Amazon Cloud and Apple icloud – Fighting the Music Lovers Need to Store Music

Amazon and Apple have announced their plans to turn the digital music world upside down by offering music on a “cloud” model, where purchased songs are not stored on an individual consumer device, but stored on Amazon or Apple servers to be accessed by the consumer anywhere. A good overview and comments in Knowledge @Wharton Today Blog

The benefits of cloud music storage and access look appealing – no more syncing multiple devices like laptops, tablets, handhelds, phones, etc. These devices will now connect to with each person’s collection on the cloud server for instant access and synchronization.

One concern for this new approach is that it fights a basic consumer insight I have observed. Music lovers want to acquire, own and store their own music. They want it accessible and untouchable. While having one’s own music stored on a cloud is virtually the same, it is different than physically building and storing your own collection.

Let me start by saying that purchasing and storing one’s own music is actually illogical from a cost benefit perspective for the following reasons:

• There are already subscriber services which will allow access to vast selections of music at small monthly rates. While not for downloading, any song is available at your command.
• Newer radio formats (Pandora, Satellite radio, digital cable, internet radio, etc,) have multiplied, each with the ability to customize your listening experience to very specific tastes. Again, you can listen but there is no download.
• Purchased music has a shelf life. I don’t actually ever listen to Springsteen’s Born to Run album anymore. Younger listeners still have their Hanson’s and Boys to Men hit singles from the 1990’s even though they no longer listen to them.

However, despite the illogic of purchasing and storing a lot of music for individual consumption, it is in music lovers DNA to want to own, and keep with them, their own music. The cloud is therefore a scary proposition for many because the big company may one day decide that they want to change the rules and your music could vanish. Unlike in business, where cloud software makes good financial sense, consumers may not be rational in this regard. Cloud ownership starts to feel like renting music even though you do own your collection in the cloud. And what happens when the cloud people realize that not all that music in your collection was purchased through them (or at all).  They might ask you where you got it. Hey, that’s my song, leave me alone. Get off of my cloud!

To the music lover and collector, the right to own and store your music in the safety of your house should be written into the constitution, like gun ownership, or free speech.  consumers want to own certain things even if alternative models are more efficient.  Personal music storage is partly illogical, yet a strong motivator in music sales. My bet is that Amazon and Apple learn this lesson quickly.

How to Make Money In The Long Tail

The Long Tail theory was developed by Chris Anderson, who first published the idea in 2004 in Wired magazine, and then went on to publish his 2006 bestselling book.   His theory was that when consumers were given unlimited access to variety of products (easy to do in an online world) – they would tend to migrate to more targeted offerings that were previously unavailable to them (in the “tail” of the sales curve).   While sales of individual products in the tail would be small, the huge selection would bring in more sales overall. It became known as the “profitable tail” in corporations as these items could be more profitable on a per unit basis.  The tail was a low volume, high profit model. And for retailers like Amazon, this confirmed their decision to extend the breadth of their offerings rather than consolidating around best sellers.  The Long Tail theory was counterpoint to the current market segmentation and portfolio approaches where high market share and high growth were the paths to profitability. 

An exciting part of Long Tail theory for the providers of these tail products and services was that the barriers of entry into markets would also be lowered in terms of investments in people, resources and discounting.  Business segments in which consumers want variety are the supposed winners.  Take recorded music and books as examples  - traditional publishing / distribution companies currently provide and promote limited variety, then achieve profitable market share dominance when sales exceed relatively high fixed costs.   Long tail thinking, however, says anyone can write an e-book, record an album, and be found on the internet.  Given access to much more choice, consumers would happily purchase something that perfectly fits their tastes rather than having limited choice. The democratization of the marketplace sounds great, especially if you are a smaller player.

The dilemma for the long-tail entries.  Entering a market as an unknown player using long tail-thinking can be treacherous.  The price that a vendor can charge if they are only playing in the long tail will gravitate to the costs of goods of the lowest cost provider, which eliminates any chances of profit for any of the players, or even worse, moves prices to zero of free.   If recording a piece of music or writing a book has no hard costs (other than the artist’s time and sweat), then pricing for these products will gravitate to zero.   Let’s say I was to try to charge people to read this blog.  My great points of view as well as my time and energy must be worth at least a penny or two, yet readers have too many other choices for quality content that is free (the tail in blogging is a very long one).

“Free” is a bad pricing model.  Working in the long tail is a labor of love, a hobby, maybe a fulfilling way to learn and dream.  But the laws of economics (pricing being a function of supply and demand) make it an unprofitable business.

The solution is to stand out.  Pricing leverage comes from offering truly unique, differentiated and remarkable products or services.  Author Seth Godin has been writing about pushing yourself to stand out in your chosen field (Read Linchpin and The Dip),  Mediocre is the risky middle ground that is expendable.  Standing out is no longer just a good idea, it is now an imperative.  Why?  It comes down to pricing power.  

Pricing power is everything.  To market products or services in the long tail, you must figure out a way to be a price leader – which means charging a fair price for something that is so unique that it has no equal.  This is a form of market share leadership – even if the market is tiny.  Make no mistake, Seth Godin, Chris Anderson, and even Amazon are market share leaders in their fields which allows them to charge money and make profits selling products.  The ease of entry into a category can be deceiving.  Offering what is already available, even if you do it really well, will lead to a lack of ability to charge a price that allows you to make money.  Focus only on what it takes to be the single best offering that will drive your market share to the top. 

Forget Digital Music–Vinyl Records Are Back!

Nielsen reported vinyl record sales are up in 2011 by 37% versus last year. While this segment is less than 2% of total music sales, the buzz around this throwback format is heating up. The genre is mostly rock & roll which makes up 90% of these vinyl sales. Consumers are likely baby boomers who are heavily vested in music collections.

Music aficionados say you can hear the difference in sound and that vinyl is better than CD or digital files. On paper this would be hard to believe since you are converting a high end digitally made file and pressing it onto a piece of plastic that will be read by a needle. Certainly it is better than the vinyl pressed 30 years ago, since the original recordings are now digital rather than lower quality tape masters. The recording equipment used today is far more advanced as well.

Vinyl record growth is all about a better overall experience. Older music lovers grew up falling in love with rock & roll through vinyl records. Many remember buying a new album, removing the cellophane wrapper and opening a full visual package along with the record itself. Once on the turntable they would take in the liner notes, the artistry and pictures. It was all set to the music of the artist who would whisk us away in a multi-sensory experience. Records were replaced by new formats, each smaller than the previous where liner notes offered very little experience due to their size and lack of artistry and excitement. Imbedded video tried to replace the experience, but again, viewing it on a tiny file storage device has the same issues.

The list of top selling vinyl records last year shows that top sellers go back to the early days of rock & roll

TOP SELLING VINYL LPS OF 2010

TOP SELLING VINYL LPS OF 2010

1. The Beatles, Abbey Road (35,000)
2. Arcade Fire, The Suburbs (18,800)
3. The Black Keys, Brothers (18,400)
4. Vampire Weekend, Contra (15,000)
5. Michael Jackson, Thriller (14,200)
6. The National, High Violet (13,600)
7. Beach House, Teen Dream (13,000)
8. Jimi Hendrix Experience, Valleys of Neptune (11,400)
9. Pink Floyd, Dark Side of the Moon (10,600)
10. The xx, The xx (10,200)

Source: Nielsen Soundscan

Digital music is here to stay and so, it seems, is vinyl. The lesson for the music industry is about consumer experience. Music lovers will pay top dollar for a great experience which is something the heavily pirated digital music industry should try harder to deliver.

Article first published as Forget Digital Music - Vinyl Records Are Back on Technorati.

Successful Musicians are Really Entrepreneurs

I wrote, in a recent blog post , about how the current music industry is wrestling with massive change due to outside forces   Free digital downloading and the rise of online and mobile applications have driven the traditional industry (recording, publishing, distributing, retailing of cd’s) to be an unattractive industry in which to enter or compete.  This change, however, is leading artists to become more creative in finding new avenues for developing a fan base.  Musicians are becoming the entrepreneurs of our age.

I like to read the thoughts of David Kusek – David is Vice President at Berklee College of Music and CEO of Berkleemusic, the world's largest online music school.  I don’t know David, but he has a lot of very progressive thoughts as to where the highly volatile world of music recording and publishing is going. David recently posted on his blog “the Future of Music” some thoughts on Strategies for Success for musicians.  If you read these strategies, they are dead on for any startup or entrepreneur.  Here is his list:

1. Living a life in music is a privilege. Earn it.
2. No one is in charge of your muse but you. Be happy and positive.
3. Practice, practice, practice – then go for it. Over prepare.
4. If you suck, you will never make it. Find a way to be great.
5. Learn how to breathe and keep your focus. Stay calm.
6. Don’t take yourself too seriously, no one else does. Have fun.
7. No matter how difficult things get, move forward. Don’t give up.
8. Find a way to make money. Start small and grow. Avoid being in debt.
9. Be unique and true to your vision. Say something.
10. Work and play with people yourself like every day. Collaborate Often.

Being a musician, now more than ever, is much like a startup venture.  The artists who are making it  are developing the skills of how to differentiate, create, and successfully market that brand.  Record companies that once had the clout to “pluck stars out of thin air”, now find the power of the market turning toward the most creative musicians   Successful artists are entrepreneurs, and the record labels have less clout in the digital download world, so musicians are making their own way and finding their own audiences.  Their example is the example for any startup.

The Music Industry – Mixing Art and Value Creation

(Kind of a long post - skip if you want)

The music industry, as you know, has a big problem today. People don’t pay for its products.  OK, some do but a lot don’t.  File swapping, free downloading and CD counterfeiting (piracy) are widespread, virtually unstoppable and have now seriously reduced the profit margins and growth of the industry.  People still love music as much as ever and it permeates everything we do. 

I don’t work in or near the music industry but I am a huge fan of music (and part time musician).  So I don’t have its solutions, just making some observations.  It is going through the kind of tsunami scenario you don’t wish on anyone.  A lot of hardworking folks, musical, technical, marketing, sales and financial make a livelihood making and selling recorded music. 

“Market Attractiveness” is a model which analyzes whether an industry is worth competing in based on its ability to generate profit (Value Creation) to existing as well as new entrants.  It examines the drivers of growth, power of suppliers, substitutes, competitive ease of entry, etc to define the factors around value creation.   It’s the heavy lifting analysis of consultants etc.  For some real fun,  there is a really cool and comprehensive music industry business case study on Biz,net UK site:  http://www.bized.co.uk/current/research/2003_04/011203.htm

The music industry’s market attractiveness is poor.  This is interesting in that it has implications as a textbook case study in the need for business model transformation in the face of disruption.  I mean, how long would the business model of making another product (say, canned peas) stay constant if suddenly consumers could have them free.  Not long.  Gone in days.  There is no nostalgia to manufacturing and distributing canned peas if there is no profit in it and there shouldn’t be for music as a product either.   

“In summary, the music industry is an unattractive industry as the threat of entry is high, supplier power is low, intra-industry rivalry is high, threat of substitutes is high, and buyer power is high. With a high level of threat from four of the five environmental forces, the music industry is one to shy away from.”

Source:   http://schmidke330.wikidot.com/industry-attractiveness

Another great view of this kind of work based on Porters Competitive Forces Model can be found here:

http://answers.google.com/answers/threadview/id/325373.html

How will the industry improve attractiveness? 

Structure – Still set up like the days of old.  While it has consolidated to 4 or 5 companies that are huge stables of smaller labels and artists of all genres – the smaller artists probably don't make much money.  The artist virtually funds their own recording by using most if their record sales and publishing fees to pay back a loan or “advance” given to them to pay for large fixed costs of recording and selling required by the record company.  Artists assume a lot of the risk upfront which is why the industry is reluctant to change their model.  

Cost Structure -   The cost of recording has remained hugely expensive, even though I can buy the equipment needed to record an album pretty cheaply in my basement on a laptop.  The industry needs to get very lean  almost like a virtual mode – a skeleton staff that outsources temporary project teams.  Recording and mixing will also go much cheaper and you will only pay for producer talent at fixed rates. In fact, the distributors and bands could form smaller co-operative project teams. The problem here is in subsidizing the artists that are not profitable.  It likely has to end.     

Pricing – is it really worth paying $1.29 for a single song if the alternative is to get it free?   Supply and demand are now adjusting the real value of a song (my guess is closer to $0.25).   My math goes like this – 160 downloads done for free and 40 downloads at $1.29 – so about $0.25 on average.  Why not just charge everyone $0.25? Or go even further, by looking at the value advertising revenue stream of a much bigger audience when you give the downloads away free (sort of like how Linked in, Facebook, Google are free and make money).

Distribution – brick and mortar stores are gone. It is also hard to find more than 4 feet of shelf space at Target anymore.  Its all digital.  Apple company pretty much owns the pay-to-download market but others like CD Baby are now going up to expose you legitimately to smaller independent artists. Videos and DVDs are going there now. 

I don’t want to see the recorded music industry fail.  It’s personal for me since I love the music.  But when an industry is not growing or maintaining its value creation, it will go under quickly.   It all seems a bit stuck in those glory days.