Saturday, January 24, 2009

All Access?

Once again the IFPI has released its annual report on global music consumption, and while the steady drumbeat of doom and gloom was tempered somewhat this year by a rather hopeful portrait of emerging digital “access” models, primarily across Europe, there was at least one shocking statistic which was repeated over and over: 95% of all music content consumed on the web is unauthorized/illegal. In other words, for every track downloaded and paid for from the iTunes store, there are 19 which are being pirated on shadowy peer-to-peer networks. The numbers point to some 20 million “illicit” downloads per day.

Is this a bad thing? The IFPI would have you believe those downloads should be valued in the same manner as the legitimate stuff. So if digital (as defined by discrete downloads and mobile ringtones) represents $3.7 billion in global revenue, as it did in 2008, then there is roughly $70 billion out there waiting to be captured, right? Unfortunately this assumes all of those P2P trades (and I've heard numbers as high as 55 million/day) could be monetized at the prevailing legit-download rate of $.99 per track. It ignores the more passive manner in which much of today’s music is consumed, as well as the public’s expectation that as supply approaches infinity, price flatlines.

So how should this new access model be monetized? The statutory wholesale cost of a stream is $.01, which implies the entire illegal P2P market is only worth about $70 million. Not terribly exciting to the IFPI, and certainly not a return to the halcyon days of 1999, when the industry peaked at $38 billion worldwide. Should the record industry take its cues from the broadcast television industry, which attempts to differentiate between “lean back” and “lean forward” viewing? Why is CPM for “lean forward” higher when the viewer is probably multi-tasking? Shouldn’t the exasperation of having to sit through 30 seconds of pre-roll on Hulu (without the benefit of a DVR’s fast-forward button) be tempered with lower CPM? A frustrated viewer means lower engagement, no? Taking this back to the music world, why does ownership connote more value than access, especially when the end user is more often than not listening to Avenged Sevenfold while Facebooking, texting and IM-ing all at once? What this leads us to is a universe of multi-channel consumption, each with its own monetization model. Just as the concept of ownership is as outmoded as the kid sitting in a darkened room listening to LPs through headphones, so is the idea that each of the 20 million illegal files shared per day is worth $.99.

Here’s the good part: they could be worth more.

Advertisers have shown a willingness to pay a premium to align with music. While plain vanilla display-supported (non UGC) music on the big social media sites costs $10 CPM, the new game in town is CPA, or cost per action. If you can associate your brand around a music player or destination where there is a call to action – this could be passing music along, filling out a brief survey, donating to a cause, or remixing some music stems – the price of admission increases commensurate with the value of getting your customers to actually do something in your branded environment. Voila! Engagement!

If you can then translate this to a multi-channel ecosystem of retail, web, mobile, media, live performance and merchandise, where music experience/consumption is far more interactive than simply downloading a few hundred anonymous tracks at a time, and if you then offer the ability to get viral – spreading your brand messaging even further along targeted audiences – it is conceivable that far more than $70 million is at stake. If the music experience environment is sticky enough to consumers – if it is active enough – we could be talking billions.

In business school we called this consumer surplus. But to the veterans of the music industry circa 1999, many of whom are still running the show, it’s plain old “money on the table”. Once they dump their rigid pricing policies and onerous licensing processes, we just might let them grab a little.

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