The Free Music Business

  Free the music 
  Originally uploaded by Lady Pain.

I’ve riffed on the notion of free as a business model frequently on this blog. We’ve even come up with a name for a business model that uses free as its foundational element – ie freemium.

The fact is that the Internet demands a free business model. It’s a network where content flows freely in abundance. Scarcity works great for physical goods, but crumbles in a digital world.

We learned this lesson in the print world as it moved online in the late 90s. The first instinct of all print media was to charge a subscription to their content in the online world. Today I can think of just one online property that is paid online, the Wall Street Journal. And when it is bought by Rupert Murdoch, it will go free as well. At least I sure hope so.

But it’s also true that many print businesses that have gone after the free online opportunity with a vengeance are making a lot of money now. The New York Times is a great example of this, but there are many more. Online can and should be free because the marginal production costs are basically zero and online advertising is a highly efficient juggernaut that shows no signs of slowing down. Page views are worth a lot more to an advertiser than the amount you can get someone to pay for a subscription to them. And the way media is consumed online, via search and social distribution (emailing links, blogging, etc), requires that the content be free to distribute and consume.

We’ve seen this movie before and it’s time for the music business to watch the movie closely and understand what it says. Free music will be a better business than paid music ever was. Read Bob Lefsetz’ rant this morning. He’s been saying this for as long as I’ve been reading him. This is the point:

what we’ve learned is more people want the music than are buying it.
Should we try to convert them, or sue them?  Is music failing, or is
the SELLING of music failing? 

So let’s agree that it’s the selling of music that’s failing. What should the music business do? Watch the movie. The print companies went free, accepted advertising dollars instead of subscriptions, plugged into Google for traffic, and the money is now pouring in.

As much money as the media owners are making online, the search and discovery companies are making even more money by delivering the right content (and ads) to the audience at the right time. On top of the content layer is the "discovery/nagivation" layer that makes even more money than the content layer online.

Before it’s too late, the music business needs to build the "discovery/navigation" layer and take a piece of the action so it can participate in that revenue stream as well. iTunes isn’t a discovery/navigation layer. It’s an online version of Tower Records, but it’s worse. You can’t browse the aisles of iTunes and look lovingly at that record you are dying to buy if you can just come up with the cash. iTunes is fine, but I have never found one single artist/song in iTunes. I find it elsewhere (and I won’t buy on iTunes anyway until they take the damn DRM off).

Services like (social networking), pandora (personalized radio), the hype machine (music blog search & listen), and playlisting services like project playlist and iMeem (which is being sued by Warner Music) are examples of this "discovery/navigation" layer. I’d also add "on demand" services like Rhapsody, Napster, and Yahoo Music to this "discovery/navigation" layer except that these services are subscription based today so they don’t really work very well to drive music discovery and consumption. Imagine if Google was a paid service. It wouldn’t be driving a lot of traffic to anyone would it? I was encouraged to see that is going to try an ad supported free version of an "on demand" service. I hope it works because this is exactly what needs to happen in order to build a free music business.

The music industry should be doing all that it can to build this discovery/navigation layer because unlike the print industry, the music industry gets paid (or has the right to get paid) every time someone listens to music that is streamed over the Internet. They get paid a compulsory license if someone listens to a stream that is defined as "internet radio" which is about a tenth of a cent per listen. And they get paid a penny a listen if the song is listened to "on demand" like through Rhapsody.

I believe these fees are easily recouped via advertising once the free music business takes off. Certainly the compulsory licenses can be ad supported and I hope lala is right that on demand can be supported with ads as well.

When all this comes to pass, and I sure hope its soon, we will have an abundant free music business where all the music is available to everyone and discoverable via search and social discovery. And that business will print money just like online print media does today. The only question is whether the music companies opt to participate in that business and prosper or fight it to their death.

Additional Thoughts: Since posting this earlier, I’ve been feeling that I left several important thoughts out. The first is that eventually the music owners will be better off taking an ad revenue share than a per listen payment. That’s already part of the deal on both the compulsory license for Internet Radio and for On Demand Services but it’s an either/or based on what produces more money for the music owner. I think the music owners should take a revenue share from day one and let innovation in the free music business flourish. The upfront costs of building a free music service where you have to pay the per listen fees in advance of selling the advertising are putting a chill on the market.

The second thought is about file based music versus streaming music. File based music has to exist today because there is no good mobile broadband internet solution. When you are at the gym, in the car, on a run, you have to have files to listen to. You can’t get your music via a stream when you are on the go. But that’s going to change and I believe within five to ten years, we’ll be listening to, the hype machine, and rhapsody in our cars and iPods and phones. And when that day comes, owning files isn’t going to be necessary anymore. It’s not necessary anymore in my home. I have several hundred gigabytes of mp3s (all acquired legally by the way) in a server in my basement. We barely ever listen to them. Streaming music is better because it’s abundant. I don’t own all the music in the world on my server. But almost every song ever recorded is on the Internet somewhere.

The final thought is that there will still be a market for purchased music in a world of free music services. People still buy vinyl.
Some people still buy CDs including me. But so many people don’t buy
music anymore that the music industry has to create a model to service
that market and grow the industry instead of shrink it. I think free ad
supported streaming services are that model.

When I mentioned the idea of free music to a friend in the music business, he said, aghast, "never". Like that was the end of the music business. I believe that what has transpired over the past 10 years on the Internet tells us the exact opposite. Free music is going to be a great business. It’s just taking an awfully long time to get there.

#My Music#VC & Technology