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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The Ringers Rocking LA

The Ringers are an LA band fronted by Joe Hursley (aka White Gold). I first caught them opening for Fool’s Gold at one of Little Radio‘s Summercamps in August (see 3rd video below) and they stole the show. The music has started to grow on me, but the performance is pure LA punk and cannot be ignored. If you like to rock, don’t miss a chance to see them live.

“Beaver Fever” and “Keepin’ Your Head Up” at The Viper Room on October 16, 2009 (Joe takes my camera on stage about 2min in):

“Scene You See” at The Viper Room on October 16, 2009:

“Scene You See” at Little Radio Summercamp on August 30, 2009:

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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 September 2nd

These are my Delicious links for September 2nd:

Delicious Bookmarks for July 9th

These are my Delicious links for July 9th:

  • Universal/TuneCore deal opens major doors for indie artists – Ars Technica – By offering their marketing services to independent musicians on a fee basis with no transfer of rights required, Universal Music Group is basically turning into a music marketing agency. The decline of physical distribution (for which labels were gate-keepers) and the ascendency of relatively open digital channels coupled with the elimination of barriers to entry in production costs means that mainstream marketing is really the only differentiated competency the labels have left. Universal's recognition of that and this play to those strengths is a smart move. It will be interesting to see if other labels (and ultimately studios, who are subject to the same technological market shifts) will follow suit.

Delicious Bookmarks for June 12th through June 15th

These are my Delicious links for June 12th through June 15th:

  • Topspin » Twitter Emerges as a Viable Direct Marketing Channel – An examination of how Twitter is helping artists using Topspin go direct-to-fan. Using awe.sm, the Topspin + SAM crew were able to establish that 22% of traffic on the first day of Jimmy Eat World's latest album release came from Twitter and that accounted for 20% of the sales. The emergence of Twitter as a meaningful traffic driver has been complicated by the difficulty in tracking its impact. But with awe.sm, publishers like Topspin artists are now able to really see the impact that social media channels like Twitter are having.
  • For TechCrunch, Twitter = Traffic (A Statistical Breakdown) – TechCrunch discusses the breakdown of their own traffic by source and cite their use of awe.sm in helping to track traffic from Twitter, which is now responsible for 9.7% of their overall traffic.
  • Can Su.pr Short Links Save StumbleUpon? (250 Private Beta Invites) – Another mention of awe.sm by TechCrunch in their story about StumbleUpon's new URL shortener, su.pr.
  • BBC NEWS | Entertainment | Bands ‘better because of piracy’ – Interesting take on the impact file sharing has had on the development of music artists in the 'post-Napster era'. One could argue that increased exposure to a broader spectrum of music during artists' formative development may diminish the need for conventional A&R. One more reason the labels' legacy cost structure may be increasingly unnecessary.

Delicious Bookmarks for May 28th through May 31st

These are my Delicious links for May 28th through May 31st:

  • Edward Sharpe & the Magnetic Zeros: A folk-rock revival with L.A. roots | Pop & Hiss | Los Angeles Times – LA Times write-up on one of my new favorite bands, Edward Sharpe and the Magnetic Zeros. They call them 'folk-rock', I think they're more 'folk-funk'. But we both agree their live show is not to be missed!
  • Why Advertising Is Failing On The Internet – The title of this piece is a bit of a red herring, and some of the arguments may be somewhat inflammatory. But I agree with the underlying premise, which is that the dynamics of the Internet are exposing the inherent flaws in conventional interruption marketing aka advertising. As a result, the author, a Wharton professor, argues online advertising will not be able to provide a broad-based revenue model to support the majority of web companies as commonly expected. He should have stopped there, but then goes on to examine other potential revenue models in a manner that detracts from his core point IMHO.

Mas Edward Sharpe

First of all, my life does not suck. Last night I was hanging at TechStars (and having my company mistaken for one of theirs ๐Ÿ˜‰ ), this afternoon I was having lunch with the Gnip team in beautiful Boulder, and tonight I was filming a concert by one of my favorite new bands.

I’ve now seen Edward Sharpe and the Magnetic Zeros 5 times in the month since Ty and I first saw them at La Cita. And thanks to Dave at LittleRadio, I was invited to be part of the crew that filmed their three show residency at the Regent which ended tonight. That footage is in the capable hands of the Artificial Army crew, but here’s some stuff I shot at last week’s show with my G7. I’m primarily putting this up for Ryan, who has been at every one of the 5 shows I’ve attended ๐Ÿ™‚

Edward Sharpe Rawks My F*%$ing Socks!

My new favorite live band hands-down is Edward Sharpe and the Magnetic Zeros. I saw them twice in 5 days and would go see them again tonight (and tomorrow night, and the night after that) if I could. They’re apparently starting a ‘residency’ at the Regent Theater in downtown LA on April 30, and I’ve already asked Dave at LittleRadio if my cousin Ben and I can shoot a proper concert video one of the nights.

In the meantime, here’s some footage I shot of their show at The Echo on Monday night (YouTube HD doesn’t quite do the 1080p footage from Kelly’s Canon 5D Mark II, aka my dream camera, justice):

And here are the photos:

Kelly (and her camera) had to leave a couple of songs into the Edward Sharpe set (I had told her they went on at 10pm and they didn’t end up starting until 12:30am). So, what you see here is just them getting started — to give you a sense of where it ended up, Alex, the lead singer (formerly of IMA Robot), spent a good deal of the show shirtless in the audience. I’m actually kinda glad I didn’t have the option of documenting the rest of their set, because I got to go crazy with the rest of the crowd instead. But I’d gladly give up a night of rocking out in order to have the opportunity to properly document this incredible spectacle. Dave, call me! ๐Ÿ˜‰

P.S. I first discovered Edward Sharpe and the Magnetic Zeros through the most excellent NPR All Songs Considered Live Concerts podcast (originally via Ian, of course).

Update: Here’s some video of the opener, Fool’s Gold:

I have 1 more Edward Sharpe video, but it’s just barely over YouTube’s 1GB upload cap. So, I guess I’m gonna keep it to myself for now.

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Delicious Bookmarks for March 31st through April 2nd

These are my Delicious links for March 31st through April 2nd:

  • Social Media ROI – Solid presentation on how to approach social media marketing from a quantitative perspective. Most interesting are the examples of different types of social media campaigns to drive different business goals. There is no one-size-fits all social media marketing campaign.
  • The Lab – A web-based Sass -> CSS compiler. Sass is basically a shorthand way to write stylesheets for your website. It allows for nesting with two spaces. Also, it can do some basic math with constants. No more going around your CSS files updating the size or color of something.
  • Newspapers and Thinking the Unthinkable « Clay Shirky – "When reality is labeled unthinkable, it creates a kind of sickness in an industry. Leadership becomes faith-based, while employees who have the temerity to suggest that what seems to be happening is in fact happening are herded into Innovation Departments, where they can be ignored en masse…With the old economics destroyed, organizational forms perfected for industrial production have to be replaced with structures optimized for digital data. It makes increasingly less sense even to talk about a publishing industry, because the core problem publishing solves — the incredible difficulty, complexity, and expense of making something available to the public — has stopped being a problem."
  • Changing Nature of Virality: Facebook and Twitter – A consolidation of interesting stats from Hitwise on percentages of traffic to entertainment sites driven by Twitter and Facebook. For example, perezhilton.com's biggest week ever was driven primarily by traffic from Facebook (8.70%) over Google (7.62%). It is clear that for certain types of sites, particularly entertainment-oriented, 'viral' discovery is an increasingly important discovery mechanism being fueled by the growth of social media sites like Facebook and Twitter.
  • The Rising Power Of Social Media As A Traffic Driver – Fred Wilson on the impact he's seeing to traffic on his own blog from Twitter and Facebook: "Links are the currency of the web and traffic is money so these are important trends for our portfolio companies and for everyone who does business on the web."
  • Tony Hsieh: Zappos In The Business of Selling “Happiness” – This was a really great presentation that i was lucky enough to attend in person. Some of my favorite quotes were "Hire slowly, fire quicky", "When all your employees live the brand, you don't need to rely on marketing and PR to handle all your communications", and "We decided to take all the money we would have put into marketing and put it into making the customer experience better." While I do feel that Zappos sounds more like a management/corporate culture experiment than a business, I still think there are a ton of great lessons that less altruistic businesses can apply. My primary takeaway was probably on Slide 17 of the presentation, the idea of "Committable Core Values": having a company mission that is actionable for every employee.
  • Economy Tech trends in 2009 by Mary Meeker (Morgan Stanley) – An omnibus presentation on the current economic climate and the high-level trends that will drive the technology industry in the near future. The first ~40 slides contain some really interesting data and charts on the larger macroeconomic situation and are worth looking at even for people not interested in the technology industry.
  • The Memefication of Your Band – A more pragmatic take on the entertainment-as-a-service concept focused on how musical artists can more effectively promote themselves. "Your band must invade the Perception Economy. Your Band must no longer be a band. Your band must be a meme. A Meme Which Generates subMemes. These memes must be compelling, intriguing, and interesting enough for people to ‘follow’ or at least think that you are ‘worth following.’"
  • High-tech Market Research and Consulting – Quantitative application of the Lanchester model, a WWII military strategy framework, to business in which market share is the proxy for number of troops. Interesting theoretical construct for understanding how players with differing market share should seek to compete in order to maximize their competitive advantage — i.e. smaller players should seek to segment a larger market into smaller pieces in which they can compete closer to market share parity while larger players should seek to compete in the broadest market possible to maximize the value of their dominance.
  • WordPress › WP Greet Box « WordPress Plugins – A very useful WordPress plugin that shows visitors to your blog a unique greeting message depending on the page they are visiting from. E.g. Ask users coming from Digg.com to Digg your post, etc.
  • Chat Catcher – An interesting service to help you track mentions of your blog posts across Twitter, FriendFeed and identi.ca and aggregate them back to your blog. The coolest thing is probably the 'Scriptless' version which can run on WordPress.com and other hosted blogs.
  • Viral Arts: Making you money… Virally – A potentially interesting service that matches YouTube video producers with brands willing to pay them for product placement.
  • The changing face of usability testing: Optimal Workshop releases free service called Treejack » VentureBeat – Basic DIY usability testing tools that allow you to test designs in the form of online surveys. Simple, elegant, and IMHO 80/20 effective (vs full-service usability testing software).
  • Why Bit.ly Will Upstage Digg – Definitely what I would be working on if I was in charge of bit.ly. While analytics were the initial draw for sharers to use bit.ly, recognition as an influencer could be a differentiator now that others like cli.gs and tr.im are commoditizing analytics for shortened URLs. I totally agree with Om that a bit.ly powered Digg (Bigg?) would produce much more interesting and representative results than Digg, which has come to be dominated by an idiosyncratic user community. Also, I think it would be foolish of Bigg to be reserved to bit.ly URLs. Why wouldn't they want share/click data from all the shortened URLs they can get it for?
  • Topspin » “Josh Freese. What are you doin’? This summer.” – Brilliant (and hilarious) showcase of how the internet can make even the way you sell your art part of the experience. Definitely worth the read! My favorite is the $10k package, which includes: "Josh takes you and a guest to Club 33 (the super-duper exclusive and private restaurant at Disneyland located above Pirates of the Caribbean) and then hit a couple rides afterward (preferably the Tiki Room, the Haunted Mansion and Tower of Terror) / At the end of the day at Disneyland, drive away in Josh’s Volvo station wagon. It’s all yours … take it. Just drop him off on your way home, though, please."
  • Relationship Symmetry in Social Networks: Why Facebook will go Fully Asymmetric – Bokardo – A very interesting analysis of the difference between the asymmetric relationship model of Twitter (arguably pioneered by Flickr) and the mostly symmetric relationship model of Facebook today and why the reality of attention inequality is a barrier to Facebook's growth as long as they stick to symmetric relationships.