The streaming music business is dead, long live the streaming music business

apple_lala Apple’s acquisition of Lala yesterday is the coda to an interesting chapter in the evolution of the music industry. It comes on the heels of MySpace’s acquisitions of iLike and iMeem (both at similarly distressed prices to the reported ~50% discount in the Lala deal) as well as the launch of (nearly) inline streaming music in Google’s search results. Talk about mixed messages: the business of on-demand streaming music (vs. streaming radio like Pandora) is broadly being conceded as a failure just as the user experience is finally hitting the mainstream.

In the last 24hrs, I’ve read a lot of analysis across the spectrum and heard the thoughts of friends in various segments of the music industry. Here are some of the big issues that are front of my mind.

Whither the MP3 of streaming music?

Most of the people I respect in online music have been opining for on-demand streaming music for years. So, their first reaction has echoed that of my friend Lucas: music in the cloud will now be a reality. But *how* it will become a reality matters too, and I think that’s been lost a bit in the discussion so far.

In the download world, an open format (MP3) pre-dated Apple’s entry. So, they had no choice but to support it in order to make their software and devices backwards compatible. In fact, it’s easy to forget today that the market for iTunes and the iPod was largely built around satisfying the needs of consumers of illegally acquired music (the iTunes Music Store was actually launched over 2 years after iTunes debuted). If not for that pre-existing market condition, I don’t think it’s hard to believe the iPod would only play AAC music files (Apple’s proprietary format). Remember that no one could compete with the iTunes Music Store as a legitimate storefront for online music until less than two years ago, when the labels agreed to let Amazon and others sell in MP3 format so that customers could play the songs sold by retailers other than Apple on iPods. (This in itself was an interesting saga with Jobs publicly justifying why Apple would never support someone else’s proprietary format on their software/devices and why they would never license Apple’s DRM to others. In the end, the labels’ fear of Apple’s growing control of the online music value chain was greater than their fear of piracy and they called Jobs’s bluff by actually licensing MP3 sales.)

The relevance here is that there is no MP3 equivalent for streaming music — no pre-existing open standard that consumers will require Apple to support before they buy a wifi-enabled iPod (aka iPod Touch). Just like there is no (legitimate) way to play films or tv shows not downloaded from the iTunes Store on your Apple TV, there will be no way to consume on-demand streaming music from other sources in the native player on your iPod. You will of course continue to be able to install separate third-party applications, like Pandora or Spotify, to manage and play streaming music you acquire through those services. But, that silo will continue to be incompatible with iTunes and the rest of your music library while the native player will offer you an integrated consumption experience across downloaded and streaming music. Maybe this will still be good enough for the small number of power-users who care enough to want an alternative to the Apple offering (like those of us today who install the eMusic or Amazon download manager to have a somewhat equivalent purchase alternative to the iTunes Music Store).

However the segment for whom I think the lack of an open streaming music standard is potentially most harmful is the actual artists and the growing industry of direct-to-fan enablers, including my good friends at Topspin. Direct-to-fan sales are better for the artist because they get to own the customer relationship with the people who are *their* fans to begin with (see my boy Ian explaining to Wired how important this is) and they can have more control of the offering and better margins by cutting out middle-men like Apple. Today, I can buy an album directly from Topspin artists like Get Busy Committee or Fitz & The Tantrums (two of my current faves) in MP3 format and play it in iTunes and on my iPod. How exactly are they going to sell me streaming music outside of iTunes (or a 3rd-party service)? There are products like MobileRoadie, which artists can use to create their own branded iPhone/iPod app. But, I don’t foresee consumers being willing to switch apps every time they want to hear a new artist (and forget about a streaming playlist with multiple artists).

Licenses, schmicenses!

Several commentators on the Lala deal have noted that their licenses with the labels expire in the case of an acquisition. And I hear from insiders that Apple has already had requests for streaming licenses denied by at least some labels. Here’s why neither of those things matter.

Apple is going to build a kick-ass streaming experience natively integrated into their service/software/device stack of the iTunes Music Store, iTunes, and the iPod. They are going to get the thousands of independent labels, aggregators like TuneCore who represent individual artists, and at least one or two major labels (my bet is EMI will be first) to give them streaming licenses on a critical mass of music. Then, they are going to use the iTunes Music Store to promote the shit out of both downloads and streaming (most likely bundled) from the artists for whom they have streaming licenses while at the same time freezing out promotions for any hold-outs.

This is a non-issue IMHO and every song you can buy as a download from the iTunes Music Store today will be available for streaming within a year of launch (just ask NBC how well playing chicken with Apple works).

Sustaining innovation doesn’t work.

This post is already way longer than I intended, so I’ll leave this point as more of a footnote. On-demand streaming music is the future. Everyone I respect believes it, Apple believes it, it is the logical conclusion of the path the music consumer experience has been on since Napster. And yet it is a business widely viewed as “toxic” by investors, several of whom in recent months have demonstrated they think so little of its future potential that they are willing to take steep losses on their investments to get out. What gives?

Not only were these businesses endorsed by the major labels, both iMeem and Lala actually had labels as investors (as does Spotify). The reason that on-demand streaming music is a great product but shitty business is because the license fees demanded by the labels make it impossible to make money with any kind of offering that consumers will think is reasonable. It’s somewhat counter-intuitive that a vendor who is an investor wouldn’t be willing to adjust their pricing in order to preserve the value of their investment. But Warner Records, in particular, made it clear that are happy to spend tens of millions of dollars co-opting companies they see as potential threats and running them out of business in order to prevent hundreds of millions of dollars in (perceived) cannibalization.

This is Clayton Christensen 101:

By only pursuing ‘sustaining innovations’ that perpetuate what has historically helped them succeed, companies unwittingly open the door to ‘disruptive innovations’.

In other words, by trying to take an innovation and use it only to perpetuate and/or protect legacy business models, incumbents give new entrants the opportunity to do things the way the market actually wants them to be done regardless of how they have been done in the past. By trying to force LaLa from being a potentially disruptive innovation into a sustaining innovation, Warner Music and the other major labels unintentionally drove them into the arms of Apple, still the biggest threat to the legacy model the labels are trying to preserve. (Studios and networks trying to “de-fang” Hulu, take note.)

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Delicious Bookmarks for September 24th through March 8th

These are my Delicious links for September 24th through March 8th:

Delicious Bookmarks for May 19th through May 23rd

These are my Delicious links for May 19th through May 23rd:

Delicious Bookmarks for February 19th through February 25th

These are my Delicious links for February 19th through February 25th:

  • HTML URL Encoding Reference – Handy table of the URL encoded values for ASCII characters.
  • A foot and a half: Finally, A Use for Twitter – Greatest Twitter story evar! I actually saw these tweets from @the_real_shaq while this was happening, now we get the backstory from the guys for whom they were intended. I <3 Shaq!
  • The Crisis of Credit Visualized – Astute, approachable, and just plain pretty animated explanation of our current economic situation. Oh, and did I mention INCREDIBLY FRIGHTENING!? Once you realize how simple, and thus fundamental, the underlying problems are, it becomes very difficult to believe in a quick or easy fix. Now, back to stuffing my remaining cash into my mattress…
  • How Freshbooks Built an Army of Passionate Evangelists on Twitter. How are YOU doing so? | Blog of Mr. Tweet – A great story from a company passionate about serving customers and building relationships with them (CRB = customer relationship building) and how they extended the reach of that passion through Twitter. Worth the read.
  • The Missing Google Analytics Manual | FutureNow’s GrokDotCom / Marketing Optimization Blog – A comprehensive collection of the most helpful links and videos to teach you how to get the most out of Google Analytics.
  • Coding Horror: Commandos, Infantry, and Police – Quotation of a legendary analogy from Robert X. Cringely’s “Accidental Empires” published in 1993. Cringely characterizes the successive waves of employees who staff a company through its lifecycle from startup to industry leader to incumbent as commandos, infrantry, and military police, respectively.”The [commandos’] job is to do lots of damage with surprise and teamwork, establishing a beachhead before the enemy is even aware that they exist. Ideally, they do this by building the prototype of a product that is so creative, so exactly correct for its purpose that by its very existence it leads to the destruction of other products. They make creativity a destructive act.”
  • Add Community to your Site with Triggit! – An interesting idea of using Twitter as a platform to create user communities for your site (a la MyBlogLog). The differentiator is supposed to be that the community discussions happen publicly on Twitter, thus driving more traffic to your site.
  • GroupTweet – Cool simple tool to create what are essentially Twitter group mailing lists. You set up a Twitter account for your group, register it with GroupTweet, and then it’s just a bot that RTs any DMs sent to the group account. In order for a group member to be able to post to the whole group, they need to be followed by the group account. And you can control who reads the group messages by protecting the group account’s updates. Simple, elegant, effective.
  • Analytics Talk » Blog Archive » Tracking Sub Domains with Google Analytics – Best article I could find on how to track subdomains properly in Google Analytics. Surprised they don’t do it right out of the box. But, these easy to follow instructions and screenshots will get you sorted quickly.

Community “Products”

Rant Alert!

I just finished the first of my three planned white papers last night, and decided to let it percolate a bit before moving on to the next two. It is currently a six-page screed on microeconomic theory in the digital age, and I will likely post some portions of it here soon. In the meantime, I thought I would catch up on some blogosphere surfing and MyWeb bookmarking (come on Yahoo! marketing, where’s the verb for that? MyWebbing? Gong!). And after reading through a couple of posts linked to from Kareem’s highly-underrated blog, something just snapped.

I work at Yahoo!. We are the leading community on the internet both in size and breadth of tools. And, we have some brilliant people who really get community (shouts out to: Ian, Michael, Russell, Randy, Stewart, Caterina, Danah, and Cameron, among others). But we also have some people who seriously don’t get it. They see community as a means to an end, not the end in itself. They are jealous of MySpace and Facebook and whatever the next big fad will be, because of their rapid audience growth.

Audience is what matters to these people because audience is what you sell in conventional advertising [oh, wtf…I’ll succumb to the 1.0/2.0 cliché – I guess it’s only a cliché because it works], let’s call it advertising 1.0. As Google has taught the world, advertising 2.0 is about selling intent. In the pre-digital age, audience put through a number of filters (like content association, demographic information, etc) was used as a proxy for intent. Advertisers weren’t really happy with this approximation, because they knew it was an inefficient means of buying what they really wanted – access to consumers with a certain intent. But, that was the best that conventional media could do, so advertisers settled. As John Wanamaker said approximately a hundred years ago, “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.” I won’t go further into advertising 2.0 other than to say that it is coming faster and faster. What makes advertising 2.0 relevant to this particular rant is the fact that it favors monetization of communities, not just audiences.

Getting back to the people who don’t get the “it” of communities; the way you can tell these people is that they talk about “user-generated content” way too much – they treat it as some kind of panacea that will fix the problems inherent with trying to port conventional media business models to the internet. The worst of these offenders use the term so much that they have taken to saving time by abbreviating it…from this day forth, I vow to walk out of any meeting in which someone actually uses the term “UGC” in anything but an ironic context. (Ok, I probably won’t really do that if there are executives present…but, that person will be put on my moron list).

Derek Powazek puts it much more eloquently than I ever could:

User: One who uses. Like, you know, a junkie.
Generated: Like a generator, engine. Like, you know, a robot.
Content: Something that fills a box. Like, you know, packing peanuts.

So what’s user-generated content? Junkies robotically filling boxes with packing peanuts. Lovely.

Calling the beautiful, amazing, brilliant things people create online “user-generated content” is like sliding up to your lady, putting your arm around her and whispering, “Hey baby, let’s have intercourse.”

Amen brother! Derek goes on to suggest the term “Authentic Media,” which I like a lot and hope gets memeified. Authentic media definitely jibes a lot more with all the web and media 2.0 theory around which people are beginning to coalesce.

Anyway, back to the rant at hand. The reason I ironically titled the post “Community ‘Products'” (yes, my over use of quotation marks is often meant to denote irony), is that I don’t believe big companies can succeed at community products. Big companies, like Yahoo!, Google, Microsoft, and even AOL, contribute most to the community value chain by building community platforms, on which the community builds its own products. Isn’t that the real underlying goal of online communities, to incite scalable self-sustaining user-behavior? If you define the product as what the end-user actually consumes, the value of any community product to a given individual user tends to be proportional to its focus on his interests. On social networking sites, like Friendster, Yahoo! 360, MySpace, Facebook, etc, what the end user consumes is a combination of content produced by the host, the community, and himself. The more that product management rests in the hands of that user, the more focused the product will be on that user’s

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