Some Thoughts On The Music Business

Over the past week, I've had several conversations with friends in various parts of the music business and there are a number of recurring themes that I thought I'd blog about. This post is about the recorded music part of the business, not publishing, not touring, not movie or video game soundtracks.

Physical distribution (ie buying CDs in stores) is still more than 50% of the recorded music business but it won't be long before digital revenues will eclipse physical. It might happen this year. Physical revenues won't decline on a straight line. They will collapse at some point as retailers start to take away shelf space. Within five years, physical distribution will likely be history.

Digital distribution is largely files (mp3 and aac) sold via iTunes and to a lesser extent Amazon and a few others. Digital also includes streaming license revenues, both compulsory license revenue from Internet Radio (Pandora, radio.com, etc) and licenses from on demand services like Rhapsody, rdio, Spotify, Napster, etc.

Digital revenue today breaks down as 95% files, 5% streaming. And within the 95% that is files, iTunes is 80% or more. But iTunes is not growing that much. It was flat last year and is growing only slightly this year. Amazon is still growing nicely but from a much smaller base. File based digital revenues are maturing and are not likely to make up the loss in revenue from physical distribution.

Streaming is growing very nicely and has the potential to develop into a large business but the companies that provide streaming services are struggling under the weight of the license fees.

The average iTunes customer purchases music that generates roughly $50 to $60/year to the record companies after Apple takes its cut. So the record companies want to get $50 to $60/year from the on demand services. The on demand services have not been able to make that model work for them yet as it requires a $100 to $120/year subscription to breakeven. And worse, the record companies are reluctant to support freemium models out of fear that they canibalize file based revenues.

I've long said that music listening is going to move into the cloud and that the dominant model will be streaming via free ad supported Internet Radio and paid subscription services. If that is to come to pass, the record companies will need to take some risks to grow this market. Converting user behavior takes time and requires free trials, subsidized offers, and a concerted marketing effort by the entire industry.

I'd advise the record companies to partner with the innovators in the digital music sector, something that they have largely been unwilling to do as long as physical distribution pays the bills. But the end is near for CDs and iTunes isn't going to replace physical at the rate it is growing. So it is high time to invest to build the streaming market. And for the record companies, that investment means subsidies and attractive license terms so that innovators can profitably build the services of the future. You have to invest in new businesses to grow them. That's what I do all day long. And I'd love to see the music industry do the same.

#Music#Web/Tech

Comments (Archived):

  1. Harry DeMott

    Amen.Seems like there is more and more activity in the digital music space – as I am sure you are aware.Labels are still tough to deal with – but getting a little better, I believe, as they see the writing on the wall. A few changes of ownership – and changes at the top don’t hurt either.It is always very difficult to transition yourself from a high margin business to a much lower margin business – but that is what the labels have to contend with. Since they are by and large necessary for streaming services – those guys are going to have to understand that they will not have “radio-like” margins in the 40% range – and will struggle to scale their business to remain profitable.Also, because so many of the record label deals that are out there are short term – if anyone gets traction on the streaming side – the labels just ratchet up the rates to try and maximize profits for themselves – rather than trying to maximize profits for the whole ecosystem.It’s a tough business – but after pretty much everybody who poured capital into music for the past 5 years has been flushed out – it might just be safe to put the toes back in the water.Side note – thanks for giving me a forum to meet great thinkers. Heading to Austin this week – and remembered that JLM lives there. Going to go have drinks next Wednesday. Looking forward to it.

    1. fredwilson

      Drinks with JLM. I’m jealous

      1. Carl Rahn Griffith

        I seem to recall JLM promised us drinks AND a BBQ sometime, Fred? 😉

        1. Mark Essel

          I skipped out on SXSW, but for that I’d travel to Texas.

        2. JLM

          Hell, I’m meeting him at Lambert’s, a very upscale……………………………………………………………..BBQ joint.Where there is life, there is BBQ.On Earth as it is in Texas!You are also personally invited!

          1. Guest

            Can I get an AMEN on the BBQ comment!!! You definitely need to get up here to KC then!

          2. JLM

            I am headed out to the plane right now and will arrive in 3 hours. I will go anywhere for good BBQ and they have the best in KC!

          3. Guest

            We will still be open then if you can get here in 3 hours!!! And “I know a guy” in case they are closed 😉

          4. Carl Rahn Griffith

            Cheers! Please get a cold glass of Chablis ordered for me and a rare filet mignon – will call when en route 😉

  2. awaldstein

    In the TV segment, a lot of the push will be coming from the ground up. From the generation of webTV users who never had cable. They will demand change and eventually will get it.I don’t follow the music industry but you seem to be saying that this is a top down driven change. Isn’t there a user swell that will force change in this segment as well?

    1. fredwilson

      Yeah. They are called pirates

    2. Carl Rahn Griffith

      Crucial point there, Arnold re: ‘User Swell’ driving how this market will develop, as opposed to ‘The Industry’ dictating its future. The music industry seems to have been pretty headless, thus far, and I can’t see that changing anytime soon.Streaming I can see as being attractive to a certain demographic but the ‘kids’ my wife and I know (my wife teaches 16-19yr olds so has a pretty good feel for that demographic/zeitgeist) seem to primarily want to listen to music they have downloaded on to their multimedia ‘phones (largely Android devices).I must admit the music industry baffles me, somewhat – is great seeing insights from the son of a friend of ours – he’s in a cool band called ‘The New Cassettes’ and have become very popular via a hit TV show over here called ‘The Inbetweeners’ which has used some of their music – this seems an increasingly common model for bands to find success, now – ie, exposure on a cult TV show and not via mainstream radio plays or YouTube, etc.Anyway, I may as well plug them whilst I am here – great bunch of guys – watch this space; they deserve success:http://www.youtube.com/watc

      1. awaldstein

        Cool band…thanks for sharing!Large consumer behavioral consumption change stems from one of two places usually:-the brand that just gets it right for the mass market. Apple (back then) for example which just opened the door and the world jumped through because it felt right.-swell that breaks the dam.One is a leap of evolution; the other revolution. I’m wondering how this will play out in both the TV and music space. A neophyte in the later but people consume entertainment in core ways I think.

        1. Carl Rahn Griffith

          I suspect the music industry has too many acolytes therein to truly embrace/comprehend such radical thinking 😉

        2. Dave W Baldwin

          As you know Arnold, it will be with the ground swell.The old model is really the top down where top has control. This applies to the Apple model also where we deliver dellusion of the consumer having more.The WebTV will be instrumental, but at this point the mid life crisis where the has beens want to have their moment will need to be overcome as it moves over into the swell.The swell simply is acknowledging the faith of the consumer being a wee bit smarter if given a vehicle for delivery that truly works.Then production will be looking at the more real time (trust me, writing songs ain’t that hard) where ‘at the moment’ will drive the bigger engine.

          1. awaldstein

            Hi Dave, thnx for this.I agree mostly but I’m a larger believer in the force of the ‘swell’ if you will.And yes, I’m a ‘populist’ for the mass market revolution against TV network control. I just can’t control myself on this one…sorry;)Social nets are always built from the bottom up and they are the big change agent. Sometimes it’s just an intentional swell of discontent; sometimes it just happens as a generation is empowered in a new way of thinking or access. I think its the later for the connected TV world.Apple aside, even the current changes in distribution for TV ala Hulu are still top down, still not social nets, still lip service to the social needs of the mass market. Hulu like Groupon and the flash sales segment are traditional models at their core with social loops as eye candy and connectors, not the model itself.I agree that we are still in the adolescent phase of change but I’m an optimist for change.I’ve intentionally not responded to the Apple piece. I think you are correct to some degree but for Apple and their fans, the connection between brand and lifestyle empowerment and the infrastructural chains of freedom of choice are still to complex to simplify easily. This will change if Apple doesn’t over time though.

          2. Dave W Baldwin

            Thanks Arnold… I was doing the Evangelical teaser regarding tool to accelerate the swell ;)I’m in KC with son and we were at the Plaza yesterday. Yes, the Apple store was full. Walked back by and there were gentlemen outside you could tell had been in there looking for the next ‘tool’.The whole swell thing is not going to be via Apple or Google, but the tool opening the sharing of suggestion, approval and is easiest to use. The ease of use moves the tool up to primary vs. tertiary or wherever… and when you do that, you have a place for the swell that can have immediate benefit for the musician/singers who haven’t signed their lives away yet.Not as abstract as some may think.

      2. Mark Essel

        Bookmarked for later listening, thanks for the tip Carl.

  3. Bruce Warila

    “And for the record companies, that investment means subsidies and attractive license terms so that innovators can profitably build the services of the future.”Perhaps there’s another route. Music preference-based behavioral targeting can double and even triple+ CPM rates for ads (banners and audio interstitials) that are adjacent to music-connected content. Moreover there’s enough revenue in the delta between run of network advertising and targeted ads that the music industry could probably thrive off an opt-in network of billions of music fans that “opt in” to support their favorite artists.. (www.emergentdiscovery.com is enabling this on a B2B basis.)

    1. fredwilson

      we have a bet on that in our portfolio called targetspot

      1. Bruce Warila

        I knew that. We plan to talk to Targetspot.

  4. Jack S

    Fred, what do you make of the argument that many of those still purchasing music from record stores are doing so because they clearly favour having tangible, permanent access to their music over convenience and cost? If this holds water, then surely when record stores do decline, a large proportion of their ex-customers will favour iTunes over streaming?

    1. fredwilson

      I don’t believe that is true. I used to be a collector myself. But I havebeen converted. On demand music is better

      1. Chris Chaten

        while wifi is becoming ubiquitous, it’s not there yet. what do you do on flights, ski slopes, camping, etc.?

      2. whitneymcn

        I can accept the spirit of “on demand music is better” if it also comes with the caveat that the current on demand services may not be taking the right approach to meeting people’s needs.It seems likely that getting the deals done to offer a massive library ahead of time — one big enough that a critical mass of users is virtually always able to hear the niche record they want to hear — is going to continue to be a meaningful hurdle, and it seems possible that it’s not the right problem to be solving.While I’m not sure exactly how it plays out, I’m more interested in seeing what comes from the ExFM/Listening Room/8tracks end of the streaming world. They’ve all got their own set of problems to deal with, but they coming at the problems from new angles, which is totally worthwhile.

      3. gorbachev

        …for you.On demand music is better for folks who have mainstream musical tastes. It’s bad for people who enjoy music that’s just not available on demand.I’m an expat. There is no way in hell I will ever get the music that I grew up listening on demand. It will never happen. I just received a shipment of CDs from my dad for my birthday. He’s my on demand music service provider.

        1. fredwilson

          I have some fairly eclectic tastes. I’ve found places to stream most of it.And I play files when all else fails. But failure is occurring less andless

    2. rick gregory

      I don’t know about Rhapsody/Rdio/Spotify etc, but on MOG I can buy an album on Amazon if I want to. I suppose I could order the CD vs the MP3 download too. The stream doesn’t mean you can’t buy CDs/downloaded music. Just that you don’t HAVE to.

  5. CliffElam

    I used to love music, I mean really love it. I worked in a record store (Kadairs, Tiger Town Mall, Baton Rouge, Geaux Tigers!) when I was 13 to get at the ‘punched’ demo records (Ohio Players, anyone?). I worked sound at concerts (ELO!) and at a local rock club (Cats Cradle). Bad hearing now, thanks very much.I would totally pay to have music at my beck and call, but I can’t. I think the reason is in your post somewhere, probably b/c of the record companies plus the changes in the industry. Man, I’d totally pay $120/year to have everything high quality everywhere. I’d rather have that than cable TV. But right now it’s hard so I don’t pay anything and don’t buy anything new.-XCPS – Now if someone could explain dang GrooveShark to me and how they make money by giving me tons of music for free?

  6. jfccohen

    If record labels don’t start being more cooperative, they are going to lose artists. Bands like Radiohead and OK Go have demonstrated that good music and passionate fans can create revenue (consider Radiohead’s donation experiment that worked really well). On top of that, many new services out there allow bands to upload their music for free and “leak it.” Consider if an artist is up for renewal with their record label, and they get pitched by a new music promotion entrepreneur who can tap into social networks, help make compelling videos, leverage new social ticket selling start ups so they aren’t reliant on Ticketmaster and create a “donate here to support” website capability (almost like KickStarter on steroids) records labels will lose their bread and butter – the artists.

  7. Mark

    Why shouldn’t artists just bypass record companies and license rights to streaming services? At the very least, a lot could be trimmed from the record company model.What is a record company but a method of distribution? Also, why should one company own all distribution rights across all mediums?I think a streaming service that was in part a label could make a lot of headway into this space. Make the streaming service a type of content owner. A new type of record company, that owned streaming rights. I’m sure artists would happily take a cut that labels would scoff at. Start with indie.

    1. ShanaC

      I think the reason largely is something that was heavily discussed in the WSJ by the bandleader of OK GO. Essentially, even for an indie band, marketing costs are expensive.I get the feeling some days that the music industry will have a model not unlike SAS. High gross margin, with high marketing costs.

    2. fredwilson

      that would be greatbut the advances and the marketing dollars are still a draw for artists

  8. Rnorton

    I used to be a huge collector but now purely view myself as a consumer. Having worked for numerous record labels it still baffles me how they maintain their ivory tower mindset and believe that people will come to them for their brand strength & experience – two things that can be filed under ‘not-required’ in todays market.I now use Spotify to stream, more than anything else it has reinvigorated my love of music through sharing new songs with friends. Where once I subscribed to all the music press now I exchange new gems in real time.For a minimal premium each month I access all I could ever need, itunes files take up far too much of my file space.Never did the phrase ‘the sky’s the limit’ ring more true.

  9. Howard Lerman

    At least CDs are cheaper here than in Japan

  10. ErikSchwartz

    The record business is a lot like the venture capital business.Both put a lot of capital to work trying to create valuable franchise properties. In both the returns are largely based on a very few hit (companies or bands) carrying a much larger number of investments that don’t do well.VC associates are like the AR guys scouting talent. There are a lot more companies/bands that want to get funded/signed than ever will. Lots of people never get funded or signed. Due dili in both is about de-risking. Traction (fans) is good. Previous hits are good. Both labels and VCs spend a lot of time and money working with and developing the talent. Hiring, team building, skills development.One giant hit can make a label or a VC, a large percentage of investments in both music and VC are pure wash outs, the middle breaks even but the margins suck.Both are getting radically changed by the smaller capital requirements of doing business in the cloud.

    1. kenberger

      another similarity is that these days, the labels and the VC’s are needed a lot less, or at a slightly later stage and only if the band/company wants to go big.the largest reason for bands is the increasing ability to self-promote via the internet. streaming services and recommendation engines are accelerating this and will continue to exceed expectations in that way.I highly recommend checking out http://earbits.com (a recent Y-Combinator grad). It’s a fantastic free service for discovering and consuming new music. I love it.

    2. kirklove

      Only one problem with the comparison. VCs are (relatively) patient. They know they are looking at a few years, if not ten, before their investment has the return they want. With majors you’ve got about two-minutes to churn out a hit or your toast.

      1. ErikSchwartz

        The numbers are surely different, both in dollars and in time. But either will drop you as soon as they lose confidence.

    3. whitneymcn

      And I think that there’s another parallel in that the most interesting stuff is happening in both recording and VC in the cases where people are exploring alternatives to the strictly hit-driven model.As you point out, one huge hit can *make* a label or VC, but it can’t *sustain* either, and chasing hits is a pretty high-risk undertaking.When you’ve got a VC fund that’s a specific amount of money to be invested for a (relatively) defined timeline this may well make sense for everyone involved; if you’re a recording company interested in sustainable growth and getting regular paychecks to a bunch of people, maybe less so. Sure, it worked for a while, but that doesn’t mean that it was a particularly good idea.

      1. ErikSchwartz

        To carry the analogy even a little further…It’s very possible that the music business (and the companies that support the music business) are going to shrink to the point of becoming what the VC world calls the “lifestyle business”. They’re fine little businesses that you do because you love them, but they will never grow very big.This is not necessarily a bad thing for musicians and consumers. But it does mean that music businesses will become an underperforming place for VC investment.

      2. FAKE GRIMLOCK

        LEAN STARTUP METHODOLOGY APPLY TO ARTISTS SAME AS STARTUPS.HAVE SAME CONSEQUENCES FOR MIDDLE MEN.

    4. Mark Essel

      Groovy analogy Erik, some of these similarities cross over to film as well. There’s indy small/cheap/agile movie creators that have bigger ideas but require external funding.The killer combo for successful VCs, AR guys, and producers/investors is picking winners early and growing successful businesses, tracks, and hit films. They help route social wealth through restricted channels of growth and development, and they also develop those channels.

      1. FAKE GRIMLOCK

        IT UNIVERSAL TRUTH, NOT SPECIFIC TO ANY INDUSTRY.MIDDLEMEN JUST SYMPTOM OF FRICTION IN SYSTEM. INTERNET, TECHNOLOGY, GLOBALIZATION REMOVING FRICTION.WHEN DISEASE GO AWAY, SYMPTOMS GO AWAY.

        1. Thor

          That implies that the middlemen are inefficiencies.If a middleman creates new efficiencies in an industry, it can benefit all parties involved.

  11. markslater

    I don’t understand what tomorrows “record company” looks like.I absolutely love Soundcloud.

    1. kidmercury

      IMHO tomorrow’s “record company” looks like….1. knows how to build brands by building social networks2. understands 360 business models (getting a piece of everything the musician does, from download sales to tours to merchandise sales)3. understands how to leverage and synthesize a wide variety of internet services to create a singular brand (i.e. soundcloud + eventful + tunecore + ning = profitable brand)just my guess….looking forward to seeing how it pans out

      1. JLM

        Interesting, where do I send the tuition check? Very insightful.

        1. Dave W Baldwin

          Piece of advice, remember it is a matter of end run customer, delivering the easiest method for them to bring up what matches their mood.Then you have to have marketers who are in today’s world knowing what ad source to go after that can gain the most being a part of that mood.Then it is a matter of seeing forward where in the end, the service that treats the artist best will win.As of now, it is a matter of seeing the ground up swell as it should be, yet isn’t due to money interests trying to keep it all primitive.

      2. markslater

        agreed Kid – but there is way too much square pegging in round holes by people stuck in a feedback loop of 1980’s record label executiveness.the new company is an advisor and service provider to the talent.the current company see every innovative iteration as a threat to their “shoe in” model. Lets face it – record companies were commercial racketeers by and large and shedding that skin is tough. But its that or total and utter dis intermediation.Now if only we could crush the racketeer called live nation. (although i do like their move this morning where they are going to be scalping their own tickets – its a good thing – because we are going to be aggregating that demand at getabl also. think – text: 2 tix to bruins tonight…..agents notified and text price…..)i hear the pitter patter of the ticket police……

      3. FAKE GRIMLOCK

        GRIMLOCK THINK TOMORROW “RECORD COMPANY” LOOK LIKE:1. ARTIST SUBMIT MUSIC TO SERVICE2. FANS BUY, ARTIST GET 70%3. DISCOVERY AND MARKETING AUTOMATEDAPP STORES RIGHT MODEL.

        1. kidmercury

          Fans buy?!?!? As in buy music???!!?! what an insulting suggestion, grimlock.Good thing you have been thoroughly DOWNCASED otherwise it would be evenruder. Who knows, next thing you know you will be suggesting we buy oxygen.

          1. FAKE GRIMLOCK

            MILLIONS OF APPS AND SONGS NOT SELLING IN STORES IN WORLD YOU LIVE IN?THAT SAD NEWS, BUT GRIMLOCK NOT SEE HOW IT RELEVANT TO WORLD REST OF US LIVE IN.

          2. kidmercury

            Elsewhere in this comments thread I dropped a link to a study showing somelong term trends in music and how the trend is clearly towards less revenuefrom music sales by virtually any measure.

        2. Dave W Baldwin

          You have to be patient FG regarding the boys in big city think in little box and just don’t know it.Amazing how they can’t see how doing the right thing with minimal OH allows better reward to artist…hence, the encouragement of producing more art. Then the odds of something actually creative stand a better shot of emerging.Nice to see one who is surrounded by 1’s and 0’s can see better than the bipolar.

  12. Paul Cross

    “File based digital revenues are maturing and are not likely to make up the loss in revenue from physical distribution” – has anyone done analysis on the costs that are being removed by digital distribution? Obviously CD manufacturing and distribution, and retailer margin. If record companies sold digital music direct to consumers, what would be the difference in Gross Profit. This would be interesting analysis.

    1. Carlos Adame

      Over the long life of the physical product, significant economies of scale have been achieved on the cost side. The sharp price and volume drop in digital versus the physical product is not enough to leverage the COGS improvement in digital. Though D2C is a great customer segmentation strategy. Certain products/bundles offered to certain customers via D2C do achieve significant margins.

  13. Eroach

    I’m no music expert, but this market seems ripe for disintermediation. Clearly the barriers are coming down, the role of the music label is shrinking, and bands know how to connect and deliver direct to their audience. The days of being shackled behind the big bad label are gone.I’d be inclined to look at creating a direct model with ad support flowing back to the bands via internet radio and a host of other connected rev models from concert promotions to gear to ad supported band to fan delivered podcasts and on and on. Why not sell direct as well just as itunes does today as well. The company creates the infrastructure and uses the bands themselves to deliver the content via their own sites.Show bands how the new business makes “them” more money, and it’s game over.Just a thought…

  14. Carl Rahn Griffith

    Thought I’d check my ‘demographic’ keyword/topic interest in ensembli and lo and behold this was waiting for me:’Super Demographic’ listeners/consumers identified re: Internet Radio….http://ensembli.com/posts/1

  15. ShanaC

    The economics of this transition feels wrong. It looks to me that we’re underwriting the transition cost at much too low a priceAlso, I realize that consumers like me are the problem. I stream constantly, and the last time I bought a cd was to get it signed after a klezmer concert.

    1. rick gregory

      i agree. For $10 per month I can listen to an unlimited number of discs. While I LOVE that, it means that I’ll end up paying something like 30-50 cents per CD. However, is this really different than radio where I don’t pay anything? In some ways this is just self-programmed radio.

      1. ShanaC

        artists don’t make dollars off of radio. Streaming costs have to be higher. Plus, there is the question of how do you make it into a playlist with no dj pushing your music – that’s a new sort of expense in the age of abundance

        1. rick gregory

          “Streaming costs have to be higher”I’d rephrase that to say that streaming *revenues* need to be higher. One way is to hike the per subscriber costs, but there’s a limit to that. I happily pay $10/month now. I’d pay $20. I wouldn’t pay $50. What steaming has the potential to do is to bring people back into the market who’ve been out of it. Make the market of people who pay for music larger. And by all means, sell the music on the album’s streaming page – give people a way to buy a disc they find they really love.As for exposure… I’m not sure that we should seek to replicate the Top 40 mechanism, but yes, that’s an issue. In my brief encounter with streaming so far, though, I’ve discovered new bands that I’d never have listened to if it meant I needed to lay out $10/CD for their stuff. Discovery’s in flux, but I don’t see that as a bad thing. What would be bad is for a new band to take the old passive route of signing with a label and letting them to everything. At this point, bands have tools to promote themselves and more are being developed… they need to know about and use these.

  16. Jonathan Vaudreuil

    The gap between what the average person spends on iTunes and what streaming costs is not too large at the moment, but what about all the other costs involved?I listen to a lot of music in my car, and mobile data coverage isn’t free. Nor is it reliable.If I’m driving between Boston and Worcester there’s a nasty black hole in terms of coverage on the MassPike. That’s right, the main highway between the two largest cities in Massachusetts has a dead zone. I don’t have to worry about that with an iPod.I often listen to music when I take public transportation. As soon as I step underground, coverage is gone. Yes, they could install wireless reception everywhere, but then mobile carriers are covering the costs so people can stream music instead of buying it and carrying it around like they always have. That’s not an easy battle to win for music companies, let alone in the next 5 years.Data coverage, or free wifi, is going to have to be everywhere and work a lot better before I even consider tapping into the cloud for music. It’s also going to have to be waaaaay better than Grooveshark, which I use for free because I actually like having the banner ads (I’ve clicked on them a few times for deals).I’m very interested to see how this all turns out. Great post Fred!

    1. Mark Essel

      A streaming/storage system that leverages something like couchDB to replicate between served/streaming music and cached local collections would be ideal. Great comment on road tunes Jonathan.

      1. Jonathan Vaudreuil

        I’ve realized there are lot more to this issue than streaming. A lot. Looks like I have blog post fodder!

      2. bernardlunn

        I use Pandora and they do SOME local cacheing, enough for a short subway ride. But I assume they could do more with some better offline synching. Do you think the hold-up is technical? Or is Apple trying to protect iTunes? If latter, I am motivated to switch to Android – love my Pandora and want it to get better

        1. Mark Essel

          I subscribe to Pandora and love it too. I don’t think the hold up istechnical beyond media bottlenecks. But there’s nothing stopping dropboxfrom being a great media sharing and delivery system, in fact it is for meminus some issues with UI on the phone.

    2. ShanaC

      they’re going to have to deal with data underground eventually – not for streaming music, but for businesspeople who must have their SAS apps at all times

    3. fredwilson

      rdio and rhapsody have caching as part of their mobile offerings. it works really well for me.

    4. sbmiller5

      The Grooveshark Anywhere offers offline playlists on your phone, so you can still listen through deadzones.

  17. Eric Leebow

    There will always be a physical component to music, as music players will exist. I don’t think people will ever want to embed music chips or players into their bodies. Most people enjoy wearing the headphones, and headphones themselves are becoming fashion items. There’s some amazing cloud music services, and although iTunes has the market, they will someday be replaced by the could music services.

  18. theschnaz

    “The average iTunes customer spends roughly $50 to $60/year on music. So the record companies want to get $50 to $60/year from the on demand services. The on demand services have not been able to make that model work for them yet as it requires a $100 to $120/year subscription to breakeven.”What prevents demand services from making a model work at $50-$60 per year? It’s it the licensing cost?Do you know how much revenue YouTube generates as a percentage of streaming? That would be an interesting stat.

    1. ErikSchwartz

      Streaming is expensive. CDNs are really expensive.

  19. Joe Siewert

    Best Buy recently announced that it will outsource the stocking and selection of music and movies in their stores.http://www.twincities.com/b…So the shift in physical shelf space is already rapdily changing.

  20. martinowen

    I am totally with the disintermediation argument. The problem recording companies are trying to solve is to work out “what is the place for us in the future?”…. As they have figured out the answer I suppose their current actions are explained by putting as many barriers to their invevitable demise as possible.Brian Eno who noted that there has always been music and it was the biz that was the anomaly.There will be a kid on the streets of the Brazzaville who will turn a beer can into an instrument. New ways of survival – and even getting rich – will evolve. It may be more likely for it to arise in African cities before it happens in Europe or the US.It is worth spending an hour or so watching “Good Copy, Bad Copy” and find out how musicians in Belem are able to survive and entertain thousands – and give their music away. In fact their distribution model is to give discs to the street pirates.http://www.archive.org/deta

  21. kidmercury

    digital sales is not the answer, and i’m not sure digital subscriptions (i.e. streaming) are the answer either. i agree digital subscriptions are great for certain niches of fans (i am a napster subscriber and love it).i found this business insider post to be of interest to music industry discussions.http://www.businessinsider….the real re-birth IMHO is free music used to build communities and monetized in the same social networks are and will be. i believe the virtual currency will be the primary form of monetization for niche communities.

    1. FAKE GRIMLOCK

      ARTICLE USEFUL, BUT REAL MEANING NOT OBVIOUS.IT NOT SHOW DECLINE IN PEOPLE BUY MUSIC. IT SHOW INDUSTRY NOT MAKE ARTIFICIAL PROFIT BY FORCE PEOPLE TO BUY ALBUMS.MARKET ADJUSTING TO NATURAL LEVEL NOW THAT PEOPLE BUY SONGS THEM WANT (CHART SAY THAT SKYROCKETING) AT PRICE SET BY MARKET INSTEAD OF BY MUSIC MONOPOLY VERY DIFFERENT THING THAN MARKET BEING DOOMED.

      1. kidmercury

        Right, and the price that ppl want to pay, as illustrated by the decline intotal revenue from sales AND the decline in digital sales, is approachingzero.

        1. FAKE GRIMLOCK

          BY SAME LOGIC, PRICE OF BIG MAC APPROACHING ZERO.THAT NOT MEAN IT EVER GOING TO BE ZERO.

          1. kidmercury

            Lol, no, the price of a big mac is actually rising. But that is primarilybecause of dollar devaluation. Once the virtual currency revolution kicksinto high gear, many networks will offer their citizens free food. well, Idon’t consider big macs to be” food,” but you get the idea.

          2. FAKE GRIMLOCK

            LOOK AT BIGGER PICTURE. PRICE OF ALL FOOD DROPPING OVER SAME TIME PERIOD MUSIC SALES DROPPING.ALL TRENDS HAVE SAME THING IN COMMON. THEY END.THIS MEAN PAST DATA MOSTLY USELESS FOR PREDICT FUTURE.SALES GO UP IN PAST NOT MEAN SALES INFINITE NOW. SALES GO DOWN NOW NOT MEAN SALES ZERO TOMORROW.

          3. kidmercury

            lol, grimlock not sure how it works in dino world but check food prices and energy prices going back to 1971 for humans. the direction is upwards. this is clear, and indisputable.trends get end when they get disrupted. virtual currency will disrupt food and music. music will become free (like as free as fred’s blog), and food will go down in price, possibly becoming free, or free with certain conditions (as free often is).

          4. FAKE GRIMLOCK

            HURR HURR. ME, GRIMLOCK, FORGET ME TALK TOO DEEP FOR YOU.GRIMLOCK MEASURE PRICES IN WAY THAT MATTER, RELATIVE TO ALL OTHER THINGS IN ECONOMY, ACCOUNT FOR INFLATION, AVERAGE WAGES.YOU WANT USE METRICS THAT MEAN NOTHING, ME NOT GOING TO STOP YOU.

          5. kidmercury

            Hahahhaha…..yes, accounting for increase in wages, food and energy haverisen. They’ve risen in real and nominal terms. That’s why we have so muchpoverty, why one in seven households in the US are on food stamps. You candeny reality all you want, it will not change the truth.

          6. FAKE GRIMLOCK

            GUY THAT ONLY HANDLE INTERNET THROUGH FILTERS NOT IN POSITION FOR CLAIMS ABOUT DENY REALITY.USDA SAY PERCENTAGE OF INCOME SPENT ON FOOD 22% IN 1950, 13.8% IN 1970, LESS THAN 10% NOW.MAYBE KID THING EVERYONE IN AMERICA SO FAT BECAUSE THEM EATING LOTS LESS?

          7. kidmercury

            Lol, ok grimlock you can believe the usda if you want, me personally illbelieve gas signs and the reality of myself, everyone I know, and al thepeople they know (except you). Income inequality and rising food costs aredocumented trends. I promise you you will find these trends tougher toignore, unfortunately.

          8. FAKE GRIMLOCK

            AS LONG AS YOU UP FRONT ABOUT BASE BELIEFS ON ANECDOTE AND IMAGINATION INSTEAD OF FACTS, GRIMLOCK FINE WITH IT.

          9. kidmercury

            I don’t have time to dig up the real data, citing USDA as an honest sourceis entertaining though. Government always lies about inflation, as it istheir preferred method of stealing.

  22. Wells Baum

    I told you digital downloads still ruled the market a while back while you claimed streaming was the future because your kid(s) don’t buy music.Ill reiterate that the Internet isn’t ubiqutious enough to just stream music. People still want the file for everywhere play, for backup, and for sheer contribution to the artist.

    1. fredwilson

      clearly we see this playing out differentlythe good news is we get to see it play out

  23. Rishi Mirchandani

    There’s another challenge – it’s not just that physical is still a large share of revenue, its the nature of the individual artists who drive the profitability of the major labels. These are still primarily superstar artists, with sales driven by broadcast radio and major media campaigns. This leads to a relatively high cost structure, in terms of overhead and campaign specific marketing – see here for some more detail: http://bit.ly/eb9ijNIt's quite possible that releasing a Lady Gaga album would be unprofitable in an all streaming world. That’s not an argument for the status quo, but it suggests the labels need to completely innovate their entire artist development process in order to thrive in an all streaming world (as well as participating in broader rights streams). If they don’t, they leave the field open for new players to step in and fund the artist development process.

  24. paramendra

    You are right. It will not be a gentle sloping curve. It will be a collapse. MySpace would know. Business innovation has not caught up with technology innovation.

  25. Rnorton

    Not to sound hyper-cynical but very few people care about contributing to the artist. Yes they care about breaking them, being the one to say ‘they were my band first’ or getting them to the top of the Billboard chart.But caring about their income? No. That’s the musician’s own challenge, and it’s one that now has infinite possibilites.

  26. PKafka

    One of the reasons the music business has had such a hard time adapting to digital even though all of its customers are already there: Fred says this post is about recorded music, not publishing. But even if every single recorded music company and copyright owner in america took fred’s advice, they wouldn’t be able to move without the assent of the publishers. And even if every single publisher/copyright owner signed on, some of this isn’t possible unless you change statutory licensing terms. And that’s all in the U.S.: Move this outside the country and you have a country-by-country replay.None of which is say it isn’t doable. And when the industry gets desperate enough (not there yet!) it will probably move that way. But it is hard.

    1. fredwilson

      i’d love to see a compulsory license for on demand streaming like we have for internet radio

  27. David Mazur

    Personally, if we’re talking about monetizing the rights that the record companies hold as opposed to the publishing rights, I think that the better opportunity is to bring innovation to synchronization licensing, which I think would meet much less resistance as it’s a B2B play and doesn’t threaten to cannibalize sales. For the uninitiated, in addition to paying a performance fee, anyone using music in film or television is required to obtain a license to use music in a way that is timed to the display of visual content. The various parties negotiate these individually based on a variety of factors like potential audience, desirability of the song to be licensed, etc.

    1. Jonathan Gill

      There are many B2B music licensing marketplaces like Getty’s Pump Audio. The licensing clearing houses have quietly done a tremendous amount of business and have existed for many years.

  28. Andrew

    A couple of thoughts on the future of music from musicians:”1) People who share your music are recommending you to people who respect their taste and opinion;2) The vast majority of people who have unauthorised copies of your music would not have ordinarily paid for it anyway;3) Do you really want for people who cannot afford your music to be prevented from ever hearing it?”http://newmusicstrategies.c…And, from OK Go’s Damian Kulash:”For several decades, though, from about World War II until sometime in the last 10 years, the recording industry managed to successfully and profitably pin it down to a stable, if circular, definition: Music was recordings of music. Records not only made it possible for musicians to connect with listeners anywhere, at any time, but offered a discrete package for commoditization. It was the perfect bottling of lightning: A powerful experience could be packaged in plastic and then bought and sold like any other commercial product.””Music is getting harder to define again. It’s becoming more of an experience and less of an object.”http://online.wsj.com/artic…I know this conversation is more about record labels than the music industry, but it’s important to remember that musicians have only existed as producers of recorded products for a brief period of time. The superstar may be dying but the working musician is not.I wish I could find the source but I seem to remember that (here in Canada, at least) there are more working musicians as an overall percentage of the population than at any other point in history, despite dropping revenues in the recording industry.

    1. fredwilson

      totally agree

  29. Frank Denbow

    This is interesting. Pretty much validates why I have no desire in playing in the game of selling music directly. There are plenty of other ways to use music and repackage them as products.With Songsicle.com, I’m trying to use short clips of music as gifts (think sending a phone call to your wife with “Sexual Healing” playing). There are other ways you can repackage music into interesting digital products (ecards, mashups, madlibs, karaoke, dance etc), and more people need to think of this area, as opposed to the unlimited music streaming businessFor those in NYC interested in startups and music, you should check out the Music Startup Academy at General Assembly: musicstartupacademy.eventbr…

    1. kidmercury

      great comment. IMHO lots of high margin profit opportunity in creating music-based products that cater to creating unique, non-repeatable experiences (your example of sending a phone call to wife with “sexual healing” is perfect)

      1. Frank Denbow

        Thanks kidmercury! I’ll keep working on it 🙂

  30. Seth Godin

    Worth noting that vinyl records keep growing in both absolute sales and market share.Music is on path to cease being a commercial form of mass media, and instead, music will spread digitally (and essentially for free). Industry players can deny this trend, but at their peril. The cost of entry is too low, the variety is too high, the marginal cost of delivery is zero.When music spreads for free, then, the industry part is souvenirs, physical instantiations, experiences, access and tribes.Defending the status quo is distracting from the real goal, which is figuring out how to help musicians who have music worthy of being spread, make a living.

    1. Mark Essel

      RocketHub is pushing this way by connecting artists with communities and it’s a hit variant of Kickstarter for creatives. The gifts/rewards are signed cds/records, small cozy or private shows. I can see this venue growing for financing artists to do what they do best, blow our minds with enchanting art.

      1. techheadted

        Dead on Mark. It is also very interesting to see the way that different types of artists are collaborating at shows (Musicians, Videographers, DJ’s, Dance, etc). We have done some amazing shows where the fans are contributing their photos and video clips that are then integrated in real time by VJ’s and then capturing it all and live streaming it out to folks that can’t attend in person (who of course send photos of what they are doing back into the show!). It is going to be amazing to see how the creative community begins to explore the new platforms that enable this type of cross disciplinary collaborative environment.

    2. Carl Rahn Griffith

      Hasn’t touring gone from being a loss-leader to a/the major revenue stream for many bands?Live music is certainly enjoying something of a vibrant and fiscally healthy renaissance – ironic (maybe because of?) in these sterile digital download times – even old farts like me and my better half, my wife (OK, she’s not an old fart, yet – that’s just me – am sure Fred will confirm that, lol), when analysing it, spent far more £/$/€ over these past few years on gig tickets than we did on CDs/downloads…And most of the ‘kids’ we know go to WAY more gigs/festivals than we do – am sure the expenditure difference for them is even more marked. Especially as most of their downloads are – ahem – from somewhat ‘dubious’ sources ;-)QED’ish.Maybe…

      1. techheadted

        Your observation is definitely what we are seeing with our business at Enconcert Carl. Although we are early stage, the response to our live production tech by Indie’s has been terrific. We “bring the studio to the stage” and provide a mobile “social” app that let’s the audience integrate photos and videos they take at the event with high quality media to produce “Artist Approved’ sources . I am speculating but believe Jerry would approve!

        1. Dave W Baldwin

          Hand in there for the long haul. Going back to my comments regarding the sharing of art/ideas in real time, this will be the growth dynamic. Delivery of clarity will be key and it is a matter of gaining interest from those that would love to check out the ‘Live’ from wherever. You just have to provide tool that allows that interested party to check out more and gain something from it…. oh my, as everyone is so scared of the Big Boy set up that is eclipsing like traditional media, they seem to forget what you could really do with Bubblegum.

      2. kidmercury

        concert ticket sales slumped big time this past year. gasoline increases cost of touring, rising ticket prices leaving stands empty. the economics of touring have lots of problems.

        1. Carl Rahn Griffith

          Interesting.I don’t know the exact data, Kid, but I suspect that is more of a USA issue – festivals in UK/Europe – especially UK – sell out within hours – for tens of thousands of people, over long weekends, etc – eg, Glastonbury – sells out within hours each year – and it is HUGE – and expensive.Also, ad hoc small to mid size gigs (apart from Arenas, which we avoid, anyway) are also generally sold out from what we see over here and from experience in trying to get tickets.Maybe the sheer scale and geographic spread of the USA has magnified the problem over there – is certainly not the case over here where even from our remote part of Yorkshire even London is only 2hrs away – the USA also seems more polarised to me re: venues/cities/vibrancy.Isn’t NASCAR even suffering I seem to recall in the USA? Huge venues are archaic and so last century – even new-build modern Premier League UK soccer/football grounds over here are being down-sized and aiming more at 60k seating rather than 100k – just charge more, offer more premium boxes, better views, and aim for full capacity for each match. Makes sense.Where we live in the UK – West Yorkshire – there are 3 provincial cities close to us – Leeds/Sheffield/Manchester, which are way behind London in terms of scale, population and wealth but each city has many very active live music venues. It’s great and I’d open such a venue like a shot if I had the spare funds! Each being a major University city also helps re: vibrancy for gigs, bars, etc.Arena gigs are suffering, though – good! – apart from context of the legacy dinosaur bands such as U2 (who recently broke the Rolling Stones record for $’s grossed on a world-wide tour I believe).

      3. Guest

        I think you are correct about the touring comment Carl. I can also say most of the music I have bought over the last few years has been purchased while attending LIVE events (a Tommy Emmanuel concert or an Irish Music Festival, impromptu rock band playing at a large bar, etc.).

    3. ShanaC

      why vinyl? Do you think cds will hold the same appearl as vinyl one day for a different generation?

      1. Carl Rahn Griffith

        I doubt it, Shana re: CDs – my wife collects ‘vinyl’ records purely for the aesthetic, audio and ergonomic pleasures of looking at them/playing them on a very primitive (more mono than stereo!) record player.Hard to describe the drivers, but it is a huge sub-industry.In fact my wife’s cousin has grown a phenomenal business from this (global) niche. One of his biggest markets is Japan.http://www.vinyltap.co.uk/Very serious business. Big money – and growing…(And no, he doesn’t give her discount, lol).

      2. Darren Mason

        I believe they already do Shana. But you have to realize, even in the midst of the “vinyl revival” – it is still a niche market. I do believe with special greatest hits, special and limited editions, CDs will be around for a long time – BUT only in niche markets.The reason CDs will not mean the same thing as vinyl to a different generation is because they have grown up without them. The reason previous generations love vinyl is because they are nostalgic. We grew up holding album covers, reading lyrics, and drooling over great artwork. The current generation never had this type of experience, even with CDs.Eventually someone will create the digital equivalent of the album “experience” and users will be able to listen and “hold” (digitally speaking) artwork, lyrics, and other digital content related to the artist/album. But I don’t see vinyl or CDs returning to mainstream anymore than 8-tracks or cassette tapes.

        1. FAKE GRIMLOCK

          DIGITAL EQUIVALENT OF ALBUM ALREADY EXIST.IT WEBSITE.

          1. ShanaC

            you can’t sign a website

          2. Guest

            Hmmmm, want to start a project fixing that Shana 🙂 I am actually serious. Full Disclosure: I am so not a coder so I cannot do any of the heavy lifting in that area. I already see a couple of avenues where a tech like this could be applied.

          3. Guest

            P.S. I think we should give Fred first chance at funding said project … this is his Blog site after all. 🙂

          4. Armine

            You should check out http://www.viinyl.com. 1 web site per song, made to enhance the music experience, seduce fans and travel the web.—disclosure: i’m the founder of viinyl.com

          5. Guest

            Armine, thanks for sharing the link. I had not seen your site before. Interesting.

          6. Dave W Baldwin

            Good looking site.The artists MUST keep things in the feel of real time.You need to see about collaborative regarding live performance. The plug for an upcoming show with rev opportunities that come before/during/after are real.

    4. Guest

      Thanks for the last comments on helping musicians make a living. Agree totally.

    5. fredwilson

      i buy more vinyl records every year than CDsi probably buy four or five vinyl records

      1. Armine

        If i may ask. Why more vinyl’s than Cd’s or simply digital files?Is it question of the quality? the feeling of holding the vinyl + artwork?If i think back of the music i use to listen to in my younger years, 2 things come to mind. Visuals + an experience.Holding a album in your hands was a pure deligh; the lyrics, artwork, you felt the vibe of the artist at your fingertips and most importantly you felft a connection with the artist. Something that today’s digital file format no longer provides.

        1. fredwilson

          I don’t like to collect/own bits. I like to collect/own atoms

          1. Armine

            i use to think the same way until i realized my main issue was more with the lack of “info/visual/experience” associated with digital.Hence, one of the reason i launched http://www.viinyl.com. A music service developed to enhance the music experience 1 Song, 1 Site 1 URL at a time.some examples: http://tequiero.viinyl.com, http://idareyou.viinyl.com/

      2. Ron Zeligzon

        Seems like the Vinyl Record business has grown substantially over the years.

  31. Geoff P.

    There are two parts to “streaming”: 1) streaming as a means of getting the bits to the speakers, and 2) a rental vs persistent ownership economic model. The two are not the same, and you can combine them in several different ways even though to date the models are mostly download/own or rent/stream.Any thoughts on the preferred mixing and matching of this? While I buy that streaming can be interesting, it seems that’s in large part because of the rental model associated with that approach, and the accompanying streaming is the necessary evil. I’d think that for reasons of both cost and network coverage, a rental model combined with a hybrid stream/cache approach works better. Or is there some huge benefit to streaming everything that I’m missing?

    1. fredwilson

      i wrote a post about that recentlyi’m not a fan of the locker modeli think “renting” is where the big opportunity is

  32. Mark Gannon

    The one thing that keeps me away from streaming services and mp3 files is: quality. I have 300 to 400 gb of CDs ripped to FLAC formats that I stream over my home network to a Slimdevices Transporter. I use flac because it preserves all of the data in the music, while Mp3s achieve compression by throwing away data. For people who spend a lot of money (>$1k) on a stereo system, I don’t think Mp3s or streaming meets the quality level of CDs, records, or files in the FLAC format. The only place I’ve ever seen FLAC files for sale is the Grateful Dead website.

    1. rick gregory

      The 320k stream on MOG is quite good. I compared it over my *phone* to a CD/DAC Combo on a friend’s high end system and, while there was clear degradation… consider that one source was a $3000 CD/DAC combo and the other was a Samsung Vibrant. Out of my Roku into my tube pre and Naim amp, it sounds quite good. The Roku has digital outs so at some point I’ll add a DAC. In fact I want to hook the Roku to my friend’s system to see how close that comes to the CD/DAC combo.Plus… I too have all of my music ripped in lossless. AND I have access to a lot of music that I don’t have. Tonight I’ve listened to Phosphorescent, Ray LaMontaigne, Eva Cassidy, Adele, some Black Keys and I have the remastered version of the Stones’ Exile on Main Street on right now. I own none of those. Before I go to bed I’ll likely check out Band of Horses and a couple of other bands. Two weeks ago before I had MOG I wouldn’t have done this.

  33. techheadted

    Excellent summary Fred. At Enconcert, we’ve been focused on the “Live” music side of the equation and have some very positive indications that high quality live production and distribution at low cost has great appeal in the Indie and Post-Label Artist arena.The Grateful Dead biz model implemented with today’s social platforms, low cost production tech and cloud based live distribution is what we believe will be a significant accelerant as the industry evolves away from Labels into a more Artist/Fan centric business model.

  34. Jonathan Gill

    Why should the record companies invest in allowing other people to make money off their assets? What’s in it for them? Presumably if they all got together and created the model that works for them, the Hulu of music, and had some innovative leadership they could shut out everyone until they are ready.

    1. fredwilson

      they get well north of 50% of the revenue that all of these services generatewhat is in it for them is they sit back, let others do all the work, and they take most of the revenues

  35. Universal Indie Records

    What the record companies should be advised to do is partner with innovators in digital music and keep the fees low enough so these companies can actually operate. They need to think long term instead of the short term which is what lead them into mess they’re currently in.

    1. David Chen

      If music labels lower the streaming fees to give more “breathing room” to the streaming services, would consumers adopt to this new form of music consumption faster?

      1. Universal Indie Records

        Maybe.. maybe not.. but there would be a lot more room for experimentation to see what works and what doesn’t. You’d have a lot more brilliant mind at least trying to come up with some solutions.

      2. fredwilson

        I think it would allow the streaming services to test and innovate aroundpricing models which I think is necessary in a new market

  36. joesomething

    The stupidity of business in the music space never ceases to astound me.The only thing dumber is some of the commentary.I wish I could write. I really do. I could then explain what you know, what you think you know and what you don’t know.I could explain how labels work and contracts. I could explain things to pundits who worked at labels what they don’t know.I could explain that the value of labels is based on contracts that detail what they own, what they do not and how revenue needs to be recognized.I could explain why itunes was one of the worst things for the music business and why.I could explain why the music business folks are “the dumbest guys in the room”.I could explain a lot of things and show examples.I could also explain how the business should work.But its irrelevant. The fact is, no one cares. It took a while to realize that. When on the internet, the only thing that matters is the mutual admiration society.Bad news. Its not about “user experience”. Its about selling like every other business.

    1. fredwilson

      i think you write pretty wellmaybe you should blogyou clearly have something to say that people should hear

  37. Kevin

    Fred,I am leading a children’s book publishing startup that has adopted a model that wouldn’t have been possible 10, or probably even 5, years ago. Our model is based on cutting out the middleman – the Borders and Barnes and Nobles of the world who take 50% of retail sales – and going directly to consumers. For us, this is a powerful model. We capture a portion of that 50% retailer margin and pass a portion along to our customers as savings. Plus we do not have to invest in significant inventory levels, ship it out to Borders, and then accept returns for a full refund – an expense that kills many publishers. The result is that our model is higher margin and lower risk. This is possible now due to the evolution of e-commerce and social networking.This model works well for us despite the fact that children’s books are an item that people are more likely to want to hold and explore before purchasing (kind of like shoes, but look at what Zappos has achieved). Music is an industry that doesn’t face that challenge at all.Why doesn’t the music industry just get a JV together to build its own streaming music service? By cutting out the middle man (CD retailers, iTunes, Amazon, Pandora, etc), they’ll capture a higher percentage of value, allowing them to maintain overall profitability while meeting consumer price points. Plus, then they’ll put themselves in the driver’s seat as the music industry evolves vs. staying on the defensive. And all of the data to which they would have access would be valuable for their core business (e.g. understanding consumer preferences, new talent, etc).Would be interested in anyone’s comments on that.

    1. NY_Commenter

      It’s one of those industries that is culturally very ego driven and very territorial. I know this sounds completely anecdotal and could be said about most industries where large profits are involved, but jockeying to sign artists and to be an executive “dealmaker” “people connector” that’s connected to a celebrity is taken to crazy extremes. The bigwigs earn huge sums, hobnobbing with pop culture stars, while the assistants get to dress for work like they’re going clubbing, go out to free shows every night, but make nothing.I worked at Sony Music (Columbia, epic, etc) during the peak of CD sales in the 90’s. When they merged with BMG it was a sh*tstorm. These folks just aren’t cut out for JV because one of them always has to be the guy on top.Like Brian Eno said, perhaps the music industry is the anomaly in the music business – I think this peak of CD sales was an anomaly as well. An increasingly expensively priced product that got cheaper and cheaper to manufacture ($18 sale price on a $1 manufacturing cost item).The “Compact Disc” is a patented, trademarked device. Note the forays into SACD, Dual Disc, etc etc.Funny that there are practically no label folks commenting here.

    2. Abraham J Safdie

      While it may make commercial sense for the labels to band together, I believe there are antitrust issues restricting their ability to do so.Aside from antitrust issues, another huge barrier to changing music distribution is the overwhelming number of historical rightsholders for each musical work. From the consumer perspective, we identify only a song; from the legal perspective, each song is a spaghetti bowl of rightsholders proving difficult to disentangle.With respect to new music, the democratization of production and distribution tools cuts both ways: musicians need not give up as many rights, but, considering the increase in music available to listeners, it’s also much more of a challenge to stand out from the static.Curious to see if fans will ever have a more centralized distribution system, for all music, from all decades, available from all locations.

    3. Guest

      Kevin, My wife & I co-founded a children’s literacy non-profit last year. We are hyper-focused geographically during this initial ramp up. I am intrigued by your venture and want to learn more. Could you please provide a link to obtain more information or a way to contact you? Thanks so much.Side-note: Kind of feel bad my comment has nothing to do with music so let me just say Metallica’s version of Whiskey in the Jar is better than Thin Lizzy’s … and I don’t even like Metallica all that much. Go figure 🙂

  38. Nick Dynice

    I don’t think physical release will ever go away entirely. Super fans just like to have stuff. It is just that the majors will probably no longer be interested because it will be a much smaller market in the future and with greater risk. Maybe sell licences to independents who will make smaller physical runs, outsourceing their risk. Independents will still release physical media like box sets, vinyl, cassete, (yes, cassette) in a boutique manner. So in the future you might have much larger number of independents taking risk with physical releases. At that point you might start to think of them as two separate industries: majors that mainly deal in mainstream artists and digital releases, and independents who mainly deal in the messy business of physical releases. But since digital is so easy they will probably do this too.

    1. fredwilson

      i could see that happening

  39. SL Clark

    Thanks Fred, This was the best laugh I’ve had in ages. Telling dinosaurs the comet is here,,,I’m in the book publishing business,where the situation is worse. This Legacy Publishing accounting scandal will cause more author defections, someone in Tech will build streaming, and poof… NY tumbles.http://kriswrites.com/2011/…When are you going to fund streaming for books? My company will jump all over this the moment someone emerges with the needed Oooomph.Cheers, -Steve

  40. Jeff Judge

    Great thoughts here. I paid for a subscription to Rhapsody for about a year after I bought some Sonos gear, but canceled after rdio came online and matured a bit. I’ve been using rdio on a subscription basis for a few months now and just really love the user interface and accessibility via web, Mac app, mobile sync and Sonos. I still have a large file collection, but not until I started using rdio everyday did I mentally switch to wanting to stream music first rather than buying it right away (which I switched to Amazon for last year over iTunes). Related, I’ve now moved a good chunk of my collection to Amazon after they released cloud storage/player and happy to rid myself of having to catalogue, backup, etc.As a music lover, I just think that there’s never been a better moment in history for music accessibility and enjoyment.

    1. fredwilson

      i’ve been using rhapsody for 12 years and rdio for less than onei may be following you shortly jeffbut i might nota lot depends on how rdio performs vs rhapsody on our sonos boxes

      1. Jeff Judge

        Either way…long on Sonos.

  41. Sean Weinstock

    There’s some interesting stuff going on here, and I think my response serves more as a reply to several folks than to just one, which is why I’m posting as a separate entity -Been thinking about the music industry for a long time, and I agree that it would be amazing to see the RIAA or a major label syndicate sponsor the kind of initiative Kevin talked to a few posts down. The problem for the labels is that, if they’re large and have the ability to make this dramatic industry-wide change, they’re publicly held corporations. It is tremendously difficult for public corporation leadership to take any kind of “unproven” “risk,” especially in an industry used to seeing immediate pops in profit without having to wait through long R&D cycles like bio/pharma. Adding to the problem is the weight of the short-sightedness that is inherent to Wall Street bearing down on all public companies which try to innovate. An easy example of this short-sightedness can be seen in Wall St’s reactions to Larry Page’s ascension to Google CEO and his incurring huge costs to keep key employees/other assets who and which he feels will best enable the company to grow into the future. The stock dropped 8% overnight. Public company leadership is therefore counterincentivized from taking risk that doesn’t have immediate revenue increasing implications because those leaders have a Board of Directors to answer to, and that Board’s primary duty is to ensure shareholder interests, which are generally calculated in short-term metrics. Finally, record labels are headed up by 50-60 year olds who, just like their counterparts in the newspaper business, don’t get it or don’t care. I don’t mean to be disparaging, but, having met these guys and seen how they work, it’s pretty true. Why don’t they care? Because they’re millionaires, or rich enough, and will retire before Judgment Day, because they didn’t start the companies and therefore realize that their legacy will not necessarily be associated with that company’s success or failure, and because they probably don’t understand how they can help.The end result is that the larger a corporation gets, the more reactionary and less innovative it tends to be. Fred actually went head-to-head with John Doerr on Google becoming a malaised behemoth at the Web 2.0 conference a little while ago. You can see that at the following link: http://www.youtube.com/watc…. In my opinion, this line of thinking is pretty much what makes Apple the phenomenal company that it is. Steve Jobs, when asked about whether or not the iPhone would canibalize iPod sales, responded very quickly, saying something to the extent of ‘Well, if we’re not going to do it, someone else will.’ As far as I know, he’s the only major CEO in the world to respond that way. Of course, my frame of knowledge is limited, but if record label executives were to respond that way, things might be different for them.

    1. fredwilson

      the best companies are usually run by entrepreneurscan larry do for google what steve did for apple?

  42. joesomething

    I love the responses and comments.I don’t want to sell music. I don’t want to invest in music. I want to be the middleman.”I have a company that…..”The pitch is this (which I have translated for all):Hello, we here at XYZ know that you are stupid and desperate. We offer this great service that (insert latest social media catch phrase). We might make you some money, but we know we will make money. Or, at the very least, attract investment.

  43. rick gregory

    I used to be skeptical of streaming, but recently tried MOG out since I got a Roku box and it supports both MOG and Rdio. The Roku feeds my stereo which is reasonably high end though not crazily so, which means that quality is important.You know what? I love it. The quality is fine (MOG streams a 320k encoded MP3 stream) but even more, I’m listening to new music again. It’s the music equivalent of what the Nook Color did for books – There’s much less of a barrier between the “hey, that sounds interesting” thought and getting the music. Someone mentioned Al Stewart was in their town in concert… I’d not thought of his music in years. A few minutes later, I’m streaming it. A participant in another community I frequent is always posting new music he’s listening to and loves… I can fire up MOG and try some out easily… if I like it, I can favorite it, if not, all I’ve lost are a few minutes of listening time.My point is that THAT is the value to music companies – instead of capturing just the people who are actively into buying music all of the time, get people like myself back in the game. Instead of worrying solely about average revenue per customer, make the market larger. It was a no brainer for me to pay the $10/month – I’m evangelizing it to a lot of other people I know who are in the same boat – lots of CDs, but not actively collecting new music. Imagine if the industry didn’t fight this, but embraced it.

    1. fredwilson

      hooking up a streaming music service to a connected device is the killer combofor me it was rhapsody on sonosbut it doesn’t really matter what the combo ismusic dial tone plus a device that can handle it in the home is the way to go

  44. ethankap

    As a former SVP at a major, I have nothing to add but YES, been saying the same things over on my blog.

    1. Yuriy Blokhin

      So, what is the main point of friction in those arguments? Is it only because of the revenue cuts that need to made in the meantime, while new business models are being experimented with via partnerships with innovative startups?

      1. FAKE GRIMLOCK

        IT HARD TO ABANDON SINKING SHIP THAT STILL MAKING MILLIONS OF DOLLARS.

  45. Martin De Saulles

    Physical books, newspapers, DVDs, magazines may not be too far behind the demise of the CD

  46. Crayonpie

    You think this would happen with software first….how many Apple users upgrade the OS online?

  47. Shachar Oren

    A bit off, in the following way: Streaming subscriptions are not growing nicely, they are growing in a crawling pace. Cloud revenues, if any (see Amazon launch without license), will not help label revenues. Streaming subscription also eats into label revenues as more revenues shift to publishing and PRO (arguably not bad for artists in the end of the day, but not great for labels). Moreover, the revenue “per listen” and what it eventually does to margins is horrible (i.e. if $4B iTunes business moves to streaming, it will kill the labels revenue pie). So what the labels have been doing for the past 13 years is not invest in any specific market but fight new digital markets to slow their progress. It’s because they are, justifiably, terrified of untested and unproven models, and like a bank, focus on “risk mitigation” instead of R&D. Indeed, their condition to a large extent has been their own doing – but also, they never managed controlling the larger forces that shape and now control their markets: High tech firms. Technology companies treat music as a loss leader, means to an end, and systematically raped the music industry (whihc often allowed them to). And that all brings us to where we are today: It’s too late for the music recording industry at large. The future spells existance for smaller entitees, artist driven, existing in a highly segmented distribution market with social-driven discovery tools. The big distribution pipelines are gone.

    1. Guest

      { Insert Sarcastic/Ironic Comment Here}Wait. What do you mean technology might have harmed the music industry by treating it as a loss leader? How do you mean? You mean the thought of creating music and building fan base of 4 million fans to sell your music to and make $15 to $25 million is less appealing than creating a B2C internet play where you sign up a million users (freemium users mind you that have never paid anything) and flip the startup for $100 million? 😉

    2. fredwilson

      i am hearing differently about the growth of streaming services

      1. Carlos Adame

        Correct. Streaming services are growing significantly but from a smaller base (vs downloads) thus they are not moving the needle for overall digital revenue for the labels.

  48. Yuriy Blokhin

    Grooveshark makes money only because they are playing with this almost-black legal area where they claim to not take responsibility for whatever music their users upload and share with the world. They position themselves as a public library of digital content – storage rather than music service.Rumors are they’re working out a deal with majors at the moment. If they’re going to achieve an agreement, it will get really interesting as it will set the precedent for “steal music – get too big to fail – share some profits and become legitimate” business model. This will be a game changer for so many other startups who are struggling with insanely high capital costs just to enter the game (ie dilution). Once (if) the precedent is there, more and more companies will try pulling this trick off and even further increase the pressure on the music industry. I actually hope for this revolutionary path, as it’s clearly taking labels too much time to evolve and realize that their larger than life image from the 80s is gone and chances are won’t ever come back.

  49. Michael Klein

    Nice thoughts, Fred. I agree whole-heartedly. From my own personal experience, I have always been a music lover. I used to pirate because why pay for something that you can get readily for free? But as a I grew older, I had less time and I stopped pirating because the experience is so clunky and time consuming. So for years, I spent exactly $0 on music through iTunes and other services. Then enter Spotify, which created a music experience that was so dramatically better. Within a week, I signed up for a subscription that is valued at $120 / yr. 2x the average iTunes user, but remember, I was not the average user, I wasn’t spending anything on music. Because it was in the cloud, I could take it with me anywhere – iPhone, car, iPad, work, TV – pretty much anywhere and anytime I wanted to listen to music. It was provided to me as an experience. And one that was so much better that I spent 4x to 5x more time with the medium. From a high level, this should be a great thing for the music companies (an increase in demand of an industry’s good or service is obviously a very good thing). The problem is that the music industry can’t get their head around the fact they are in the media, or more appropriately, the experience business (this lack of consciousness is hindered by their current revenue model). Music is not a physical good, and thus should not be sold as one. People on the other hand, are willing to pay money for experiences. Look at where artists make most of their money today – concerts. Those are experiences. Music is an experience, and with the cloud and new devices, it has never been such a compelling one. The time is now for music companies to capitalize on it.

    1. fredwilson

      you and i are poster children for the power of the streaming model

      1. Michael Klein

        Indeed. You inspired me to write a post that I had been sitting on for a while: http://commutingvc.com/2011…. Exciting time in music.

        1. fredwilson

          I read it. Good post

    2. itvc

      “I used to pirate because why pay for something that you can get readily for free? But as a I grew older, I had less time and I stopped pirating because the experience is so clunky and time consuming. “That’s great Michael I’m glad you are so proud (with your big deal resume and income no less) that “why pay for something that you can get readily for free?” and the only reason you stopped was “I had less time” because “the experience is so clunky and time consuming.”

  50. Milton Soong

    Music execs have long been irrational about their business (I have worked with them in the past in the anti-piracy front). If I am a betting man I’d say chance is not good for them to make the right decision in time before the ship hit the iceberg…

  51. css

    I can’t wait for music to move into a cloud based model. I’ve never bought music from itunes. I like to stream from online stations I listen to.

  52. FAKE GRIMLOCK

    MUSIC INDUSTRY ALREADY HAVE PLAN.TAKE EVERY PENNY OUT OF DEAD HORSE THEM RIDING UNTIL IT STOP MOVING, THEN LEAVE WITH MONEY.THAT LEAVE THEM WITH LOTS MORE MONEY THAN BLOW IT ALL BUILDING NEW MUCH LESS PROFITABLE MODEL.

    1. markslater

      you are not far wrong.

    2. Dave W Baldwin

      Thanks for another ‘simple truth’.On top of that, the problem is money sources want to do something that would get them invited to the office/studio of current dead horses instead of opening mind and feeling larger vibration that can happen in the community.

  53. Gregory Magarshak

    How come all the songs are available on youtube for free?Last year I built http://youmixer.com for my parties . We’re going to actually fix it up and launch it on ipods soon. Why pay for songs when you can search and stream them all legally for free…

    1. fredwilson

      YouTube is the most popular streaming music service

  54. Litty

    Not an expert here… but seems like labels are living in the past. Their asset is their catalog (past). Their current value to consumers and musicians (hard to even figure out what that is these days) continues to diminish. Every time labels “hold out” it seems like they end up with even smaller piece of a diminishing pie. Meanwhile, consumers continues to get both a cheaper and better experience.The business seems broken. Maybe the lables should take a piece of equity from the major services as part of their distribution deals. Then their goals are better aligned. This is what MSO’s do with new cable stations (MLB TV, NFL Network, etc.) as well as how Hulu started…

    1. Yuriy Blokhin

      Actually, this is a very common requirement on top of the licensing fees. Not every startup is ready to both give up this much equity and still pay steep licensing fees.They just keep trying to make the same profits they’ve been doing at the peak of CD sales in the 90s.Labels and their business model is in depression right now. There is a very common methodology to break down human depression into 5 stages: denial, anger, bargaining, depression and acceptance. It seems that majors are stuck somewhere in the middle of anger and bargaining.It’s going to be an interesting year with Spotify finally making progress with breaking into the North American market and Sean Parker’s potential acquisition of Warner Music.

  55. brianbotkiller

    Wow, that was effing boring. Thanks for telling me what a billion other articles already did.

    1. fredwilson

      You are welcome

  56. Stat Spotting

    The point you have conveniently ignored is the growth of iOS devices and the possibility that Apple could itself soon be a very big player in streaming.

    1. fredwilson

      I hope so

  57. dan_leslie

    Fred, you’ve said before that you’re bullish on streaming as the dominant long-term delivery system. I’m just curious how you expect streaming to become dominant when mobile data service is not always reliable.Air travel, international roaming, network capacity, and lack of wireless broadband in remote areas are all likely to be issues for years to come — not a user-friendly scenario when all my music is in the cloud. What’s the solution?

    1. Bryan J Wilson

      Totally agree. Until those issues get resolved, streaming will not be a totally satisfying experience. So it may be a while before I put away the iPod. The licensing issue also becomes a problem if they have to occasionally renew their deals and risk losing certain artists/labels.

    2. fredwilson

      Many of the streaming services cache locally

  58. rich

    How about the streaming services themselves? How do they differentiate themselves? Is that a winner-take-all market? Experience can be a differentiator.I’ve used Rdio and Napster. Rdio has a great experience, but there are holes in their catalog. Full Catalog + Social Discovery + fun experience is the winning model, but is there a ceiling to how big this market can get?

    1. fredwilson

      I think they will be like phone companies. They will compete on price andservice. But it will be commodity. Its music dial tone after all

  59. Rich Yudhishthu

    How about the streaming services themselves? How do they differentiate themselves? Is that a winner-take-all market? Experience can be a differentiator.I’ve used Rdio and Napster. Rdio has a great experience, but there are holes in their catalog. Full Catalog + Social Discovery + fun experience is the winning model, but is there a ceiling to how big this market can get?

  60. Cortneyharding

    I agree 100% with your central point — record companies need to invest in and create mutually beneficial partnerships with streaming services. However, I have some issues with the way you conflate the “music industry” with the “record industry.” You do make the distinction at the top of the piece, but then keep using the term “music industry” throughout.I know this sounds ridiculous and nitpicky, but I think it invites a bigger question — why isn’t the music industry as a whole more engaged with technology and vice versa? I’ve seen several start-ups that could really own and innovate parts of the music industry (selling merch, building fan communities) pretty much refuse to engage with labels and artists. And while I’ve also seen plenty of music folks stand in the way of artists exploring tech, I’ve had discussions with higher ups at companies many startups consider stodgy and behind the times — only to find them to be open minded and honestly excited about working with the startup community.This disconnect is frustrating and benefits no one. There are a few organizations and people (and, full disclosure, I am one of them) trying to bridge these gaps, but not much seems to be happening. I’d love to see more startups and more music industry types work together, rather than in opposition.

  61. David Chen

    Record labels want the same margin from streaming services as they do with digital downloads. They know the streaming services currently lack scale comparing to digital download. They are hoping the streaming services like Pandora, Spotify, Rdio can demonstrate to them that their business model could work in the long run. And they believe a monthly subscription model ($10/month, which equals to $120/year) could work. The issue here is the consumers hasn’t demonstrated an strong interest in this subscription model at this price level. It took Netflix a few years to build up their user base, I think it’ll take a few years of intense marketing, plus building smart recommendation system and community features for the streaming services to win over users to this $10/month subscription model. The current landscape is simply to fragmented and pricing model too confusing/limited for the average consumers. It is still way easier to just download music than to subscribe to a streaming service for the average folks.

  62. Siminoff

    The biggest problem in the music business has never been the pirating of music but the inability to sell a bundle of songs in the digital world. It has to be a 10x decrease in totoal market size due to selling individual songs vs. a awesome song bundled with 12 crappy ones.The business has not realigned its infrastructure to deal with this change which is step one. Go to a big record labels office and you would think that record sales are up 50% this year, not down.First rightsize the companies, then strike the deals like you suggest above.

  63. Andrew Brackin

    Great post, I love streaming yet am working on http://TuneBundle.com a new way for artists to release music in bundles, saving the consumer money, bringing them extra content and some insight into the music with the bundle and artists can increase downloads by partnering with us putting them into Bundles.

  64. Alejandro Cosentino

    Physical record music business is dying without a solution. Digital music business won’t reach a point to replace the physical CDs. Apple and Amazon are not a solution. They subsidize the business and they will not revert the fall. Revenues lines from recorded music business should be erased but a new business model was created and streaming services will add value to many parts of the value chain.Streaming services is a solid business case since it’s multiple client cluster with different value propositions:1. End user: the service can be amazing (all the library with the power of internet, apps, mobiles, suggestions, bands discovery, collective power… a paradise of music lovers), 2. Promoters: for them SS is the new terrestrial radio, they needed to promote shows, bands, merchandise, etc. 3. Adverstisers and Sponsors: music is the media to reach the elusive segments of young consumer that other media cannot do.4. New Bands: SS can help to do their part in the support of the upcoming bands.I experienced first hand but was too early player across Latin America and although we reached 4.5M unique users/month we could not survive due to dispute among shareholders. If SS has the right biz model and patient VC has a significant chances to win.PD: If DMCA (Digital millennium Copyright Act) are well execute helps to save a lot of money in royalties and deliver a superior service.

  65. Huntington Cudahy

    About five years ago James McQuivey at Forrester Research predicted a major shift by music consumers to a subscription based model, but that hasn’t happened yet. The reality is that the entire music industry has become fragmented. Consumers now choose the delivery model that suits them best be it subscription based, downloads or physical products. The entire ecosystem has changed and nothing major labels do will ever get them back to the sort of profitability they once enjoyed. Not that they’re going to disappear, they will simply remain bigger fish in what is now a very crowded sea.Here are a couple of slides I created a few years ago that represent the pre and post internet music business model: http://su.pr/9psLD8

  66. Matthew MacDonald

    I’ve read numerous blog posts and had many discussions regarding the parallels between the “takeover” of digital music as precedent for the takeover of the e-book.Would be interested to get your those on e-books as it relates to what your discussing.My opinion:The end use experience of digital music and traditional is the same (played through speakers/headphones, etc)..BUT the end user experience of reading an e-book is DRAMATICALLY different than reading a hard copy book…Thoughts?-Matt

  67. Alex Williams

    Some interesting commentary here. I probably fall into the file collector category, but my thoughts have changed lately. I recently signed up for Rdio and am really enjoying it. I signed up for 2 reasons: managing a massive music collection gets exhausting and expensive. More and more devices, hard drives, etc…it starts to take a lot of time. What songs to put on the iPhone, iPad, etc..? Syncing, dragging folders, – meh. I have 50,000 songs in iTunes, I didn’t even know what to listen to anymore. I was losing my musical mojo.I am loving Rdio to discover new music. Feels like record store a little bit. Music feels new and most importantly – effortless. The right mixture of easy, everywhere, and price point is going to win. If something else comes along that makes it easier, I would switch from Rdio. I just want to listen to music and I will pay plenty not to have to think about anything else.

  68. Kevin Drost

    I worked for several years in the music industry, as a musician, an A&R rep for a major label, and then as the owner of an independent label, before my current career as a digital media strategy consultant. Here is my take-People love to bad mouth the music industry as greedy and short sighted. While partially true, there are plenty of visionary and innovative people working directly for large corporate labels. One major issue preventing innovation is just what Fred started with: even 10 years+ after Napster, physical sales still account for 50% of revenue. Of that, 90% come from the top 2-3 accounts (Best Buy, WalMart, Target). It is extremely difficult as a publicly traded company to institute new models that jeopardize those accounts. Re-wind to 2001 and it is virtually impossible to credibly back any new technology or business model that would threaten WalMart’s physical sales, who would in turn threaten to cancel upfront orders. How does a CEO tell shareholders that he’s going to give up a single account worth 30-40% of his business to embrace a new model that won’t see any real revenue for 3-5 years? It’s pure innovators dilemma.That said, fast forward to today (or 3-5 years ago) and there are no excuses left. The damage is done and labels are in survival mode. Yes, the industry has to embrace cloud-based experiential music delivery. It’s obvious to everyone, including shareholders (those that are left), and it’s disappointing that the various stakeholders (artists, lawyers, labels, retailers, aggregators, device manufacturers) can’t streamline the rights process for consumer-friendly, cloud-based service. I emphasize the various stakeholders, as labels are only a small part (yes, artists and their reps are a huge reason digital services have had such a hard time – believe it or not).If anyone is interested, here is a whitepaper speaking to how all media companies need to move beyond just offering content and start offering differentiated experiences.http://www-935.ibm.com/serv

    1. fredwilson

      Great comment. Thanks for the link

  69. David Gross

    Thanks really helped me quickly get a deeper understanding and vision for a Market I only peripherally understand but which crosses my path a lot. Thanks for sharing 🙂

  70. Nick Kampe

    The future of music doesn’t involve purchasing music whatsoever.

  71. Volnado

    The music business has a larger problem than this one Fred. Its customer relationship management bc the fans are spread out across so many platforms to interact with the many music entities that make up the industry.The win is the combo of fixing music CRM by making streaming music the touchpoint. Welcome to my life.

  72. Thor

    The music recordings industry is not going anywhere. But I think a pertinent question is whether record labels are going to continue to be pertinent player.As I understand, traditionally a record label does the following:1. Scouts out talent2. Provides advances to the artist so that they can record their music.3. Manufactures the product4. Distributes the product (usually handled by a distribution company)5. Promotes the productCost of entry for artists is lower and lower. Depending on the style of music the expense of a recording studio doesn’t necessarily apply. So advances aren’t necessarily required. Artists are financing their own recordings through working jobs and saving up, or sites like Kickstarter (basically glorified pre-sales) and others.Manufacturing doesn’t apply for downloads or streaming.Distribution is usually handled by a distribution company anyway, but in the digital domain this isn’t a huge hurdle.Promotion. This is the major expense. Typically in the major label game much of this cost is externalized onto the artist anyway and comes out of their advance. Artists pay for the production of their music videos, etc. (So what exactly is a record label again but a high priced lender?)If the musician has the talent and some money, they can go straight to promoters and distributors. All a major label has is expertise, but as the playing field changes their experience counts for less and less. And as the costs involved aren’t so high any more, it’s easier and easier for smaller players to enter the game.

  73. Julian

    Nice to see someone from a cold-hard-business-perspective speak the truth about what needs to happen for the future of the music industry.

  74. Monroe

    Wow, great thread, my head is spinning. I just have some thoughts if I may (record producer in the industry for over 20 yrs, Grammy winner—I know, who cares, sorry).1. Much of this conversation seems to center around the question of what the new model will be. I believe many of us think this way because in our lifetime there was the “one” business model that sold the widget that people bought that made noise. Because it was here before we were born, we never questioned it. But the truth is the “record” industry as the big behemoth we’ve come to know is really only about 70 or 80 years old. So, anything could happen. All to say I don’t think it’s going to shake out into another “one” main model— many splinters… different types of distribution of physical and digital product, majors with refined 360 deals, indies with boutique companies and niche markets, etc. Too many people like too many different kinds of music and want to access them in too many ways. As we all know, it’s not the same world that gave us Ed Sullivan and the Beatles. Or…. there’s something completely brand new that none of us have seen yet! It’s still early. I’m actually very excited about all the new stuff coming down the pike.2. If you take the long view, and look at how music’s been experienced or distributed over the last few hundred years or so, the big money made in the last six or seven decades is the exception. It may be that people will come to the point where they will just no longer want to pay for recorded music period, but I think that they will pay for it if it’s attached to a great idea. And those with the best ideas will rule. The good news is, music is more popular than it’s ever been; it’s a huge part of people’s lives.3. I think someone mentioned this earlier, but it’s true, the way the majors were run traditionally made no sense what so ever. When I was first married and my wife was a pharmaceutical rep, I was always telling her about projects being shelved for no apparent reason after they poured crazy money into them, or artists being signed and dropped, and she’d reply “ don’t you realize, the company I work for would go under if it were run that way?!” Maybe it was just a matter of time (check out the book Appetite For Self Destruction). I don’t see labels partnering with innovators until the old regimes start to give it up to new young upstarts. They say they want to embrace new technology, but they’re still holding on to their old ways with the death grip. It’s about control, and the ship is going down. indies with boutique companies and niche markets, etc. Too many people like too many different kinds of music and want to access them in too many ways. As we all know, it’s not the same world that gave us Ed Sullivan and the Beatles. Or…. there’s something completely brand new that none of us have seen yet! It’s still early. I’m actually very excited about all the new stuff coming down the pike.2. If you take the long view, and look at how music’s been experienced or distributed over the last few hundred years or so, the big money made in the last six or seven decades is the exception. It may be that people will come to the point where they will just no longer want to pay for recorded music period, but I think that they will pay for it if it’s attached to a great idea. And those with the best ideas will rule. The good news is, music is more popular than it’s ever been; it’s a huge part of people’s lives.3. I think someone mentioned this earlier, but it’s true, the way the majors were run traditionally made no sense what so ever. When I was first married and my wife was a pharmaceutical rep, I was always telling her about projects being shelved for no apparent reason after they poured crazy money into them, or artists being signed and dropped, and she’d reply “ don’t you realize, the company I work for would go under if it were run that way?!” Maybe it was just a matter of time (check out the book Appetite For Self Destruction). I don’t see labels partnering with innovators until the old regimes start to give it up to new young upstarts. They say they want to embrace new technology, but they’re still holding on to their old ways with the death grip. It’s about control, and the ship is going down.

  75. Emily

    One fact that you’ve missed is that 90% of downloaded music last year was illegal. As the saying goes – there goes the neighborhod…

  76. Wes Smith

    Relationships with content owners and consumers (and their checking accounts) will likely dictate the shift. Apple has relations a plenty, and my guess is they’ve got this horse worked out. It’s not like they have to change consumer habits from shopping at bricks and mortar to online. iTunesCloud is probably close by and I couldn’t be happier if they’d drop the media streaming service bomb and rid of all the hack services and copy cats out there…On a side note, that should probably be the main note, let’s not forget that artists produce the content…there is a place for labels and aggregators large, small, independent, to facilitate this cultivation. The problems to date aren’t the music/video medium, it’s because the business of music/video is full of shitty people.

  77. Wes Smith

    Btw, my other point was how is this any different than the software business? It’s a near identical model, have idea, develop, brand, market, distribute, et al! Yet few seem to be so upset about it because we are conditioned by software inherently being delivered electronically? But at the end of the day, it too is a walled garden, especially in SaaS, the monopolistic packaging where you use service to mask fading software margins and desperately create vendor lock-in to help cover up your lack of concern for quality and the ability to deliver packaged software.Let’s give Microsoft kudos for their adventures in SPLA and Software + Service vs. SaaS. When others follow suit, the price/value of software will be separated from the price of service, and business and consumer will both benefit as free market returns and quality again becomes the focus.

  78. boikej

    There’s a quote in a recent New Yorker story about quantum computing: “physics advances by accepting absurdities.” The same holds true in many parts of technology industry. Record companies would do well to learn this.

  79. fredwilson

    I should have said the record companies make $50 to $60 per year on theaverage iTunes user. That number is after apple takes its cutI would fix my post but I’m away from a computer for the rest of the dayAlso the CDN costs for streaming are significant as are the customeracquisition costs. Streaming services are expensive to operate

  80. fredwilson

    We’ve not invested in music. But I am a rabid consumer and observer and liketo write about it

  81. Wells Baum

    I thought Soundcloud was one of your portfolio companies?

  82. fredwilson

    they are about sound, not musicmusic is a part of the service for surebut like youtube, it is not all about musicit is about sound

  83. Dave W Baldwin

    Thanks for the link Charlie. Unfortunately got in too late. Hope the response was good.