Digital Noise: Music and Tech

SanDisk's SlotMusic strategy puzzled me at first. I didn't understand why anybody would pay almost the same price as a CD for an easily misplaced microSD card with lower-quality audio. The release of the $19.99 SlotMusic player, which is basically an MP3 player capable of playing these cards, changed my opinion a little bit. But I suggested that the real strength would come in curated cards containing, for example, a selection of songs from the Billboard charts. Given that a regular album cost $14.99 on this format, I figured that a curated card for the same price would include 20 or 30, or maybe 100 songs.

(Credit: Corinne Schulze/CBS Interactive)

At CES this week, SanDisk surpassed my expectations with the new SlotRadio, a $39.99 MP3 player with a preloaded microSD card containing 1,000 songs. That's four cents a song, plus you get to keep the player, which is capable of playing the SlotMusic albums and other music contained on a microSD card, and also has an integrated FM tuner.

The first players will contain cards preloaded with Billboard chart hits, which is a fine place to start, but SlotRadio could get really interesting if SanDisk branches out beyond the mainstream. Imagine a collection of the year's top-rated albums by Rolling Stone, Pitchfork, or Nic Harcourt. Or heck, go a little further and hire musicians to curate the collections: imagine Keith Richards' favorite blues songs, or an Alan Bishop collection. You might expect that music nuts--the kinds of people who care about Sublime Frequencies--wouldn't relinquish control of their playlists, but at four cents a song, I'd be happy to save myself the trouble of ripping or downloading 1,000 tracks and let somebody else drive for a while. As long as it's a driver I trust.

iTunes is the No. 2 music retailer in the United States (behind only Wal-Mart Stores), and it passed the 4 billion download mark in February, but nobody knows how much money Apple's actually earning from the service.

In Apple's earnings reports, iTunes revenue is lumped into a category called "other music-related products and services," alongside licensing revenue from iPod peripheral makers, and the company doesn't break out expenses or operating profit by segment.

It's No. 2 in the U.S., but how much money does it make?

(Credit: Apple)

So some Billboard reporters decided to do some back-of-the-envelope calculations, using Amazon.com's expenses as a benchmark for a large-scale e-commerce operation. They conclude that iTunes earned an operating profit between $160 million and $390 million on revenues of roughly $1.7 billion in the year ended September 30, 2007. They believe that the profit is probably on the lower end of that range--or perhaps even below it--because Apple spends more money on marketing and technology (the latter, because each sale must be fulfilled with a song download).

This is good news for all those start-ups wondering if it's possible to earn money with digital downloads: the answer is yes, if you get enough scale. But for Apple, iTunes is a drop in the bucket, compared with the business of selling iPods. The company garnered more than $8.3 billion in revenue from iPod sales in the year ended September 2007, and teardowns tend to suggest that profit margins are pretty high on iPods.

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.

(Credit: CEA/Billboard)

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.