Cordelia

Music and Content

Speech by Adam Singer to KPMG

MP3 music files started to proliferate in 1995 and the first player that you could put in your pocket was the RIO, which shipped out in1998. It held a handful of songs, and it was obvious that, after Moore’s Law, digital compression, abundant cheap bandwidth, this was the fourth horseman of the digital apocalypse, in that it was the harbinger of cheap universal storage.

You could see that given time, sufficient capacity, and access to enough bandwidth, this was the end of physical ownership of content, the end of HMV, Virgin Megastores, and the end of the industrial strength margins, and the corporate affluence that had been created by the CD.

Mass bandwidth harnessed to mass storage hints at the end of the DVD, and TV channels as we currently know them, and traditional television advertising. These endings are not going to happen overnight, but the path like the yellow brick road is suddenly there in front of you.

The question is, can your organisation cope with the fundamental shift from streamed content to on-demand content? When ever there is major shift in the technology that underpins current business models, very few organisations can make the transition. Only one or two entities represented here tonight will survive in this new future. What kills an organisation is never its intelligence, its skills, its aggressiveness, its culture, but can those skills that worked in one era work in another?

So let’s start with a case study.

The music industry is often first into new storage technology, the piano roll, the 78 disc, the LP, and on into the CD. Each new iteration of storage brought wealth, and the CD created wealth for the music industry beyond its wildest vinyl dreams.

With wealth comes comfort and a reluctance to face change, and so it has been interesting over the last 10 years to watch the music industry struggle with the advent of the weightless economy, as where music goes the rest of the media sector will follow, and why will TV or Movies handle these problems better than them?

The music industries first reaction to MP3 was ‘It won’t work.’ As in, who wants to listen to music on a computer, the sound quality is poor, the Rio player is too expensive, holds too few tracks, it takes too long to download, will never catch on as there are no sleeve notes, and most of all as the player is in black so will only be bought by Goth techno nerds. Thus ignoring Moore’s law which says all these problems get solved the next time the number of transistors on a chip doubles and that happens every two years. Every single piece of electronic technology that you know and the resultant business models they support has been built on integrated chips containing up to 250,000 transistors. Two years ago the 500,000 transistor chip emerged and is now coming on to the market, and this year we will see the first billion transistor chip.

So it dawns on the music industry that MP3s might work but only for geeks. That’s OK, it’s a well known fact that only 16.37 per cent of babies become geeks. So phew, no need to worry. Let’s build another CD pressing plant in Shanghai.

Then it’s realised that MP3 works for more than geeks, but the revenues are too far small to bother about. Too small to bother is a real killer phrase in a world driven by technological exponential growth. As music executives they might have remembered the words of Bob Marley’s Sheriff John Brown, ‘kill it before it grows”.

At this point, about 5 years into MP3s, a highly dangerous concept starts to get aboard that music can be had for free, this is tremendously damaging for music. Downloading works for lots of people, especially for teenagers. But the balance sheet that drove the share price that drove the bonuses was crystal clear; that for the foreseeable future selling shiny discs at Wal-Mart would continue to be a helluva lot more important than the Internet.

The music industry has smart people whose heads were not in the sand. This is an almost impossible dilemma, solve the internet and lose today’s huge physical retail revenues, or don’t solve the Internet and have ever increasing copyright theft that destroys long term values. In other words, you had two conflicting irresolvable business models.

So the music industry ignores downloaders, and in lieu of a legal supply downloaders become copyright thieves for wanting something the recording industry wants them to want on any other platform except the internet. This is serious, suddenly the internet is trashing the value of music - why buy when you can steal for free? This is new territory, nobody has been here before, there is a slight whiff of understandable fear as the music industry responds with “hang the teenage thieves”.

If you suggest to the industry that the problem rests in the economics, their failure to supply, and the risk reward ratios, i.e. the price of CDs made the risk reward of internet stealing worthwhile, you are accused of being anti-copyright. Suddenly you are in the music equivalent of being on the Falls road, in the middle of a working class war, where one group is trying to maintain its traditional privileged status in the face of a new group who want them to share the status. Dialogue is hard when it’s about giving up the privileged now for an uncertain benefit in the future and rational debate is replaced by the semantics of semtex.

So the music industry then worries that the creative economy is doomed and asks the government for a sympathetic support, any kind of support, especially more rope, and a levy on anything that can be used for recording, i.e tape, blank discs, hard drives, a back dated tax on piano rolls and music boxes, as well as a swinging levy on paper and pens as they can be used for capturing notation.

So 9 years later the music industry finally responds to demand by letting new entrants Apple and legalised Napster create legitimate sites for MP3 and iTunes. These new entrants are not of the music business, to cope with the internet the music industry is having to use the skills of others. Apple’s agenda is not necessarily the music industry’s agenda, Apple is about selling Ipods. This is like hiring mercenaries to guard your city. As Machiavelli says, “He who holds his State by means of mercenary troops can never be solidly or securely seated. For such troops are disunited, ambitious, insubordinate… and whenever they are attacked defeat follows; so that in peace you are plundered by them, and in war by your enemies. And this is because they have no tie or motive to keep them in the field beyond their paltry pay”.

So 10 years later we now have a working legitimate download market, and record execs are breathing a sigh of relief. They are extremely sensitive to the accusation that they responded slowly saying, “but we are not in the distribution business, we are in the music business, how did we know what to do?” This is a fair point, but a pointless point as the game changed on them, and the only question is, can you play the new game? If you can’t, lets find someone who can.

This is why established firms seldom make the transition to the new savannah, as to be a player you have to let go of the old game, and adopt the new game. New savannahs create new dominant players, wireless created the BBC, digital compression created Sky, PCs created Microsoft. This new music savannah may well create a new entrant, a new music player that will never go near a shiny silver disc.

The music industry is as capable as any other cross section of humanity. The people in it are not dumb. I could have told the same storey about British broadcasting executives in the early 90s and substituted the threat of multi-channel television for downloading and the internet. The point is this: no entity lasts for ever and the seeds of its demise are in its culture. The issue is not how smart we are, the issue is how smart will the culture let us be?

For the music industry, the culture of a hundred years of physical distribution, the distraction of a low-revenue new business, the need to maintain revenues and share price on an existing base, made it hard to respond to what was a technology that promised huge volume tomorrow but only margin erosion today.

This made it hard to see the issue of rights theft via downloading as a consequence of a failure to recognise un-satiated demand. Un-satiated demand will always find a way to satisfy that demand, either legally, or illegally. Look at the drugs debate as evidence for that.

Most of us go through this. Carlton and Granada’s traditional broadcast culture made them see digital as analogue with knobs on, and not what it really was, a retail platform business a million miles away from broadcast. It raises one of the great questions, what would ITV have been today if it had not spent a billion on ITV digital?

Likewise my own sector - cable - was so inured in the monopoly model of US cable and fixed wire telephony that we were culturally incapable of understanding that wireless competition in the guise of mobile telephone, and Sky in television, caped and scuppered our business model.

It’s not thinking outside the box that is the issue; that is meaningless. The issue is how do you think outside the culture? It may be that while one takes the culture’s wages you can’t.

I have used the music industry to make a point, but you may have seen in the papers that Television is now facing a similar threat. ‘24’ is the most downloaded programme. People want to see the next episode before Sky transmits it. Today it’s too small a problem to worry about. But what happens as broadband gathers speed and mobility and ease of use? Do you try and introduce ever more complex digital rights management schemes to stop out of area down loading, or do you put it on the web and make it an on-demand iProgramme?

Sky is an awesome phenomenon, a paragon of business focus, but can its culture cope with a major shift in the techno economics? The long term issues it faces are the falling cost of bandwidth, the rise of broadband, the rise of mammoth network games, the possible arrival of competing EPGs on its platform, the rise of on demand programming, and the rise of Windows media centre.

None of this is worth losing sleep over now, but as the music industry has showed, it will come and bite you. The key question will be, what is Sky? It has done a brilliant job at making us think it’s a programming content business, if so, no problem, content does not get commoditised. But if you look at Sky, it’s actually a signal retailer, it uses its encryption system to collect money for channels. The business does not rest on programming, it rests on engineering and its call centres. These are things that are far more vulnerable to the rise of broadband.

When the attack comes from high speed mobile broadband, with wireless anywhere connectivity, it will be a cheaper, bigger and a more interactive offering than Sky, and the question will they be, are they able to give up their addictive satellite premiums to cope with this threat?

The cultural issue is how do you switch into broadband while your emotional and capital investment and your share price relies on a belief in satellite? If anyone can do this, Murdoch can, as nobody understands better that the only day the share price is relevant is the day you want to sell.

Back in the early 90s, Sky was at the height of its losses and Newscorp was within two weeks of going bust. It didn’t, and, as a subsequent commentator observed, because Murdoch was not in denial, and that made him an exceptionally rare CEO.

This is the killer ripple from iTunes, that all content is on demand and downloadable, and there is no geography.

This killer ripple suggests that ITV should start a premium VOD service sooner rather than later. Tomorrow’s Coronation Street today for £1. This will mitigate the advertising eroding PVR effect. A premium VOD service automatically questions the need for the licence fee. Does the BBC plan for that now, or just jump for joy that life on licence fee death row has had a 10 year reprieve?

UK radio and Television is based on stream economics, and advertising. iTunes shows the we are entering the era of the content by the lump, the highest margins will be for the freshest on demand content. It is an era of new business models, and how do we transition and cope if our cultures won’t let us contemplate letting go?

As I said where music goes all media is sure to follow. Music is doing very well – it’s alive and kicking – but its business model are changing, and today’s musical behemoths may not be tomorrow’s.

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