So I went to a mid-tier business school, and might not be informed enough to offer some opinions on some things I've been reading about recently. But that won't stop me from doing exactly that below and if these thoughts are off, feel free to comment, make fun of me, or never read this blog again.
By the way, if you're wondering why I haven't posted in soooo long (I'm sure you are not), it is because I am lazy. Facebook and Twitter allow me to muse to the masses of people (none) that hang on my every word, and I can do so without having to offer anything remotely resembling a cogent argument since these are usually limited to 140 character bursts.
So enjoy some of these musings of based on things that I have been reading recently instead of doing work:
Marginal Costs of Web Content
There are a lot of libertarian-types who believe that since the marginal cost of producing digital content is essentially zero (that is, once a piece of digital content such as a song, movie or news article is created, it is virtually $0.00 to produce another copy of it), that such content should be free. Free is the new business model! But this does not reflect total costs, which this VC points out……charging for content shouldn’t be considered ludicrous only because of this economic phenomenon.
Take Comcast for example. They have already invested millions (billions?) to lay all of their fiber optic wire….its marginal cost to add another subscriber is virtually zero (they do incur costs for the installation – but they pass on that cost to you). But yet they still find a way to gouge around $150/month from subscribers for their “Triple Play” offering. People need to get over this whole “marginal cost = 0 then price should = 0” faulty logic chain.
The real impediments to monetization of digital content are bundling, scarcity and piracy. The first two I'll address later. The third, piracy, is pretty much uncontrollable without direly affecting the buyer’s experience (through DRM or subscription services, such as Rhapsody). The ease of piracy means content producers (particularly music content) have to focus on other places to make money. In the same way that refrigerators made it impossible for the market to charge for ice except in only niche circumstances (yes, there once was a burgeoning ice manufacturing industry in this country), piracy enabled by digital technology and the internet have made it impossible for the market to charge for music except in niche circumstances/segments.
Fixed Cost Structure versus Variable Cost Structure
This insightful (please note sarcasm) analysis by a blogger appropriately titled “Reflections of a Newsosaur” shows basic misunderstanding of this insightful, investigating, probing journalist on the concept of fixed versus variable costs. Though the underlying report was originally mis-published (no this is not a word but I choose to use it anyway so suck it), this individual can’t believe (understand?) how the newspaper industry could have a 100% decline in revenue but still have a 12% operating margin – and that maybe the industry isn’t so bad off after all (these statistics were originally misreported – however, the blogger’s misunderstanding of these statistics is what I’m addressing).
Newspapers have a lot of fixed assets – printing presses, delivery trucks, etc. The variable costs to operate these are not trivial…but it’s not like launching a space shuttle. If a newspaper isn’t heavily leveraged and burdened with outrageous debt/interest payments (see Tribune Company), the variable costs to operate a newspaper could still be modest enough to possibly maintain an operating margin “double that of Wal-Mart’s” even in the face of declining advertising revenues (Note that this guy is so sharp that he is amazed that an entity is printing money if its margins are 2x that of a discount retailer which competes on price and therefore has razor-thin margins.) The on-going costs to operate a newspaper – basically staff salary – for some papers may still be offset by its ad revenue. There is actually a paper in NJ that refuses to do any digital distribution and only offers a print edition – and is still doing OK. This primarily fixed cost structure is also exactly why the old-school copper landline phone business is minting free cash flow for Qwest, Verizon, etc.
The point however isn’t that newspapers should avoid digital and do only print. The point is that high fixed cost-based businesses, even if they have dying technology, should still continue to milk this until the business just dies. You realize that AOL’s dial-up service is still around? Yes, it is! It’s a high fixed cost business with low cost to operate. Mints money. UPDATED 12 AUGUST 2009: NY Times may even consider keeping the Boston Globe due to its (relatively) low cost to operated and cash flow it generates, even though it continues to decline.
As I’ll continue in the next post, the fixed costs/variable costs issue puts internet online web streamers/radio stations such as Pandora, Last.fm, Imeem, Spotify, etc., in quite a bind. As web pure-plays, they don’t have to invest in the broadcast infrastructure that terrestrial radio stations do. However, their costs are almost exclusively variable. The more listeners they acquire, the more bandwidth and royalty costs they incur. Contrast this against terrestrial radio, where infinite listeners can tap into the over-the-air broadcast without any marginal costs to the station.
Showing posts with label digital music. Show all posts
Showing posts with label digital music. Show all posts
08 July 2009
17 February 2007
Hang the DJ
My brother asked me the other day why music sucks now. "Where's the next Nirvana? How do we go from Nirvana to Jessica Simpson being popular?" Why is music so sucky? The Answer: Radio.
The fact of the matter is (well, fact as I see it, which isn't necessarily fact but moreso opinion, but why split hairs?) that good music is still out there. But even in this age of social networking and "music 2.0" sites, you still have to go out of your way to find it. Spend a few hours of your time a week tooling around Last.fm, MySpace, Haystack, et al and you'll discover some good stuff. Spend another view hours a week combing through blogs (fluxblog, 3hive) plus your local town's "alternative" newspapers (Citypages, The Rift) and finally tune in to the local public radio station when you are in their broadcast range (The Current) and you'll end up discovering a ton of good music. And people who are into music don't really mind doing all this stuff. But - totally unscientifically here - maybe this is at most 20% of the population? The vast majority of the general public learn about music from two sources. 90% = radio and 10% = movies/TV. So, if you believe that most of the "other" people in the general population have sucky taste in music - and let's face it, there is no way it is better than yours - it has to be blamed on radio.
Music 2.0 zealots will tell you that radio is dead. Radio sucks tremendously, but it is not dead. There is no other medium that is so easy to consume content in a passive way, playing in the background, piquing the interest of the listener when something interesting is detected in the brain. Music 2.0 in its current form - and all the other tasks listed above - require too much of an active audience. Because of that, they will never replace radio.
So, why is radio so sucky? Consolidation and commercialism.
The question which then arises is: will people be willing to sift through the myriad of stations and try out new formats, or simply tune into the internet version of the same crappy stations which are out there now???
The fact of the matter is (well, fact as I see it, which isn't necessarily fact but moreso opinion, but why split hairs?) that good music is still out there. But even in this age of social networking and "music 2.0" sites, you still have to go out of your way to find it. Spend a few hours of your time a week tooling around Last.fm, MySpace, Haystack, et al and you'll discover some good stuff. Spend another view hours a week combing through blogs (fluxblog, 3hive) plus your local town's "alternative" newspapers (Citypages, The Rift) and finally tune in to the local public radio station when you are in their broadcast range (The Current) and you'll end up discovering a ton of good music. And people who are into music don't really mind doing all this stuff. But - totally unscientifically here - maybe this is at most 20% of the population? The vast majority of the general public learn about music from two sources. 90% = radio and 10% = movies/TV. So, if you believe that most of the "other" people in the general population have sucky taste in music - and let's face it, there is no way it is better than yours - it has to be blamed on radio.
Music 2.0 zealots will tell you that radio is dead. Radio sucks tremendously, but it is not dead. There is no other medium that is so easy to consume content in a passive way, playing in the background, piquing the interest of the listener when something interesting is detected in the brain. Music 2.0 in its current form - and all the other tasks listed above - require too much of an active audience. Because of that, they will never replace radio.
So, why is radio so sucky? Consolidation and commercialism.
- A Future of Music Coalition study indicates that it's not your imagination, but radio stations basically play the same songs over and over:
* The top four radio station owners have almost half of the listeners and the top ten owners have almost two-thirds of listeners.
* The "localness" of radio ownership – ownership by individuals living in the community -- has declined between 1975 and 2005 by almost one-third.
* Just fifteen formats make up three-quarters of all commercial programming. Moreover, radio formats with different names can overlap up to 80% in terms of the songs played on them
- A Washington Post article discovered via Hypebot sadly showcases a radio station's reduction of playlist building to market research. Radio is undoubtedly a double-edged sword - it has gotta play what people like so it can attract listeners and therefore sell ad time. But, the radio station business model isn't about music, it's about selling shit. Experimenting with content that doesn't fit tried and proven is not way to entice big media buys done on the behalf of companies looking to sell shit. Warning: you will be depressed after reading this article.
The question which then arises is: will people be willing to sift through the myriad of stations and try out new formats, or simply tune into the internet version of the same crappy stations which are out there now???
08 February 2007
Thoughts on Music: The Economics of the Album
By now, you've probably already read or at least heard about Steve Jobs' Thoughts on Music post - and if not, you are still a die-hard CD buyer or your musical tastes top out at Corinne Bailey Rae. Lots of people in and out of the blogsphere have offered commentary on Jobs' motivation for this stance, ranging from European regulatory pressure to open up iTunes to the simple fact that, hey, iTunes is a loss-leader for Apple and anything it can do to create more media supply compatible with the iPod will continue drive its sales.
One of the most insightful points in Jobs' post - though so simple and obvious that it has been overlooked for a while - is that while the major labels continue to push for digital rights management (DRM) for digital music, 90% of all music sold is DRM-free (i.e., physical CDs). Now I am no music industry expert (there are smarter, more insightful people than me who write on this topic, like Hypebot and Coolfer), but for the life of me I can't figure out while the Labels won't embrace DRM-free online music given that they sell CDs this way. The prevailing theory of why this is happening, of course, is the threat of piracy.
With no real research, I suspect that P2P illegal file sharing most likely occurs from people buying CDs, ripping them, then sharing them, and generally not someone buying an unprotected mp3 file and uploading it. "Who sells unprotected mp3 files of music that is actually popular?" you may ask, especially if you ignore the success of and/or don't have a taste for the catalog of eMusic. But think of the recently shut down allofmp3.com, a Russian download site selling albums for like $3.99 in mp3 format (with questionable legality). People could have easily bought mp3s from this site and shared them on a P2P network or Torrent. But...that just doesn't seem to jive with human nature. Of course, like most of my thoughts, it's based totally on my intuition and no fact....but I just can't picture it.
Instead, I think the economic model of the album is really driving this resistance to embrace unprotected digital music. Labels make a good amount of money on the album product. No one sells singles in stores anymore. When was the last time you saw a CD single for sale? You only really see singles on vinyl, as part of extended re-mixes for DJs. Otherwise, singles are generally only available in the digital format. (Note: the last single I bought - or, more accurately, my brother brought - was U2's cassette single of "Desire", which had a great song titled "Hallejuah, (Here She Comes)", which I think is now on Disc 2 of their Best of 1980 - 1990).
No, the labels exclusively push the album product. But, this wasn't always so. A great 2003 New Yorker article provides an interesting look at the history of recorded music (and touches on so many other aspects of the modern music industry). Music was orginally sold as singles, and artists sold only singles for the longest time - really until The Beatles popularized the album concept. Of course, the record labels loved it - the cost to manufacture and distribute an album was only nominally more expensive than that of a single - but they could charge a much higher price due to its perceived value (10 songs on a 33.3 rpm album record versus the two you would get on a 45 rpm single). Higher price, same cost = more profit.
But the interesting thing is, by most accounts, digital music provides greater profit for labels than physical sales. From this report (sure it is Canadian and from 2004, but it gives directionally-correct data), we see that Labels make an estimated profit of $1.20 per physical album. For a digital track, however, they make around $0.47/song....the breakdown in this report of digital tracks doesn't account for marketing + promotion - but let's say it is still roughtly 13% of the price, as it is for CDs (as indicated in the report)...so $0.47 - $0.13 = $0.34 per digital song in profit for the label. Estimate 10 songs/album, that is $3.40 per digital album. So, let's summarize: the labels sell a DRM-free album at a margin of $1.20, but they aren't willing to sell that same DRM-free album, in another medium, at a margin of $3.40???? Now, I generally can't think myself out of paper bag - but WTF?? This makes no sense. The labels hide behind piracy - piracy is why selling unprotected mp3s will kill their business. But, as Jobs points out, piracy is equally as likely with a CD as a digitally unprotected track - there is something more going here!!!!
The problem is this: in the digital world, consumers aren't forced to buy the bundled product, i.e., album (sure, some artists on digital media retailers do enforce this, but for the most part, this doesn't happen). Consumers can buy the songs a la carte as they choose - an option they don't have in the physical world. So, let's compare how a the label would make out if they sold CDs to 100,000 customers (i.e., 100,000 CDs) versus some combination of digital tracks to 100,000 customers. Making assumptions for the average album on the proportion of people who, if given the choice, would still buy the entire album or only some portion thereof, we get a quick and dirty analysis that looks like this:
Sure, it won't fall exactly like this, but you get the point: unbundling the album threatens the favorable economics that the Labels get by bundling the album in a CD. Sure piracy is a factor at play - but given that a CD can be pirated with as equal ease as an unprotected track - you have to wonder if this doesn't account for some of the resistance.
So what are the implications for the labels: either sell a lot of a single song or sell more albums. If you're a Long Tail disciple, the first strategy will be increasingly more and more difficult in the future. How do you sell more albums? Well, most recently, The Shins sold 119,000 albums, 30% of which were digital. Maybe good artists making quality albums may be the prevailing business model of the future?
One of the most insightful points in Jobs' post - though so simple and obvious that it has been overlooked for a while - is that while the major labels continue to push for digital rights management (DRM) for digital music, 90% of all music sold is DRM-free (i.e., physical CDs). Now I am no music industry expert (there are smarter, more insightful people than me who write on this topic, like Hypebot and Coolfer), but for the life of me I can't figure out while the Labels won't embrace DRM-free online music given that they sell CDs this way. The prevailing theory of why this is happening, of course, is the threat of piracy.
With no real research, I suspect that P2P illegal file sharing most likely occurs from people buying CDs, ripping them, then sharing them, and generally not someone buying an unprotected mp3 file and uploading it. "Who sells unprotected mp3 files of music that is actually popular?" you may ask, especially if you ignore the success of and/or don't have a taste for the catalog of eMusic. But think of the recently shut down allofmp3.com, a Russian download site selling albums for like $3.99 in mp3 format (with questionable legality). People could have easily bought mp3s from this site and shared them on a P2P network or Torrent. But...that just doesn't seem to jive with human nature. Of course, like most of my thoughts, it's based totally on my intuition and no fact....but I just can't picture it.
Instead, I think the economic model of the album is really driving this resistance to embrace unprotected digital music. Labels make a good amount of money on the album product. No one sells singles in stores anymore. When was the last time you saw a CD single for sale? You only really see singles on vinyl, as part of extended re-mixes for DJs. Otherwise, singles are generally only available in the digital format. (Note: the last single I bought - or, more accurately, my brother brought - was U2's cassette single of "Desire", which had a great song titled "Hallejuah, (Here She Comes)", which I think is now on Disc 2 of their Best of 1980 - 1990).
No, the labels exclusively push the album product. But, this wasn't always so. A great 2003 New Yorker article provides an interesting look at the history of recorded music (and touches on so many other aspects of the modern music industry). Music was orginally sold as singles, and artists sold only singles for the longest time - really until The Beatles popularized the album concept. Of course, the record labels loved it - the cost to manufacture and distribute an album was only nominally more expensive than that of a single - but they could charge a much higher price due to its perceived value (10 songs on a 33.3 rpm album record versus the two you would get on a 45 rpm single). Higher price, same cost = more profit.
But the interesting thing is, by most accounts, digital music provides greater profit for labels than physical sales. From this report (sure it is Canadian and from 2004, but it gives directionally-correct data), we see that Labels make an estimated profit of $1.20 per physical album. For a digital track, however, they make around $0.47/song....the breakdown in this report of digital tracks doesn't account for marketing + promotion - but let's say it is still roughtly 13% of the price, as it is for CDs (as indicated in the report)...so $0.47 - $0.13 = $0.34 per digital song in profit for the label. Estimate 10 songs/album, that is $3.40 per digital album. So, let's summarize: the labels sell a DRM-free album at a margin of $1.20, but they aren't willing to sell that same DRM-free album, in another medium, at a margin of $3.40???? Now, I generally can't think myself out of paper bag - but WTF?? This makes no sense. The labels hide behind piracy - piracy is why selling unprotected mp3s will kill their business. But, as Jobs points out, piracy is equally as likely with a CD as a digitally unprotected track - there is something more going here!!!!
The problem is this: in the digital world, consumers aren't forced to buy the bundled product, i.e., album (sure, some artists on digital media retailers do enforce this, but for the most part, this doesn't happen). Consumers can buy the songs a la carte as they choose - an option they don't have in the physical world. So, let's compare how a the label would make out if they sold CDs to 100,000 customers (i.e., 100,000 CDs) versus some combination of digital tracks to 100,000 customers. Making assumptions for the average album on the proportion of people who, if given the choice, would still buy the entire album or only some portion thereof, we get a quick and dirty analysis that looks like this:
Sure, it won't fall exactly like this, but you get the point: unbundling the album threatens the favorable economics that the Labels get by bundling the album in a CD. Sure piracy is a factor at play - but given that a CD can be pirated with as equal ease as an unprotected track - you have to wonder if this doesn't account for some of the resistance. So what are the implications for the labels: either sell a lot of a single song or sell more albums. If you're a Long Tail disciple, the first strategy will be increasingly more and more difficult in the future. How do you sell more albums? Well, most recently, The Shins sold 119,000 albums, 30% of which were digital. Maybe good artists making quality albums may be the prevailing business model of the future?
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