CandidCapital

I was lucky to spend five days last week at MIDEM, the international music conference held in Cannes.

Apparently, the state of the conference reflected that of the industry - 8,000 delegates this year compared 12,000 last.

The overriding concerns expressed in all the keynotes and panel sessions were:

• How to monetize digital distribution of music (or what to do if this is not longer, or is less, possible).
• How to engage fans and persuade them to spend money on other music services to compensate for the decline in recorded music revenues.
• In this new landscape how the "food chain" (especially the labyrinthine rights structure) can adapt to enable new revenue streams to grow.

Monetizing Digital Distribution

By the end of the conference, it became clear to me that all the players will go a very long way to monetize the digital download of music and protect it from illegal file sharing. Factors cited in support of this:

• Collapse in illegal file sharing in Sweden after the Pirate Bay trial and prison sentences
• Traction in lobbying governments (e.g. UK and France) to implement one or more of: "3 strikes and you're cut-off"; levy on internet connections; levy on internet advertising revenue

That said, there's a recognition that simply defending the status quo isn't enough. File sharing will go on (how do you stop side-loading on Wi-Fi or Bluetooth enabled devices - especially with Wi-Fi hotspots set to expand). Legitimate downloading, driven by iTunes (who has an ulterior motive of driving device sales) and Amazon (with enormous economies of scale) has decimated the pricing of music - made worse as individual track sales outstrip album downloads.

However, the alternatives - principally the streaming services (Pandora, Rhapsody, Spotify, We7, Deezer and Lala) - are almost as unpalatable as illegal file-sharing. It's clear that ad supported eat-as-much-as-you-can (EAMAYC) streaming is unsustainable - Spotify's been rationing access to the free version of its service and We7 announced during MIDEM, contrary to all previous statements, that it was introducing a subscription version of its service, including caching to mobile like Spotify. The labels are therefore conscious (and I assume the collection societies think the same way) that the royalty revenues that they have enjoyed are unsustainable - leaving a choice of cannibalising those royalties or hoping that the streaming services can persuade enough users to buy subscriptions. The latter looks an increasingly forlorn hope even though Spotify's VP business development boldly asserted that the service had 250,000 subscribers by Christmas 2009.

The degree to which the labels have doubts about the current crop of digital services was made clear by a comment from Warner Music's SVP Digital Business Development who said that they were unlikely to "be backing any new digital business models" - implying that they will extract royalties from the outset and not try to predict, and back, potential winners. Beggars Group's head of digital cited other reluctance to support EAMAYC streaming - it decimates sales to serious music fans, who can spend tens and hundreds of pounds a year on content from Beggars Group. An EAMAYC subscription would mean that they'd be able to get it all, as well as content from all the other labels, for £100 per annum or less.

Developing Other Revenue Streams

There was a lot of interest in the idea of building a closer relationship with the dedicated fan - and persuading more fans to become dedicated, in order to increase the annual spend by each on goods and services related to their favourite artists - most obviously live music performances, but also custom video, merchandise and a range of competitions, prize draws and other activities where incentives to be participate (backstage tickets, gala events etc) can be offered to winners. A good example of this is Radiohead's remix competition where fans were encouraged to remix specific tracks from the latest album and take part in competition with active engagement from the band as the principal incentive.

However, the natural beneficiaries of these activities are those players already doing them: the artists themselves, the agents and the promoters and any new distribution partners (mobile operators, broadcasters etc) who can leverage them. However, the baleful influence of the rights structure impacts on the ability of new partners to really exploit these kinds of activities - especially where they're cross border.

At the artist level, both signed and unsigned, there's increasing recognition of the power and importance of direct fan engagement. Every artist of note has a Twitter stream and the effective ones write it themselves (Come on! 140 characters, 8 or 10 times a day isn't that difficult). "Authenticity" was a recurring theme in the conference about fan engagement - especially in exploiting social media. Ning, the customisable social networking platform provider , sees this as the overriding determinant of success in social engagement (endorsed in an excellent masterclass on Twitter and music during the conference). Chipmunk, the 19 year old UK rapper who put in an excellent performance during the Brits at MIDEM night on Monday and who has had a UK No1, constantly tweets to his fan base (even direct messaging to thank people for tweets and re-tweets).

It's possible that we'll see very successful second tier artists who build their own eco-system based around social media, live performance and direct sales to fans (although the latter is hard - since most fans want digital download to be integrated with their music management application - most obviously iTunes). This assumes that it will still make economic sense for major artists to remain signed to big labels with all the promotional infrastructure that goes with that relationship - though the labels are cutting their roster of artists to concentrate on those with the greatest economic potential.

Can the Food Chain Adapt?

The rights system is an albatross around the neck of the music industry - with its plethora of competing interests of whom most - if not all - are motivated by the imperative to extract as much royalty income from today's music use regardless of the impact on the ability of new, potentially vital, business models to emerge and gain traction. Sony Ericsson's principal music rights lawyer told a workshop that they would like to build more and richer collaborative music products or services. She cited a joint promotion with Robbie Williams, on his last-but-one album which was pre-loaded onto some millions of Walkman handsets across Europe, as a successful programme for all the principals (Williams, the label and Sony Ericsson) but took months of protracted negotiation with Lilliputian collecting societies across Europe - enough to stop SE seriously considering repeating the exercise.

It seems to me that the simple answer to the question is "no" - unless the EU and national governments intervene.

The Year To Come

It's hard to see how things will pan out - will streaming services, with an EAMAYC business model, especially ad-supported, survive and prosper? How can the music industry leverage the power of user generated content without risking loss of legitimate revenue from creative works that are subject to copyright? How will better, cheaper and more reliable access to rich media on mobile change users' engagement with music?

What does seem clear to me is that artists are the key to the future - they have the power (certainly for future works) to avoid the sclerotic effects of the current rights system. They have the attention of fans and are the natural counter-parties to authentic engagement with them via social media. They have a clear interest in ensuring that fans can get the music they want when they want it, where they want it and how they want it. I believe that new music services that reinforce and leverage this are the ones that will succeed in the longer term.

Samoens, Haute Savoie
31 January 2010