Music Ally’s Stuart Dredge reports on this afternoon’s panel session at MidemNet: labels and services talking about the do’s and don’ts of digital…

The panel featured two music services – Spotify and we7 – three labels – WMG, Sony and Beggars Group – and The Orchard. It focused on the deals being struck between labels and digital services, in as much detail as the participants are allowed to talk about. In particular, the way the streaming model has been evolving.

The panel: Simon Wheeler from Beggars Group, Steve Purdham from we7, Michael Paull from Sony Music Entertainment, Richard Gottehrer from The Orchard, Stephen Bryan from Warner Music Group, and Paul Brown from Spotify.

Moderator Paul Brindley (Music Ally) kicked off by pointing that digital income was up 12% in 2009 – “okay, but we’re still not there in terms of making up from the overall shortfall in recorded music sales”. However, he pointed out that streaming services HAVE been gaining traction, citing Sweden as the key example, where digital recorded music income rose by 10.2% last year.

Paul Brown from Spotify kicked off, talking about how the streaming music company is going. Having launched in Sweden in October 2008, then in the UK in February 2009, it now has more than 250,000 paying subscribers.

The company now has a 40-strong ad sales team – “a double-digit million Euro business now on its own” – but he agreed that there’s a well-established view in the industry now that “free drives pay” – getting people to sign up for the premium service, fuelled by the launch of Spotify’s mobile apps.

“It’s been a big driver, but every little thing you do can move the needle a bit,” said Brown, citing Spotify’s offline mode, and the catalogue as key selling points for the premium version.

we7’s Purdham said his service has also been commercially available for a year, following a year of technology development, then a year to get the licensing deals. “All of the economics are driven by the audience,” he said. “By telling nobody about we7, we’ve got two and a half million people who come to the site!”

Ad-funded is we7’s main business model, but the company is introducing a subscription model next week – 1st February – via PC and mobile. “Mobile subscriptions shouldn’t be a freemium model,” he said, warning that music fans are happy to pay for the mobility of their music collection.

It’s notable that neither service has spent a lot on marketing – neither has Pandora, pointed out Brown (who used to work there) – and Spotify doesn’t even have an external PR agency. “Ultimately it’s about the consumer, and if they love the product, that’s the biggest marketing you’re going to get in this day and age,” he said.

So has a corner been turned now with streaming – is this how consumers want to get their music? Wheeler said à la carte isn’t over by any stretch of the imagination – streaming is just another way to discover and consume music.

“We want a very wide and diverse musical ecosystem out there, where everyone can find what they feel comfortable with,” he said. “The rise of the streaming services is a really welcome addition to the landscape… but these services are going to continue to evolve and diversify. We need more players like that in the market.”

Sony’s Paull agreed that not all music lovers want the same thing – some want to own and some just want to access. “I don’t view one model as a substitute for the other, they’re complementary,” he said. “The two businesses? I don’t really see them as separate.”

Bryan pointed out that current web technology is providing a better experience than ever for streaming music. “The question is what is the right business model that you layer on top of that underlying technology?” he warned.

The concern, though, is whether streaming models won’t just cannibalise download revenues – people don’t pay as much, so the overall revenues will be less. Or will they? Bryan thinks not – saying that streaming has the ability to reach a wider base of consumers.

Wheeler agreed. “The industry is just going to have to deal with all these different models that are coming through. It’s no good saying: ‘That’s our business – selling a cylinder disc…'” He said the business needs to be structured around all these new models, with everyone – labels, publishers and other elements of the ecosystem – adapting rather than digging their heels in.

The Orchard’s Gottehrer talked about the income coming into his company from new digital services. “I don’t personally care what format succeeds or fails. I just know that it’s much different than when I grew up in the business… It became more complex and interesting with the coming of the Internet, but I don’t think it really matters.”

He went on to say that “we came to expect an awful lot, and the world changed on us – not only in the context of music, but of everything… All these changes are great, and we’re just going to have to own up to the fact that we’ll make a little less, or perhaps we’ll be able to build an audience for our artists so we make even more…”

Moderator Brindley suggests that Music Ally’s research has found that people ARE using streaming services like Spotify and we7 to sample music, which they then go on to buy. But when people really are connected 24/7 in the future, this may change – people won’t need the permanent copy of a song.

Wheeler said there’s no indication so far that streaming is cannibalising purchases in any significant way. “As we look forwards, as consumption becomes easy… when you’re accessing whatever music wherever you want it, that’s when the shift is going to come. But it’s a way down the line.”

A zinger of a quote from Brown: “There’s no point having scale if you don’t have a clue how to make money out of it: it’s about scale AND monetisation.” The context being that earlier this week, UMG’s Rob Wells was talking at an IFPI launch about the healthy revenues his label is already making from Spotify – in contrast to the regular speculation about the company’s numbers.

Are there segments in the user base of these new streaming services? Brown said that Spotify is getting some fascinating data on the habits of its users. “What we’ve found really interesting is playlists. We’ve got a very active Twitter following and Facebook following, but people share playlists on Spotify all the time.” He said this is becoming a powerful discovery tool for Spotify’s users.

WMG’s Bryan says that its figures show that users of subscription services are consuming a much wider breadth of content than downloaders – which he said is an interesting opportunity for WMG from a catalogue point of view, particularly when it comes to marketing albums.

“When you’re in an access model or subscription model, it’s more about sustaining engagement with content over time,” he said, rather than the traditional big marketing push in the run-up to the launch of an album.

Paull warned that having ‘unlimited’ access to music can actually feel like having nothing – people are overawed by the sheer choice. “We approached it backwards: we gave you on-demand, but we didn’t give you programming”. However, he said the current evolution is putting those two ideas together – subscription services that actively help people discover stuff to listen to.

“That’s where we’re on the road to going, but I don’t think it’s been perfected yet,” he said.

The panel also talked about business models – the unlimited download model, for example Virgin Media’s deal with UMG in the UK, which has reportedly faced obstacles from other labels. Brindley asked when or if that kind of service will happen, and what impact it might have on the streaming services.

Wheeler was in no doubt that unlimited download models will happen. “There’s a huge amount of concerns around getting to an unlimited model, and being an indie label we’ve got very different concerns to some of the major labels.”

Such as? Wheeler said independent fans are voracious consumers of music. “Our main concern is we’ve got these passionate ones, they’re pretty turned onto technology. They are going to be some of the first ones to buy into these services… so you take all our £500-£1,000-a-year customers and turn them into £100-a-year customers.” Although he stressed that’s only a problem if these models don’t get mainstream adoption beyond th
ose people.

Bryan said that the unlimited downloads model “doesn’t address the broad consumer base that we need to go after… potentially it’s a model attractive to certain types of consumers, many of which are attractive to us today”. So it may just attract the people spending lots of money on music already, which is the concern for WMG and the other majors.

“It’s an offer that may be appealing to voracious music consumers,” he said. Paull agreed, and said he’d rather go down the road of “solving what the consumer needs, rather than come up with a model that they’re not asking for” – suggesting that what consumers have been asking for is the ability to listen to their music on any device they want, which is being solved in other ways.

Wheeler still thought that unlimited download models will be part of the future mix of music services, but said that the industry needs a controlled trial to test it out – to get data on how music fans really do behave when they have access to this kind of service.

Brindley moved the conversation on to cloud storage, and the rumour that Apple may be launching an iTunes-in-the-cloud service soon. Will that have a big impact?

Gottehrer pointed out that Michael Robertson tried to do it with MP3tunes several years ago, “and he got crucified for it!”, but that Apple may well be able to get the model up and running. The panel were invited to speculate about Apple’s plans at this point, but didn’t bite.

Purdham did talk about what he’d do in Apple’s position, with the cloud era “hurtling towards you, you have to make that step”. In other words, taking iTunes to the cloud is less a brave leap forwards for Apple, and more a necessity.

So, the do’s and don’t of digital deals. Purdham talked about the economics of advertising in relation to music, where 12 months ago, licensing costs were around a penny a stream, but said it didn’t really matter whether it’s a penny or a tenth of a penny. “The key element of it is ‘is there a revenue stream that will pay for it, so it becomes a sustainable model?”

And is there? For every song someone listens to on we7, there are 3.7 ad opportunities, he said. So there’s “a certain level” of advertising rates that the company has to get, to make its model work. And can it get them? “I believe we can get to the point where the actual advertising rates we get cover the costs of the music, at a rate where the music is valuable – not at a point where it’s a revenue share that’s so small, it’s not even worth talking about.”

But of course, increasingly companies are adding subscription elements to their basic ad-supported models, so there’s that to factor in.

Bryan said that WMG sees the ad-supported services as important for building a mass audience, who can then be converted into paying via premium subscription models. “We want to make the paid services as attractive as they possibly can be relative to free options,” he said. He also said that WMG is very focused on taking services like Spotify into discussions with ISPs in the US – “where you have the ability to integrate billing potentially in a feels-like-free model”.

Which could be an interesting pointer to the Spotify launch in the States in the coming months. Spotify already has deals along these lines with TeliaSonera in Sweden and 3 in the UK, of course. And he agreed that Spotify’s free service is “about conversion – it’s a great way in“. He thought the last six months, and especially since its mobile apps, has shown the momentum behind this ambition.

Brindley asked Brown if the idea isn’t to have its deals with labels based more around a share of revenues than per-song payments in the future – as UMG’s Wells’ said it’s already doing in four markets, last week. Brown said this is where the model will go over time – “but deals are deals, and they’re all confidential between the parties!”

Wheeler thought it was important to understand how these deals are constructed. “When you’re licensing a startup, their income’s zero,” he said, saying that they have to build their revenues up to the point where they can pay their outgoings and start making a profit. And he hinted at the importance of equity stakes as “a vehicle where you can share in the growth of the company”, while pointing out that very few deals that Beggars does with music services are the same, due to the sheer variation in startups.

What about the mistrust from artists and managers towards streaming models? Bob Dylan’s music can’t be streamed, and La Roux’s album was recently removed from Spotify. Brown said he understood the concerns of managers. “You’re going to get some bumps and issues as a new business, but in time I hope all the artists are on there. It’s a time factor, and we’re only 12 months in.”

Wheeler said the best way of addressing any mistrust is “communication and transparency – if any of our artists and managers want to know, we can have that conversation with them”. Brown chipped back in, saying that Spotify is also getting a lot of support from the artist community and managers.

Purdham also responded to this question, talking about we7’s work with unsigned artists, promoting them on its site to help them gain an audience.

The panel were also asked about how deals will be affected when consumers have to pay for a service – their broadband – but also for the ability to access that service (e.g. charges for unlimited broadband data – as is being proposed in the US). In other words, what happens if customers are paying a fee for music and then a separate fee for the bandwidth.

Bryan said WMG doesn’t want to see these kinds of hidden charges, but admitted that it’s a challenge as the ISPs and mobile operators face growing traffic on their networks. He also talked about the labels’ desire to work with ISPs not just on legal services, but in taking action against piracy.

A question from the audience asked the two label participants about niche services – are they going to open up the kind of companies they’re dealing with (dance sites, indie sites – stores focused on particular genres). So big dance remixes from WMG artists might be available on iTunes, but not on the biggest dance stores.

Paull said it’s a matter of resources. “How many companies can we work with directly? But we are trying to figure out ways to let smaller niche services get access to the content so they can bring it to the user, without being overly burdensome to our infrastructure.”

How about high-definition downloads – better quality files? Brown said Daniel Ek of Spotify is actually quite focused on this, being an audiophile. “We would love to offer FLAC and really high quality audio beyond MP3, for those that want that” – as downloads, that is. “We would love to do it: it’s just cost and time.”

Brown was asked about playlists on Spotify, and he said that there’s huge variety in what kind of playlists people are creating. “I’m starting to get anecdotal evidence from people who aren’t in our industry saying they created a playlist. That’s the mass-market – people reaching out and starting to share music with each other.”

The final question focused on the labels – how important is equity for the likes of WMG and Sony when working with a new service, especially given the less-than-stellar return provided by their stakes in services like Imeem and Lala last year.

“I don’t think we’re planning to be investors going forward,” said Bryan, saying that Imeem and Lala was “a unique situation where we were essentially playing a dual role&quot
Paull preferred not to say too much, stressing that Sony’s aim is to ensure it can pay its artists from any deal. And that was a wrap.


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Stuart Dredge

Stuart Dredge is a freelance journalist, and a regular contributor to Music Ally, The Observer and more... including midemblog :)

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