The streaming music business is dead, long live the streaming music business
Apple’s acquisition of Lala yesterday is the coda to an interesting chapter in the evolution of the music industry. It comes on the heels of MySpace’s acquisitions of iLike and iMeem (both at similarly distressed prices to the reported ~50% discount in the Lala deal) as well as the launch of (nearly) inline streaming music in Google’s search results. Talk about mixed messages: the business of on-demand streaming music (vs. streaming radio like Pandora) is broadly being conceded as a failure just as the user experience is finally hitting the mainstream.
In the last 24hrs, I’ve read a lot of analysis across the spectrum and heard the thoughts of friends in various segments of the music industry. Here are some of the big issues that are front of my mind.
Whither the MP3 of streaming music?
Most of the people I respect in online music have been opining for on-demand streaming music for years. So, their first reaction has echoed that of my friend Lucas: music in the cloud will now be a reality. But *how* it will become a reality matters too, and I think that’s been lost a bit in the discussion so far.
In the download world, an open format (MP3) pre-dated Apple’s entry. So, they had no choice but to support it in order to make their software and devices backwards compatible. In fact, it’s easy to forget today that the market for iTunes and the iPod was largely built around satisfying the needs of consumers of illegally acquired music (the iTunes Music Store was actually launched over 2 years after iTunes debuted). If not for that pre-existing market condition, I don’t think it’s hard to believe the iPod would only play AAC music files (Apple’s proprietary format). Remember that no one could compete with the iTunes Music Store as a legitimate storefront for online music until less than two years ago, when the labels agreed to let Amazon and others sell in MP3 format so that customers could play the songs sold by retailers other than Apple on iPods. (This in itself was an interesting saga with Jobs publicly justifying why Apple would never support someone else’s proprietary format on their software/devices and why they would never license Apple’s DRM to others. In the end, the labels’ fear of Apple’s growing control of the online music value chain was greater than their fear of piracy and they called Jobs’s bluff by actually licensing MP3 sales.)
The relevance here is that there is no MP3 equivalent for streaming music — no pre-existing open standard that consumers will require Apple to support before they buy a wifi-enabled iPod (aka iPod Touch). Just like there is no (legitimate) way to play films or tv shows not downloaded from the iTunes Store on your Apple TV, there will be no way to consume on-demand streaming music from other sources in the native player on your iPod. You will of course continue to be able to install separate third-party applications, like Pandora or Spotify, to manage and play streaming music you acquire through those services. But, that silo will continue to be incompatible with iTunes and the rest of your music library while the native player will offer you an integrated consumption experience across downloaded and streaming music. Maybe this will still be good enough for the small number of power-users who care enough to want an alternative to the Apple offering (like those of us today who install the eMusic or Amazon download manager to have a somewhat equivalent purchase alternative to the iTunes Music Store).
However the segment for whom I think the lack of an open streaming music standard is potentially most harmful is the actual artists and the growing industry of direct-to-fan enablers, including my good friends at Topspin. Direct-to-fan sales are better for the artist because they get to own the customer relationship with the people who are *their* fans to begin with (see my boy Ian explaining to Wired how important this is) and they can have more control of the offering and better margins by cutting out middle-men like Apple. Today, I can buy an album directly from Topspin artists like Get Busy Committee or Fitz & The Tantrums (two of my current faves) in MP3 format and play it in iTunes and on my iPod. How exactly are they going to sell me streaming music outside of iTunes (or a 3rd-party service)? There are products like MobileRoadie, which artists can use to create their own branded iPhone/iPod app. But, I don’t foresee consumers being willing to switch apps every time they want to hear a new artist (and forget about a streaming playlist with multiple artists).
Licenses, schmicenses!
Several commentators on the Lala deal have noted that their licenses with the labels expire in the case of an acquisition. And I hear from insiders that Apple has already had requests for streaming licenses denied by at least some labels. Here’s why neither of those things matter.
Apple is going to build a kick-ass streaming experience natively integrated into their service/software/device stack of the iTunes Music Store, iTunes, and the iPod. They are going to get the thousands of independent labels, aggregators like TuneCore who represent individual artists, and at least one or two major labels (my bet is EMI will be first) to give them streaming licenses on a critical mass of music. Then, they are going to use the iTunes Music Store to promote the shit out of both downloads and streaming (most likely bundled) from the artists for whom they have streaming licenses while at the same time freezing out promotions for any hold-outs.
This is a non-issue IMHO and every song you can buy as a download from the iTunes Music Store today will be available for streaming within a year of launch (just ask NBC how well playing chicken with Apple works).
Sustaining innovation doesn’t work.
This post is already way longer than I intended, so I’ll leave this point as more of a footnote. On-demand streaming music is the future. Everyone I respect believes it, Apple believes it, it is the logical conclusion of the path the music consumer experience has been on since Napster. And yet it is a business widely viewed as “toxic” by investors, several of whom in recent months have demonstrated they think so little of its future potential that they are willing to take steep losses on their investments to get out. What gives?
Not only were these businesses endorsed by the major labels, both iMeem and Lala actually had labels as investors (as does Spotify). The reason that on-demand streaming music is a great product but shitty business is because the license fees demanded by the labels make it impossible to make money with any kind of offering that consumers will think is reasonable. It’s somewhat counter-intuitive that a vendor who is an investor wouldn’t be willing to adjust their pricing in order to preserve the value of their investment. But Warner Records, in particular, made it clear that are happy to spend tens of millions of dollars co-opting companies they see as potential threats and running them out of business in order to prevent hundreds of millions of dollars in (perceived) cannibalization.
This is Clayton Christensen 101:
By only pursuing ‘sustaining innovations’ that perpetuate what has historically helped them succeed, companies unwittingly open the door to ‘disruptive innovations’.
In other words, by trying to take an innovation and use it only to perpetuate and/or protect legacy business models, incumbents give new entrants the opportunity to do things the way the market actually wants them to be done regardless of how they have been done in the past. By trying to force LaLa from being a potentially disruptive innovation into a sustaining innovation, Warner Music and the other major labels unintentionally drove them into the arms of Apple, still the biggest threat to the legacy model the labels are trying to preserve. (Studios and networks trying to “de-fang” Hulu, take note.)
The Ringers are an LA band fronted by Joe Hursley (aka White Gold). I first caught them opening for Fool’s Gold at one of Little Radio‘s Summercamps in August (see 3rd video below) and they stole the show. The music has started to grow on me, but the performance is pure LA punk and cannot be ignored. If you like to rock, don’t miss a chance to see them live.
“Beaver Fever” and “Keepin’ Your Head Up” at The Viper Room on October 16, 2009 (Joe takes my camera on stage about 2min in):
“Scene You See” at The Viper Room on October 16, 2009:
“Scene You See” at Little Radio Summercamp on August 30, 2009:
I’ve been quite absorbed with my startup the last couple months, but it’s been hard to escape the derailment of the Obama administration’s political agenda — in the form of the current healthcare “debate” — less than a year after sweeping to office with a seemingly overwhelming mandate. As much as I’ve pushed these concerns to the back of my mind, I can’t help but at least subconsciously find the reemergence of the politics of fear depressing.
The right-wing extremists we united to vanquish only 10 months ago haven’t disappeared; they just went underground long enough for us to lose focus and for them to prepare their insurgency. This political battle is Afghanistan, not Iraq (or more accurately, what Iraq was supposed to be) — it’s not quick or sexy and the minute we let up, the enemy will take advantage with sneak attacks.
With enough stability regained that the everyone no longer feels we’re in crisis mode and Obama in office long enough for people to realize he’s not some kind of miracle worker and that the solutions to the problems we face are going to take meaningful time and effort, the right-wing has turned up the intensity of their guerilla war by reengaging in the politics of fear. Healthcare is obviously the most conspicuous theater (‘death panels’, really?!), but Glenn Beck’s unabashed claims that Obama is a racist, the “outrage” over Obama’s back-to-school speech, and now the forced resignation of Van Jones are all part of a pattern we cannot afford to ignore.
This post was prompted by one from Carl Pope, Executive Director of the Sierra Club, on the Van Jones debacle entitled “We All Blew It“. I couldn’t agree more, and it made me realize this is a problem that is only going to escalate if we don’t do something to stop it. We progressive Americans, who were only finally galvanized by our reaction to 8 years of Bush/Cheney coupled with the bright promise of the change Obama could bring, have reverted back not just to complacency, but worse to underestimation.
Just because *we* are immune to the politics of fear, does not mean they have lost their power — no matter how absurd the claims in question (whether it be ‘death panels’, Obama’s racism, or Van Jones’s “extremist views and coarse rhetoric”). Remember how much we underestimated George W. Bush in the 2000 election (regardless of whether he legitimately won, none of us thought it would ever even be close)? We have to stop assuming people fact check outrageous claims and recognize that inflammatory propaganda must be stopped in it’s tracks and those who perpetuate it must have their credibility undermined so they can’t continue to do so much damage. Say something enough times (especially on tv) and too many people will start to think it’s true. The more unsubstantiated and/or downright false claims we allow the Glenn Becks of the world to shout from the rooftops, the further they will push the boundaries. We cannot afford to let these extremists define the terms of engagement — if you have to answer questions on ‘death panels’, you’ve already lost.
The politics of hope are a challenge of patience and understanding, while politics of fear pander to our desire for quick fixes and to blame others. Getting people to think beyond sound-bites and seek substance is no easy task, but we have proven it can be done. Let’s not let all that hard work be squandered by neglecting to follow through.
I won’t lie, I’ve found the continued emails from the White House and Equality California (the No on Prop 8 folks) annoying. But I realize now that’s because they remind me I can and *should* be doing more. I’m going to start by phone banking for Equality California this week, because if I don’t participate then I don’t have a right to complain.
What are you going to do?
This struck me as so weirdly incestuous/small-worldly I had to post it. I just came upon a song featuring vocals by Sandra Possing, who happened to be the bartender at Delaney’s when I first met with Todd to discuss what is now awe.sm (she even tweeted about it!). Not only that, but I found the track through friend and former co-worker Lucas Gonze, and it’s being hosted on a site built by another former co-worker, Ethan Diamond.
The social media singularity is officially upon us people! Enjoy the music:
First of all, my life does not suck. Last night I was hanging at TechStars (and having my company mistaken for one of theirs
), this afternoon I was having lunch with the Gnip team in beautiful Boulder, and tonight I was filming a concert by one of my favorite new bands.
I’ve now seen Edward Sharpe and the Magnetic Zeros 5 times in the month since Ty and I first saw them at La Cita. And thanks to Dave at LittleRadio, I was invited to be part of the crew that filmed their three show residency at the Regent which ended tonight. That footage is in the capable hands of the Artificial Army crew, but here’s some stuff I shot at last week’s show with my G7. I’m primarily putting this up for Ryan, who has been at every one of the 5 shows I’ve attended
Like many investors right now, I’m spending a lot of time trying to figure out whether the stock market has actually hit a stable ‘bottom’ or whether it still has further to fall. My dad and I had a long discussion last night about different methodologies for calculating what equity prices *should* be based on historical market behavior and the dynamics of the current situation. The two main factors that have driven the slide from the heights of October 2007 (DJIA @ 14,279.96 and S&P 500 @ 1,576.09) are the sudden de-leveraging of the financial markets (i.e. some major investors being forced to liquidate >75% of their positions) and the macroeconomic effects of a recessionary cycle (i.e. higher unemployment, lower consumer spending, deflation).
While theoretically possible, I believe modeling the impact of these two factors is a practical impossibility because they are so intertwined — de-leveraging sparked the recession and the recession is driving further de-leveraging. You could also do a technical analysis where you try to match current market behavior to past patterns and extrapolate what happens next based on what happened before. But that method requires making a bet on which past patterns to match against, i.e. is our current situation more similar to the Great Depression or all the recessions since. And that’s a big bet.
So, I propose a different (and much simpler) approach: assume a realistically sustainable growth rate over a long enough period and figure out where we would be if the market had grown at that pace. I picked 20 years as the period and charted the monthly percent change of the Dow Jones Industrial Average (DJIA) from 2,342.32 at the end of January 1989 to 8,131.33 at Friday’s close. The actual percent change is the blue line, and I plotted 3 other lines against it: 10% annualized growth in green; 6% annualized growth in orange; and 2% annualized growth in red.
Here’s what that period looks like in annual percent change for the DJIA and S&P 500:
And here’s the annualized rate of return for both the S&P 500 and the DJIA since 1989:
Over the course of this 20 year period, there were only 6 years in which the market declined *at all* (one of which, 2005, was basically break-even) and there were 10 years in which the market gained *more than 10%* and in 7 of those it gained *more than 20%*. Even after the tech bubble “burst” taking the market from 11,497.12 at the end of 1999 to 8,341.63 at the end of 2002 (a 27.4% decline in 3 years), the market would still have delivered a *10.1%* annualized rate of return over the prior 12 years. From where we sit today, it’s no wonder the DJIA declined 33.85% in 2008 (taking us to a still very respectable annualized rate of return since 1989 of 7.24%). But that doesn’t answer the question of how much further down it needs to go before we can consider the value of the equity markets stable.
That’s where the annual growth rate analysis comes in. It is still highly subjective — depending on what one believes to be a representative sample period and sustainable annualized growth over that period. But I like it because it helps me think about the broader market in terms I feel more comfortable making assumptions about, like what do I think is a reasonable rate of value creation for the economy as a whole over a given period. In the case of the 20 years since 1989, do I believe there’s a reason that the equity markets should have averaged ~10% annual growth while our Real GNP achieved only 2.76% annual growth over the same period? No, and obviously neither does the market at this point.
So, what is a reasonable expectation for a bottom? Your guess on the underlying assumptions is as good as mine. But if one believes technical advancements over the last 20 year period enabled us to double efficiency (i.e. extract twice as much profit from the same revenues), then the markets *should* have grown at around twice the rate of Real GNP. In that case, we would be expecting 5.51% annualized growth in the markets since 1989 as of the end of 2008. Starting from 1989 closing prices of 2,753 on the DJIA and 353.4 on the S&P 500, 19 years of organic equity growth pegged at 2x GNP growth should have closed 2008 at 7,634.38 and 979.95, respectively (actuals were 8,766.39 and 903.25).
Update: Dad accurately points out that GNP is a trailing indicator and equity prices are leading indicators. So, this analysis shouldn’t be considered anything other than directional. I find it helpful as one factor in my overall assessment of the current situation, but as Howard reminds us no one really has all the answers.
This final chart shows the actual level of the DJIA (blue) compared to what it would be if it was pegged at 1x GNP Growth (red), 2x GNP Growth (orange), and 3x GNP Growth (green). It is essentially the same as the chart at the top but now instead of arbitrarily picking annual growth rates, we have pegged them as multiples of Real GNP (i.e. ratios of business efficiency). As you can see, for most of the last 20 years the markets were assuming >300% improvements in business efficiency.
All the above charts and underlying analysis can be found in this spreadsheet.
My new favorite live band hands-down is Edward Sharpe and the Magnetic Zeros. I saw them twice in 5 days and would go see them again tonight (and tomorrow night, and the night after that) if I could. They’re apparently starting a ‘residency’ at the Regent Theater in downtown LA on April 30, and I’ve already asked Dave at LittleRadio if my cousin Ben and I can shoot a proper concert video one of the nights.
In the meantime, here’s some footage I shot of their show at The Echo on Monday night (YouTube HD doesn’t quite do the 1080p footage from Kelly’s Canon 5D Mark II, aka my dream camera, justice):
And here are the photos:
Kelly (and her camera) had to leave a couple of songs into the Edward Sharpe set (I had told her they went on at 10pm and they didn’t end up starting until 12:30am). So, what you see here is just them getting started — to give you a sense of where it ended up, Alex, the lead singer (formerly of IMA Robot), spent a good deal of the show shirtless in the audience. I’m actually kinda glad I didn’t have the option of documenting the rest of their set, because I got to go crazy with the rest of the crowd instead. But I’d gladly give up a night of rocking out in order to have the opportunity to properly document this incredible spectacle. Dave, call me!
P.S. I first discovered Edward Sharpe and the Magnetic Zeros through the most excellent NPR All Songs Considered Live Concerts podcast (originally via Ian, of course).
Update: Here’s some video of the opener, Fool’s Gold:
I have 1 more Edward Sharpe video, but it’s just barely over YouTube’s 1GB upload cap. So, I guess I’m gonna keep it to myself for now.
My dad and I had a long conversation over lunch today (at In-N-Out
) about my most recent blog post. He mentioned that the studios are keeping a close eye on what is happening in the music industry as a preview of their own potential future 5 years down the road, and that they are taking preventative measures based on what they see. I replied with two reasons why I don’t think that’s something to brag about. First of all, that 5 years is more like 2 years (if that) and it’s shrinking every day. The pace of technological progress has only accelerated since it first began to disrupt the music industry, and it ain’t slowing down. Secondly, the film industry’s approach to understanding the data has been merely to plot historical events and interpolate a trajectory. They have made no attempt to understand the underlying equation and thus extrapolate the end-result. In high-school trigonometry terms, they are plotting points on the left half of a parabola without understanding that they are part of the graph of y=x^2. How do I know this? Because you can see it in their actions, they are clearly trying to treat a growing number of symptoms with no clue about the nature of the underlying disease.
My dad agreed with me and then said there’s a lot of money to be made by the guy who can show them what the future really holds. Being the giving person that I am, I hereby offer it to them free of charge (and with charts, no less!):

First of all, your audience is moving from conventional offline distribution channels to new online ones. You may think you have the control to slow this, but you don’t! At this point, you must consider it *axiomatic* that every genie will get out of every bottle. There are over a billion people on the Internet, and it just takes one to put your content on BitTorrent and all your anti-piracy efforts are rendered moot. Content consumption is moving from offline to online whether you like it or not. So, you have a choice: get on-board by giving consumers what they want and keep some of them as customers, or drive them away entirely by ignoring their needs. If you choose the latter, you probably won’t ever be able to win those lost customers back. And even if you choose the former, you will most likely never be able to aggregate the same size audience for a given piece of mass-market content online as you could offline. Mainstream media (or ‘head’) content is a first-class citizen offline, where there is artificial scarcity and so being first in line counts for something. But, there is an (effectively infinite) abundance of content online and what matters most is finding what is most interesting to me.

That’s the bad news. Here’s the good news, by moving online you can build deeper relationships with that smaller audience and explore variable pricing options to increase the average value of each individual fan (again I reference Josh Freese, who illustrates this point not without irony). However in order to fully engage your most passionate fans and get them to give you more money, you can’t continue to just sit back and pump out passive entertainment experiences with some snazzy marketing around it. You will need to invest in turning your content into 360° entertainment and change your mentality about selling it as a packaged good.

Yes, I know that sounds expensive. It definitely won’t be cheap and will require you to build out new competencies you don’t have today. But you’ll be able to pay for it (and then some) with all the money you save by getting out of the very expensive mass-market content and offline distribution businesses.
So if you’re willing to become an online-first media company, I think I can promise you’ll return to profitability in 5-10 years depending on how quickly you move to jettison your legacy offline businesses. Now, your shareholders may not be so keen on all these restructuring costs and write-downs, not to mention all the money you’re going to be leaving on the offline distribution table by focusing on getting into the online business while you still can. But, that’s ok because they value the long-term survival of the company over short-term profits. Right? </sarcasm>
Mass-market content and offline distribution are declining businesses, but they are still quite profitable. Especially compared to niche content and online distribution, which are clearly ascendent but still a rounding error to the bottom-line of these major media companies (not to mention the corporations that own them). I believe the decline of the former is going to be a lot quicker than the entertainment industry thinks (because they believe they can control it and they don’t understand the exponential acceleration of technological progress) while the rise of the latter will be retarded by a lack of investment in developing the infrastructure to make it a profitable business. The film industry obsessively spends hundreds of millions of dollars to build the biggest anti-piracy stick they can while watering the online video carrot with an eyedropper. If they were to put meaningful time and money into figuring out how to make legal online content consumption compelling and profitable, it would be more effective than spending a hundred times that on anti-piracy efforts. But they won’t, instead they will continue to do everything they can to prop up dying (but profitable) revenue streams, including stifling the growth of the emerging revenue streams that could one day take their place. And so, the studios will some day (soon) find themselves with not enough offline money and not enough online audience from which to try to make money.
If I were the head of a studio, I would stop trying to figure out how to grow the buggy whip business by keeping down the automobile. I would also recognize that transforming my profitable if shrinking buggy whip business into a money-losing automobile business making it up in volume is probably not in the best economic interest of my shareholders. So instead of throwing good money after bad trying to keep the overall buggy whip market from shrinking, I would focus on getting as much share as possible while all my competitors spent their time futilely worrying about the cars. I would ruthlessly cut costs to maintain profitability in the face of shrinking demand. And, I would put all those profits into a dividend so my shareholders would stop pressuring me for growth that isn’t there. Finally, when it’s time to close my buggy whip factory’s doors, I would take all that dividend money I earned and put it into the best automobile company I could find (and then I would be sure to sell that ~80 years later
).
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