Study the diagram attached to this post.  This diagram is the future.  When I say that substitution is going to be a far bigger challenge for record labels and artists than replication/file sharing - this is what I am talking about.  File sharing should be a dead issue.  Use your energy to conquer the future.

Sudden Substitution Impact
Attached to every play, forward, reverse and shuffle button will be a digital aggregator, a recommendation engine and ten million songs.  Every link on this chain is or may become a commodity.  

Devices - Commodity
Apple has a device manufactured like the one shown in the diagram for less than $50 USD.  It doesn’t matter if the thing is bolted into a cell phone or implanted in your head, the hardware to play music will be a commodity business.  Any record label or group of artists will be able to buy/sell/give-away these things by the truckload.  MP3 players will multiply like the one billion used cell phones rotting in your junk drawers.

Digital Aggregators - Commodity
Paid downloads, ad-supported music, personalized streaming, etc. - any company will be able to wrap songs into a business model that uses inexpensive point-of-sale and/or ad-coupling services; supplied by the companies that will compete to supply this low-margin, high-volume service.  It won’t be much different than seeking a company to process credit cards - it’s will be an obtainable, competitively priced commodity.

Recommendation Engines - Commodity?
It’s early days for recommendation engines.  I’m still undecided if one service will outperform another service to the extent whereby they all don’t end up competing on price?  Nevertheless, any company will have the ability to plug and unplug recommendation engines into their consumer offering.

The Song Pool - Commodity
Record labels don’t like hearing this, but the combination of device + digital aggregator + recommendation engine + ANY large pool of songs makes every pool of songs a commodity.  So what if Universal is missing from the pool - take this device (Brand Z) - it’s free.  Press the play button, press the play button again, press it again, press it again, press it again… Sounds pretty good huh?  Brand Z doesn’t need 100% of consumer mindshare to make money - no, they just need an hour or two a week of their target market’s disposable time.

It’s a Great Time To Be an Artist
Artists please take note that I did not say your song will be a commodity - it’s the pool of songs that will be the commodity.  While the eventual reality of this scenario is a problem for some, for artists that make great songs - this is the future that will cause the companies with cash to bid for your songs and services.  Every company that can offer a branded music solution will seek to differentiate itself from every other company offering a competing product.  While I stressed “commodity”, it won’t be a commodity like bananas are, it will be more like cars or television channels; switching will occur within the category less frequently than it does in the produce isle.

Strategies For Artists
Stop worrying about file sharing, forget everything you know about promotion and do nothing but make great songs.  Everything else will sort itself out.   But seriously, read about P-SPINS on my previous post and think about how to improve the odds of enabling your songs to be found within a large pool of songs connected to a recommendation engine.   Translation = great songs placed everywhere and anywhere, paid and unpaid - will increase your odds for success.
 
Strategies For Labels
Stop worrying about file sharing, clone the red square, put it under the blue container and stock your pool with the best songs.  Cut overhead, hire the Google guy and prepare to bid on the best songs and artists.  Start building/looking for products that will generate higher margins and offer a deeper level of engagement for consumers.  Pray that Live Nation isn't doing all this.  
   

This post is a follow up to my last post titled The Wrong Trousers where I described substitution as a far greater challenge to the music industry than sharing/replication. 

The Substitution Dilemma 
The iPod giveth, and the iPod taketh away. The digital music technology that enables your music to be effortlessly substituted for music created by someone else is the same technology that enables someone else’s music to be effortlessly substituted for yours.

Searching For Another Emotive Spike
I’ve had this quote (below) from Karla Starr’s excellent article titled 22,000 Songs And Nothing To Listen To rolling around in my head for months.

“My iPod is like a remote control or a slot machine, flicking through 500 songs, searching for another emotive spike.  I now find myself getting bored, even in the middle of songs, because I can. The paradox of spending so much time changing songs, trying to find one that you like—without giving it time, meanwhile thinking about what else you could be listening to—is that you wind up attached to none of them.”

I can’t find any hard research on behavioral patterns of digital music consumers.  However, when someone gets around to it, I bet you’ll find “emotive spike hunting” right up there with “playlisting” and “shuffling”.  

New Technology - New Behavior Patterns
Within a couple of years one billion people will have tens of thousands of songs at their fingertips; accessible through mobile phones and iPodish devices.  Think about the new behavior patterns:

• Emotive Spike Hunting - just explained.
• Playlisting - building playlists for personal consumption and sharing.
• Shuffling - random generation from an endless list(s) of songs you have control over.
• Button Pushing - Endless fast-forwarding and reversing - because you can.
• Recommending - Machine to human and human-to-human.
• Sharing - effortlessly sharing because it’s finally acceptable.

It’s all Substitution
All these new (easier to do now than ever) behavior patterns add up to what I am going to call the Substitution Challenge.  There are so many great songs in the world, and it’s going to be so easy to skim, skip and linearly or randomly churn through thousands of songs.  It makes me wonder how much of this activity, over any given interval of spare time, will displace what was once spent on passive listening?

Substitution and Economics  
In a competitive market, where products can be easily substituted, prices get pushed down to marginal cost; thus practically eliminating the ability to generate a profit.  MP3 players (and the Internet) are the new radio (my favorite line) and every artist wants to be on the radio.  Where record labels pay to place songs on the radio today, it makes sense that artists will certainly continue to offer songs for free in exchange for placement in the new “radio” tomorrow.  Unfortunately, those that are selling songs have to compete with those that are trying so hard to get on the “radio”.  And, as the first line in this paragraph says - where products can be easily substituted (see behavior patterns above), prices get pushed down to marginal cost; thus practically eliminating the ability to generate a profit.

The Substitution Solution
If you have some time watch this video by Barry Schwartz titled The Paradox of Choice - Why More Is Less.  My solution will be forthcoming.  There are two challenges that have to be dealt with simultaneously; the first challenge is the Lack-of-Margin-Challenge (in a .99 cent sale) and the second challenge is the Substitution Challenge described here.  The solution(s) to these challenges are intertwined.

Start Here - Practically Indisputable Economics:
In a competitive market, where products can be easily COPIED, prices get pushed down to marginal cost; thus practically eliminating the ability to generate a profit; therefore the solution is to create products or features that can't be simply REPLICATED.

And Then The Music Industry Said:
In a competitive market, where products can be easily COPIED, prices get pushed down to marginal cost; thus practically eliminating the ability to generate a profit; therefore the solution is to stop people from REPLICATING our products.

But, Someone Put The Wrong Statement In The Play Book.  It Should Have Read:
In a competitive market, where products can be easily SUBSTITUTED, prices get pushed down to marginal cost; thus practically eliminating the ability to generate a profit; therefore the solution is... (a post covering this is in the works).

Common Sense Says - Rule Out This Option:
In a competitive market, where products can be easily SUBSTITUTED, prices get pushed down to marginal cost; thus practically eliminating the ability to generate a profit; therefore the solution is to stop people from SUBSTITUTING our products.

Substitution Is a Bigger Problem Than Replication
At this point in time, given the adoption of MP3 players (including cell phones), broadband Internet, Internet everywhere, video game consoles and the pending media recommendation tsunami - substitution of one song instead of another is a far bigger challenge than replication; that is, if you don't have the right strategy... 

Continue to the follow up post on substitution. 

 

 

How many ways can you slice the digital music revenue pie?  Most of the companies operating in the digital music ecosystem seem to think the answer is: as many ways as you could slice the old-music-revenue-pie.  That’s the wrong answer.

Artists need every cent of a $.99 cent sale to survive.  Business models that call for extracting percentages from artists are no longer appropriate; slicing the pie is the wrong metaphor, and there is a better way.

The Old Pie Paradigm
Prior to the digital revolution, music revenue was a pie that could be sliced; $15.00 could be carved up using a formula that was negotiated upon percentages, and just about everyone made money if revenues met expectations.  Deals structured around percentages worked when the average unit sale was $15.00; percentages don’t work when the average sale is $.99 cents.  Models that extract percentages are killing the music industry.

New Metaphor = Batteries
The music industry needs a new financial metaphor.  Throw out the pie mentality and think of digital music revenue as batteries.  What happens when a machine calls for 12 volts and you give it 8.4 volts?  It doesn’t work.  You can’t run a machine with 30% less power than it needs. When you run any machine using a deficient power source - it slowly dies from overwork under inadequate power.

What happens when you ship a battery that’s worth $100?  Does UPS charge you a percentage of sales?  No, UPS charges you a shipping fee that has nothing to do with the selling price.  When you sell a battery on the Internet, should you pay a percentage of your sales to your ISP, to Dell or to Microsoft?  No, you pay a flat fee for your Internet service, for your computer and for your software - no matter how many batteries you sell.  

If the companies operating in the digital music space don’t substitute the battery metaphor for the pie metaphor, the machine is going to break down and cease up.

Charge Flat Fees - Make More Money
Size the total potential market.  There are four million artists in the English-speaking world, and that number is growing rapidly.  If artists were charged annual service fees instead of sales percentages, every nimble service provider in the digital music ecosystem would thrive.  Four million artists paying $250 a year, spread out over multiple companies, is a billion-dollar annual business for service providers.  With up-selling and tiered pricing, add another five hundred million to the total potential market.  Add the rest of the world and we are talking about a three to five billion dollar business for providing fee-based services to artists.

Flat fees or no fees are the only things that make sense in the digital music world of extremely low margins.

The Other Argument
Please don’t comment that more music sold = more bandwidth consumed.  The companies operating in the digital music space have generated billions in profits from selling digital music hardware, from selling recommended merchandise, and from selling digital music.  Every one of these companies could justify selling digital music at a loss.  It’s not a matter of redistributing wealth, it’s a matter of common sense.  Slicing the pie is killing the goose that lays the gold records.  Service providers should think about this, fans should think about this, and artists should choose services that charge flat fees instead of those that extract percentages.

 

The days when the A&R person from the record label mysteriously landed at one of your shows, offered you a record deal, drove you away in a limo, and eighteen months later you were on MTV Cribs, are dead over.

If you are hoping to get a record deal someday - forget it!  

Guy Hands, the man running EMI (one of the four major record labels), writes this in a memo to his staff:  “EMI currently has 14,425 artists on its roster…  EMI tried to break 1,300 artists globally in 2007…  Only 3% of the 14,425 artists are currently profitable...  The roster is too large and the number of album releases are too many, to apply proper focus or expertise…  Sadly, between 1,500 and 2,000 jobs will have to go.”

Even sadder, the 3% (artists) that are profitable are probably going to leave EMI when they legally can, and most of the other 97% are legally bound, tied and strapped to EMI for years to come.  

Every record label is cutting back, CD sales are plummeting, the rate of growth of digital music sales is slowing, and the theft of music is at all time highs; even music publishing companies are halting cash advances that cost more than a New York lunch.

Although the consumption of music is exploding, the new business models that are fueling the growth in consumption are built upon low-margin, high-volume models that pay in fractions of pennies instead of multitudes of dollars.

The current realities of the music industry dictate that you will never be offered a record deal.  Stop hunting for a record deal, you are wasting your time.  You should erase the term “record deal” from your head.  In fact, when I get notes from artists about “record deals” I want to pound my keyboard and scream.  

With the exception of contracts that come from a handful of dealmakers, if you know someone that got a record deal yesterday, it’s not a FerrariHummerEscalade deal, it was a contract to tie up the rights of some unlucky artist while he looses money over the next three to five years; because he was too desperate or too uninformed to do something on his own; instead he opted to join the unprofitable 97% that are tied to boat anchors.

You have to learn to be self sufficient, and if you do everything right, there will be dozens, if not hundreds of companies that may offer you an opportunity that is cutting edge, artist friendly and relevant to what’s going on the marketplace, but it won’t be a record deal!  Here’s what you have to look forward to, and what you have to do to attract interest from investors:

Single Song Investments
I wrote a post several months ago that talks about Cool Streams.  Cool Streams are roaring onto the scene.  Everyone from Last FM and Pandora, to Apple and Yahoo and Slacker, to every wireless company on earth will be in the Cool Streams business.  Music streaming that is supported by advertising or paid for by subscriptions is one of the ways songs will generate (micro) income.  Getting your songs into Cool Streams should be your primary goal.

There will be a multitude of companies (notice that I don’t specifically say “record labels”) that will learn how to rapidly process global music activity data.  This information is all of the music data worldwide that can be collected, sorted and analyzed.  This analysis will tell song investors where the great new songs are.  If one of your songs “pops out” on a report, you may be offered a Single Song Investment contract.  This contract will guarantee that your song is promoted to the fans that are building their own personal Cool Streams of music.  Single song investors may also offer you a cash advance in exchange for sharing in your song revenues (including downloading revenue - which I believe will be overtaken by streaming revenue by 2013).

I will go out on a limb and say that within five years, the Song Investment and Song Buying process will turn into an auction whereby song buyers will compete for the best songs.

To qualify for a Single Song Investment contract, to pop out on a report, here’s what you have to do:

First:  You no longer need to worry about filling a CD with a dozen songs.  You need to work with a producer to repeatedly improve your three best songs.  If your best songs cannot compete TODAY with the best songs in your genre - then forget it.  A record label is NOT going to parachute in and help you improve your demos because you have a great voice, twelve songs and wild hair.  If you can’t find a way to dial in a couple of songs with a producer, you will never appear on the radars of song investors.  Find a producer / engineer that has the balls to look you in the eye and tell you which of your songs are great, which songs suck and why.  Anyone telling you that you have some “good material to make an album” is stuck in 2005 (1994).  

Second:  Unleash your songs.  The most fd up thing I witness - in the entire music world - is the artist that had six (or even six hundred) plays on MySpace yesterday, but he doesn’t enable free downloading of his songs.  To pop out on song buying reports, you need to have POSITIVE data.  You will not generate positive data unless you are in the computers and iPods of 250,000 to 300,000 people.  You need to be played and enjoyed (repeatedly) by a shitload of people to generate positive data.  Stop worrying about file sharing.  You will be lottery lucky if everyone decides to share your songs “illegally”; it will be the best thing that ever happened to you.  

Summary: The combination of a great song + rapid file sharing is the only thing that will make you go through the roof quickly.  If your songs suck, nobody will share them.  If your songs can’t be downloaded within one click, you are slowing down the promoters (pirates) that give you the best opportunity to POP OUT ON SONG BUYING REPORTS.

Music Venture Investments
Also loosely referred to as 360-degree deals, a Music Venture Investment is an investment that is just like a venture capital investment in a software startup.  In a Music Venture Investment, the artist pledges all his rights, services and income streams to his own corporation.  A music venture investor (not necessarily a record label) makes an offer to invest capital into the artist’s corporation in consideration for obtaining a percentage of stock in that corporation.  Essentially, the music venture investor and the artist become partners.  The money that goes into the corporation is used to create and promote product.

As noted above, all income streams are pledged to the artist’s corporation, including: music revenue, publishing revenue, streaming (also publishing) revenue, merchandise revenue, advertising revenue and sponsorship revenue.  Once the music venture investor makes an investment, his interests and your interests become aligned; what’s good for you is good for him, and what’s bad for him is bad for you.

Since investing in music is currently (and probably always has been) such a high-risk investment (just look at EMI’s numbers above), artists will have to jump a lot of hurdles and pass a lot of tests to qualify for a music venture investment.  

To qualify for a music venture investment you will need to demonstrate that your PLAN has massive upside potential, and that you have an elaborate (but elegant) plan that will mitigate risk.

Demonstrating that you have massive upside potential these days goes way beyond boasting that you can pack a dozen nightclubs.  Music revenue is dropping and just about everything outside of touring that generates revenue will happen on, or be a consequence of what you do on the Internet.  You will have to show that you can translate the popularity of your music and your Internet activity into just about every revenue stream mentioned above, including advertising and sponsorship revenue.

If you’re saying to yourself: “shit, if I can do all that, what do I need investment capital for?” you’re partially right.  Music venture capital will be available to multiply the effort you are proving out on a small scale.  If you can demonstrate that you are running on all eight cylinders, that your team and management is smart enough to pull in revenue from all sources, and that you only need to put gas in the tank to go global, then you may qualify for a music venture investment - to scale the measurable effort you are already engaged in.

Finally, you will have to show that you can mitigate risk.  This differs from demonstrating upside potential in this way: big upside swings from sudden exposure, from massive YouTube numbers, from overnight download explosions, from MySpace popularity, or from five minutes of television fame don’t always translate into cash.  You will have to show that you have a three-year, levelheaded plan to translate fickle popularity into a profitable business.  The best way to do this is by first surrounding yourself with the right team, and second, by demonstrating that you know how to be entertaining on the Internet; which once again, involves creating an elaborate plan.  

Conclusion
Record deals are done and/or pointless.  Single Song Investments and Music Venture Investments are the way of the future.  A small single song investment may lead to a larger music venture investment; either way, you have to stop looking for a “deal” and start setting the stage to attract an investment.

MODERN AUTO RECYCLING - A NEW MODEL FOR RECORD LABELS
This is not a funny joke.  I have experience working in both industries and the problem solving skills needed to succeed in one industry are remarkably similar to the problem solving skills needed to thrive in the other.

In this post, I am going to tell you why modern auto recycling is a great model for the record labels of the future.

This post will help artists develop strategies they can use to improve their odds as the music industry evolves to become as sophisticated as the global auto recycling industry.

The Auto Recycling Industry
Consider that every single car on the road will ultimately be recycled; that the automotive recycling industry generates over $30,000,000,000 (billion) in revenue annually; and that auto recycling is one of the most complex, competitive, data intensive and demanding industries on earth, and this is where the music industry is headed.   

Roughly Speaking, The Auto Recycling And The Music Industry Are Numerically Identical...

• There are as many record labels as there are auto recyclers (modern junk yards).
• There are several dominant auto recycling groups, but the "indie" recyclers also thrive.
• There are as many automobiles wrecked each year as there are artists performing or recording each year.
• There are as many songs per artist as there are salable parts per wrecked car.
• There are as many automotive manufactures as there are major genres of music.

To begin to absorb the analogy (for the future) hold this in your head: (recycler = label) (vehicle/car = artist) (song = part).

The Complexity of Auto Recycling
Auto recyclers acquire whole wrecked cars for their constituent parts at highly competitive auctions.  The cars come from insurance companies that have inherited the cars from consumers after a car is appraised as unfixable (after an accident for example).

When an auto recycler buys a vehicle at auction, the recycler has to rapidly process a complex matrix of information, as every car has numerous parts, and EACH AND EVERY PART has numerous questions that have to be answered before a bid price can be tendered:

• Damage question - Is the part damaged or not?
• Interchange question - Will this part fit on other similar cars?
• Mileage question - How old or used is this part?
• Supply question - Is this same part already in stock and how many do we have?
• Supply question - How many miles are on the same parts we currently have?
• Competitive question - How many of the same part do my competitors stock?
• Competitive question - What are my competitor's prices on the same part?
• Demand question - How often do calls come in for this same part?
• Demand question - How many days did it take to sell the last one of this same part?
• Pricing question - How many times have I lost a sale trying to sell this same part?
• Pricing question - What is the average selling price of this same part?
• Handling question - How expensive is it to handle this same part?
• Capital question - How long does it take to recover my investment in this same part?
• Capital question - How much is capital costing me right now?

Remember This Paragraph
Using sophisticated (and FULLY AUTOMATED) salvage buying programs, the answers to these questions are numerically tallied and scored against every other vehicle that the recycler could possibly buy at the auction, as an investment in one vehicle usually means forgoing an investment in an alternative vehicle that carries a different matrix of answers to the questions above.

A typical large auto recycler has to make this type of inventory investment analysis decision hundreds of thousands of times per year.  Large auto recyclers carry tens of millions of dollars worth of inventory and the inventory investment decisions are absolutely critical to the success of a recycler.

Remember This Paragraph
Auto recycling is a data driven business.  The acquisition of cars for their parts is driven by data.  No amount of promotion or marketing by the entity disposing of the car will change the data driven decision that the recycler must make to be profitable.



The Music Industry Will Become a Data Driven Business
The current music industry is a business driven by marketing and promotion.  Going forward, any company that puts "record label" on their business card will have to be a business that is skilled at RAPIDLY acquiring, managing, analyzing, presenting and intelligently acting upon - DATA.

Why Data Trumps Marketing?
You can no longer put lipstick on a pig, and it's becoming impossible to sugarcoat shit.  There you go; it's becoming more and more difficult to promote anything that can't positively populate the data matrix that equates to great music; as collectively determined by a niche of humans coupled to the Internet.  Moreover, the margins are going to remain so thin, AND THE COMPETITION FOR THE GOOD STUFF WILL BECOME SO RAPID AND INTENSE, that there will be no room to make mistakes when acquiring "inventory" to nurture, invest in and to SMARTLY promote.

The Complexity of The Music Industry - The Data Matrix
The cool-looking, pointy ball in the diagram above is a Matchkey from a Boston-based company called Matchmine.  A Matchkey is a mathematical representation (shown graphically here) of your personal interests, tastes and preferences in movies, music, video and blogs.  In reality, everyone has one of these things conceptually growing and evolving in their head.  

I am not sure how Matchmine represents or calculates music, but here's how Hit Song Science does it:

"Our analysis application is able to "listen" to any CD and isolate patterns in many musical events, some of which are melody, harmony, tempo, pitch, octave, beat, rhythm, fullness of sound, noise, brilliance, and chord progression. This is a process called Spectral Deconvolution. Each song is then mapped onto a grid we call the music universe and is positioned according to its mathematical characteristics. Each song is represented by a dot on the universe and the songs on one end of the universe are vastly different from songs on the other end of the universe. Songs with mathematical similarities are positioned very close to one another."

Like Hit Song Science's application, your subconscious brain also does the Spectral Deconvolution thing to form a Music Matchkey in your brain.  Every time you interact with music using your mental Matchkey - a data event occurs:

• You listen to a song and a computer ups the play-count by one.
• You buy a song and a computer ups the buy-count by one.
• You share a song and a computer ups the share-count by one.
• You stream a song and a computer ups the stream-count by one.
• You comment on a song and a computer ups the comment-count by one.
• You rate a song and a computer records your rating.

Here are a few "negative" data events that are not captured by systems - but should be:

• You listen to a song, but you don't buy it.
• You skip a song repeatedly because you are tired of it.
• You repeatedly hit the next or seek button because you can't find more of what you like.
• You negatively commented on a song

A Song is a Keyhole
Think about a song as a keyhole.  If the pointy ball above (remember, everyone has one) fits into your keyhole then a data event will occur, and if it does not fit into your keyhole, a negative data event will occur.  Someone's matchkey fits when melody, harmony, tempo, pitch, octave, beat, rhythm, fullness of sound, noise, brilliance, lyrics and chord progression match your keyhole.  (Please - no keyhole jokes on the comments.)

This Is What I Told You So Far:

• Auto recyclers purchase vehicles at auction for their constituent parts.
• Every part has a data matrix that must be analyzed prior to bidding.
• The amount of data that a recycler processes and analyzes is huge.
• If a recycler's analysis is not driven by his data - he's fucked.
• In music - it's becoming impossible to put lipstick on a pig.
• Margins in the music industry are thin and getting thinner.
• Competition for the best artists/songs is going to heat up.
• Every human has a mental Matchkey.
• Using your Matchkey generates data events.
• Every song is like a keyhole.

Labels Need To Operate Like Auto Recyclers
I estimate that there are four million artists in the English-speaking world creating ten million new songs per year; which are being vetted and adopted by 500,000,000 music fans.  That's a lot of parts (songs) sitting on a lot of vehicles (artists) that need to be analyzed by numerous recyclers (labels) that have customers (fans) that are looking for those exact parts (songs).

This is what the record labels of the future will have to do to thrive:

• Obtain the bulk data that is generated by the matchkey-driven events described above.
• Use the data to generate new "master" matchkeys that represent large pools of humans.
• Insert these "master" matchkeys into as many keyholes (songs) as possible.
• Sign artists (or do song deals) with artists that have the highest frequency of matching master matchkeys to keyholes.
• Laser promote the matching keyholes to the humans from the pool that have the exact or similar matchkeys.
• Do this repeatedly, rapidly and with as little friction as possible.
• Start learning how to do it now because your competitors will.
• Get ready for scenarios where competition to sign the best (songs and/or artists) comes down to an auction.
• When this day comes - re-review the strategies auto recyclers use.

Final Note To Artists

Remember, the music industry is going to be driven by data.  Your data is not going to pop out on someone's screen unless it's exceptional.  If you take anything at all away from this post it should be this final paragraph:

If your songs do not cause data events to occur (described above) your career will die from obscurity.  You need to make sure data events are happening to your songs.  This is the primary reason I advise unsprung artists to make their MP3s available for free and paid download everywhere.  You may miss out on a few thousand dollars worth of MP3 sales, but you should consider the forgone sales as an investment in your data and your ability to:

• To be found by record labels.
• To be found by programming directors.
• To be found by fans worldwide.
• To mushroom above and out of your geographic area.