Digital Noise: Music and Tech

When I first looked at Imeem last December, I was boggled by the site's interface--I couldn't tell if it was a social networking site, a streaming audio and video site, or a library of user-posted content for downloading. At the risk of sounding like Grandpa Simpson or Doug Morris, I dismissed the site as a symptom of widespread attention deficit disorder among the younger set.

Last week, market research firm Compete, which measures Web traffic by compiling and measuring data from various sources, reported that Imeem had surpassed Yahoo Music as the number-one streaming music site on the Web, with 58% growth in unique visitors since March 2007. I figured I must have missed something, and took another look.

I still don't understand the appeal of yet another social networking site, but I'm happy to report that Imeem's music-finding feature is 100% better than it was in December--it actually works. I conducted my usual test search for Pink Floyd, and while the results were still an array of personal homepages with widely varying themes and content, the search results listed how many songs were available on each page. Searching for the rather obscure Floyd song "Biding My Time," three results came up. The second result was obviously correct. Clicking on the "more details" tag exposed a big "play" button, so I didn't have to waste a lot of time scrolling and clicking to hear the song. Total time elapsed between search and play: about 3 seconds.

A search for Portishead's Third returned every song on the album. What about that new Scarlett Johansson album of Tom Waits covers? Any good? When I misspelled her name (with two "n"s instead of "s"s) the sponsored listings in the right column alerted me to the right spelling. Tried again, and boom, every song on the album appeared, ready for me to stream.

In other words, a little design discipline and a vastly improved search engine have turned Imeem from curiosity into a useful first stop when you want to sample new music or hear that song running through your head.

On Friday, I pondered if Microsoft would kill Yahoo Music. Now, it looks like Microsoft won't have to bother: this morning, Yahoo announced an agreement with RealNetworks to transfer all Yahoo Music subscription customers to Real's Rhapsody service. In all likelihood, this deal was well underway before the Microsoft announcement--Yahoo's been rumored to be considering a free service for several weeks now--but the timing certainly makes it look like Yahoo's accelerating its cuts. And it appears that Rhapsody's the default partner of choice for companies that want to cut their digital music ties with Microsoft--recall that MTV signed a similar deal last August after Microsoft stabbed the Urge service in the back with the Zune Marketplace.

One of the first things Microsoft did when launching the new Zune was kill the 2-year-old MSN Music download service.

The business reasons were plain: MSN Music was a PlaysForSure service, but the Zune wasn't PlaysForSure-compatible, and it came with its own music download service, integrated into the Zune software.

Sure, there's still something with the brand name MSN Music, but it's basically a shell--a few music videos, some promotional tie-ins with Zune (through a program called Ignition), and a radio station powered by Pandora.

So what might that mean for Yahoo Music, if Microsoft's proposed acquisition of Yahoo clears? Probably not much, at first.

Microsoft's Kevin Johnson, who leads the group responsible for online services and Windows, mentioned in a conference call that the company would get the quickest benefits from combining their advertising platforms, particularly paid search: "scale economics can kick in fairly rapidly when you just look at the simple step of just combining the search-related ad inventory on a single ad platform."

Translation: as soon as the acquisition closes, Yahoo Search would be folded into Microsoft's Live Search, and Panama would be folded into AdCenter.

Eventually, though, Microsoft would go through all the other Yahoo divisions, looking for overlap or strategic misfits. Here's where Yahoo Music could feel the heat. Selling PlaysForSure-protected files does nothing for the Zune, and even if Yahoo goes with DRM-free MP3 files, it would seem to be redundant with the Zune Marketplace.

Now, if Microsoft were smart, it would recognize the popularity of the combined Yahoo Music and LaunchCast (see Aribtron's online-radio ratings). But often, decisions in acquisitions are driven by politics and emotion rather than actual business logic.

Editors' note: Yahoo on Monday announced that it is discontinuing its Yahoo Music Unlimited subscription service, transferring its customers to RealNetworks' Rhapsody service.

Yahoo Music's going to join Amazon.com in offering DRM-free MP3s, either for free as part of an advertising-supported service, or for sale on a per-download basis, according to anonymous record company executives cited in this AP story.

Ian Rogers, the exec in charge of Yahoo's music service, has certainly thought long and hard about the future of the music industry, and Yahoo's got tons of traffic (which it hasn't done a very good job of monetizing, but that's another story). I like the site's search interface--it's a lot better than Amazon's, which mixes MP3 downloads and physical CDs with no rhyme or reason--and it's the only major commercial music download site that offers lyrics.

They've got a fighting chance, in other words, but will need something extra to differentiate themselves from the rapidly growing pack. Some ideas: offer a range of bitrates, all the way up to lossless. Do more with the lyrics, like integrating them into music streams, then scrolling them across the Yahoo Media Player when users play or link to a song that's hosted on the Yahoo streaming service. Make it as easy as possible for independent artists to post their files on the site, like CDBaby and (recently) Last.fm--depth of catalog is key.

What not to do: stay wedded to Windows Media Audio, require a subscription fee or online registration, or (worst of all) try and create yet another desktop application for playing music--we've got plenty of those already, and most iPod users will stick with iTunes.

I'll wait on the details before speculating further as to whether a revamped Yahoo Music will hit or miss.

Ian Rogers, Yahoo's VP of Video and Media Applications, didn't get much chance to speak on the five-person panel I saw at Billboard Live. However, he gave a very interesting presentation at Aspen Live, a conference for music industry types sponsored by talent agency Creative Artists Agency (CAA), and he's paraphrased the talk in its entirety--complete with slides--on his blog.

Most of his arguments ring true to me: scarcity has been replaced by abundance, and spending incremental dollars on improving quality (while difficult and highly subjective) will provide much better returns in the long tail era than spending incremental dollars on marketing. In English: people are going to download the stuff their peers say is great, not the stuff that marketers push. He also namechecks Yngwie Malmsteen and quotes Neil Peart by way of Geddy Lee, suggesting he's a fellow refugee from the suburban 80s hard rock universe.

But I'm not sure I agree with his final point, in which argues for a new set of standards for labeling media files (the hAudio microformat), playlists (XSPF), and sharing user information and other data among social-networking and user-generated-content services (he offers no specific suggestions here). In essence, he's saying there need to be the types of open standards that enabled the Web, like HTTP and HTML, only for digital media.

The trouble with this argument is that the Web has been the exception, not the rule. Most "standards" are not predetermined by a committee or industry consortium and then miraculously adopted by all participants. Rather, most "standards" are proprietary technologies that become ubiquitous through end-user behavior.

Look at music. MP3 is considered the standard for compressed digital audio. But it's a patented technology, developed by private corporations (Fraunhofer, mostly), and licensed through the Motion Picture Experts' Group (MPEG). The Red Book standard for audio CDs was developed by Sony and Philips and must be licensed.

Companies dream about having a patented technology become a standard. That's why Microsoft, and Apple, and Sony, and everybody else on the technology side of digital music have fought so hard for so long to make their digital audio technologies ubiquitous. (It's also why companies play games with standards...like sitting on standards committees while quietly trying to achieve market ubiquity with their own proprietary alternatives...or trying to get their own patented technologies approved as a standard...or enthusiastically supporting open standards when the alternative is a de facto but proprietary standard owned by a competitor.)

It's hard to be the grump who argues against open standards, but in this case I'm not sure who would create these standards for digital media, or who would listen once they were created. Unfortunately, that means a harder landscape for content owners: they might have to pay attention as competing formats emerge for these needs, and bet on a winner based on actual user behavior.

Whether you agree with his point about standards or not, the rest of the speech is great and well worth a read.

Correction 5:35 p.m. PST: This blog gave an incorrect last name for the head of EMI Music's digital business. He is Barney Wragg.

Because I had to leave Las Vegas on Wednesday, I was only able to catch the first two sessions of the one-day Digital Music Live conference, a conference about technology and the music industry co-sponsored by Billboard and the Consumer Electronics Association (who's behind CES). Nonetheless, the morning speakers had some interesting thoughts.

First up was Gregg Latterman, president of Aware Records, whose company manages multimillion-selling artists The Fray (which had already been signed to Epic by the time Latterman began managing them) and John Mayer.

Despite the rejection of traditional promotion and distribution by everybody from the youngest MySpace bands to the most-established rockers, Latterman argued that the old ways--terrestrial radio and major label marketing and distribution--are still necessary for artists to sell more than a million records. He acknowledged that it's harder to create million-sellers from scratch--a few years ago, he claimed, a label could put $1 million into promotion and radio and almost guarantee a million album sales--but he noted that many critically acclaimed independent acts just aren't selling in big numbers, citing Bright Eyes (whose last album sold 189,000 copies, according to Latterman) as an example.

He also pointed out something I noted when Radiohead first revealed its tip-jar pre-release download plan for In Rainbows: without EMI, the band might never have built the huge global audience that allowed it to perform this experiment and sign distribution-only deals for the actual full CD.

My favorite insight, however, came in a discussion of how digital downloads are becoming a larger proportion of sales:"it's not fun to buy a record anymore." He didn't expand, but I imagine he was thinking of big-box stores and $18 retail prices.

The next session was a five-person panel on the current state of the industry. EMI Music's head of digital business, Barney Wragg, claimed that moving to DRM-free downloads revitalized the label's sales of digital full albums, as opposed to singles, contradicting the industry's fear that users would cherry-pick fewer tracks in the iTunes age, leading to less revenue per sale. (He didn't reveal exact numbers, but hinted they were significant enough to change top executives' thinking on the subject.)

He also acknowledged that many executives at the majors have had their heads in the sand regarding digital downloads and combating file trading, but pleaded for some tolerance, noting that a lot of artists and publishers refuse to participate in newer forms of distribution for fear it'll hurt their own bottom lines. I'd be crying crocodile tears if I pretended to be too sympathetic, but it was a good reminder that the majors aren't monolithic corporations, but actually must represent lots of parties with conflicting interests and levels of comfort with digital distribution.

There were a few other interesting points in the panel discussion, although 45 minutes seemed hurried.

Ian Rogers, VP of Video and Media Applications for Yahoo, praised the impending end of DRM, claiming that Yahoo Music had been unable to sign many deals--such as one with home automation company Control 4--because of the expense of supporting DRM-protected audio files.

Matthew DeFilippis of publishing rights clearinghouse ASCAP talked about how the organization was never interested in DRM, but cares much more about tracking usage--watermarking could be a useful technology here--and mentioned a system ASCAP is using to monitor songs playing in public places.

Finally, well-known music lawyer Fred Goldring summed up the problem nicely: empowered consumers with an unlimited supply of music directly contradicts the old industry basis of enforced scarcity. The trick is figuring out how to monetize what consumers are already doing. Unfortunately, there are no jaw-droppingly obvious or brilliant solutions at hand, although he and Nettwerk Music Group CEO Terry McBride seemed to lean toward some sort of blanket license applied on ISP fees.

According to a report yesterday in The Wall Street Journal, Yahoo's restructuring plan will likely involve significant cutbacks at Yahoo Music, including the shutdown of one or more of its subscription-based services.

In fact, it looks like Yahoo has already removed all links to its Yahoo Music Unlimited To Go service. The service, priced at $11.99 per month, allows users to transfer files to a compatible portable device. The service now can be found only by conducting a search, and I'm not sure if Yahoo is accepting new customers for it. That leaves Yahoo Music Unlimited, which offers PC-only downloads for $5.99 per month, with an option to buy CD-burnable downloads for an extra $0.79 apiece.

This could cause some trouble for manufacturers of portable music players that don't have their own stores. I'm thinking particularly of SanDisk, which has the No. 2 position fairly well locked up at this point, with around 10 percent of the market, mostly at the low end. (Microsoft hopes to be in this position by next year, but so far hasn't officially announced any low-cost flash-based players, so it isn't in the same market category.) Today, SanDisk's Sansa Connect player is the only one offering a Wi-Fi-enabled device with a subscription-based service--that is, anytime, anywhere access to millions of songs. But that product relies on Yahoo Music Unlimited To Go. So SanDisk will either have to find another partner (Rhapsody?), build its own store, or fundamentally change the Connect--perhaps offering downloads only, as Apple's going to do with its iTunes Wi-Fi Store.

The decision to cut back on Yahoo Music also illustrates a point I made yesterday: online music stores generally exist to sell some other product. According to an Insider estimate from April by PacificCrest's Andy Hargreaves, Apple pays about 70 percent of the cost of each download back to the content owner. (Anecdotally, this matches up with the cut that independent musicians receive when they sell their songs on iTunes via CD Baby--see the end of this post on Digital Audio Insider.) After that, Apple has to cover various other costs (delivery, transaction fees to payment processors) and probably ends up keeping about 10 percent. Compare this with the estimated profit margins on Apple hardware like the iPhone (50 percent before the recent price cut) and iPod Shuffle (around 40 percent when it launched in early 2005), and it's clear that iTunes is meant to drive hardware sales, not the other way around.

Microsoft and Nokia are following a similar tack, building their own music stores in hopes of selling more devices. But for companies with no adjacent business, selling online music is tough. I imagine large retailers like Amazon.com and Wal-Mart Stores do OK because of their huge scale, and RealNetworks is making a go of it with Rhapsody, but smaller online retailers face a tight squeeze.

(UPDATE: RealNetworks has filed an 8-K form with the SEC that contains some more details about Rhapsody America. Most notable: MTV is contributing a $230 million note to the deal, and RealNetworks will in exchange be required to spend that amount with MTV on advertising. The joint venture is between RealNetworks and MTV, with Verizon as a distribution partner.)

The 2007 Consumer Electronics Show must've held some awkward moments for Microsoft.

The previous year, the company had trumpeted MTV's Urge music store as the showcase for the Windows Media Player 11 that was due to ship with Vista. Bill Gates had Justin Timberlake on stage to promote the forthcoming service, which would be integrated into the Windows Media Player (as was previously the case with other stores, such as Napster and MSN Music), and would "bring people's emotional connections with music to the forefront of the digital entertainment experience" (said a particularly ebullient press release). At the same show, Microsoft also made a big deal out of Verizon's V Cast service, which was the first to offer both over-the-air and PC-based music downloads using Microsoft's Windows Media Audio technology.

A year later, in 2007, Vista was still not out--the result of a final delay that had the OS missing the 2006 holiday season--so Microsoft was forced to trot out Urge and Windows Media Player 11 yet again as examples of how great digital media would be in Vista. Only this year, there was a new wrinkle: in the interim, Microsoft had announced and launched its own competing music player, software (why "integrate" with the Windows Media Player if you can build your own dedicated app?), and store. None of which were compatible with the vast array of products from long-standing partners, such as MTV and Verizon.

At the time, Microsoft insisted that its PlaysForSure initiative (which identified compatible Windows Media-based players and stores from third parties) was not dead, but would remain on a separate but equal development path from Zune. Apparently the partners didn't believe it. First, Samsung jumped ship, creating its own player-store-software combination. Now MTV and Verizon have teamed up with Microsoft's oldest competitor in the digital music space, RealNetworks. The ink's still drying on the deal, but their goal is to launch a new company, Rhapsody America, that will give users access to a huge library of music from almost anywhere--the "celestial jukebox" that many music fans have been wanting for years.

The alliance makes sense. Rhapsody, which consistently wins praise from reviewers and users, would get a huge marketing boost from both Viacom/MTV (which recently announced plans to spend $500 million expanding its game portfolio) and Verizon, as well as a new distribution channel (inclusion on Verizon phones, sales of over-the-air downloads). MTV gracefully shutters Urge--which never had a chance to get off the ground--without abandoning the online music market altogether, and gets a way to distribute music to mobile phone users. Verizon gets an online subscription service to add to its over-the-air and download-based services.

So now it's Microsoft's move. Will they respond by adding an over-the-air component to Zune? (As SanDisk and Yahoo teamed up to do, and RealNetworks and iRiver plan to do.) An announcement should be coming in the next couple of months if they're going to get anything new out in time the holidays.

[This entry has been revised: I didn't read the MediaNet release carefully enough...they are offering DRM-less MP3s, not WMA files. Apologies to anybody whom I misled. My bad.]

Back in May, EMI--one of the big four record labels--agreed to sell its songs through Apple's iTunes without digital rights management (DRM) protection.

Before this move, iTunes and the iPod were technically linked: if you bought a song from iTunes, you could only play it on an iPod (unless you burned it to CD then re-ripped it into an unprotected format). Offering DRM-less downloads severed this link, allowing users to play downloaded iTunes songs directly on a Zune player (one of the few portable players other than the iPod to support AAC), and making the MP3 conversion process easier. But by and large, the landscape didn't change much. The iPod already has 70 percent+ of the market, so there just isn't much demand for playing iTunes songs on other types of devices.

Today, MediaNet announced that it, too, has licensed more than 1 million DRM-free tracks from EMI. MediaNet, which just changed its name from MusicNet, is the back-end store for most of the second-tier music download stores (iTunes is the only tier-one store, with something like 80 percent market share), including Yahoo Music, MTV Urge (heavily promoted by Microsoft before it launched its own Zune player and store), and Samsung Digital Connect (Samsung's response to Zune).

Equally important, the DRM-less downloads on the MediaNet stores will be in the MP3 format. While AAC (and Windows Media Audio, for that matter) offers a much better quality-to-compression ratio, MP3 is supported by all portable players, all digital media software for all computer platforms, and far more consumer electronics devices than any other compressed digital format. This could actually change the landscape: paid downloads, from one of the major labels, playable on an iPod, from a source other than iTunes. That's new.

The challenge to iTunes' hegemony could accelerate when Amazon launches its MP3-based store later this year. If EMI and the other smaller labels offering DRM-less MP3s begin to see their digital sales rise, then the other big labels might follow suit. And once all tracks are available in DRM-less MP3 format, the only differentiator for the iTunes store is the fact that it's integrated with the iTunes software, which is required to use an iPod (or iPhone). That integration should be enough to keep iTunes in the lead, but now these other stores have a fighting chance to compete on pricing and selection.