp3.com/faq/new_user.php.

So, I just had to laugh when our designer (the attractive and talented Stephen Blake) came up with the graphic for this story:

http://mp3.com/story/feature_matchoo2.html

I think today was a record on the number of people who emailed me the story, and I realized this afternoon that I don't really know what to think. It was inevitable, I suppose, and we have all known that Yahoo was going to open a store ever since they posted a job for a Product Manager for a Digital Music Store. I think Elliot has a good tack on the unseen angle here… the dreaded name that strikes fear into all audio software developers… Thomson! I remember when I was working on a media player (remember Sonique anyone?), and my jaw dropped when I found out how much you had to pay Thomson per install – - its good to own patents. As far as the future… hard to say. Merging two companies/technologies can be a big head-ache, but Yahoo has done it before. Was the price too high? Maybe… but its all about leverage… last time I checked Launch was the second biggest music site on the web.