The New Digital Economy, Part II

The New York Times was accommodating enough to print an article on Monday titled "New Model For Sharing: Free Music With Ads." I say "accommodating" because that article ties nicely with my post from yesterday.

Over the past seven months, I've posted multiple columns about the extreme short-sightedness on the part of the music industry. Instead of embracing the digital world, the four largest music labels have, until very recently, been standing on the beaches spitting at the incoming tides. On September 16, I lambasted Doug Morris, chief executive of the Universal Music Group, here.

Morris was threatening to prosecute social networking sites like MySpace.com and YouTube.com for copyright infringement instead of recognizing that these websites permit young people to discover new musical acts and hype favorite songs. Laura Vivanco made much the same point in a comment to my post yesterday when she said that sample chapters are advertising tools for publishers.

Lately there have been some encouraging signs that the music industry is coming around. First, Warner Music Group announced an agreement to distribute on YouTube the library of music videos from WMG’s roster of artists as well as "behind-the-scenes footage, artist interviews, original programming and other special content." Shortly afterward, USA Today reported that YouTube made "deals with CBS and two major music labels . . . Universal Music Group and Sony BMG Music Entertainment."

The music labels are beginning to realize that there are other viable business models beside that of a straight royalty-paying one. Advertising-supported music is one of those new models.

According to the Times' article, Qtrax "plans to open for business in September, [and] already has deals to sell music from Warner Music Group and EMI Group, and it plans to announce a similar deal with Sony BMG Music Entertainment . . . Allan Klepfisz, the company's president and chief executive, said Qtrax was in negotiations with the fourth major label, University Music Group, and Merlin, an agency that represents many independent labels."

This is not a brand new concept. Commercial advertising has been supporting network television since the Bulova Watch Company paid $9 for a 20-second spot in 1941. As social networking sites grow in popularity, it makes sense for advertisers to want to buy space where potential buyers aggregate. It also makes sense for the social networking sites to share that advertising revenue with the providers of the content being used to attract new users. And, since the content providers are getting free publicity by having their material appear on popular sites, perhaps they accept a percentage of that advertising revenue in lieu of royalties.

Although the music industry has resisted moving away from a royalty-paying model (are you listening, publishing?), they need new business models. "Sales of compact discs are down sharply so far this year after previous declines, and revenue from online music stores, such as Apple's iTunes, is not growing fast enough to compensate." (NYT)

I was particularly interested in one industry insider's comment: "[D]on't try to get people to consume the way you want them to, . . . Figure out how they're consuming . . . market to that and monetize their behavior." While simple, it's brilliant in terms of watching consumer behavior and then adapting the retail market around that behavior. This echoes another comment made by Laura to my post for last night: "Advertising works best if it goes to where the consumer is, rather than expecting the consumer to go to the point of sale to find out if they even want to buy something."

Under an ad-supported peer-to-peer model, Qtrax displays files for which it has permission and then, when a user selects music to listen to, Qtrax provides associated advertising. There will be a limit to the number of times a listener can play a song before needing to purchase it. Revenue will be generated both from the purchase of the music and from the advertising displayed.

Qtrax's deal is structured so that it starts by revenue-sharing with the music labels. Over time (and hopefully as business grows), it will morph into a royalty-paying model.

I'm delighted to see the music industry exploring other income-producing models. It's my belief that publishers are moving rapidly toward a similar point-of-crisis. I actually think the publishing situation will break down into two questions:

1) How will individual publishing houses resolve their ambivalence to Google and its Google Book Search program?
2) With the increasing digitization of books, what value will the publisher bring to the table?

The first question will be answered over the next year as we approach the court dates for the two lawsuits against Google.

The second question may not be answered for many years although I suspect one or two publishing houses are already thinking ahead to the potential consequences.

What do you think will happen? I'll make my own predictions in tomorrow night's post.