Second Life Lessons: Underestimate Niche at Your Peril

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September roiled the recording industry, and tightening consumer wallets could spell a vicious fourth quarter.

That is part of a bigger, multi-year slide for major labels, a downward spiral driven by a tanking CD.

But not everyone is getting the doom-and-gloom memo, including EMI Music senior vice president of Digital Strategy Cory Ondrejka.  During a late-day keynote at Digital Music Forum West in Hollywood, Second Life cofounder Ondrejka offered a snappy, smart, and optimistic outlook for the beleaguered label.  Tossing words and phrases likecollaborative filtering , community formation, entrepreneurship, and crowdsourcing, the incoming brain focused on niche audiences, microtargeting, and rapid responses to consumer needs.  “Underestimate niche at your peril,” Ondrejka urged.

But the coveted niche exists within a very, very large potential audience. “We basically have access to half of the earth,” Ondrejka said, pointing to collective internet and mobile penetration rates that easily surpass three billion (1.2 billion internet users, 3.2 billion mobile users).  “We have billions of fans, and zero marginal costs.”

If Ondrejka at times seemed like a digital dreamer, he also realistically pointed to a business model and cost structure that has been focused on big hits, big artists, and super-sized marketing campaigns.  But Ondrejka also placed emphasis on Long Tail theories throughout, and was clearly motivated to energize more focused audiences.  “Those artists way out on the curve are valuable, and this can be scary in a hit-driven world,” Ondrejka said.  “The top of the curve is dropping faster than the market as a whole.  That is the curve flattening out, this is the Long Tail that Chris Anderson talks about.  The niche actually monetizes better, and if you doubt that, you should probably go check out eBay, or Google, or Second Life for that matter.”

Of course, label revenues are clearly declining, though Ondrejka pointed to massive increases in music consumption, across both free and paid channels.  “This is actually a really great time, in some ways this is the best time ever to be in music,” Ondrejka said.

Ondrejka was recruited by Douglas Merrill, an ex-Googler and EMI newbie who shares a similar digital brilliance and optimism.  The combination is certainly refreshing, though largely incongruent with technophobic strategies like file-sharing lawsuits and arduous licensing approaches.  Those touchy topics were left untouched, though the broader question is whether Merrill and Ondrejka can quickly solve an urgent monetization riddle.

Report by publisher Paul Resnikoff in Los Angeles.