Spainish Pirates Ahoy

Pablo Soto launched Blubster in 2001 and it grew from its humble Spainish routes to be one of the world's most popular peer-to-peer Internet file-sharing programs of recent years. Within days of its launch nearly 1 million people worldwide had downloaded it. Although Soto collects advertising revenues he still operates out of his grandmothers apartment and lives in a rented flat.

Now Soto finds himself in the latest major piracy battle against the music industry. Promusicae, the Spanish record label association that includes Sony, Universal, Warner and EMI, is suing Soto for 13 million euros. Promusicae hope the case will mirror court rulings against operations such as The Pirate Bay and also force Spain to draw up new legislation and enforce it.

According to the U.S. copyright industry group International Intellectual Property Alliance, some 2 billion music tracks were illegally downloaded in Spain in 2008, compared to 2.2 million purchased legally. This represented a loss of $1.6 billion in revenue in 2007 and 2008.

Soto, 29 claims that Blubster is a fully legal Internet tool and that he is not responsible for what people do with it. He claims legitimate uses include downloading historic speeches, uncopyrighted music and public domain intellectual property such as music and books. Soto argued that if he is guilty, so too are companies such as Google and Spanish telecoms giant Telefonica that permit the process. Downloading copyrighted material is illegal in Spain but is not a criminal offense, and courts rule it an infringement if used for commercial profit.

Rhapsody Turns Up the Volume

Rhapsody, the music store jointly owned by Real Networks and Viacom Inc's MTV Networks, is about to launch a media assault of $50 million dollars to promote its new and changing music store. Rhapsody is the music store for MTV music sites and iLike, one of the most popular music applications on Facebook.

It already sells music on a subscription service, allowing unlimited song streaming for $13 to $15 a month,. It now will sell MP3 downloads with the goal of getting them played on iPods and join the band of players, Napster, Amazon, WalMart, now challenging iTunes. Rhapsody will also now be available on mobile phones via Verizon Wireless's Vcast music service, enabling users to buy and download a song via their mobiles.

Last month Napster Inc joined WalMart and Amazon inn launching their MP3 store. Recently Amazon announced the roll out of their MP3 offer to the UK and globally. However iTunes continues to dominate music sales in the United States selling over 5 billion songs since it launched in 2003.

At one end we see the four major music manufacturers removing DRM and now at the other end the take-up and availability of these files via major retailers, music traders and the likes of Nokia. We also see a blurring of subscription and download which is going to offer consumers even more options. What is clear is that iTunes will not have it all their own way moving forward.

Music Continues to Reposition and Change

Today’s Times article 'Music sales fall to their lowest level in over twenty years' must send yet another shiver down the backs of those who run the major music production companies. Worldwide music sales are now at their lowest level since 1985. The figures released by IFPI yesterday stated that the equivalent of 1.86 billion albums were sold last year (for comparison they counted ten individual song sales as being the equivalent of one album).

So what does this tell us about the state of what we all know is an industry going through radical change where the once dominant record producers are being squeezed from both ends of the value chain the artists and the consumer?
The sales peaked in 1996 at 3.4 billion so have effectively halved in just over a decade. 1996 ironically was the year when the Internet started to change from being the old dirt track to the superhighway and companies such as Amazon were becoming established.

Today CD sales are not only collapsing in terms of volume but have finally also collapsed in terms of value with prices now being significantly discounted down from those heady days when some would have said that the industry fixed high prices in the UK. This double collapse is further compounded by digital sales continuing to fall far short of bridging the gap. Production company revenues in the UK are 13% down and on last year. On one hand UK CD sales fell by 16% to £871 million but although digital sales increased 28% this only amounted to £132.2 million. Today the consumer wants to make their own compilations and not pay for the extra tracks they don’t want. The charts are revivant to a few but not to the many and social sharing as it always has been is a given.

The IFPI is calling for the usual suspect to be culled, fined and thrown in jail claiming that between 50 and 80% of ISP traffic was accounted for by illegally swapped content. To us a 30% variable would appear a wide margin of error and would serious raise the question of whether they actually know the facts or whether a lot is based on assumptions and the fist waving we are used to from the production companies.

Music companies and lobbyists are trying to reach agreement with ISPs but this is not the problem. The issue is a value chain shift that is disintermediating one of the previously strongest links in the music chain. It isn’t about copyright infringement its about change. Change in how artists are taking control of their revenue streams, branding and merchandising. Change in how, when and what the consumer wants and is willing to pay. Change in how the artist and consumer are linked and the relationship.

The music business is still huge and influential. It will survive and make money going forward but it will change and have to change. Some look to other media sectors such as book publishing and ask what are the lessons we can learn from the music industry – and there are many. We would say that the one thing that is certain in any value chain is that once you stop adding perceived value then your place is in question and that no one has a divine right to remain in perpetuity.

There is Gold at the End of this Rainbow

Radiohead ‘Rainbows’ was the first to be offered as an ‘honesty box’ buy with fans paying what they thought it was worth to download it. The exercise was a huge success attracting new as well as established fans and generating a wide range of payments. Many in the press knocked it as a failure and predicted no or little sales of the album when it was released.

The album was released on plastic CDs and vinyl LPs on Jan. 1, with the CD priced at $13.98, though it could be found for as little as $7.99True the sales have not matched those of previous albums but it still sold 122,000 copies in the United States in its first week. It also reached number one in the UK weekly music chart. Demand for the album was such that some record shops put it on sale before the label’s planned “street date,” resulting in sales of about 9,000 copies the previous week.

The iTunes service, sold about 28,000 copies had not carried any of the band’s previous albums, owing in part to Radiohead’s demand that its recordings be sold only as complete works.
The sales suggested that the band’s name-your-price offering, and fans’ subsequent free sharing of files, had clearly reduced their sales but had gained them massive exposure, more fans and probably as demonstrated by Prince earlier this year guaranteed a bigger cash prize on the band’s tour of 20 North American cities this year.

Mixed Music Messages - But What's New

According to the UK industry trade association, the BPI, and the Official Charts Company the 150 millionth download was sold last week. This figure has been achieved over the last three years. So are things picking up for the industry are retailers happy at a time when pre-Christmas sales make up 40% of its revenues?

The digital sales actually amount to an average of less than one 79p per download per head of population per year. Recorded music companies have seen the slide in CD sales not being offset by growth in digital music.

So what is the answer and does one exist? Some blame DRM (Digital Rights Management) for the slow take-up of legal digital services and now more companies are starting to experiment with the DRM-free MP3 format. This charge was started in February by Apple’s Steve Jobs and has been followed by many including the major producers Universal Music, EMI who offer consumers a premium for DRM-free versions of its music on Apple’s iTunes store

At the moment, DRM is clearly seen as putting consumers off and the added confusion about formats results in driving people toward illegal downloads. BPI research this month that found consumers were almost four times as likely to choose an MP3 file as a DRM-protected track when the two were offered alongside each other.

The news from the US is no better. Even though, according to a Jupiter Research report, digital music spending is expected to grow to $3.4 billion over the next five years, and account for more than a third of U.S. consumer music purchases, it will not compensate for the anticipated lost in CD sales. They predict that the music download business will serve as an alternative, but not a replacement to CDs. JupiterResearch president David Schatsky reflects that, "One size does not fit all when it comes to acquiring music and consumer behaviour toward the variety of formats available reinforces that claim."

So even in a digital market such as music the physical product is still holding an attraction. Does this mean will still be enjoying the book for many more years than Mr Gates wildly predicted?

It has Finally Happening – SpiralFrog

In the Brave New World report last year we wrote about SpiralFrog a free music download service whose business model is based on advertising support. The service was due early in the year and when it didn’t happen we assumed it to be one of those great ideas that may never make it. Well the beta version of the service has been launched in North America. The service will offer over 700,000 music tracks and videos for free and rely on advertising to generate revenues. The licencing companies include Universal, EMI and BMI, that covers three out of the top four. The long overdue full official launch of the service is expected before the end of 2007.

The potential impact of this model is huge and it could revolutionise what we download and how we download it. Coupled with the Steve Jobs' DRM-free movement we can see a completely different music model in the near future. After all, why pay when you can get it ‘free’ and why restrict what you can do when you can elect not to have restrictions? When you add the Prince free album via newsprint its easy to see a value chain that is being not only redefined in real time, but one where there is likely to be disintermediation in a big way. The record producers and High Street retailers are not companies we would invest in.

Can’t wait till hits the UK!

Music Wars

Has Apple and its iTunes an unsustainable position with their 70% market share? Many would suggest that they are so far ahead of the pack it is difficult to be caught but perhaps there are some real competitors now appearing and the fashion bubble is about to burst.

We reported in 'Brave New World' about Spiral Frog and their huge potential to turn the tables upside down with their ‘free download paid for advertising model’. We said December and it is still ‘coming’. But they haven’t been sleeping but signing more labels and also hiring some more impressive players to their team. This certainly looks like a service to hit the road running, make significant traction and then sell out for lots of money.

This week we hear of another potential player Omniphone. The UK-based technology company has launched MusicStation, a cheap subscription-based music service for mobile phone users in Europe. It will allow subscribers to download an unlimited number of tracks to their mobiles, from its one million strong catalogue, for a monthly fee of £1.99. For an extra £1 they can listen to tracks via their PC. There are questions on whether the subscriber owns the tracks or merely has unlimited access as long as they continue to pay their monthly fee. However, with around 75% of mobile phones able to download and play music and a price so cheap, its attractive and will the consumer care?

What is clear is that whether the Sprial Frog model, or the Music Station one, steals share, the alternatives are starting to surface. Apple has had it good too long and we can expect some serious tune wars at the end of the year. No wonder Steve Jobs is offering to drop his DRM barrier.