Digital Media

Apparently, the digital download didn't kill the album after all.

Can Apple revamp the album format?

(Credit: Polydor/Jimi Hendrix: Bold As Love)

The four largest recording companies and Apple reportedly have plans to create what they hope is the next-generation album. Driving the efforts is the hope that music can once again deliver fat profits, instead of the scrawny margins earned on 99 cent downloads.

On Sunday evening, the Financial Times reported that Apple plans to entice customers to accept packaged music by throwing in "photos, lyric sheets and liner notes" and also enable consumers "to play songs directly from the interactive book without clicking back into Apple's iTunes software."

A music industry source told me the labels are working on their own interactive album format and they will offer it to Amazon and other music services. Apple and the labels are shooting to release their album versions in the fall.

Critics will undoubtedly say such plans are folly. For nearly a decade, digital technology has enabled music consumers to bust the CD into pieces and obtain only the songs they wanted. Even music industry execs have acknowledged that for too long, fans were forced to pay on the order of $15 to obtain 12 or so songs of which only two might be any good.

Whatever the next-gen album is, it can't be a vehicle that forces unwanted music on fans for premium prices.

But the music industry's dilemma was sized up candidly earlier this year by David Ring, executive vice president of business development for Universal Music Group's digital arm.

"If what we're trying to do is one-by-one downloads...that's not a business that can grow," Ring told EconMusic Conference attendees. "It won't be healthy for the industry."

What that means is that there's too little money in selling individual songs. The ailing music industry appears to be looking for ways to give people music and then entice them to dig deeper into their wallets for extras.

Earlier this month, EMI began selling the "digital 45" to mark the 60th anniversary of the vinyl 45 single. A 45 was a vinyl record that was smaller in size than the standard album and typically featured two songs, one tune on the A-side and another song on the B-side. To create a similar effect, EMI began bundling hit singles with B-sides in a download format.

When it comes to boosting margins, the labels have already achieved some success.

Last January, in an unprecedented move, iTunes maker Apple announced that it would allow the recording industry to charge something other than the traditional 99 cents per song.

Perhaps Apple and the labels can come up with content combos that people will find valuable. But the danger here is in trying to force the packages on consumers and possibly alienating them even more, which could send them sailing into new piracy waters.

When news broke late Sunday that Apple has plans to create the next-generation music album, some in the record industry were steamed.

The Financial Times reported that Apple was working on a plan code-named "Cocktail" that involves the creation of "new type of interactive album material, including photos, lyric sheets and liner notes that allow users to click through to items that they find most interesting." That's nearly identical to a plan that executives from some of the four largest music labels pitched Apple about 18 months ago, said a music industry source who requested anonymity.

Even as the music industry cooperates with Apple's efforts, what has some insiders upset is that Apple rejected the labels' plan. By seizing credit, Apple is being "disingenuous," said the source. He added that Apple's attempt to develop a proprietary technology around the new interactive album is an example of the company once again falling back on "the walled garden approach."

What he was referring to was how users of Apple's iPod were prevented from playing songs wrapped in digital rights management made by competitors. That effectively blocked anybody but Apple's iTunes from selling music files to iPod owners. Now, most download stores sell songs in the MP3 format and these DRM-free tunes can play on iPods and iPhones.

Apple representatives did not respond to an interview request.

But Apple's refusal to participate in the labels' plan didn't mean they gave up. The largest recording companies have continued to develop software that will help them release their own version of a new interactive album. Apple will have Cocktail, but Amazon and all the other competing services will get access to the labels' version, which will offer more content than Apple's, said the music industry source.

Apple plans to have Cocktail ready to launch by September, according to the Financial Times, and that's when the labels hope to have their version ready as well, said the source.

Both Apple and the top recording companies appear to be pursuing the same goal: rejuvenating the album, which was the benchmark sales unit that helped the music business generate billions of dollars over the past half-century. Up until the digital download turned the music industry on its head, the album was the standard means for music distribution. Even after the switch from vinyl to the CD, the album format was preserved, as most CDs featured about a dozen tracks.

Record industry execs have long said that there's no way to grow the business by selling single-song tracks. But the big labels have an uphill fight--many consumers may well resent any attempt to force them into paying a premium for packages that include unwanted tracks.

The new Kazaa appears to be mostly a run-of-the-mill subscription music service, but it does add a few new twists. The one that stands out right from the sign-up phase is that subscribers can either pay by credit card or via their telephone company.

(Credit: Kazaa.com)

"Brilliant Digital Entertainment Inc. (BDE) and Kazaa are not affiliated with your local telephone company," Kazaa writes in the company's terms of service, "However, for your convenience, BDE's charges will appear on your local telephone bill."

Music industry insiders have long talked about creating subscription services in partnership with Internet service providers, who could tuck monthly charges into a phone bill. The thinking is that consumers would be less likely to feel the pinch of by monthly fees if they were mixed in with all the other fees found in typical phone bill.

These ISP-music stores have yet to emerge in any significant way, but Kazaa's subscription service, announced Monday, appears to borrow this idea in an attempt to make the $20 monthly charges a little more palatable.

One of the main problems I saw this weekend when I tried out Kazaa's new service was that in order to post the charges to my phone bill, the company asked me to submit my Social Security number. That is bound to spook plenty of people.

Ring-tone companies have charged customers this way for a while, but to the best of my knowledge, not another major music service offers a similar payment option.

After becoming one of the world's most popular file-sharing programs, Kazaa was nearly sued out of existence several years ago. The new iteration is much more legal, if not much more routine.

The songs are protected by digital rights management, which is the norm for most subscription services. The service supports PCs only, not Mac or Linux, which means it is not compatible with iPods. Of course, like most subscription services, when a person stops paying, they lose their songs.

Brilliant Digital Entertainment, Kazaa's parent company, appears to be betting that Kazaa's brand will give it an advantage in a U.S. market, which has seen a score of music subscription services come and go. None of them have found a significant audience.

Sony has spoken with some of the major recording companies about providing music for the PlayStation Portable, music industry sources told CNET News.

The sources said the talks are only preliminary and no deals have been struck. But apparently, Sony is considering offering music on the PlayStation Network, the company's nascent multiplayer gaming and digital download service. Such a move could place the PSP in direct competition with other multiuse music players, most notably the iPhone.

Spokespeople from Sony and the big recording labels declined to comment for this story.

The PSP is a nifty little handheld that plays games, video, and music, but has never fully lived up to its potential, many say. With a larger screen and superior games, the PSP could have rivaled the iPod. The PSP's development, however, was partially hobbled by not offering digital content for download.

PlayStation Portable

(Credit: Sony Corp.)

Instead, Sony early on chose a walled-garden approach to content. To watch videos on the PSP, the company stuck with physical media and required customers to buy Universal Media Discs, the mini DVDs that play only on PSPs. UMDs never caught on, and one reason was that Sony didn't initially offer a means to watch the discs on a television. This meant PSP owners who bought a UMD movie had to pay out again for a DVD if they wanted to watch on a TV.

If you believe the rumors that have flooded the gaming sector in recent months, Sony plans to release a totally revamped PSP. Some reports say the device will feature a larger screen than the PSP 3000 and have slide-out controls--and it will no longer play UMDs. Told that Sony was interested in music for the PSP, Michael Pachter, an analyst with Wedbush Morgan Securities, a financial services company, applauded the idea.

"This makes total sense that Sony would try to get content for the device," Pachter said. "If Sony is smart, they would manage it the same way iTunes has and be device-agnostic. Whatever you get on a Sony site should play on an iPod as well.

"(Sony) should want that but right now you can't download a Sony PSP game to an iPod Touch because the operating system won't allow it," Pachter added. "I know I can get music from iTunes to the PSP...It's just a question, but I wonder if Sony will configure the PSP so it would be incompatible with iTunes. They could come up with their own proprietary format for music so that MP3s won't work."

As the current music format of choice is MP3, this would be bucking the popular trend in music, to be sure. The PSP currently plays unprotected MP3s and Apple and most other leading download services have removed digital rights management from their songs. Nonetheless, Pachter knows Sony's long history of trying to force proprietary formats on consumers.

Remember the Music Clip, Sony's first digital music player that ignored the public's preferance for MP3 and only played in its own ATRAC3 format? Sony's MiniDisc was supposed to replace the cassette tape but failed to catch on anywhere but Asia.

When it comes to selling music online, Sony hasn't had much luck there either. Connect was Sony's answer to iTunes, but the download service proved hopelessly buggy. Sony shut the service down in August 2007.

The good news for Sony is that CEO Howard Stringer appears willing to adopt a more open approach.

"If we had gone with open technology from the start, I think we probably would have beaten Apple," Stringer told Nikkei Electronics Asia recently. "Sony hasn't taken open technology very seriously in the past. Its Connect music download service was a failure. It was based on OpenMG, a proprietary digital rights management (DRM) technology. At the time, we thought we would make more money that way than with open technology, because we could manage the customers and their downloads.

"This approach, however, created a problem," Stringer said. "Customers couldn't download music from any Web sites except those that contracted with Sony."

This should be welcome news to PSP fans, many of whom consider the device an excellent game and video player. If Stringer is good to his word, and if Sony does offer music downloads, the company apparently won't try to imprison songs in a Sony system.

Imeem, a social-networking site geared for music fans, has obtained new funding that in all likelihood saved the company from closing, according to music industry sources.

The money received so far by Imeem, which streams ad-supported music to users' PCs, is unlikely to last the company through the end of the year but the start-up's financing efforts continue, said the sources.

In March, TechCrunch reported that Imeem was in financial trouble after managers failed to sell the company or raise more money. At that time, the company denied that a shutdown was imminent. The company went back to some of its investors, which included some of the major music labels and asked for help, which it received. But last month Imeem went back to investors and told them even with the added assistance, Imeem needed new funding to survive, according to two industry sources.

An Imeem spokesman declined to comment.

Imeem made it clear that if it didn't raise money soon, the situation was "dire," one source said.

This first quarter of 2009 has been particularly bitter for ad-supported music sites. SpiralFrog, a site that offered ad-supported downloads closed its doors in March. In January, Ruckus, the music site tailored for college students, shuttered operations.

Some of Imeem's remaining competitors are facing their own struggles, including MySpace Music, the joint venture from News Corp. and the major labels. Music industry sources say the big recording companies are dissatisfied with the ability of the 8-month-old service to generate revenue. Read more about that here.

The good news for MySpace Music is that its record label backers are pleased with the traffic the site is attracting. The bad news is that the 8-month-old service has yet to turn that big audience into big dollars.

Some of the record labels have told Courtney Holt, MySpace Music president, they are disappointed with MySpace Music's revenue.

(Credit: MySpace)

At a MySpace Music board meeting last month, the company's CEO, Courtney Holt, got an earful from several music label representatives, according to multiple music industry sources. "Several key players were unhappy" with how MySpace Music was performing, said a source with knowledge of the talks. Some board members want MySpace Music, the joint venture formed by the four largest recording companies and News Corp., to make changes such as boost sales conversions and do more to integrate the service with the regular MySpace site, the sources said.

The meeting was designed to provide "open dialogue" and "constructive feedback" from the board to the service's managers, said a source. But another source described parts of the discussions as "tense." On Wednesday morning, a MySpace Music spokeswoman declined to comment.

MySpace Music represents the largest attempt so far to wed social networking to music. Some in the recording industry argue that MySpace and Facebook are choice areas for promoting artists and songs and MySpace has long been a place where bands showcased their songs. With Apple dominating online music retail, MySpace Music is seen as a potential new opportunity to generate sales.

At the very least, MySpace Music's sluggish performance illustrates how difficult that task is. Music consumption on the Web has really come down to two horses: iTunes and illegal peer-to-peer sites.

During the meeting, Holt conceded MySpace Music needed improving, according to the sources who spoke with CNET News. Board members understand that MySpace Music was launched only last September and that Holt, a former MTV executive, was named the site's president just five months ago. He impressed some of those present by promising that he and his staff are ready to make improvements, a source said.

One source said that all the labels appear "very confident" in Holt and "nobody is panicking."

The labels have been spurring Web music services to start generating profits. The record companies say they have offered price breaks and other concessions to help start-ups build audiences but they won't offer these forever.

The labels are telling companies that they want to see results sooner rather than later.

Updated at 12:45 p.m. to include quotes from Harvard economist Anita Elberse.

If iTunes shoppers truly believe in our free-market system, then they shouldn't worry about a $1.29 price for songs.

On Tuesday, Apple's traditional 99-cent song price was shelved. From now on, record labels can choose to charge $1.29 for new releases. Some older catalog titles will sell for 69 cents, and everything else will be available for the tried-and-true 99 cents. CNET first reported the price changes in January.

The blogosphere is full of gloomy warnings about how Apple's new pricing structure will alienate customers. But aren't consumers supposed to have the final say on market prices, at least in theory? Earlier in the day I wrote that if shoppers reject iTunes' three-tiered pricing scale, the big recording companies and Apple will be forced to retreat. I've since talked to a Harvard economist who told me that's not necessarily true.

Anita Elberse, associate professor at Harvard Business School, says each consumer has a "reservation price," or the maximum price they are willing to pay. Even if some consumers are not willing to pay the higher price, it is unlikely that all consumers will refuse to pay more--particularly the most avid fans of an artist. Collectively, consumers may not be nearly as powerful as some assume.

Elberse said finding someone's reservation price, however, is very difficult. She said the key question for Apple and the music labels is whether the people willing to pay 30 cents more for a song can make up the losses from those unwilling to pay.

"Most people in the industry that I've talked to say, 'yes, it's going to make up for that," Elberse said. "We might lose some people that are dropping out because their reservation price is below $1.29, but we make it up when we get 30 cents more from the people that stay. That is constantly the trade-off that you make."

There are limits to this concept, Elberse said. Apple could "jack up the prices to $10, and sales of music at that figure may not cover the losses from people who would refuse to buy at that price."

The new pricing scheme at iTunes could test customer loyalty like never before. Since launching in January 2001, iTunes has been synonymous with digital-music sales. Prices at the site have cost 99 cents for over five years.

The strategy has served Apple well. A recent survey by research firm NPD Group showed that 87 percent of people who buy digital music in the United States download from iTunes.

Why change now?

For years, the four biggest record companies have clamored for more control over pricing on iTunes. Apple relented, presumably in exchange for the right to sell songs stripped of copy protection software.

The big question is what the new prices will mean for Apple and the music industry.

After doing numerous tests, the big labels are confident that music fans will pay $1.29 for hit songs, according to industry sources. But in these uncertain times, determining what kind of revenue this might generate is unclear, the sources said. The recording industry is hoping that charging 30 cents less for older titles than iTunes' traditional 99-cent standard will reinvigorate sales.

It must be noted that most of the prices on iTunes are unchanged or reduced. Brad Stone at The New York Times found that of the 100 best-selling songs, only 33 are now selling for $1.29.

Of course, the music industry is trying to make up for dwindling CD sales and the losses from illegal file sharing. A lot of digital-music fans see the struggles of the recording companies as self-inflicted. They are unlikely to dig deeper into their pockets just to help the industry.

Music fans likely will do what they have always done; pay for those songs they value. Most certainly, they will vote on iTunes' new pricing with their dollars.

A clarification was made to this story.

Steve Jang has resigned as chief marketing officer at Imeem, the financially troubled social network.

Steve Jang has resigned as Imeem's chief marketing officer

(Credit: Imeem)

Jang's departure had been planned for some time and was amicable, said Matt Graves, an Imeem spokesman. He added that Jang, who also led the company's business development unit, will remain associated with Imeem as a strategic adviser. Graves said Jang was leaving "to do something new" but would not disclose what that was.

In addition, the company's vice president of Western advertising sales has resigned. She, too, had planned to leave, Graves said. According to Graves, Imeem has also laid off six employees as part of a company restructuring. The company now intends to double efforts to make the service profitable.

Imeem streams music to users' PCs free of charge and has tried to support itself through advertising sales.

The reorganization of the company comes as Imeem fights to stay afloat and has asked investors and some of the top music labels for a new financial arrangement, according to a report by the news blog All Things Digital. Some of the investors and labels have agreed to new deals, according to the report.

Imeem is the latest ad-supported music service to stumble this year after Ruckus and SpiralFrog ceased operations.

There are several reasons being offered to explain why the sector is running into trouble. Nobody argues that the broader economic storm has sent the ad market into a free fall. But some say that top recording companies charge too much for the use of their libraries. In particular, critics say that the so-called penny-per-play rates charged by the labels is too high for ad-supported start-ups to pay.

This isn't the first time that Imeem has needed a bailout from the labels. In a story published by CNET on Monday, Graves acknowledged that the company has had previous success convincing the labels to renegotiate their financial arrangements with Imeem. A music industry source close to the negotiations said that the labels have given financial breaks to Imeem on several occasions.

Apparently, this time, some of the labels are balking, according to the report in All Things Digital.

Warner Music Group has declined to give Imeem better terms. Were Imeem to lose access to Warner's songs, its task of generating profits would become tougher. Many of the company's rivals do offer Warner's library.

There are plenty of people blaming the music industry for Imeem's troubles, but the music industry source said that the labels were less than thrilled with the job done by Imeem's management team. They say that some of its competitors, including MySpace Music and Bebo, are doing a better job of turning ad-supported music into dollars.

What's going to be interesting to see is how aggressive Imeem becomes at charging for services and how the company's following will respond.

Clarification at 6:27 p.m. PDT: A sentence in this story, as it was first published, could have been misconstrued to imply that Imeem currently does not have Warner Music Group's songs in its library. It does, in fact, have Warner's whole library available for streaming now.

15-year-old David Nelson co-founded Muziic, a new music service, with his father. Whether the site is legal remains unclear.

(Credit: Mark Nelson)

David Nelson, the 15-year-old co-founder of the free site Muziic, idealizes Napster creator Shawn Fanning. But that doesn't mean he's going to run his business the same way.

Muziic, which launched two weeks ago, is a music service that piggybacks on YouTube. Nelson's software rounds up YouTube's music videos and enables users to sort and add them to playlists as if they were MP3s. There's no messing around with YouTube's search engine, videos, or advertisements.

There's little about Muziic that compares to Napster, the peer-to-peer service that helped demolish the traditional music business and usher in a new digital era. Yet, Napster in its original trailblazing form didn't last long. The site, some would argue, doomed itself by defying copyright law. For Muziic, Nelson has more modest goals and higher hopes.

Nelson, who lives with his parents in Bettendorf, Iowa, about 60 miles east of Iowa City, said: "We knew when we started out that the key was to develop something legal."

But the question of the site's legality is still unanswered. Mark Nelson, David's father and Muziic's co-founder, acknowledged this week that Muziic was built without the consent of YouTube or any of the major recording companies. What's unclear is whether Muziic complies with the terms of service for YouTube's API or whether the big record companies will object on the basis of copyright.

Last weekend, a YouTube spokesman said that after a preliminary review of the site, Muziic appears to violate its terms of service. The spokesman didn't specify how. On Thursday, Mark Nelson, 45, said he and David were contacted by YouTube and talks between the companies have begun.

Later in the day, a YouTube spokesman issued a statement about Muziic that at best was noncommittal: "We encourage people to leverage the power of our open API to embed YouTube videos in creative and innovative ways that comply with our terms of service."

Representatives from the three largest labels still doing business on YouTube, Universal Music Group, Sony Music Entertainment, and the EMI Group, either declined to comment or did not respond to interview requests.

What is clear is that a teenager--armed only with a good idea and precocious coding skills--has plopped himself into a rapidly shifting and legally shaky digital music climate. The record companies, perennially struggling with the digital world, may just now be developing serious doubts about sites like Muziic.

During the past two years, the big labels partnered with ad-supported streaming services such as Imeem, MySpace Music, and Last.fm (owned by CBS, parent company of CNET News). They hoped the sites would one day generate big advertising bucks and spur download sales, according to record industry sources. Recent studies show, however, that free streaming may compete with sales, the sources said.

'Can you do that?'
"We don't have anything against sharing with the music industry," said Mark Nelson when asked whether he worries about lawsuits or paying licensing fees.

If some in the music sector think the elder Nelson sounds arrogant, on the phone he sounds more naive than confident. One must remember there's no public relations rep coaching the Nelsons during interviews. There are no MBAs, no lawyers, not a dime of venture capital money.

There's nothing but father and son.

Nearly a year ago, Mark and David were watching "Star Trek" in their living room when Mark suddenly asked: "Wouldn't it be great if we could use YouTube's API to build a music site?"

David got excited. "It needs to be a desktop app," he told his father. "It's got to be something that anybody can open up in Windows. Imagine if you took YouTube and could play the videos in a media player."

"Can you do that?" Mark asked.

David paused to consider what it would take. "Yes," he said.

He was 14 at the time.

David taught himself how to write code, he says. At age 8, he started messing around with HTML. He moved up to JavaScript, PHP, and finally Visual Basic. He said while other kids were outside playing, he was inside reading manuals on scripting languages. His father, who works nights operating machinery at U.S. aluminum giant, Alcoa, says he knows his way around a PC, but doesn't know how to write code. "David did all the coding," Mark says.

What does David do for fun? Like most teens, he hangs out with friends. But he also enjoys reading about two of his other heroes, Google co-founders Larry Page and Sergey Brin. "I'm into Google history," David said. "I like learning about business."

Besides helping his son generate ideas for the site, Mark Nelson's biggest contribution to Muziic is paying the bills. According to David, the entire Muziic project has cost the Nelson family less than $10,000.

Those costs are likely to rise, however. A story about the service published last Saturday by CNET blogger Matt Rosoff helped raise the site's profile. Muziic now sees a total of 70,000 visitors per day, says Mark. Before Rosoff's story, the site received about 4,000 daily visits. In the two weeks since the site's launch, Muziic's software app has been downloaded more than 500,000 times.

Managing this kind of growth isn't easy for a two-man operation (in David's case "man" is used loosely). On Wednesday, Muziic saw some performance issues as a result of making too many queries to YouTube's API servers, David said. YouTube limits the amount of traffic from developer sites.

David said he solved the problem by caching queries made by Muziic's users so information can be pulled from his site's servers instead of YouTube's. It's obvious by the way David explains the fix that he enjoys trouble-shooting tech problems.

Other challenges may prove less fun.

Navigating the music sector
When Fanning unleashed Napster in 1999, the record companies were still very much in the dark about digital music, file sharing, and the power of the Web to transmit songs.

In some ways, it was easier then to launch a disruptive music service than for today's start-ups. Music executives have a greater understanding of technology. They also can be more wary. They still cut plenty of deals with digital services, but negotiations can be complex. The costs of obtaining licenses from a major label can run into the millions. For companies that don't negotiate, litigation can be just as expensive.

In Muziic's case, the Nelsons also have to worry about television networks and film studios. On YouTube there are a lot of music performances recorded from television or film. Do YouTube's licenses cover sites like Muziic?

Mark and David may have had some of these questions answered prior to launch had they spoken with YouTube. They said one reason they didn't was to avoid exposing their work to other developers. The other reason was David and his father didn't want to risk getting shutting down, David said.

That could rankle some label executives. One of their major complaints about digital music services over the past several years is that many launched first, built followings--enticing visitors with free music--and then told the labels "we're here, so there's nothing to do but negotiate a licensing deal with us."

Often the labels do just that. But music execs say using their libraries to draw an audience and then later ask for rights can undermine potential partnerships. They also emphasized that a site with a big following isn't guaranteed a deal. Just ask Project Playlist, a service that launched first, got sued by the recording industry, and as a result has been bounced off the top social networks.

The Nelsons say that they want to deal in good faith with the labels and they suspect the record companies will welcome them. "We think we solve a lot of the problems confronting digital music," Mark said.

One thing the Nelsons say they don't worry about is YouTube.

"We're not scared of Google," said David. "Those guys know a good idea when they see one, and I think they're going to recognize our service is a great way to listen to music."