The future of digital music

Why pay for something you can get for free? Many reasons:

• Support the people creating what you like
• Vote with your dollars
• Save the time and effort of doing it yourself
• Be a responsible member of the community

Why give away something you could get paid for? Again, many reasons:

• Reach a wider audience
• Make your creation available to people who otherwise couldn't afford it
• Free/cheap publicity
• Generate good feelings for your business, leading to other sources of income
• Be a responsible member of the community
• Have your creation be the base for other works, leading to greater richness for everybody

These arguments are true for both open source software, and music. So why charge for software, or music?

1. Put food on the table of the creators, and keep a roof over their heads
2. Make it possible to pay for distribution to the masses
3. Make a buck

In this last list, the Internet has made reason #2 obsolete. No longer do we need a big recording industry to aggregate dollars to make it possible to pay for studios, masters, distributors, and music stores. The average amateur can buy a decent microphone, make a studio in their garage, and use a computer to handle all the mixing, mastering and production, for no more than a couple thousand dollars. The Internet makes distributing that music almost free. No longer do we need big blockbuster hits to aggregate enough dollars to pay for studios so good that it highlights the musician's flaws--amatuer equipment is good enough. No longer do you need to sell hundreds of thousands of copies of a CD to pay for those high production costs, to make a profit.

Recording companies used to be necessary to mass-produce music, because the cost of distributing music made it a scarce resource. Because only a few companies controlled the distribution in this expensive industry, the recording industry became gatekeepers, deciding what music and musicians might become popular enough to recoup their investment. The recording industry served as a filter before distribution of music, because the cost of distribution was so high.

Times have changed. Clay Shirky writes in his latest essay:

The Filtering is Done Post Hoc - There's an analogy here with every journalist who has ever looked at the Web and said "Well, it needs an editor." The Web has an editor, it's everybody. In a world where publishing is expensive, the act of publishing is also a statement of quality -- the filter comes before the publication. In a world where publishing is cheap, putting something out there says nothing about its quality. It's what happens after it gets published that matters. If people don't point to it, other people won't read it. But the idea that the filtering is after the publishing is incredibly foreign to journalists.

... and we can add that filtering after music distribution is incredibly foreign to the recording industry.

I went to an MIT Enterprise Forum dinner panel last night. The topic was about the future of digital music. David Dederer, of the Presidents of the United States of America, was the representative musician on the panel. Other panelists included Bill Valenti, the CEO of Melodeo, a company that is trying to sell music over cell phone networks; Robert Acker, a VP at Real Media; David Weinberg, a VP for Universal Music; and the moderator, Michael Malone, founder of AEI Music Network.

So what's the future of digital music? Depends on who you ask:

Robert Acker: "All you can eat" subscriptions. Real Media is betting heavily on their subscription service, Rhapsody. For one relatively low monthly price, you have access to any track in their 1.1 million song collection, any time you're connected to the Internet. You can listen through your computer. You can copy it to your portable player. You can soon play it in your car. Make it easy enough, and this could be a great way to get your music.

By adding all of the social filtering pioneered by sites like del.icio.us, people can recommend music, and find new (or old) tracks recommended by people who have similar taste.

The problem with this scheme is that if you ever stop paying your subscription, you lose access to all of that music. By signing up, you're in a sense locking yourself into this system, forever paying for the same thing over and over again.

Bill Valenti: Cell phones are ubiquitous. Nearly everyone has one, and people who have them are accustomed to paying for additional services. People willingly pay extra to send text messages and photos, or to download ring tones. The platform is closed, and the industry goes to great lengths to keep it closed and secure. Why not take advantage of this medium to distribute music, and be able to charge for it? You can buy music straight from your phone, and Melodeo makes a copy available to you on your computer. You can transfer a song to a friend's phone immediately, and Melodeo can charge your friend for the privilege. By taking advantage of the trend for instant gratification, Melodeo and the wireless crowd hopes to make a mint.

David Weinberg: It's all about owning the copyright, and marketing. If we can stop people from stealing music, provide a reasonable way for people to pay for and consume music, and prevent them from giving it away, we have lots of opportunities to do well in the digital age. Apple's iTunes has made it possible to find all sorts of music that hasn't been available for a while. Universal is busy going through their back catalogs and making old music long out of distribution available. This is leading to a big new revenue stream. Online music sales currently represent 3% of all music sales. While that may seem like a small piece of the pie, what's remarkable is how fast it has grown, on the order of 50% in the last 6 months. [Okay, that growth figure is made up by your humble author--and all of this is paraphrasing...]. At the current rate of growth, digital media sales may very quickly become 25%, 35%, and more of the total music sales. Within three to five years.

Dave Dederer: For musicians, it's an exciting time. While musicians like to get paid for the songs they perform, having a lot of people listen to your music for free isn't really a bad thing. Musicians don't get paid for songs played on the radio. By negotiating directly with Apple, the Presidents of the United States of America already make 25% of their income through the iTunes store, and this took very little work on their part to make happen. Dederer credits the recording industry for their popularity in the first place, but now that they've established their own label, they get a much better deal selling direct to their audience, via services like iTunes and Rhapsody. Responding to a question about piracy, Dederer called the record labels pirates, saying that their former label still distributes their music overseas, more than two years after their license to do so has expired.

This highlights a problem all of the panelists recognized: the right to distribute the same music in different countries isn't always owned by the same entity. One label might own the North American rights, while a different label owns the European rights. And, of course, on the Internet national boundaries become meaningless.

All in all, the panel seemed to have a consensus on the various roles each entity had to play in the music business. Here were their conclusions:

• Any future of digital media has to be convenient, easy, reasonable, and not prevent people from doing what they really want to do with their music.
• Just like in the past, there is a role for the musician (create music), a role for the labels (promotion, financing, distribution), a role for the stores (selling songs, albums, subscriptions), and the role of the consumer (to pay for it all).
• The panelists seemed to agree that with the rise of the Internet, much more power was moving away from the record companies, and to the consumers.
• Musicians and consumers stand to benefit overall, musicians because it has become so much easier to communicate with their audience, and consumers because they have access to so much more music than was possible before.
• In between, for the record companies and the distribution channels, there would be a small number of huge winners, and a lot of big losers. Somebody would find a business model that everyone would like, and come out on top. Most other companies would remain small or disappear entirely. Will it be iTunes, or Rhapsody, or Yahoo, or some other unforeseen breakthrough that a 19-year-old is inventing in their bedroom as we speak?

I'm not sure I agree with this last point. I have some very definite ideas about this whole landscape, and I see factors to this situation none of the panelists seem to recognize. I'll be writing more posts about what's missing from this picture, and propose a whole new model for music distribution. Actually, it's not my idea at all, but a logical synthesis of the ideas of a bunch of other smart people. Stay tuned...