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FEATURE ARTICLE

Subject: January 2002 ECMgt.com: Transition to VMS3.info (the Value Equation)
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January 1, 2002 *4,300 subscribers* Volume 4, Issue 1
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Ten years after the invention of the World Wide Web, a second revolution appeared on the Internet, the reinvention of the music industry. For over 50 years, radio had enjoyed unparalleled reach to consumers. Equal to television in user adoption, radio had the ability to deliver focused content to a multitude of user products and locations. Radio had reach into automobiles, homes, personal appliances, business and shopping (Muzak). Ironically, radio was a distribution channel without the ability to "distribute". Transistor radios in the 1960s brought portability and audiotape the ability to capture, but only with preparation, careful timing, and no easy way to mix. The convergence of computers, CD-ROMs, and large hard-drives allowed for manual cutting and mixing of music, but with poor quality, and high storage demands. Ubiquitous networks brought a revolution in discovery and distributed downloading, Napster. With a proliferation in file types and personal electronic players, the course of the music industry seemed to change overnight. Record labels, radio stations, artists, and the courts grappled with legal and copyright issues, standards in file-types, and reinventing business models that leveraged technology and consumer expectations. Far from a state of chaos, the value equation makes sense of the various models, and suggests strategies that protect stakeholders while offering insights into the future. In many respects, this is a "publishing" problem.

Radio was possibly the first "portal". A large and loyal audience, a place to "login" and receive wireless content, and syndicated content, editorially freshened and combined with advertising. With 50 million daily listeners, CBS - Infinity rivaled Yahoo and AOL together in total "members". Ironically, radio never understood their portal status, and focused on advertising as a single business model. Napster was able to do an end-run around radio and CD-ROMs as a distribution model, but ironically, never focused on the legal distribution and sale of single tracks as a business model. With music currently a $40 billion industry, and over two thirds of all Internet users downloading at least one music track, the timing seems perfect for a new business model. But first, let's reexamine the term "convergence" combined with the value equation.

Convergence usually speaks to technology, rather than business models. Music may challenge that premise. With content as a common denominator, it appears that the value differentiator is in how files are "streamed" to the user, whether those file formats can be captured, and if transactions can be designed to legally "bind" ownership to the captured content. Technology is focused on a single problem, how to facilitate legal ownership of content once the intellectual property becomes fragmented into a multitude of physical and digital distribution channels. Music labels and artists, radio, and Internet portals are seeking definition and revenue streams to capture value as consumers are capturing content. Satellite XM subscription radio may actually be a faster pilot for a subscription network model, while radio experiments with streaming websites, and Yahoo and AOL launch music as syndicated content. Networks will factor in discovery, delivery, and transaction medium for music, but will take time for consumers to adopt. Strategy has shifted from simply using legal action to prevent illegal trading, as the music industry now grapples with defining their business, unique value provided, and how to favorably leverage network effects. Future music will be recorded in one format, and distributed across many channels. Labels will become venture arms for artists, and vertically integrate with distribution channels that include traditional CDs and Internet music portals, the "new radio".

Value equation analysis:

Process phase - consumers "discover" music media primarily through radio, but purchase physical media through retail outlets. Internet consumers discover music through Napster-like services, download but do not purchase, and often play tracks once and then discard. A careful analysis of the entire music industry indicates that passive push from radio is a weak form of discovery given a single channel, but much stronger when the typical selection of 50 local channels is considered. XM band subscription radio will deliver hundreds of channels, and test a $10 monthly subscription model. Amazon.com has moved to hybrid delivery of traditional CD-ROM purchase coupled with Liquid Audio download of single tracks, allowing "pre-sampling" prior to purchase. AOL / Time-Warner and Yahoo are slowly launching music content as a way to generate subscription revenue. Currently Yahoo is hosting 140 "radio" stations. It is clear that many listeners enjoy downloading but not paying for MP3 formats, and the proliferation of MP3 players are purchased mostly for minors, who can not legally use a credit card for purchase. To maximize process, a significant move from traditional radio to XM band and radio portals will need to happen. Additionally, Napster like technology will need to encapsulate binding payment.

Transactions are the key to solving many of music's business model issues. "Spot buy" purchases of single-tracks currently represents a small market for labels, as aggregation across artists is a challenge, and distribution is not coordinated from the label through the music portal. Replenishment only factors in if 30-day keys expire, and surveys of consumers have indicated that they are unlikely to pay simply to keep a few tracks alive in their players. Coupling keys to tracks burned on CDs is even more problematic, as connecting a payment interface to a CD player is almost a non-starter. The best hope for revenue models is an extended or hybrid subscription model that connects consumers to streaming media, including traditional radio (XM band) with the option to download, at tiered pricing, a certain number of single tracks per month. The XM band approach, extended from satellite to broadband Internet, may solve the product adoption hurdle that portals like Yahoo and AOL Time-Warner are struggling with.

Participants - Music artists, labels, portals, and consumers, all connect by "networks" are players. Consumers have need for discovery of new music and artists. They typically only connect to networks through radio, occasionally for music downloads, and purchase solely through retail outlets. Artists and labels need a "discovery-distribution" medium larger than current radio. To connect to more consumers, labels need to extend the reach of their content through the new XM radio model, alliances with portals, and creating a new "single track" product that can be downloaded in high quality formats over the Internet. Streaming MP3 can be a loss leader, but a subscription model, allowing access to a dozen or so tracks at $5 a month would create the most profitable reach. Traditional retail has seen a decreasing revenue stream, while Internet retailers including Amazon have moved to hybrid sales of both CD-ROMS and Liquid Audio downloads. Retailers will need to move to a digital delivery of singe-track music, but may find channel conflict with labels and artists seeking the same advantage from the Web.

Current strategy shows that networks allow for discovery, transactions, and novel file extensions that add value to the IP already created, and extending that value into new player devices. Managing strategy will require negotiation, delivery, and payment to condense into two steps. Low-resolution music formats with 30-day expiration dates will serve as loss leaders for higher quality formats that are specific to individual players, and purchased at the point of download. The XM satellite radio band is a strategy to manage the global reach of wireless networks, aggregate a larger audience of listeners for each music genre. XM can not deliver downloads for replay, and will need to create an Internet site specifically for that. An evolving strategy would include a tiered-pricing model that blends subscription radio with access to high quality downloads. An issue involving credit card payments by minors must be resolved, and could present a serious business issue for a large consumer audience. Without that, spot buy and recurring revenue models will be limited to 18 year-old and above consumers.

Summary: Music today has a value chain problem, channel conflict, and is not taking advantage of network effects and reach. Radio was a passive push portal, not active pull portal. Internet file transfer has revived the "singles" market, but mostly for a fragmented player market. Satellite XM subscription radio may actually be a faster pilot for a subscription network model, while radio experiments with streaming websites, Yahoo and AOL launch music as syndicated content. Networks will factor in discovery, delivery, and transaction medium of music, but will take time.
· Strategy deployed - use legal action to prevent illegal trading. Music industry grapples with defining their business, unique value provided, and how to favorably leverage network effects.
· Strategy managed - Labels form alliances with portals. Start to emulate the 75-year-old "radio model".
· Strategy evolved - Music is recorded in one format, and distributed across many channels. Labels become venture arms for artists, and vertically integrate with distribution channels that include traditional CDs, Internet portals. Radio industry is redefined by members, focused / syndicated content, and ability for members to have control / ownership over content.

Goals of a business model for music are to:

The value equation shows that focusing on PTP (Process, Transactions, and Participants) moves music from the passive radio push portal to high quality satellite brand radio for broad discovery that protects IP. Napster like technology was a free-for-all technology that moved the music industry to the reality of network effects. PTP shows that labels and artists must embrace a value chain approach to content ownership that transcends file types, and offers consumers multiple discovery, download and purchase models.

Strategy deployed:

Strategy Managed:

Strategy Evolved: