The Open Road

Even as the decline in DVD sales--both in the U.S. and abroad--has accelerated since 2006, DVD rentals through services such as Netflix (adding 25 percent more customers since 2008) and Redbox (adding 500 machines per month) have been booming.

The reason, as The Economist surmises, may be a shifting view on how consumers prefer to consume entertainment:

The real worry (for the movie industry), then, is not that people are abandoning DVDs but that they are abandoning the notion of owning them.

This is perhaps exacerbated by an industry that can't seem to make up its mind by what it means by ownership, as Ogilvy Group U.K.'s Rory Sutherland writes in The Spectator:

(The) piracy debate is far from one-sided. The very same record industry which today bleats on about intellectual property seemed conveniently blind to the concept back in the early 1990s when they charged us 19 pounds (about $31) for every CD they reissued--even when we already owned the very same album on vinyl....

The BBC often commits the same offense. Why should I pay full price for a DVD boxed set of "The Office" when I have already paid for the series through my license fee? Either the value lies in the physical packaging or in the content itself. Publishers try to charge for both; to have their cake and sell it. This is questionable.

Indeed, it is. Whether we're moving to a rental market or finding new ways to apply ownership to digital goods through digital rights management (DRM) and other means, those industries that sell digital content (movies, books, news, software, music, etc.) need to get their story straight. Is the value in the content, or is it in the packaging?

For Apple, it's both. Apple has long insisted that consumers prefer to own rather than rent, and it has sold more than 6 billion songs through its iTunes Store to prove it. But arguably, the value in Apple is in its distribution service (iTunes), more than the bits and bytes of the songs themselves. I can download Bob Marley for free, but I elect to buy through iTunes for a fee. The service justifies the price.

In software, it's increasingly packaging and ancillary services that drive purchasing because the "content" (i.e,. the software) is a free download. That packaging, like Apple's iTunes, is worthless without the content, but together, they're a good deal.

Is this the future?

Trent Reznor seems to think so. You?

Follow me on Twitter @mjasay.

While the music industry desperately searches for ways to stem the tide of piracy that threatens to engulf it, new data from the BI Norwegian School of Management suggests that music pirates actually buy more music than others. A lot more.

As Ars Technica reports,

When it comes to P2P, it seems that those who wave the pirate flag are the most click-happy on services like the iTunes Store and Amazon MP3. BI said that those who said they download illegal music for "free" bought 10 times as much legal music as those who never download music illegally.

How can this be explained?

I've written before that piracy is a great way to help the music industry gauge the tastes of its prospective customers and that there are a host of new adoption-based business models lurking in this rampant piracy.

But these perhaps explain solutions to the piracy problem. They don't explain why music thieves may purchase more music than others do.

One way to explain it is simply to acknowledge that piracy may precede purchase. People may be downloading songs in anticipation of buying those worth their 99 cents. In this way, most of the downloaded songs will never be followed by a click-to-purchase.

For me, the frequency of downloading songs off peer-to-peer service LimeWire has trickled to a halt over the years as Apple's iTunes library has expanded. At 99 cents, I can afford to squander money on songs that I may delete a few days later. But I'd prefer to listen to a full song before I buy it, if that were an option.

Yes, I know I can use services like Pandora and Last.fm (operated by CNET News publisher CBS Interactive), and, yes, I know that iTunes and Amazon.com offer brief preview clips, but this latter option is almost never a great way to evaluate music. It's too brief.

I doubt that many people deliberately want to steal music. They simply don't want to buy in inconvenient formats (who wants a physical CD?), or they don't want to pay for casual listening to music that they really don't like enough to buy. So the download becomes the equivalent of listening to music over the radio.

There are ways to monetize this casual interest, as I link to above. But the music industry is going to have to experiment to discover them. Ultimately, it's going to have to grapple with piracy as an opportunity, not a threat.

Follow me on Twitter @mjasay.

Digitization has a disruptive effect on a wide range of industries, from music to software to publishing to...you name it. If it can be digitized, it can be disrupted.

It's therefore encouraging to see the music seemingly converging on a cool new-old model: an ASCAP (American Society of Composers, Authors, & Publishers)-like tax from one's Internet service provider that allows unlimited downloading of music.

Gerd Leonhard's recent presentation on the subject is the best I've seen yet, one that I'd recommend you review, even if you never stray from the software world to think about music:

Leonhard argues that digitization has made a control-based music economy impossible, forcing the industry to seek other ways to monetize music--ways that conform to digitization's abundance, rather than to the old idea of scarcity.

In a sign of things to come, the Isle of Man just approved "a single blanket fee (that) will cover unlimited download activity for all 80,000 or so...residents," as Ars Technica reports.

This follows a new trend toward "free" services, in which the music industry hides the cost of the music in the price of a separate service or device. It's oddly similar to trends I'm seeing in software.

This isn't the only model. As the Future of Music blog points out, some musicians, like Corey Smith, are finding that giving away music to drive more concert ticket sales can be a winning recipe. But while $4.2 million last year for Smith is a great return for an individual artist or band, it's not a great way to build an industry. I'd liken it to "lifestyle" software businesses that generate great revenue for their founders but provide little in the way of equity for other participants in the company's success.

So I think the "adoption tax" model is promising. The future is flat-rate: you subscribe, you forget about paying for individual transactions, you enjoy more music than you ever have before.

CD sales dropped 20 percent in 2008, as reported by The Wall Street Journal. But this isn't the whole story.

As Ars Technica points out, the music industry as a whole grew in 2008, with online sales accelerating. But this, too, doesn't tell the whole story.

The real story behind this creative destruction is called out by rising revenues for organizations like ASCAP, and underlined in the Media Futurist blog, where Gerd Leonhard points out that the real shift in the music industry is away from copy-based license business and toward flat-rate, attention-based business models. What is an attention-based model?

It's a model in which the creator's brand offers more protection than digital rights management because you can't counterfeit a live performance, for example. But it's more than that. It's also about customers liking and trusting one's brand enough to subscribe to a steady stream from the creator, not just partaking in dribs and drabs (i.e., licensing copies to the music).

Attention-based revenues (i.e. not just advertising-as-we-knew-it but also revenue sharing of flat-rate offerings, next-generation advertising, up-stream selling and marketing, sponsorships and branding, linking and referring, etc.) will very likely surpass copy and unit sales revenues.

A future where many content creators of all kinds, in all locations, and within all levels of accomplishment will make more money based on what their brand stands for, based on their fans, aka users, having real, meaningful experiences with or through them, and based on who pays attention to them, when and where....

In our immediate future as content creators and companies that serve them, it's all about gathering and converting attention--at least until the world is so well-served with feels-like-free content in return for attention that physical copies become desirable again (and they will).

What does this have to do with software? Much, if you're an open-source or SaaS business, but I think it also applies to Microsoft and Oracle. Whether open-source or proprietary software, however, I think it's particularly germane to the big providers in these categories: Red Hat, Sun Microsystems, Salesforce.com, Oracle, and Microsoft.

Why do enterprises pay Red Hat for a Red Hat Enterprise Linux subscription today? In part, it's to get a license to use RHEL on a particular server for a particular application at a particular time.

But really, it's to tap into an ongoing value stream, as Red Hat CEO Jim Whitehurst intimated to me several months ago. It's a subscription to the Red Hat experience, in other words, not one copy once and for all.

Today, that Red Hat experience is somewhat limited: it's an operating system, and it's an application server. I suspect, however, that Red Hat's future lies in becoming an ASCAP of open-source software, rather than The Police of operating systems. Customers will look to Red Hat to provide a steady stream of open-source value, not a few big "songs."

The same thing is happening elsewhere. Oracle has set itself up as a broad brand that can provide value on a wide array of fronts, following Microsoft's lead. Salesforce? It clearly has set its sights on becoming more than just a CRM player with a novel delivery model. It aims to be the ASCAP of SaaS-based software delivery. And Google? Well, looking at its top 10 applications, it's clear that it, too, is building a broad Google experience, not simply one-off applications.

This is the near-term future of enterprise software. It's not about protecting individual copies of software so much as delivering a strong brand that can command broad-based subscriptions to one's overall value. For open-source vendors like Red Hat and Sun, it may mean that they need to start aggregating a wider array of open-source products into their subscriptions sooner rather than later.

Is music modular enough to make music production social, Linux style? Minimum Noise, premised on the idea that music creation can be crowdsourced, thinks so, but I doubt it.

Robin Wauters at TechCrunch gives Minimum Noise the benefit of the doubt, then suggests it is unlikely to work. It's not hard to guess why: creativity is rarely a social activity, at least, not in this way. Creativity is an individual's response to the world.

This is not to say, however, that individual responses couldn't be aggregated into a complete work, as Minimum Noise seeks to do, and as regularly happens in open source. However, using open source as an exemplar is problematic because the majority of open-source software tends to get written just like proprietary software: by a small core of dedicated professionals. True, they may not be employed by the same company, but the importance is in the close, dedicated relationship of the core contributors.

Minimum Noise would need to replicate this, but it's hard to imagine a group of like-minded musicians discovering each other and then collaborating online. Call me romantic, but I still believe in bands creating music in the studio or somewhere together. While the different instruments are modular, in the code sense, which is a critical element of open source success, the proper synthesis of the disparate parts won't happen well over the Web.

Minimum Noise may be a noble effort, but I can't see it working. Some authorship can be relatively social, like open-source software, but music...? I don't think so.

As reported in Friday's Wall Street Journal, the music industry has apparently given up on suing 13-year olds and dead people in its quest to stem music piracy. Instead, it plans to work with ISPs to identify and notify copyright infringers of the need to come clean:

[T]he Recording Industry Association of America said it plans to try an approach that relies on the cooperation of Internet-service providers. The trade group said it has hashed out preliminary agreements with major ISPs under which it will send an email to the provider when it finds a provider's customers making music available online for others to take.

Depending on the agreement, the ISP will either forward the note to customers, or alert customers that they appear to be uploading music illegally, and ask them to stop. If the customers continue the file-sharing, they will get one or two more emails, perhaps accompanied by slower service from the provider. Finally, the ISP may cut off their access altogether.

Cory Doctorow, among others, has sharply criticized such an ISP partnership in the past, but I see it as a big step up from the industry's current tactics, and one that could lead to other possible solutions like a music tax at the ISP level. TechDirt doesn't like this option, but it's unclear what other (good) options the industry has.

Throttling downloads at their source - i.e., the ISP that provides the bandwidth - is at least the right area in which to target the activity. Whether a tax or some other solution ends up working matters less than that the industry is now focused on the right piece of the piracy puzzle.

For those struggling musicians worried by rampant piracy and the subsequent difficulties in earning a living, Tim Blanning has news for you: it was ever thus.

Writing in The New Statesman, Blanning traces the history of the music industry, finding "Modern musicians' lot compares very well to that of their predecessors." Indeed, Blanning points out the very bane of modern musicians' existence - the ability to record (and, hence, copy and distribute) music - is also the very reason that musicians have an opportunity to generate outsized returns on their musical investments.

Until music could be recorded, the only revenue available to the musician was from performances of that music. "Not even as great a virtuoso as Paganini or Liszt had a back catalogue."

The result? Today, good-but-not great bands like Coldplay can make tens of millions while the great composer Richard Wagner died a comparative pauper. With all the flaws of the modern system from pirates and ensuing economic uncertainties, we should be cheering the modern system and its digitization of musical content, even when some profit is lost to piracy.

For composers...copyright protection is very much a creation of modern times. Until deep into the 19th century, piracy of the most flagrant kind was the norm....In the course of the 19th century, ever-growing markets, bigger spaces for music and better communications allowed many more performers to make much more money....

...[Even so] for every Bono and his countless millions, there is a host of modestly paid session players, 90 per cent of whom earn less than [$22,500] a year....It will come as no consolation to them to know, if they do not know it already, that it was ever so.

Ever since musicians emerged from the servile but cosy world of aristocratic patronage into the harsh daylight of the public sphere, the musical profession has been a pyramid with a broad base and a sharp top. The new opportunities brought by every major technological shift have also left many casualties among musicians unable or unwilling to adapt.

There are no easy answers for the music industry, but in its quest to capture all possible digital revenue, let's not forget that digitization has introduced dramatically more available revenue than ever before. A little "leakage" hurts, but not nearly as much as it would to go back in time and earn one's keep by performance alone.

Warner Music Group has a proposition for U.S. universities, according to Techdirt: buy a blanket license to music downloads through file-sharing services, or be sued.

Techdirt thinks that this is a bad idea, and I disagree.

Techdirt's criticisms are clear:

It's basically a music tax--allowing the record industry to be lazy. Someone else gets to go out and collect all this money, and hand it over to the industry to distribute (or, actually, not distribute). It effectively sets the business model of the recording industry in stone, and harms better, more innovative business models by inserting the recording industry (and not the musicians) into a role where they don't belong.

But the benefits to such a blanket tax are also clear, as I wrote back in 2003. Consumers want a convenient way to pay for content. A tax levied by the ISP is a highly efficient way to ensure that the music industry gets paid, and that consumers don't get slowed down in their enjoyment of music.

Techdirt has some valid points, but it fails to identify the "better, more innovative business models" that would take the music industry forward, either in this article or in the others to which it refers.

Personally, I pay for my music, movies, and other media. But not everyone does, perhaps because they don't want to use iTunes or a similar service, for whatever reason. A minimal tax added to students' university fees would easily cover this, with little cost to these consumers and great benefit.

No, not every student would end up using the service, but that's the nature of a tax: sometimes you pay for others' benefits, not yours. In fact, that's usually the way it works.

I've been using Pandora, the excellent music discovery service, for over three years now, discovering Death Cab for Cutie, Band of Horses, and other bands in the process. I was therefore dismayed to discover that Internet radio royalty fees threatened to bury Pandora earlier this year.

Fortunately, you can't keep a great service down: Pandora has notched two million users on the iPhone, becoming Apple's most popular iPhone application. As Jack Schofield of The Guardian suggests, this iPhone popularity should ensure Pandora's enduring presence in my life, and hopefully yours.

What still rankles me, however, is that Pandora should be in jeopardy at all. Why would the music industry lobby to raise Internet royalties on its music, when services like Pandora, Last.fm, etc. contribute to enriching the music experience, helping would-be buyers find more music worth buying?

I wrote recently on this topic, suggesting that music discovery is the future of the music business. I was writing about Apple's new iTunes Genius service, but Pandora is actually a better service, as it's more likely to turn me onto hitherto unknown music. This is something for the industry to embrace, not fight. Warner, for example, is actually learning that digital music can be a Very Good Thing: as it has embraced the Web, it has seen sales increase, while its competitors have flailed to double-digit declines.

I'm glad to see Pandora thriving on the iPhone because users love the service. I'd love to see it doing even better with the music industry loving it, too. It should show its love by lobbying for lower royalties on Web music services like Pandora. In turn, I firmly believe consumers will respond with cash for the industry.

Fair trade?