In many of the conversations weve had with software providers and enablers of so-called Digital Rights Management technologies – so-called because many would argue that DRM has everything to do with restricting rights and little to do with guaranteeing them – we often hear the argument that the implementations should be left up to the providers and content distributors. As is their right, software vendors claim that theyre in the business of providing software solutions to meet demand. As content holders are demanding software that will restrict what consumers can do with their content, they are all but required to deliver it, so the argument goes. Fair enough. But we highly encourage all of the software firms developing such technologies to think carefully about who theyre getting on board with, because if the wheels come off, fine distinctions about content providers versus technology providers may get left behind in a hailstorm of consumer backlash. And if you dont think consumer vitriol can be an important concern, just talk to Intuit, which several months back had to resort to an ad campaign apologizing to its users.
The Music Industry: A Pilot Gone Terribly Wrong
The case study for how not to operate in the new era of digital content thus far has been the RIAA. Weve argued before that the RIAAs campaign against downloaders would be shortsighted and ultimately futile, but late last year the RIAA claimed victory in the shape of a Pew Internet & American Life Project study that indicated overall downloading numbers were down from May 2003 to December 2003. A January report from NPD, however, seemed to call Pews findings into question, with an indication that after an initial decline, file trading was back on the upswing. Without question however, the numbers have declined from their peak. This must be an indication that the RIAAs draconian campaign of suing users – which Pepsi memorably made light of in their Super Bowl ads featuring one of the eighth graders sued – is working, right? That must be it.
From the RIAA perspective – where everyone downloading music is a criminally inclined pirate in need of “education” – that is the logical conclusion. Mitch Bainwol, the Chairman and chief executive of the RIAA, concluded as much by asserting that these lawsuits are educating the public here. But approached from a different perspective, one in which users were tempted by the convenience of downloading but pushed towards illegal alternatives by the music industrys initial inability – some would say refusal – to offer a reasonable service at a reasonable cost, the causative factors appear to be more complex. For example, the fact that the industrys most popular legal online music store – iTunes – became available for the most popular desktop platform – Windows – in mid October for the first time may have something to do with a drop in the number of illegal downloads.
Even presuming the RIAA is correct and that its campaign is the primary factor behind the current decline in downloads rather than the emergence of relatively fair, legal alternatives, theres a basic problem – campaigns like this galvanize the public against the RIAA. This is a problem primarily because the public is the customer. This is apparent from not just the Pepsi ads, but from counter suits like that brought by Michele Scimeca recently in which she sued the RIAA for racketeering. The ham-handed approach of the organization at one point led RIAAs former chief Hilary Rosen to concede mistakes and ask for a “do-over, a chance to reconcile with consumers.”
But worse for potential music industry partners is the emerging realization that, based on the current economics, the online music business is at best a loss leader – and at worst a pure loss. CNETs Eliot Von Buskirk pointed this out months ago in his piece entitled –What the Labels Still Dont Comprehend. As he illustrates, the fact that the music industry collects about 65 cents out of the 99 charged leaves little margin for Apples profit. That iTunes is a loss leader for the iPod has been known for some time, but what of businesses that dont have the hardware sales to fall back on (and thats ignoring the question of how long the iPod can continue to be the dominant music player)? Well, as the San Jose Mercury News found out a few weeks ago the new Napsters not faring too well, as its currently hemorrhaging both cash and executives. So despite the success of such platforms from a volume perspective – Apple has registered over 25M in downloads – the general outlook is cloudy at best, and somewhat reminiscent of dot com era businesses where profits were always on the horizon and never in the bank.
The shame of all of this is that it doesnt need to be this way. For all the crocodile tears from record company executives concerning the rights of artists and the perils of illegal downloading to their livelihoods, there are models available that would benefit both musicians and consumers – the ones truly threatened are the record labels, as pure middlemen. Not all downloaders (even illegal ones) are malicious criminals, and many musicians have successfully profited from the internet through music downloads and online merchandise sales. As the Electronic Frontier Foundation (EFF) points out, artists from the Beastie Boys to Wilco have made money from internet without suing anyone. Pearl Jam offers a great example of musicians potentially making money from the net directly. From their ill fated crusade against the Ticketmaster monopoly to the decision to release every live show they do on relatively low cost, high quality CDs, Pearl Jam have consistently demonstrated both an affinity for their fans and an understanding that the high price of tickets and concerts can be prohibitive for large segments of their audience. They recently finished out a contract with Epic – owned by Sony – and emerged as free agents. While still unsigned, they paired up with both Apple and Amazon.com to offer up a new single theyd written, thus making available a single to a massive audience without any help from a major label. Does this model herald the death of record labels? Hardly. It does highlight the fact that musicians and music fans can achieve mutually beneficial relationships via technology, and that those relationships need not be antagonistic. You might argue the Grateful Dead proved this long ago by encouraging fans to tape their shows; and has there ever been a more loyal relationship between musicians and their fans, the Deadheads?
In the UK, Marillion have shown that the Internet can be used directly in a grassroots way to invigorate interest in a band’s fans, rather than record labels, have paid upfront costs for recent albums and tours, by subscription. Meanwhile Peter Gabriel is building a community of artists called Mudda, the “magnificent union of digitally downloading artists”. The business behind the community is called On Demand Distribution.
Music isnt the only industry that can benefit from compromise-driven, mutually beneficial approaches. By forgoing the typical litigation-based approach currently in vogue, content providers can drive further paid business. By providing some free content to webmasters and offering $25 bounties for subscriptions funneled its way, Playboy increased its subscription revenue by 74% in 2002. Its difficult to say whether lawsuits would yield similar results, but the laissez faire approach unquestionably allows for a better relationship with anyone interested in Playboys content – aka its potential customers.
RedMonk Take
Digital content distribution is not going away; nor, for that matter, is downloading. What needs to be found is an acceptable balance between the two, and that depends entirely on the business model enforced by the technology providers. The most successful DRM mechanisms to date have been those, like iTunes, that take a fairly laid back approach to content restrictions relative to the initial forays. While it would be nice to see the music industry take a hard look at the possibilities of subscription-based services like emusic.com, its fairly clear at this point such changes are not going to happen without a significant change in leadership and direction from within the RIAA. The music industry will have to be dragged, kicking and screaming, into substantial change. As CNETs Von Buskirk put it, “It’s hard to swing to the next vine when you won’t let go of the last.”
As software companies move forward and expand into new content areas, through examples such as Microsofts recent Disney deal, it would behoove them to look closely at who they are partnering with. It is critical that potential partners are closely scrutinized because many may not be particularly concerned with an equitable financial arrangement. Modern consumers tend to fairly sophisticated, and as kids at heart, hate being patronized. While the dot com era supported businesses that eschewed profits for future gains, the environment today is markedly different. Investor patience with loss leading businesses is far lower. Vendors must tread carefully with content deals though, because much as they might wish to believe they just provide technology and that its the providers that dictate business models (and bear the brunt of their decisions regarding restrictions), the public is not always so adept at seeing such a fine distinction. Given the experiences of the RIAA to date, it would seem that being tarred with a similar brush wouldnt be high on any vendors list (except for SCO, but thats a whole different story). Bad publicity and associations with organizations bent on litigating their customers hold little promise of future returns; consumers, while rather passive about some issues, care deeply about their digital rights. Even worse for vendors, they tend to be as unforgiving as they are passionate. Because of that, wed advise vendors to think long and hard about who they partner with, and under what terms, because most technology vendors will get one chance win over a consumer, if that. That might mean taking a second look at existing partnerships and questioning the clichéd “its up to the content provider” line, but the alternative – PR firestorms, consumer complaints, and lawsuits – are not likely to be attractive to any vendor. Unless they particularly enjoy asking for do-overs.
