March 2011

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I really don’t want to write this post.

I’m an optimist; a glass-half-full type.

I believe in opportunity that comes from disruption.

I believe that there will always be people making music, and that there will be methods for these artists to monetize their creations, and that there will be business opportunities for those interested in working in the music business to innovate and make money.

However….

I don’t believe people are adequately assessing the current situation with respect to the trajectory of the music business (and, by that, I mean today’s music business, and not what it might become — by the way, no one knows what it might become).

There was a good piece that ran yesterday, written by Frederic Filloux, entitled “The NYT’s Melting Iceberg Syndrome.”

While I tend to agree with the article’s assessment of the NYT’s digital operation, what really struck me was the relevance of the Melting Iceberg Syndrome and its relationship to the current music industry.

Mr. Filloux sums up the theory well:

…no matter how large the iceberg is at the beginning, it inexorably dissolves as it drifts toward warmer latitudes. The progression is barely visible but, at some point, as the exposed part liquefies under the sun, the iceberg’s center of gravity moves upward and it suddenly capsizes without warning (that’s why there is no permanent manned base on icebergs): As an iceberg melts, the resulting change of shape can cause it to list gradually or to become unstable and topple over suddenly”. (From The use of catastrophe theory to analyze the stability and toppling of icebergs Annals of Glaciology, 1980).

What prompted me to write this piece was a piece on Hypebot entitled, “Another Industry First: Music Royalties Fall 1%.”

While the title of the article isn’t surprising, what is surprising are the reason PRS assumes royalties were down: “PRS suspects that digital piracy and a fall in high street sales are to blame.”

There is, imho, a glaring omission with respect to why royalties might be down: lack of royalties due to streaming.

It’s this issue that really resonates with me with respect to The Melting Iceberg.

I’ve written at some length about the rapid acceleration of streaming.

In an era of constant connectivity and universally available content, there is no distinction from a user’s perspective between streaming and downloading.

There is however a distinction from an artist/content owner’s perspective.

Put simply, if you’re an artist who is used to getting ~$7 for the sale of a ~$10 download from iTunes (or ~$.7 for the sale of a ~$1.00 single), your revenue (royalty?) is being diminished by several orders of magnitude when that same album/song is streamed.

While the figures change in terms of payments depending on if the stream is interactive (ala rdio, spotify, etc) or non-interactive (ala Pandora), in both cases the payment from streams is a number that has a decimal point, and then several/many zeros before a number that’s not a zero pops up (e.g. $.000x or $.000000x).

Thus, streaming — not “piracy” or “street sales” — is what’s causing the decline in royalties.

And, I do very much believe that the 1% decline is the tip of the proverbial melting iceberg, and that the iceberg is indeed listing, and that the days of artists/content holders seeing royalty payments even approximating amounts they’ve been accustomed to from the sales of downloads are rapidly coming to an end.

Certainly, direct to fan models offer some support, but, again, when customers begin demanding streams as opposed to buying downloads, artists will need to evolve and service the customers via a stream, and this will materially impact their revenue models.

In fact, it could obliterate the direct to consumer model. The very thing that makes d24 so compelling — cutting out the middleman in order to have a higher margin for downloads — is fundamentally altered. When (eventually – sooner rather than later) a customer comes to a favorite artist’s site, and wants to stream the music, will they really pay more to do so from an artist’s site than they do as part of a spotify/rdio subscription? Will they pay at all?

No. Of course not. The value proposition is all off.

This doesn’t mean that others (subscription, exclusive tracks, tix, merch, special packages, whatever) won’t fill some of the void, but those hefty margins that occur currently when a customer dls directly from an artist’s site will soon(ish) be a thing of the past.

Sorry for the doom and gloom. Maybe I’m wrong (I’m not).

As I’ve said, there will be new models that emerge (and, yes, there could be an increase in volume of streams that will offset some of the decline in revenue loss, but there’s going to have to be a massive increase of streams; I don’t see it), but I feel very compelled to at least raise the question: Are artists/content holders preparing themselves for the days when their margins from downloads are obliterated and they are only getting revenue from streams?

I hope so, but I wouldn’t be building on the iceberg right now.

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I was recently with my friends Troy and Charlie Ball (there’s no way I can adequately explain what makes Troy and Charlie so inspiring, but this will give you a good sense of why I do (scroll down to the “Marshall, Coulton and Luke, The Sons” section)).

We were at a gathering and Troy was making introductions. She introduced all of those in the group, including her husband, Charlie, as only a classy Southern woman can; in that way that makes everyone feel special. At the end of the introductions she added this line: “I go with Charlie.”

Those three words — “I go with” — have stayed with me since she said them.

Certainly, the phrase is partly a Southern colloquialism, but that’s not why it resonated with me. Rather, it impacted me because it so succinctly articulates a relationship of values.

The choices we make with respect to who we “go with” define us.

Certainly, I “go with” Marci, and with Annabelle, and Henry. But I also “go with” my friends, and I “go with” those with whom I work.

Going with the people with whom your values align is challenging today, because we’re bombarded with the possibility to “go with” just about anyone.

In this era where we’re constantly filtering, sorting, adding and subtracting the people we “go with” — following people on Twitter/Facebook, subscribing to RSS feeds/Tumblr blogs, and working on myriad projects — it becomes increasingly important, and often increasingly difficult, to “go with” the people we really should.

For individuals, this is a problem because the people with whom we shouldn’t go, but still do to some degree, diminish the attention we can spend with those with whom we should go.

For firms, the problem is more about the opportunity cost associated with non-value adding customers. Social media gives the illusion that a company can connect to pretty much any customer (we’re all on FB, right?). But, of course, the reality is that unless the values of the company align with those of the customer, reaching them/connecting with them does no good, and often does harm.

We’re very much in the era of “curation,” (it’s the only antidote to information overload). Discerning, therefore, who and what you “go with” has taken on a heightened importance.

[Disclosure: I have proudly assisted Troy & Charlie in the lead up to the launch of their Moonshine.]

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