Marenco Media

Digital Music Report 2012

2012-02-09T22:41:00.000-08:00

Digital Music Report 2012
Expanding Choice. Going Global
2
Contents
Introduction 3
n Plácido Domingo, chairman, IFPI
n Frances Moore, chief executive, IFPI
Artist voices 5
Digital Music: Expanding Choice.
Going Global 6
n Executive Summary
n Global digital growth rate accelerates
n The global top selling digital singles of 2011
n Access or ownership? You choose
n Global expansion
n Progress against piracy
n Intermediaries have a key role
The business models of digital music 10
n Downloads break through borders
n Digital album demand alive and kicking
n The rise of subscription
n Subscription reaches new consumers
n Bundling music – a route to the mass market
n Internet radio continued to expand
n Music video meets strong consumer demand
The art of digital marketing 14
Piracy: Improved cooperation from
online intermediaries 16
n A rigged market
n Books feel the impact
n ISPs: The needle is moving
n Progress in Europe
n New study assesses the effect of graduated response
n US and New Zealand: ISPs engage
n Moves to block “rogue websites”
n Evidence of site-blocking impact
Focus on France 20
n Hadopi: “Positive impact for years to come”
n The independent’s view: Innovation and
“meaningful sanctions”
Focus on the US 21
n ISP agreement and strong digital growth
Focus on South Korea 22
n A continuing success
Developing a legitimate business in China 23
n Major record companies license Baidu
Protecting content online: Intermediaries
step up 24
n Search engines should link to legal music
n Advertising: Cutting the funds to piracy
n Payment providers act on illegal sites
n Hosting providers: A key partner
Self-Help: Anti-piracy enforcement
and education 26
n Tackling the pre-release hackers
n Public education: a long term commitment
n A Guide to Music, Film, TV and the Internet
Digital Music Services Worldwide 28
Digital Music Report 2012
3
I accepted the invitation to become chairman of IFPI in 2011 because
I wanted to help improve the very challenging economic environment
which musicians – young and old – everywhere face in their
careers today.
We all know the music industry is in a period of dramatic change.
Much of this is cause for optimism and opportunity, as the Report that
follows suggests. Thanks to the amazing technology of the internet, the
audience for recorded music is fast-expanding across the world. Artists
who might not otherwise find a way to make their music available can
take advantage of the new ways to distribute music the internet offers.
At the same time policymakers better understand that the internet does
not make music “free”. There is greater acceptance of the need for
good and fair copyright laws to stop the infringement of artists’ and
producers’ rights. A widening circle of vital partners in the internet
world are cooperating in stopping piracy.
As a passionate supporter of the music industry, I welcome these
changes. However, it is fundamental that artists and creators, and
the producers that invest in them, should be rewarded for their work
in the digital environment just as in the physical world. Governments
and legislation have an essential role to play. I only have to look at my
native Spain – where piracy has had a terrible effect on everyone’s
royalties and the labels’ investment in artists – to see the extent of the
challenges we face.
A world where copyright is properly respected brings income to artists
and producers and investment in artists of all genres. It also delivers
jobs, growth and tax revenues. And, of course, it also brings an
enormous amount of pleasure to billions of people. As its chairman,
I am trying to help IFPI in its efforts to create an environment in which
the public can enjoy the benefits from a successful digital music sector.
Plácido Domingo
Plácido Domingo was appointed chairman of IFPI, the organisation that
represents the recording industry worldwide, in July 2011.
Domingo is a world-renowned, multi-faceted artist. Recognised as one
of the finest and most influential singing actors in the history of opera,
he is also a conductor and a major force as an opera administrator in
his role as general director of the LA Opera.
A digital world that rewards
artists and creators
By Plácido Domingo, chairman, IFPI
Plácido Domingo. Photo by John Marshall
4
Looking through the pages of this latest
IFPI Digital Music Report, you see a
striking paradox: on one hand, there is the
innovation and drive of a business that
has led the way for creative industries
in adapting to the digital age; on the
other hand, the extraordinarily difficult
environment in which these changes
are taking place.
This is the ninth report that we at IFPI have produced documenting
the evolution of the digital music sector worldwide. It has been
a challenging and often painful transition, but as we enter 2012,
there are reasons for real optimism. The digital music business has
now reached out to encompass the globe. The largest international
legitimate digital music services are present today in no fewer than
58 countries – this number has more than doubled in the last
twelve months.
Consumer choice has been revolutionised, as new models for
consuming and accessing music are rolled out in new and existing
markets. The number of paying subscribers to services such as
Spotify and Deezer has leapt in the last twelve months, from an
estimated eight to more than 13 million. At the same time, cloudbased
services, such as iTunes Match, have become a reality in the
marketplace, helping drive the popularity of music downloading.
With a healthy 8 per cent increase in our digital revenues in 2011 –
the first time the annual growth rate has risen since records began
in 2004 – some might feel tempted to say that a troubled era for the
music industry is coming to an end. Such complacency now, however,
would be a great mistake.
The truth is that record companies are building a successful digital
music business in spite of the environment in which they operate,
not because of it. Figures in this report show that more than one in
four internet users globally regularly access unlicensed sites that
contain copyrighted music. This is a startling statistic that captures
the challenges we face in developing a sustainable legitimate digital
music sector.
We are undoubtedly making important progress in changing this
environment, dealing with both peer-to-peer (P2P) and other forms
of digital piracy. In the US, music and film companies have agreed
with ISPs a new copyright alert system. In France, the Hadopi law has
been successfully implemented and research shows it is accepted and
having an impact on consumer behaviour.
South Korea, a pioneer of anti-piracy legislation which has required an
effective role from ISPs in stopping infringement, is seeing continued
market health. New Zealand implemented a new graduated response
law in 2011 and surveys show it is already affecting consumer
behaviour positively. In Europe, a series of successful court actions
required ISPs to block access to The Pirate Bay, prompting substantial
reductions in users of that service.
On top of this, there is a “new frontier” in our work against piracy.
Cooperation from a far wider circle of technology and business
partners, from advertisers to search engines, is now needed to deal
with the problem. In 2011, we made significant progress with these
intermediaries. A ground-breaking three-way collaboration between
payment providers, IFPI and the City of London Police has helped cut
funding to 62 illegal websites. That is a positive model that can be
extended to new forms of piracy in the future.
The role of search engines in relation to piracy will be a key priority in
2012. Google and other search engines are an important access route
for those looking for unlicensed music on the internet. Our industry
has stepped up cooperation with search engines in the last year,
but a lot more cooperation is needed, such as prioritising legitimate
sites in search results and helping prevent the funding of illegal sites
via advertising.
Despite the challenges ahead, the optimism for digital music
going into 2012 is well-justified. The music industry has grasped
the opportunities of the digital world in a way few, if any, other
businesses can claim to have done. Our digital revenues, at onethird
of industry income (and now more than 50 per cent in the US),
substantially surpass those of other creative industries, such as films,
books and newspapers.
The music business is a dynamic contributor to the digital economy.
Yet it can be much more than that, delivering sustainable growth
and jobs. This cannot be done through innovation and licensing
alone. We need a fair legal environment, effective cooperation from
intermediaries and a resolute commitment from governments to use
legislation to curb all forms of piracy. These are the priorities we will
be pushing for in 2012.
Digital Music Report 2012
Digital Music in 2012:
Optimism Justified. Complacency not Accepted
By Frances Moore, chief executive, IFPI
The music industry has grasped the
opportunities of the digital world in a
way few, if any, other businesses can
claim to have done.
Frances Moore. Photo by Philippe Molitor
“I love the way music turns all these
techie devices like PCs, mobile phones
and iPads into personalised juke boxes
and I love how the internet lets me
connect with fans wherever they are in
the world.”
Natasha Bedingfield
“As a lover of music, an admirer of almost every
genre of music, a fan of creativity, it’s such a
blessing to see the recent growth of people
supporting this art we call music. It’s touching to
know more and more people value supporting
the music industry with integrity.”
Van Ness Wu
“Music is available to everyone
at the touch of a button. Please
try and only use those services
that actually pay the artists,
songwriters and producers,
rather than those that don’t.”
Queen
“As artists who spend
much time on the
road we applaud the
possibilities available
today of having legal
and fast access to so
many kinds of new,
inspiring music.”
Frida Gold
“The creation and recording of a song
is the result of the work and talent of
many: composers, musicians, arrangers,
engineers, assistants, producers. Each day
there are more and better digital services to
help us enjoy the wonderful music created
throughout the world. To consume music
legally protects and respects the work of
each and every one of the people involved
in its creation and recording.”
Shakira
“The digital age has brought about a way
of consuming music and connecting with
your fan base that is unprecedented.
Partnering and working closely with digital
platforms allows us ways and means
of connecting with our fan base which
in turn creates greater exposure and
generates sales.”
Professor Green
“There has been tremendous growth
with new digital channels and
streaming services. These new business
partnerships have the potential to help
turn around our business. We must
create an awareness with the public
to realise the tremendous damage that
has been done to our industry, artists
& consumers. We must fight to ensure
that the next generation of artists can
survive & flourish into the 21st century.”
Lee Ritenour, guitarist/artist
“Using many of the new music
services allows us all to be able
to access a treasure trove of
music; new, old, forgotten or
even undiscovered. It gives the
listener the power to express
themselves and explore or
simply find old favourites.”
MiMi
5
Artist voices
“It’s fantastic that fans can listen to
all the music they want for a good
value-for-money price. This is the
future and I am so happy that my
music can be listened to in France
but also across the world thanks to
those new music services.”
Tal
Executive summary
The digital music sector is pushing the limits of consumer choice,
extending its business models and reaching out to consumers across
the globe. Digital channels have overtaken physical formats to become
the dominant revenue stream in the world’s largest market, the US.
And the digital music market is poised to further expand its reach
internationally in 2012.
Despite the huge challenges outlined elsewhere in this report, there is
a mood of optimism in digital music at the start of 2012. Download
services are seeing continued strong consumer demand and are
expanding their customer base, particularly in previously untapped
developing markets. Meanwhile, a fast-growing number of consumers
are using subscription services and other models. “There’s a race
among the services to go global and plant the flag in new territories,”
says Stephen Bryan, executive vice president, digital strategy
and business development, Warner Music Group. “We’re seeing
services that are generating revenues and growth. There is high
engagement with these services. Consumers love them and spend
hours using them.”
Global digital growth rate accelerates
Digital music revenues to record companies grew by 8 per cent
globally in 2011 to an estimated US$5.2 billion. This compares to
growth of 5 per cent in 2010 and represents the first time
the year-on-year growth rate has increased
since IFPI started measuring digital
revenues in 2004. Digital channels
now account for an estimated 32 per
cent of record company revenues
globally, up from 29 per cent in 2010.
Some markets now see more than
half of their revenues derive from
digital channels, including the US
(52%), South Korea (53%) and China
(71%). IFPI estimates that 3.6 billion
downloads were purchased globally
in 2011, an increase of 17 per
cent (combining singles and
album downloads).
At a time when other creative
industries, in particular
film, newspapers and book
publishing, are only now
rapidly shifting to online
and mobile channels, the
music industry’s level of
digital penetration still
dwarfs that of all other
comparable sectors,
except games.
Sources: PWC Global Entertainment & Media Outlook and IFPI. Notes: games
includes players’ purchases of accessories and additional game content as well as
subscriptions. Music share is based on trade revenues. Newspapers include digital
advertising and subscriptions. Books excludes audio books. Film excludes online sales
and rentals of physical discs.
42%
Proportion of industries’
global revenues coming
from digital sales (2011)
32%
5% 4%
1%
Games Music Newspapers Books Film
Digital Music: Expanding Choice. Going Global
“We have really only scratched the surface of
digital music in the last decade – now we are
starting the real mining, and on a global scale.”
Rob Wells, president, global digital business,
Universal Music Group.
“There’s a race among the services to go
global and plant the flag in new territories.
We’re seeing services that are generating
revenues and growth.”
Stephen Bryan, executive vice president,
digital strategy and business development,
Warner Music Group.
Digital Music Report 2012
6
Country % of record company revenues from digital sources
China 71
South Korea 53
USA 52
Source: IFPI estimates, 2011.
7
Access or ownership? You choose
Certain fundamental factors underpin this growth. First is the continued
widening of consumer choice. Digital music is now broadly segmented
into two main consumption models - “ownership” and “access”.
Both took big strides in 2011. Subscription services expanded and
linked with new partners to reach new audiences – most notably
integrating with Facebook and bundling their services with ISP offerings.
Meanwhile, developments in cloud technology are transforming the way
fans manage and store their music.
Music companies believe both models – access and ownership -
have enormous growth potential. Rob Wells, president, global digital
business, Universal Music Group, says: “The fact that these two models
of consumption can co-exist speaks volumes about the future. In fact,
we have really only scratched the surface of digital music in the last
decade - now we are starting the real mining, and on a global scale.”
Also driving growth is the global surge in consumer demand for
smartphones and tablets. These, along with steadily growing broadband
penetration, are a major factor in the increased uptake of both download
and subscription services. “The technology infrastructure is being put
in place in a way that we have never seen before and that is one major
reason why we feel positive about digital music going into 2012,” says
Edgar Berger, President and CEO, International, Sony Music Entertainment.
Record companies are working with business partners to create products
that can offer a better user experience than unauthorised services. Mark
Piibe, executive vice president, global business development, EMI Music,
says: “We know that some people will migrate from piracy and that others
will not, but we want alternatives to be there. We think the presence of
access services can expand the whole market.”
“We think the presence of access services can expand the whole market.”
Mark Piibe, executive vice president, global business development, EMI Music.
The global top selling digital singles of 2011
The top selling single of 2011 was Bruno Mars’ Just The Way You Are, which sold more than 12.5 million copies. The combined sales of the top
ten digital singles grew by 11 per cent in 2011.
Digital music trade revenues by year
2009 2010 2011
Trade Revenues (US $) 4.6 billion 4.8 billion 5.2 billion
Growth 10% 5% 8%
Source: IFPI. 2011 figures are estimates.
Source: IFPI, 12 months to November 2011. Sales are rounded. Combines all versions of the same song.
Artist Title Sales (m)
Bruno Mars Just The Way You Are 12.5
Bruno Mars Grenade 10.2
LMFAO Party Rock Anthem 9.7
Jennifer Lopez On The Floor 8.4
Adele Rolling in the Deep 8.2
Lady Gaga Born This Way 8.2
Pitbull ft. Ne-Yo, Afrojack & Nayer Give Me Everything 8.2
Black Eyed Peas The Time (Dirty Bit) 7.3
Maroon 5 Moves Like Jagger 7.0
Bruno Mars The Lazy Song 6.5
8
Global expansion
Digital music retailers are fast spreading their reach globally. At the
start of 2011, the largest international digital services were present
in 23 countries. One year later they are present in 58 countries.
In 2011, iTunes opened for business in 28 additional markets, now
reaching more than 50 countries worldwide, including all members of
the European Union. Download service 7digital announced in October
2011 that it was launching new stores in Australia, New Zealand,
Malaysia and Singapore. This expansion means 7digital is now
available in 37 countries worldwide. Subscription services Spotify,
WiMP and Deezer are also expanding fast across national
borders. Spotify launched in the US and four European
markets and now reaches 12 countries. The US also
saw the launch of Muve Music in 2011. Deezer opened
its service in the UK in partnership with Orange, and
plans to continue to expand globally in 2012.
Latin America
In Latin America, iTunes opened for business in 16
countries in December 2011, following its successful
establishment in Mexico in 2009.
US-based subscription service Rdio launched in Brazil in partnership
with local mobile operator Oi. The Blackberry BBM music service
became available in Mexico and mobile operator America Movil/
Carso’s Ideas Musik launched in Mexico and Brazil. Other services,
including Google Music, are expected to reach Latin America in 2012.
Record companies have also formed innovative partnerships in the
region. Universal Music struck a deal with Peugeot in Brazil, that
enabled the car manufacturer to offer unlimited music downloads for a
year to consumers who bought a Peugeot 207 Magnetico car. It also
joined with computer manufacturer HP to offer unlimited tethered
downloads for a year and 120 DRM-free downloads to buyers of
several laptop models.
Afo Verde, president, Latin Region, Sony Music, says: “Broadband
penetration in Latin America continues to grow and the region has
become the number two cell phone market in the world, presenting a
great opportunity to expand the digital music business. Subscription
services are beginning to take root and we anticipate these will
perform well, while download services will benefit from the rollout of
cloud technology.”
Asia
In Asia, South Korea remains the most successful digital music market,
with an estimated three million music subscribers. The most popular
service is MelOn, followed by MNET. Taiwan has the recently-launched
Omusic, an ISP bundled service. KKBOX, a major service in Asia,
is present in Hong Kong and Taiwan, offering streaming and
download services.
In China, a market currently throttled by piracy, a landmark partnership
was announced in June 2011 between three major record companies
– Sony, Universal and Warner - and internet search giant Baidu.
Baidu, which previously had a licensing agreement with EMI, said it
would close its infringing “deep links” service and establish a new
authorised digital music offering, Ting, as part of the new agreement.
The digital music market
internationally remains
extraordinarily diverse.
“There isn’t one single road map
of development for all our markets,
and every territory is unique,”
says Wells of Universal. “The
way consumers interact with
music varies enormously by market.
Every country has different economic
conditions, and different levels of
broadband and device penetration
and digital development.”
Record companies are now
increasingly focused on new
developing markets where digital infrastructure
is fast-evolving and there is exciting growth potential, provided digital
piracy can be effectively tackled. India, for example, has more than
40 million smartphone users and 14 million broadband connected
households (FutureSource Consulting Ltd).
Digital Music Report 2012
At the start of 2011, the largest international digital services were present in 23 countries.
One year later they are present in 58 countries.
9
“The technology infrastructure is being put
in place in a way that we have never seen
before and that is one largest reason why
we feel positive about digital music going
into 2012.”
Edgar Berger, president and CEO, International,
Sony Music Entertainment.
Progress against piracy
Despite the big steps forward of 2011, digital piracy remains a critical
barrier to growth and investment by record companies. More than a
quarter of internet users globally (28 per cent) access unauthorised
services on a monthly basis, according to IFPI/Nielsen.
Digital piracy broadly divides between peer-to-peer and non peer-topeer
channels. Cooperation from a range of online intermediaries
is needed in response. IFPI advocates an inclusive combination of
graduated response, site blocking and other measures.
“You cannot play down the significance of piracy,” says Wells for
Universal. “Spain, which should be the powerhouse of repertoire for
Latin America and the US Latin market, is effectively a dead market.
Yet in South Korea, where we have new anti-piracy laws, the market is
surging and now spreading its repertoire far beyond its own borders.”
There is important progress on piracy. France has successfully
implemented its “Hadopi” law, introducing education and warning
measures and the threat of sanctions to help migrate users to legal
sites. Research shows this is helping change consumer behaviour,
while the number of peer-to-peer (P2P) file-sharers fell by 26
per cent within the space of a year (IFPI/Nielsen).
“Hadopi is our chance to revive
French digital music in France,”
says Yves Riesel, founder of indie label
Abeille and specialised digital platform Qobuz.
“It’s not the only solution, of course, but along with
the efforts of platforms and record producers it has given
us a chance to reverse the crisis of the last few years.”
Similar positive indications come from South Korea, while New
Zealand introduced graduated response legislation in 2011 and
in the US a landmark Memorandum of Understanding set out a
new programme of graduated response cooperation that will be
implemented by most major ISPs in 2012. Meanwhile, draft legislation
targeting “rogue” sites is being debated in the US. Evidence of the
impact of site-blocking comes from jurisdictions in Europe.
Intermediaries have a key role
The fight against piracy is pushing at new frontiers too.
Other intermediaries, ranging from search engines and
advertisers, are increasingly getting involved. A partnership
between record companies, credit card companies
and law enforcement in the UK in 2011 typifies
the widening circle of engagement of these third
party “intermediaries.”
Search engines are a major channel for consumers
to access music. However, many of the top
results provided by search engines are linked to
unauthorised content. Advertisers can also help
restrict the funding of illegal sites. Important steps forward were taken
in these areas in 2011, but more cooperation will be needed.
The music industry commits considerable resources to anti-piracy
actions and public education campaigns. These are part of an industry
digital music strategy that is comprehensive and multi-faceted,
combining legal offerings, education and enforcement of rights.
In 2011, IFPI was able to secure the removal of more than 15
million infringing links, a 115 per cent increase on 2010.
There are around 500 legitimate music
services worldwide offering up to
20 million tracks.
The business models of digital music
Downloads break through borders
Ten years after the first online stores emerged in the US and Europe,
the music download sector continues to expand internationally and
improve its offer to consumers. Download stores account for a
large proportion of digital revenues and account for most of the 500
legitimate services worldwide, offering libraries of up to 20 million
tracks. Many major markets are seeing healthy increases in single
track download sales, including the US, up 10 per cent (Nielsen
SoundScan); the UK, up 8 per cent (Official Charts Company/BPI) in
2011; and France up 23 per cent (GfK). Consumer demand for iTunes,
the market leader, is growing healthily.
Streaming from the “cloud” turned to market reality in 2011, with
new systems that enhance the way consumers manage and store
their music. Leading the way, Apple launched its iTunes Match
service in November 2011, offering the opportunity to draw more
users into iTunes and drive purchasing. iTunes Match enables users
to access their music libraries across the full range of devices they
own for a fee of US$25 a year. The service, licensed by international
record companies, effectively upgrades a user’s music collection and
dispenses with the need for them to physically transfer the music
files they have bought across the full range of their families’ devices.
iTunes Match will be available in the new markets worldwide that
iTunes is entering.
New major players are following. Google launched a new music
service in the US, Google Music, in November 2011 for the Android
platform. Consumers can purchase individual songs or albums which
are then delivered to the cloud from where they can be streamed to
multiple devices.
Digital album demand alive and kicking
Digital was once mistakenly feared to be the killer of the album.
However, this has proved far from the case. Digital album volume
sales have grown steadily in recent years, with US and UK digital
album sales in 2011 up by 19 and 27 per cent respectively.
(Soundscan and Official Charts Company). In the US and the UK,
digital albums already account for 31 per cent and 24 per cent
respectively of all albums sales by volume. Consumer demand for an
artist’s body of work remains strong in the digital world especially as
price competition is often fierce and storage on computers and devices
is less of an issue.
Several factors explain the strength of demand for digital albums:
strong marketing campaigns, premium offerings that provide additional
content and consumer habits. Premium albums often outsell their
lower priced equivalents in the first few weeks of release, suggesting
many music fans appreciate the extra value offered by these products.
The rise of subscription
Music subscription is transforming the way people experience and pay
for tracks and albums. It is also a fast-expanding business model.
The number of consumers subscribing to music services globally is
estimated to have increased by nearly 65 per cent in 2011, reaching
more than 13 million, compared to an estimated 8.2 million the
previous year. This supplements the tens of millions of consumers
who already use download services. “Subscribing to music used to
be quite an abstract concept – but now it has become a practical
concept. The mass market understands how it works and consumers
see the huge benefits,” says Edgar Berger of Sony Music.
Subscription has caught on exceptionally well in some markets,
particularly in Scandinavia. In Sweden, for example, subscription
accounted for 84 per cent of digital revenues in the first 11 months
of 2011, boosted by its national champion Spotify. Other markets
saw sharp growth in subscription revenues, including France which
saw an increase of more than 90 per cent in the first 11 months
of 2011 (SNEP).
Digital Music Report 2012
10
Digital album volume sales growth in 2011
US +19%
UK +27%
France +23%
Global (est) +23%
Source: Nielsen SoundScan, Official Charts Company/BPI, GfK and IFPI estimate.
11
The subscription model saw some high-profile advances in 2011, led
by Spotify’s move into the US and expansion in Europe to 11 countries.
Spotify reports it has 2.5 million paying subscribers worldwide,
including over 400,000 in the US market since its launch there in July.
Spotify sees its expansion in the US as a springboard to international
markets. Ken Parks, chief content officer, says: “We were very
focused on how Spotify, which had been a European service, would
translate to the US. Now, having seen the acceptance in the biggest
music market, it gives us a huge degree of confidence and optimism
to expand elsewhere.”
Deezer is a digital streaming service that was established in France in
2007 and is now expanding globally. Since launching its partnership
with Orange in August 2010, it has achieved more than 20 million
registered users and over 1.5 million paying subscribers.
Deezer opened for business in the UK in September 2011, in
partnerhsip with Orange (Everything Everywhere). In late September,
the company announced its strategic integration with Facebook,
enabling artists and fans to legally share their music and make new
discoveries even more easily.
In December 2011, Deezer announced it was opening for business
in scores of countries worldwide over the next six months, whether
in telecoms partnerships or as a standalone service. It has already
launched in more than 25 countries across Europe. By the end of
February 2012, it is expected to be up and running in 80 countries
across Africa, Australasia and Latin America, with more countries to
follow in June 2012. Mark Foster, managing director of Deezer, UK
and Ireland, says: “We think in many countries we will be kick-starting
the whole digital music sector and early investment will give us a great
market position and ensure we achieve strong early growth.”
Subscription is arriving or expanding in other markets too. Rhapsody
announced in December 2011 that it was the first US streaming
subscription service to amass more than one million paying customers.
Canada-based Galaxie launched a subscription based mobile
streaming service, while three new subscription services, JUKE,
Rdio and Simfy, advanced the model in Germany and Austria.
Norwegian-based streaming service WiMP announced in November
2011 that it had more than 350,000 paying subscribers across
Norway, Sweden, Denmark and Portugal. Daily streams rose five-fold
in Norway in 2011 and two-fold in Sweden and the second half of the
year. WiMP has partnered with Norwegian ISP Canal Digital to offer the
service bundled with a TV subscription. In three Scandinavian markets
it partnership ISP Telenor and in Portugal in partnership with Portugal
Telecom. WiMP plans to launch in Germany, Ireland and Benelux in
2012. Per Einar Dybvik, chief executive of parent company Aspiro
Music, says: “WiMP is now targeting roll-out in several new markets,
using our experience to turn streaming into a success.”
In December 2011, rara.com announced the launch of a streaming
service in more than 20 countries worldwide, including Canada,
France, Germany, Mexico, Spain, the UK and US. The service,
powered by Omnifone, is aimed at consumers who still use CDs
and want a simple way to access digital music through their internet
browser. The ad-free service offers more than 10 million tracks from
US$/€/£4.99 for online access and US$/€/£9.99 for smartphone
access, with lower introductory prices for the first three months.
rara.com is pre-loaded on the majority of European HP PCs and is
also available on Android, iOS and other platforms.
Music subscription is transforming the
way people experience and pay for tracks
and albums. It is also a fast-expanding
business model.
Estimated paying subscribers to music subscription services GLOBALLY
2010 8.2 million
2011 13.4 million
Source: IFPI estimates.
12
Subscription reaches new consumers
All players in the subscription business agree the “holy grail” is
scale. In 2011, subscription services made groundbreaking moves
to achieve mass-market reach, most notably through their integration
with Facebook, which has propelled music subscription into the
environment of social networks. Under Spotify’s partnership with
Facebook, new sign-ups to Spotify come through Facebook and
users then share their playlists with friends.
Subscription services have brought huge benefits for consumer
choice. These often operate a “freemium” business model, aimed
at attracting consumers with a “free” advertising-supported offering
before migrating them to the “premium” paid-for service. For such
businesses, converting free users to paying subscribers is vital to
ensuring their sustainability. The free tier of service is effectively
their customer acquisition tool. Spotify is seeing a conversion rate of
around 15 per cent internationally, but in some markets this increases
significantly. There are
added benefits from
converting to the premium
service: no advertising, the
ability to use on a portable
device or offline and
better sound quality.
The service claims
particular success
converting young fans
over to its paid-for
option: one-third of its
US paying subscribers
are under 24.
Music subscription offers a different model of return on investment for
artists and record labels. In the à-la-carte environment, an album or
track is downloaded once and paid for. In the streaming environment,
a track or album may be listened to hundreds of times, each triggering
a payment to rights holders. While the individual payment for a stream
is lower than a download, the cumulative payment triggered by a
consumer repeatedly listening to an album or track may be higher
over a longer period.
Bundling music – a route to the mass market
One key route to the mass market for digital services is “bundling”
partnerships with ISPs and telecoms companies. These companies
have the commercial footprint and billing structure to enable music
services to reach a broad audience. ISPs benefit too, attracting
customers, reducing churn (customers joining and leaving) and
improving network efficiencies.
Stephen Bryan of Warner Music Group says: “ISPs and mobile carriers
are aware they need to offer entertainment content to stay relevant.
As they see the economic benefits of offering such content they
become more willing to tackle piracy and help develop a consumer
experience that is a lot better than piracy.”
Two of the most high-profile partnerships launching in late 2011 were
Virgin Media’s tie-up with Spotify, and Orange’s coupling with Deezer
in the UK, seeking to replicate their joint success in France.
More longstanding partnerships include Spotify and Telia
in Finland and Sweden, Telenor and WiMP in Norway,
and Cubo Musica by Telecom Italia and Play Me
in Italy. In Ireland, leading ISP Eircom operates
its own dedicated MusicHub service, offering
subscription and downloads
and using its reach as the
country’s largest ISP with
some 40 per cent of the
broadband market.
In the US, Muve Music
is an example of a new
subscription service that is
being hard bundled into a
wireless rate plan.
The service is operated by Cricket, a leading wireless carrier in the
US. For US$65 a month users can enjoy unlimited song downloads,
ringtones and ringback tones and unlimited national talk, text and
web access. This plan is offered on an Android Smartphone with
no contract.
Subscription services have brought huge
benefits for consumer choice...converting
free users to paying subscribers is vital to
ensuring their sustainability.
ISPs and mobile carriers are aware they
need to offer entertainment content to
stay relevant.
Digital Music Report 2012
13
Since its launch in the first quarter of 2011,
Cricket’s Muve Music offering has attracted
more than 500,000 customers, half of
them new to Cricket. Muve Music was
built specifically for mobile phone use with
customers less likely to have broadband access
in the home. It is only distributed through
carrier partnerships. By the end of 2012,
Muve Music expects to be the number two
subscription music service in the US.
Jeff Toig, senior vice president of Muve Music, says: “For the customer
segment we target, the mobile phone is central and cash is the
primary payment mechanism, while, in contrast, other digital music
services have primarily been built for the computer with the credit
card as a source of payment.”
A different type of bundled service, also aimed at reaching new
types of music consumers, integrates the music offering into
consumer hardware in the home. Spotify’s partnership with
Sonos is one of the first deals to give music fans a subscription
offering that is geared to provide top-quality audio for people
who want to listen to music in the home. Sony’s Music Unlimited
service is based on the population of connected PlayStations and
connects to other Sony devices, such as televisions. The service
has launched in 17 countries and on Apple devices.
Partnerships between physical stores and digital services have also
helped extend the reach of music subscription. Cricket’s Muve Music
offering is backed by agreements with Walmart and Best Buy that saw
these retail giants sell Cricket’s phones and sign up customers to its
digital service. In Norway, WiMP partnered with physical music store
Platekompaniet to sign up customers for its music service offered
in partnership with ISP Canal Digital. There is a similar physical and
digital tie-up between new music service JUKE and German retail
giants Media-Saturn and Media Markt.
Internet radio continued to expand
Internet radio services have long been popular in the US, attracting
significant audiences for a more “lean back” non-interactive consumer
experience. Pandora continued to grow in 2011, reaching 40 million
active listeners in the third quarter of 2011, up 65 per cent on the
prior year.
In November 2011, Nokia launched the Nokia Music App with
personalised radio features. The app comes pre-installed in the Nokia
Lumia 800 phone and enables users to run a personalised streaming
service as well as offering the opportunity to purchase downloads or
buy live concert tickets. It also offers dozens of stations programmed
by music experts. Users can stream any station on demand, or
download 15 hours of programming to listen to any time offline.
Music video meets strong consumer demand
Consumers continue to watch music
videos in sharply increasing numbers
worldwide. The most watched artist
on YouTube is Justin Bieber, whose
videos have been viewed more
than two billion times. His video
Baby remains the most individually
watched music video on YouTube,
with more than 690 million views.
In December 2011, YouTube
announced it would be pursuing a
strategy focusing on more prominence for its specialised “channels”,
including dedicated programming from artists such as Madonna. The
service also embraces social networking by integrating with Facebook
and Google + so users can see what their friends are watching.
The most prominent dedicated online music video platform is VEVO,
which provides a revenue stream from premium high-quality videos,
original music programming, live events and a forum to break new
acts. Across its distribution footprint, VEVO reports it is streaming
3.6 billion videos a month to more than 415 million users worldwide.
The fastest-growing parts of VEVO’s platform are its mobile and tablet
applications which are used by 13 million people. A model that
was principally used for marketing purposes has become a
commercial proposition.
VEVO generates revenues today through advertising and brand
sponsorships. The service has attracted more than 550 advertisers
from sectors ranging from automotive to finance. By its second
anniversary at the end of 2011, VEVO delivered more than
US$100 million in royalties to rights holders. Its chief
executive, Rio Caraeff, says: “VEVO offers the largest
premium music video inventory in the world. We want to ensure
the music audience is valued by advertisers. Value is created by
embracing ubiquity for the audience and scarcity for advertisers.”
Integration with social networks is vital for the service. More than
7,500 artists have its VEVO for Artists app on their Facebook pages,
helping them power and monetise their videos. VEVO itself has 1.5
million Facebook fans and is working to further improve the embedded
experience for users over the next year.
14
The art of digital marketing
In the digital world, record companies are innovating to reach audiences in new ways.
Engaging a new audience in digital: Take That
Many of Take That’s fans are women in their 30s and 40s, not
typically early adopters of digital music technology. When the album
The Circus was released in 2008, just 4 per cent of its sales in the
first week were through digital channels. Paul Smernicki, director of
digital, Universal Music UK, says: “We realised we needed to bring the
Take That audience with us on a digital journey.”
The band joined online social networks, with their Facebook followers
growing in number from around 200,000 to more than one million
between the release of The Circus and Progress two years later.
Polydor created an app that was downloaded more than 500,000
times. Digital assets, such as photos, were used carefully. The label
built excitement about the first picture of Robbie Williams with the rest
of the band before releasing it and encouraging fans to share it online
with their friends.
The result was clear, with 20 per cent of sales of Progress in its first
week of release coming through digital channels. It was notable that
Progress appeared twice in the iTunes top five, both the original and
deluxe versions, with the premium product selling more copies.
Innovative partnerships in Latin America
How do you sell recorded music in markets
where there are comparatively few digital and
physical stores?
Sony Music Latin America has worked on
two initiatives to address that question,
creating premium product bundles with Music
Ticket + and partnering with Corona Beer in
Mexico to create a dedicated online music channel.
Music Ticket + bundles the sale of tracks and concert tickets. Fans
pay a premium for the ticket, and receive a card at the concert which
contains a code they can use to download studio tracks from the
performing artist.
Chayanne, the Puerto Rican singer, has benefited from Music Ticket +,
selling more than 350,000 premium tickets during his recent tour of
Latin America. This is a significant number of tracks in markets that
have been devastated by piracy, with his last album selling around
25,000 copies in Brazil. When fans logged on to obtain downloads
after the show, they saw a short film of Chayanne thanking them for
obtaining his music legally.
The creation of the Corona Music Channel in Mexico has benefited
bands including Pearl Jam, whose album was made available on it for
a week before it went on general release. Under the terms of the
deal, Corona guaranteed 20,000 copies of the album – a substantial
volume for a market where 30,000 album sales achieve a gold record.
Both initiatives are educating music fans about how to obtain digital
music from legal sources. Fans also supply their contact details,
making it easier for them to be contacted about future albums
and concerts.
Digital Music Report 2012
Chayanne
15
Working with social networks: Pablo Alborán
Pablo Alborán is a singer-songwriter from
Spain. EMI began discussions with him two
years ago about how to promote his work
in the digital age. Simone Bose, managing
director EMI Iberia, says: “Pablo is a very
talented artist, with a strong work ethic.
We were always clear that we did not want
him to do anything that did not reflect his true personality.”
The label posted online films of Alborán performing the tracks he
was writing in preparation for his debut album, providing fans with a
glimpse into the creative process. They also supported his tour across
Spain, capturing his performances and posting them online. Kelly
Rowland saw the films and said he was an amazing talent, spurring
further global interest in Alborán.
Social networks provided vital feedback on the music and this helped
to decide which of the 40 tracks Alborán had recorded should appear
on his debut album, which topped the Spanish charts for 15 weeks.
His follow-up Christmas 2011 acoustic album was made available as
a bundle, combining a premium version of the album with additional
video footage and a discount on the best tickets for a special
Christmas concert.
Bose concludes: “Working with Pablo has helped us learn about how
social networks can deliver for our artists, turning theory into practice.”
Touching music fans’ hearts: Christina Perri
Warner Australia wanted to build a digital
campaign to promote the launch of singersongwriter
Christina Perri’s debut single
Jar of Hearts.
The label decided to build on the incredibly
strong message of the song by constructing
a microsite that would enable users to
anonymously place their stories of heartbreak in a virtual jar, while
other visitors to the site could offer personal advice, setting these
hearts free.
Integrating the microsite into social networks was crucial for the
success of the campaign. As people could see other stories being
placed in the virtual jar, they were encouraged to open up about their
own experiences. Users directed their friends to the site through links
on Facebook and Twitter in particular.
Christina Perri was so struck by the idea that she promoted the
microsite through her own online social networks, helping the site
gain legitimacy and momentum. Warner Australia also persuaded
journalists and media personalities to try the site, offering advice to
those who had placed their hearts in the virtual jar. This helped ensure
coverage for the story across broadcast, online and print media outlets.
Users could click through to iTunes to buy a copy of Jar of Hearts,
which plays as a background track while they explored the microsite.
Thanks to the digital campaign and offline promotional activity, the
single went to number two in the ARIA charts and Christina Perri’s
album, lovestrong, went top five.
Main photo: Take That. Getty Images
Top left: Chayanne. Photo by Ruben Martin
Middle: Pablo Alborán. Photo by Jose Luis Tabueña
Top right: Christina Perri. Photo by Lani Lee
Pablo Alborán
Christina Perri
16
Widespread piracy is the biggest factor undermining the growth of
the digital music business. The music industry sees cooperation from
online intermediaries, such as internet service providers (ISPs), payment
providers, advertisers, mobile service providers and search engines, as
indispensible in addressing the problem and significant progress was
made with all these parties in 2011.
The vast scale of the problem is widely recognised, as is the recent
evolution of new forms and channels. Globally, it is estimated that 28
per cent - one in four - of internet users access unauthorised services
on a monthly basis (IFPI/Nielsen). Around half of these are using
peer-to-peer (P2P) networks. The other half are using other non-P2P
unauthorised channels which are a fast-growing problem. These include
blogs, cyberlockers, forums, websites, streaming sites, smartphonebased
applications and stream ripping applications. In some countries,
the rate of usage of illegal sites is far higher than the global average - for
example 42 per cent and 44 per cent respectively in the major markets
of Spain and Brazil (Nielsen/IFPI).
A rigged market
The result of this activity is effectively a rigged music market. Legal
services, whatever their model, incur the business costs of being
authorised and paying rights owners, as well as investments to develop
secure payment methods and good quality services. This model is
unsustainable when facing competition from infringing services that have
greatly reduced costs and circumvent the normal rules of commercial
business. A commercially sustainable digital music sector needs an
environment in which the industry can effectively enforce its rights.
Even in a digital marketplace replete with attractive legal services, illegal
“free” continues to be an irresistible magnet for consumers.
Surveys consistently find that piracy undermines the incentive to obtain
music using legitimate paid models and depresses spending, even
among those consumers willing to purchase music.
Research by The NPD Group during 2010 in the US found that just
35 per cent of P2P users also pay for music downloads. P2P users
spent US$42 per year on music on average, compared with US$76
among those that pay to download and US$126 among those that pay
to subscribe to a music service. While some P2P users also pay for
music, and a few are serious fans who spend a lot, this positive effect
is counterbalanced by the far greater numbers of P2P users that spend
little or nothing. The overall impact is therefore negative, and this finding
is corroborated by a study in Europe by Jupiter Research in 2009.
Books feel the impact
The problem increasingly affects other creative industries, such as
book publishers, who are trying to monetise their products in the digital
environment. In October 2011, Börsenverein des Deutschen Buchhandels,
the organisation representing German publishers and booksellers, reported
that 60 per cent of e-book downloads in Germany are illegal. Publishers are
warning about the impact this is having on investment decisions. René
Strien, CEO for publishing of the major German book firm Aufbau Verlag,
says: “In this situation, investing in digital business models is a double
risk for my company, which is why having the right legal framework is
so essential.”
The music industry advocates a three-pronged approach to tackle
online piracy. Providing attractive legitimate services and conducting
public education campaigns are two key elements of this approach.
The other is the ability of the industry to effectively enforce its rights,
ensuring that consumers have an incentive to move from illegal free
to legitimate services.
“Why is the needle in this debate on the move? First, no doubt, because ‘free’ is no longer just a
problem for the music industry. Film studios, book publishers and newspapers are all now in
the same storm.”
Paul McGuinness, manager, U2
“Many factors have hurt music sales, including
the closing of so many record stores. But
almost every... study has concluded that
file-sharing played a role, and anyone
who believes otherwise is running out of
alternative explanations.”
Robert Levine, Author of Free Ride – How the Internet
is Destroying the Culture Business and How the
Culture Business can Fight Back
(The Bodley Head, 2011).
Piracy: improved cooperation from online intermediaries
Digital Music Report 2012
Source: Nielsen/IFPI, November 2011.
Active internet users refers to monthly users of the internet. Unlicensed services
refers to selected P2P and non-P2P services that are used to access music and
other content.
Percentage of internet users accessing at least one unlicensed
site monthly
Europe 27%
Global 28%
17
ISPs: The needle is moving
ISPs are uniquely situated to help tackle online piracy. A multi-faceted
strategy is needed to address the problem in its different forms and
channels. Broadly, the two main approaches to be taken are graduated
response and website blocking measures. Site blocking is effective in
dealing with the various new forms of infringement such as cyberlockers
and websites. However, an approach based exclusively on website
blocking is insufficient by itself, given the importance of major P2P
services that are decentralised and therefore not covered by blocking.
IFPI advocates graduated response measures as the most proportionate
and effective solution to address the major problem of P2P piracy.
Policymakers worldwide, as well as some ISPs, are increasingly
embracing this approach as fair and right.
Graduated response
Under the graduated response approach, rights holders alert ISPs and
mobile data network service providers to IP addresses that are being
used to infringe copyright by uploading protected content on to the
internet without permission. This is not done by monitoring individual
user behaviour, but rather by keeping watch on P2P networks and
infringing file distribution channels. ISPs can match the IP address to
the subscriber details they hold and contact their customers to inform
them their account is being used to break the law and urge them to
use legal services. This is done without sharing personal information.
The account holder is told that continued infringement after a series
of notices will lead to a penalty or sanction. These vary from country
to country, but may include temporary account suspension, bandwidth
throttling or protocol blocking, as well as potential fines.
Essential to the impact of graduated response is the existence of a
credible sanction. Notifications without consequences lack deterrent
effect. Third-party research consistently indicates that graduated
response, including legal consequences, is effective in changing
consumer behaviour. Among numerous surveys conducted in 2011:
n In Germany, 81 per cent of consumers that download media content
illegally believe that warnings with the prospect of consequences
would make people stop their illegal activity (GfK, February 2011).
n In South Korea, government officials report that 70 per cent of
infringing users stop their activity on receipt of a first notice.
A similar pattern is found on receipt of the second notice, with
70 per cent of users ceasing to use their account to infringe.”
Progress in Europe
France became the first country in Europe to introduce graduated
response legislation. The “Creation and Internet” law established
a new agency, Hadopi, which sends notices to internet subscribers
whose accounts have been used to infringe copyright. If a subscriber
ignores two notices within six months and infringes copyright law
for the third time in a year, Hadopi can notify a criminal court, which
can suspend the internet account for up to a month and levy a fine of
up to €1,500. To date there have been more than 700,000 notices
sent, which IFPI estimates to have reached around 10 per cent of P2P
users in France.
There are good indications of the impact Hadopi has had on piracy
in its first year of operation. The use of unauthorised P2P networks
has sharply declined, with overall P2P use down by 26 per cent since
notices started being sent in October 2010 (IFPI/Nielsen). According
to Peer Media Technologies, data on the number of infringing movie
downloads initiated on P2P networks in France also shows a dramatic
decline since notices started, supporting the view that P2P piracy has
seen a significant drop.
A study commissioned by Hadopi in May 2011 found that among
those who had either received a notice or knew someone who had
received one, 50 per cent said knowledge or receipt of a notice made
them stop their illegal activity and a further 22 per cent said
it reduced their illegal consumption.
France’s Hadopi law: Protection for artists.
26%
Reduction in P2P use in France since October 2010
81%
German consumers who think warnings with consequences would deter illegal file-sharing
18
New study assesses the effect of
graduated response
A new academic study – The Effect of Graduated Response Anti-Piracy
Laws on Music Sales: Evidence from an Event Study in France, by
Danaher et al1- has also found evidence that Hadopi has had a positive
impact on iTunes sales in France. The authors studied sales of digital
singles and album downloads on iTunes from July 2008, before the law
was adopted, until six months after the start of notices. They developed
an estimate of what French iTunes sales would have looked like in the
absence of Hadopi by studying a control group of similar markets.
The analysis found that French iTunes sales saw a significant uplift
at exactly the period when awareness of Hadopi was at its highest, in
Spring 2009, when the law was being debated in the National Assembly.
This effect was maintained throughout the period studied. French iTunes
sales were 22.5 per cent higher for singles and 25 per cent higher for
digital albums than they would have been, on average, in the absence
of Hadopi. The study also found that the increase in sales was larger for
more heavily-pirated genres, such as rap, and smaller for less-pirated
genres, such as jazz.
“We see sales in France for heavily pirated genres rise much faster than
less pirated genres, which suggests that this sales increase is due to a
reduction in French piracy levels,” say the authors. “Our results have
important implications for other countries in Europe and abroad who are
considering passing of similar graduated response laws....we also note
that our study likely understates the true impact of Hadopi.”
A separate study by Ipsos MediaCT, conducted in November 2011, found
90 per cent of P2P users in France were aware of the law and 71 per cent
would stop infringing if they received a notification with potential sanctions
as part of the graduated response programme. Half of P2P users aged
15 to 50 (48%) claim the law has or will have a deterrent impact on their
illegal behaviour. 23 per cent said they have either received a notification
with potential sanctions directly or know someone that has. Approximately
one in six P2P users (16%), around one million people, claim the new law
has or will encourage them to use legal services more.
In Ireland, a graduated response programme has been in operation
since October 2010 by eircom, the country’s largest ISP, as part
of an agreement with the music industry. Account holders receive
three warning messages before facing a seven-day account
suspension. If they continue to infringe after this they can face
a twelve-month disconnection of their broadband service.
In parallel to its graduated response programme, eircom established
MusicHub, a fully authorised service. Streaming is free and unlimited for
eircom customers and subscriptions to enable bundled downloads vary
from €5.99 to €22.99 per month.
Slow progress in UK
In the UK, the Digital Economy Act, which established provisions
for a graduated response programme, was passed in April 2010.
Implementation has been delayed
by a judicial review of the Act and
development of an implementing
code by regulatory body OFCOM.
The UK government has also
disappointingly decided not
to implement the sections of
the Act that deal with website
blocking. In the meantime, levels
of unauthorised downloading
remain high in the UK, despite the
presence of more than 70 legal
services. The UK government is
attempting to reach a voluntary
agreement on an expedited
procedure for blocking user
access to illegal websites and is
committed to implementing the
graduated response measures
in the Digital Economy Act. Ed
Vaizey, minister for culture, said
in August 2011: “It is essential that businesses have the right
tools to protect their hard work and investment in the digital age.
Our creative industries must be able to protect their products
and the Digital Economy Act will help them
do that.”
In May 2011, the European Union announced
it intends to review its Enforcement Directive, including the way it
addresses online piracy. The Commission has noted that the exemptions
from liability that ISPs enjoy under the eCommerce Directive do not
free them from the obligation to tackle digital piracy. Internal Market
Commissioner Barnier has indicated that the review will target the
“source” of illegal content and will look to strengthen copyright
protection online. The initiative needs to tackle all forms of
infringement, website and P2P, if the initiative is to be effective.
“Our results have important implications for
other countries in Europe and abroad who
are considering passing of similar graduated
response laws...we also note our study likely
underestimates the true impact of Hadopi.”
Danaher et al
Digital Music Report 2012
1Danaher, B; Smith, MD; Telang, R; and Chen, S
The Estimated ‘Hadopi Effect’ on iTunes
Single track s Digital albums
Increase in sales in control
group 26% 42%
Increase in sales in France 48% 67%
Effect of Hadopi
(France minus control) 23% 25%
Source: The Effect of Graduated Response Anti-Piracy Laws on Music Sales:
Evidence from an Event Study in France. (Figures are rounded).
19
US and New Zealand: ISPs engage
A ground-breaking ISP cooperation deal was struck in the US in
2011 and will be implemented in 2012. Most major ISPs have
signed up to a “copyright alert system” that will issue escalating
notices and warnings to subscribers, with deterrent measures
applied to repeat infringements, accompanied by a new Copyright
Information Centre and well-resourced education programmes.
Legislation addressing “rogue”
websites is also being discussed
(see US focus, page 21).
New Zealand implemented
the Copyright (Infringing File
Sharing) Amendment Act in
September 2011, putting in place
a graduated response programme
involving notices sent by ISPs and
sanctions for repeat infringers.
John Key, the prime minister, said
the internet could not be a “Wild
West” where creators’ rights
were trampled underfoot.
Early indications since the
announcement of the new law
suggest it has had an initial
impact on consumer behaviour.
Ipsos MediaCT research from
August 2011, on the eve of the implementation, found that seven
in ten P2P users said they would stop infringing on receipt of
a notice with a sanction as part of the country’s graduated
response programme.
According to IFPI, usage of P2P networks fell
16 per cent between September and November
2011, accompanied by increasing online sales.
By November 2011, digital sales in New Zealand
were up 35 per cent (RIANZ). However, the high
cost of notifications to ISPs by rights holders
could prevent the graduated response system
being used over the long term to optimum effect.
Moves to block ‘rogue websites’
ISP and Mobile Service Providers’ position as gatekeepers to the internet
also enables them to block users’ access to websites dedicated to the
distribution of infringing material. There has been growing support for
site blocking from courts and governments.
In June 2011, Malaysia announced it would take action to expedite
the process of blocking access to infringing websites. The Malaysian
Communications and Multimedia Commission (SKMM) required the
country’s ISPs to block ten file-sharing websites for violating the
Malaysian Copyright Act (1987). In India, the judiciary ordered website
blocking measures against sites illegally distributing movies and music in
April 2011. The Department of Information Technology announced that
11 websites would be blocked by Indian ISPs.
Evidence of site-blocking impact
Blocking of illegal sites can have a significant impact. In Belgium, in
September 2011, the Antwerp Court of Appeal ordered ISPs Belgacom
and Telenet to block access to The Pirate Bay by way of domain name
service blocking. Data from comScore shows that this reduced the
service’s audience by 84 per cent between August and November
2011. In Italy, ISPs were ordered to block access to The Pirate Bay in
February 2010 - at the time, the biggest torrent site in Italy. Once the
blocking order was passed, usage of the service fell dramatically and it
is still down by 74 per cent (IFPI/Nielsen). In April 2011, ISPs were also
ordered to block BTjunkie, another major torrent site in Italy. Use of the
service fell dramatically by 80 per cent following the block (IFPI/Nielsen).
In Denmark, the Supreme Court required ISPs to block access to The
Pirate Bay in a May 2010 ruling. Website blocking elsewhere in Europe
is increasingly similar. Blocking measures were also introduced in 2011
in Austria and Finland, requiring ISPs to block access to The Pirate
Bay or other infringing sites. In the UK, in October 2011, the High Court
ordered leading ISP BT to block unauthorised service Newzbin2.
Spain has written website blocking into its Sustainable Economy Act,
widely known as the “Law Sinde”, whose implementing decree will
enter into force in March 2012. The legislation contains provisions
that, in the absence of voluntary compliance by the website owner,
require ISPs to block access to websites, blogs and forums that provide
links to copyright infringing content. This takes place through an
expedited administrative procedure combined with prior authorisation
by the Courts.
In New Zealand, usage of P2P networks
fell 16 per cent in the first three months
of notices, accompanied by increasing
online sales.
Consumers heed graduated response
Ipsos MediaCT findings in New Zealand (August 2011)
n Half of all online adults aged 15-50 agree that internet suspension
or fines for repeatedly downloading content without the copyright
owners’ permission are acceptable.
n Although the law was not yet in place, 14 per cent of P2P users
aware of it claimed their behaviour had already changed.
n Most P2P users that had already changed their behaviour as a result
of the law (62%) avoid particular unauthorised services altogether.
n New legal measures have the ability to significantly impact P2P
as seven in ten users claim they would stop on receipt of a
notification with a sanction attached.
Illegal downloading
remains rife in the
UK despite 70 legal
music sites.
Hadopi: “positive impact
for years to come”
Marie-Françoise Marais, who runs Hadopi, the
agency responsible for tackling internet copyright
infringement and promoting legal offers in France,
has no doubt it is successful. “Hadopi is working
well. It is gaining widespread acceptance. People
are changing their behaviour in favour of legal offerings.”
Hadopi is the leading example in Europe of the graduated response model.
It takes a progressive approach, warning users about their infringing
behaviour, creating awareness of the importance of intellectual property,
promoting legal services and applying sanctions only after repeated warnings.
Hadopi’s goal is to ensure that intellectual property rights are protected
effectively. It is a big task. Ipsos MediaCT research indicates that around
10 per cent of P2P users in France have by now received a notice.
Hadopi runs education campaigns through the www.Pur.fr site, which certifies
more than 30 legal digital content services in France. Marais praises the
music sector for offering consumers what they want. She says: “The music
sector cannot be criticised for a lack of diversity or types of services. Music
has fully evolved online and is adapted to the needs of internet consumers.”
Hadopi is being watched by other countries looking to follow its example.
Marais says requests for meetings have come from a wide variety of
countries including Canada, Denmark, Italy, Norway, Singapore, Spain and
the US. Marais says Hadopi’s mission is a long-term one. “We are looking
to achieve a real long-term solution to piracy, creating close cooperation
between ISPs and rights holders.” She says there has been negligible
adverse reaction to letters. “Most of the calls we get are from people who
received a warning and they are asking what was downloaded. They want
to understand. There is a change in perception from the public, and they are
accepting what we are doing, and that our efforts will have a positive impact
on France.”
Marais says the programme is flexible enough to keep pace with changes
in piracy trends as Hadopi’s remit covers streaming and cyberlockers sites.
“Hadopi will have an important role to play in promoting culture in France;
we can have a positive impact for years to come.”
The independent’s
view: innovation and
“meaningful sanctions”
Yves Riesel is chief executive of Abeille
Music, an independent label that
holds France’s largest catalogue
of classical music.
Riesel has responded to the changing marketplace, embracing digital
channels and pioneering high-quality products, moving into the digital
market in 2007 with streaming service Qobuz. The premium service
is aimed at audiophiles and is available for €29 per month. Riesel’s
latest innovation is a fully licensed, super-high quality, high value
subscription service available in multiple territories.
“Classical music needs to take an approach just as innovative in
the digital world as other genres. That goes for all aspects of the
business, from the production to digital products to marketing but also
in the types and quality of products we offer.”
Riesel believes France’s graduated response system is vital for the
future. Independent businesses depend on recouping significant
investments, and the legal environment plays an important factor in
allowing them to do so. Riesel praises Hadopi: “It is necessary for the
market to have a body curbing piracy and placing real and meaningful
sanctions on those who steal music. If piracy goes unchallenged,
every part of the music sector suffers. Classical is affected by piracy.
No-one can deny that piracy destroys sales.”
Some 12 per cent of Abeille’s revenues are currently from digital
channels. However, Riesel expects his efforts in the digital realm to
change that, predicting growth to 85 per cent over the next five years.
“The challenge will be once all the businesses are mostly digital, to
still maintain the value of music enough for producers and artists to
make a living off it. If piracy continues to destroy the market that will
no longer be possible.”
“Hadopi will have an important role to play in
promoting culture in France; we can have a
positive impact for years to come.”
Marie-Françoise-Marais, president, Hadopi
“If piracy goes unchallenged, every part of the
music sector suffers.”
Yves Riesel, chief executive, Abeille Music
Digital Music Report 2012
Marie-Françoise Marais.
Yves Riesel. Photo by JB Millot
Focus on France
20
Source: IFPI/Nielsen.
6,500
6,000
5,500
5,000
4,500
4,000
3,500
3,000
Decline in P2P use in France after Hadopi implementation
Jul 10
Aug 10
Sep 10
Oct 10
Nov 10
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
Jul 11
Aug 11
Sep 11
Oct 11
Nov 11
No of users
ISP agreement and strong
digital growth
2011 was a watershed year for the US music
industry. The launch of innovative services,
new market entrants, growth in smartphone
and tablets and the shutdown of the illegal
file-sharing service Limewire, have helped
return the market towards growth.
Digital growth has helped revive the US music market. Download
sales have grown and there has been growth in legal streaming
services, such as Rhapsody, and particularly strong performances from
the newly-launched Spotify and Muve Music. Rhapsody announced
in December 2011 that it had passed the one million mark for paying
customers. Growth in 2011 was partly thanks to a new partnership
with mobile phone service provider Metro PCS, which bundled
Rhapsody’s offering in with a US$60 per month unlimited data plan.
Growth has also come from internet radio services such as Pandora,
Rdio and MOG. Internet radio services helped boost performance rights
revenue in recent years, making the US the largest market in the world
in this sector. US album sales increased by 3.2 per cent 2011, while
singles sales climbed by 8 per cent, according to Nielsen SoundScan.
There have also been groundbreaking steps forward in the fight against
piracy. In July, an agreement was struck between rights holders
and ISPs, establishing a system of “copyright alerts” that will notify
internet subscribers when their accounts are being misused to infringe
copyright law. A system of “mitigation measures” aims to deter repeat
infringements by those who ignore repeated alerts. The agreement
also establishes a Center for Copyright Information to administer the
programme and coordinate education activities. A separate new body
will handle disputes.
The agreement, the result of two years of negotiations, has strong
support on both sides. Randal S. Milch, General Counsel of major
ISP Verizon, says: “We understood the problem and its importance
to the creative industries. We wanted to cooperate in a way that
would be effective in curtailing piracy, and also raise awareness
among our customers of copyright law and the security issues
around P2P networks. We also wanted to ensure the privacy rights
of our customers. We’re very confident this balance will be achieved
and that this new partnership will work for all sides and serve as a
model to others.”
Music companies say the hard-fought ISP agreement has changed the
mood in the US industry. “This initiative is one of the things that will
fuel the shift in the mindset of American consumers. Some element of
deterrence is needed, and this is a proportionate programme,” says
Glen Barros, chief executive of independent label Concord Music Group.
Litigation has also played its part in the US recovery. The most
heavily-used illegal music service in America, Limewire, was closed in
October 2010 when a federal court in New York issued a permanent
injunction against the company. The percentage of the US internet
population using a P2P file-sharing service fell from 16 per cent in
the fourth quarter of 2007 to 9 per cent in the fourth quarter of 2010,
when Limewire ceased its file-sharing operations. The average number
of tracks downloaded fell from 35 tracks per person to 18 tracks per
person over the same period (The NPD Group).
Meanwhile, both the US House of Representatives and the Senate are
advancing “rogue site” legislation that would target foreign websites
that exist fundamentally to trade in infringing works and counterfeit
products. Both pieces of legislation, known respectively as the “Stop
Online Piracy Act” (SOPA) and the “Protect IP Act” (PIPA), seek, through
court orders, to disrupt funding of the sites by payment processors and
advertising networks. Both pieces of legislation are set to be debated
further in early 2012.
“This initiative is one of the things that will
fuel the shift in the mindset of American
consumers.”
Glen Barros, chief executive, Concord Music Group
“We wanted to cooperate in a way that would
be effective in curtailing piracy, and also
raise awareness among our customers of
copyright law.”
Randal S. Milch, General Counsel, Verizon
Focus on US
21
US key data in 2011 (units)
Increase in singles sales 8%
Increase in album sales (physical and digital units) 3.2%
Source: Nielsen SoundScan.
The impact of the Limewire judgment
Q4 2007 Q4 2010
% of US internet population using
infringing P2P services 16 9
Average number of track s downloaded
from P2P services 35 18
Source: The NPD Group.
A continuing success
South Korea illustrates how good legal services, combined with strong
repertoire and a healthy legal environment can lead to significant market
growth. The recorded music market in South Korea grew by 6 per cent in
value in the first half of 2011, following a 12 per cent increase in 2010. In
2005 it was ranked as the 33rd music market in the world. Today, it ranks
as the 11th largest market.
One of the key rewards of South Korea’s improved legal environment is
more investment in local artists. Domestic repertoire used to account for
around 60 per cent of recorded music sales, but this figure has climbed
to around 80 per cent in 2011. Around 70 per cent of the revenue from
“K-pop” repertoire comes through digital channels, compared with 55 per
cent across the market as a whole.
Q Chung, managing director, Sony Music Entertainment Korea, says:
“South Korea is committed to being the most advanced digital economy in
the world. Our government understands that a fair legal environment is an
essential foundation for such an ambition. This means we have been able
to concentrate on what record companies do best: discovering, signing
and promoting great local talent both at home and overseas.”
South Korea’s improved copyright landscape did not happen overnight.
The government began to update its copyright law in 2007, requiring
online service providers to filter illegal content on request from rights
holders. In July 2009, graduated response measures were
introduced and in April 2011 a new law required cyberlockers
and P2P services to register with the government and
implement filtering measures. South Korea operates
a range of measures to tackle digital piracy, overseen
by the Ministry of Culture, Sports and Tourism (MCST)
and largely implemented by the Korea Copyright
Commission (KCC).
Graduated response is integral to South Korea’s
copyright enforcement system. The KCC has sent
around 100,000 “recommendation notices” to service
providers, requiring them to tell infringing
users to stop breaking the law.
The government says 70 per cent of infringing users stop on receipt of
a first notice and 70 per cent of the remaining infringers stop on receipt
of a second notice. If users refuse to stop following three notices, this
triggers a further series of “correction orders” issued by the MCST. Only a
small percentage of users continued to infringe once they received repeat
notices backed by a sanction.
South Korean copyright law also requires online service providers,
including P2P services, to block the illegal distribution of infringing
material. Unauthorised P2P services and overseas blogs and cyberlockers
are targeted through a programme of website blocking. The Korea
Communications Commission reports that 24 mostly international sites
were blocked in the first five months of 2011.
Digital Music Report 2012
Focus on South Korea
22 K-Pop stars Yiruma, M.C the Max and BEAST.
Source: IFPI, based on total music revenues.
South Korea Placement in Global Market Rankings
2007 23
2009 14
2011 11
Source: IFPI, based on data from Nielsen.
No of Users (000s)
17,000
16,000
15,000
14,000
13,000
12,000
11,000
10,000
Usage of Cyberlockers (Webhards), the primary target of graduated response,
has fallen sharply
June 10
Jul 10
Aug 10
Sept 10
Oct 10
Nov 11
Dec 10
Jan 11
Feb 11
Mar 11
Apr 11
May 11
June 11
Jul 11
Aug 11
Major record companies license Baidu
China is a market with huge potential for the music industry. Yet it has
suffered from an estimated 99 per cent digital piracy rate in recent
years, meaning the legitimate market has operated at only a fraction of
its true potential.
China has nearly twice as many internet users as the US, but digital
music revenues per user are currently about 1 per cent of that of the US.
More than 70 per cent of music sales in China are digital, but the market
has achieved a tiny fraction of its potential. In 2010, China’s overall
music sales were worth only US$67 million, making it a smaller market
than Ireland.
In July 2011 three major record companies – Universal, Sony and
Warner - struck a partnership with China’s largest internet company,
Baidu, a milestone in the music industry’s development in China. While
the other major company, EMI, already had a licensing agreement with
Baidu, under the new venture Baidu pledged to close its infringing
deep-linking music search service. The agreement between Baidu and
One Stop China, in which the three music companies are investors, also
marked the close of years of litigation.
Under the terms of the new partnership, consumers can download
tracks for free from Ting, a new legitimate service supported by
advertising revenues.
The deal by no means ends China’s piracy problem. Other unauthorised
“deep-linking” services are still operating, while cyberlockers and illegal
download sites remain a huge barrier to growth. China has increased
its commitment to fighting piracy with numerous special anti-piracy
campaigns. These have achieved some results, but a sustained
enforcement campaign is needed over the long-term.
Lachie Rutherford, president, Warner Music Asia Pacific, says: “Baidu’s
decision to switch to an authorised music service in a market that
has until now been dominated by infringement is a milestone for the
development of our business in China.”
“This is a market with enormous potential where attitudes to copyright
are slowly but noticeably improving. The Baidu deal is a groundbreaking
partnership that combines the enormous reach of China’s biggest
internet company with the expertise and creativity of the largest
music companies.”
Catherine Leung of Baidu says: “We believe in the long-term commercial
viability and success of music for Baidu. The next generation of young
people needs to be encouraged to consume music in the right way.
Hopefully, in a couple of years, perhaps 20 per cent of our users will be
in one way or another paying customers for music. Even 10 per cent of
100 million is a big number.”
“The next generation of young people need
to be encouraged to consume music in the
right way.”
Catherine Leung, general manager, music and
entertainment division, Baidu
“The Baidu deal is a groundbreaking
partnership that combines the enormous
reach of China’s biggest internet company
with the expertise and creativity of the largest
music companies.”
Lachie Rutherford, president, Warner Music
Asia Paciifc
Developing a legitimate business in China
23
China facts and figures
Music sales 2010 US $67 million
Digital sales penetration 71%
Piracy rate Estimated 99%
Source: IFPI.
24
Search engines should link to legal music
Search engines such as Bing, Google and Yahoo! are a major channel for
consumers to access music. However, many of the top results provided by
search engines are linked to unauthorised content or sites which regularly
infringe copyright. The music industry believes search engines should bear
important responsibilities in this area.
The scale of the problem is illustrated by research commissioned
in the UK, where Harris Interactive found that 23 per cent of consumers
regularly download music illegally using Google as their means to find
the content (September 2010). Further research in New Zealand by
Ipsos MediaCT (August 2011) also highlighted that search engines direct
a significant number of users to unauthorised sources. 54 per cent of
users of unauthorised downloads said they found the music through a
search engine. In Ireland, this figure was 49 per cent (Ipsos MediaCT,
October 2011).
For some search terms, links shown on the first page of results are often
overwhelmingly to infringing sources. IFPI’s anti-piracy team conducted
research which found that entering the name of the top five artists in
the Billboard Top 100 chart on 1st November 2011 plus the term “mp3”,
the dominant legal and illegal file format for digital music, found the
majority of search results were infringing.
Search engines need to adopt responsible practices and procedures if they
are to ensure that consumers are not drawn into behaviour that is illegal and
often compromises their online security. In January 2011, it was announced
that rights holders in the UK were in discussions with the government and
search engines on a draft code of conduct covering matters such as the
prioritisation of legal sites in search results and online advertising.
There is already cooperation between the music industry and search
engines in this area - but it needs to be much better. Mass numbers of
takedown notices are sent to search engines each month asking them to
delist links to non-legal content. However, response times vary and delays
still occur. There are also sometimes restrictions on the number of
non-legal links that rights holders can notify. These need to be removed,
and search engines should take measures to prevent notified infringing links
re-appearing in results. Search engines also need to go beyond delisting
and address the prioritisation of links. They need to rank search results
factoring in clear indication of legality or illegality. A basic measure such as
this would help consumers not only avoid viruses and malware, but also
being directed unwittingly towards content piracy.
Protecting content online: intermediaries step up
Search engines also have a key role preventing advertising revenues from
funding piracy. Some have advertising businesses that sell search terms to
advertisers or that serve advertisements to websites wishing to generate
revenue from advertising, which can be used to fund providers of websites
that are dedicated to illegal use of content. Search engines should
implement effective screening procedures for advertising partners, and
eliminate all advertisements on substantially infringing sites and on search
results pages that contain links to such sites.
Advertising: cutting the funds to piracy
Advertising is a major source of funding for digital piracy worldwide. Illegal
music sites may offer their content for free, but they are often commercially
driven, and advertising revenues are a principal source of funding for many
of them.
The amount of revenue generated by such sites can be substantial, as
demonstrated in the legal case against Limewire in the US. Prosecutors
showed Limewire made an estimated US$20 million in revenues from
advertising in 2006 alone. The judgment that shut the site down noted “LW’s
sources of revenue depend on Limewire attracting the massive user population
generated by its infringing-enabling features....As Limewire’s user base
expanded LW’s revenues from advertising and software distribution increased.”
Reputable companies are increasingly removing their advertisements from
unlicensed sites. The recording industry approaches advertisers, alerting
them to the fact their advertisements are appearing on such services.
Companies including E-ON, HSBC, ING Direct, Mazda and Monarch Airlines
were clear they did not wish to associate their brands with piracy. Such
companies were commonly unaware their media buyers were placing
advertisements on networks that included illegal websites.
In June 2011, GroupM, WPP’s media investment arm, developed and adopted
a pioneering new digital media buying policy designed to prevent its clients’
ads from appearing on websites that distribute illegally obtained content. The
policy is designed to actively oppose online piracy in all its forms and to protect
the copyright-protected, intellectual property of all content-producing companies.
In conjunction with the new policy, GroupM created a list of more than 2000
sites that were identified as containing or supporting pirated content.
GroupM buys an estimated US$82 billion a year globally in media for its
clients (Source: RECMA).
“We’re serious about combating piracy and protecting our clients’ intellectual
property as forcefully as we possibly can,” said GroupM Interaction Global
CEO, Rob Norman. “This policy extends to digital media buyers at all GroupM
agencies, as well as other WPP companies like Team Detroit, which manages
Ford’s media business.
In October 2011, the US Congressional International Anti-Piracy Caucus wrote
to the American Association of Advertising Agencies, the Association of National
Advertisers and the Interactive Advertising Bureau, asking them to take action
to curb advertising on illegal websites. The bipartisan committee said that
advertisements from blue chip brands helped to fund piracy and their appearance
on illegal sites could give visitors the impression the sites were legitimate.
Digital Music Report 2012
Artist Infringing results from search for artist name and ‘MP 3’
Google Yahoo! Bing
Adele 77% 62% 70%
Rihanna 86% 71% 65%
Maroon 5 82% 67% 75%
LMFAO 82% 81% 80%
Foster The People 55% 57% 60%
Source: IFPI.
25
Payment providers act on illegal sites
The music industry is stepping up pressure on the illegal websites
that distribute its products without permission or payment by
removing their ability to abuse payment services. Thanks to
close cooperation between IFPI, law enforcement and the
payment industry, rogue sites are finding it more difficult to
secure the merchandising services of companies such as
MasterCard, PayPal, the paysafecard group and Visa, as well as
phone payment services.
A partnership between IFPI, the City of London Police and payment
providers has prevented 62 illegal websites based in Russia
and Ukraine from abusing payment services since it began in
March 2011.
Under the terms of the cooperation, IFPI supplies the City of
London Police with evidence that illegal downloads are being made
available from an infringing site. The police review the evidence,
verify its integrity and notify payment providers that their services
should not be provided to such sites. It is estimated that, to
date, the programme has stopped some £180 million of illegal
trade, based on the revenues generated by the sites over the
previous year.
Payment providers have always prohibited the sale of illegal goods
and services using their payment systems, but this collaboration
expedites the process and ensures website operators cannot
continue to build businesses based on theft.
Detective Chief Superintendant Steve Head of the City of London
Police says: “We are fully committed to proactive initiatives
such as these, where we work with the private sector to prevent
offending and minimise harm to entire business sectors such as
the music industry.”
Jim Issokson, senior business leader, public affairs
communications, MasterCard Worldwide, adds: “The partnership
between MasterCard, IFPI and the City of London Police is
progressing very well. The coalition approach we have created
is both effective and mutually beneficial. Our collaboration has
successfully disrupted illegal activity and curtailed the ability
for criminals to profit from such activity at the expense of
hard-working, legitimate participants in the recording industry.
MasterCard plans to continue to partner with both entities to
eradicate intellectual property piracy in the recording industry.”
Hosting providers: A key partner
Web hosting services are also a priority. These provide server space
and internet connectivity to websites, sometimes enabling rogue
websites to illegally distribute copyrighted material. IFPI sends
warnings to make the host provider aware, taking legal action if
necessary. In May 2011, a court in Luxembourg ruled against a
leading hosting provider which was providing services to a number
of illegal websites.
Some companies appear to market themselves as offering an opportunity
to circumvent copyright laws. In Canada, web hosting company Amanah
offers its clients “no more fighting with DMCA restrictions” as a feature
of its server hosting services, playing on its location outside of the
US. Under the US Digital Millennium Copyright Act, rights holders can
issue takedown notices to web hosting companies. Cases such as this
highlight the need for legal reform to strengthen copyright protection in
Canada and other jurisdictions worldwide.
It is estimated that, to date, the programme
has stopped some £180 million of illegal
trade, based on revenues generated by
the sites over the previous year.
“Our collaboration has successfully disrupted
illegal activity and curtailed the ability of
criminals to profit from such activity at
the expense of hard-working, legitimate
participants in the recording industry.”
Jim Issokson, senior business leader, public affairs
communications, MasterCard Worldwide
“We all must improve
the way we secure our
most valuable assets.”
Paul Rosenberg,
manager of Eminem
Tackling the pre-release hackers
Pre-release piracy is a major problem for the music industry as online
leaks have the potential to significantly damage sales of albums and
singles. So-called “release groups”, “splinter groups” and individuals seek
to obtain music before it officially goes on sale, distributing it on blogs
and forums, from where it can proliferate across the internet. This costs
valuable sales in the critical period around release, often also costing
artists an optimum chart position.
IFPI works with its member labels to prevent leaks occurring, improving
security around promotional copies of new music, and if a leak does take
place, it works to remove the infringing links that appear online. Antipiracy
investigators use the latest automated technology to identify
and remove infringing links worldwide. In 2011, it removed more than
15 million tracks, up from seven million in 2010, a 115 per cent increase.
As a result of this increased security, hackers are now
targeting the email accounts of artists and those
who work with them to illegally obtain content before
its commercial release. They send “phishing”
emails, purporting to be from legitimate contacts,
asking recipients to reset passwords and
linking through to bogus websites that pose as
legitimate social networking sites or personal
email services. Once a hacker has
obtained log-in details for an email
account he can check it for audio
files, copy the victim’s address
book and even unleash a virus
that lets him take over
a computer.
Hackers seek the kudos from
their peers by releasing music
online before it goes on sale. Some
also try to secure “shouts” from artists,
audio or video recordings praising
the hacker, in exchange for them not
leaking their music. Hackers have also
been able to hijack individuals’ social
networking profiles, leaking personal
content such as photographs.
IFPI assists artists and labels in tracing such hackers. One such
investigation was launched after those working at Shady Records
were targeted to secure tracks from Eminem’s seventh studio
album Recovery.
Paul Rosenberg, Eminem’s manager, says: “Eminem is obviously an
artist that takes his craft very seriously and puts a huge amount of time
and effort into making his music. If outsiders are able to pry his work
to share with the world when the songs may not be finished or possibly
never intended to ultimately be released it’s a difficult thing to come to
terms with.”
Once it was clear hackers had been able to obtain tracks from the
album, Rosenberg alerted his contacts to the fact they were being
targeted. He says: “We need to raise awareness within the label and
those involved with the recording process that they will be targeted and
should be aware of emails asking for log-in details. We all must improve
the way we secure our most valuable assets.”
Jeremy Banks, director, anti-piracy, IFPI, says: “Pre-release leaks
have always been a damaging problem for record labels and artists,
threatening to sabotage months of work. In the last couple of years
we have seen such piracy take a new and sinister form as hackers
compromise people’s privacy to get hold of commercially valuable prerelease
music. This is being addressed through cooperation between
artists, labels, anti-piracy experts and law enforcement.”
Public education: a long term commitment
Public education plays a crucial role in developing a thriving digital music
sector. The industry supports campaigns across the world to promote
legitimate services and improve understanding of copyright. A few of
these are highlighted below. Governments are playing their part too,
with France and South Korea leading the way.
Music Matters
The Music Matters campaign was
developed by a collective of artists and
others that work in and around music to
remind listeners of its enduring value. It
encourages music fans to consume in
an ethical way by highlighting the digital
services that support artists and those that invest in them through the
Music Matters trust mark. The campaign was launched in the UK in
2010 and extended to Australia and New Zealand in 2011. It highlights
the value of music through a series of films focusing on inspirational
music with featured artists featured including Dave Dobbyn, Eskimo
Joe, Kate Bush, The Jam, Sigur Rós and Thin Lizzy. In August 2011,
the biggest band in history joined the campaign when The Beatles
authorised a film using their music. Music Matters will get a further
boost in 2012 with the launch of Música Trasciende, the Spanishlanguage
version of the campaign, in Latin America.
www.whymusicmatters.org
Self-help: anti-piracy enforcement and education
Digital Music Report 2012
Eminem: tracks were obtained by hackers
Eminem. Photo by Nigel Parry. 26
27
“We needed to communicate directly to the public and explain what
Hadopi really aims to achieve,” says Pichevin. “If music and films are
just taken without reward that will have a very important impact on
the kind of offerings we will get tomorrow. The campaign was about
highlighting the youth and the promise of creators.”
As Pichevin explains, “We wanted to show that Hadopi is defending
artists and the emotions their works engender, rather than being an
internet censor. Promoting the PUR trust mark for legitimate services
will help French consumers know which sites are legitimate, and
the campaign has widened the discussion.” Education, coupled
with Hadopi’s graduated response system, provides consumers with
everything they need to make informed decisions.
Pichevin says the campaign provoked an awareness-raising debate.
“People know that taking content illegally is wrong, but our campaign
aimed at going beyond the morality to explain the consequences for
our culture. We believe many people might change their behaviour
once they understand this better.”
www.pur.fr
South Korea
South Korea has conducted a
comprehensive education programme
to complement its actions to protect
intellectual property online. When
the copyright law was updated, the
government launched an advertising
blitz across billboards, broadcast outlets
and the print media. It explained that
if users wanted to benefit from cultural
goods and services, it was only fair they pay for them, and that if the
government did not protect copyright today, then consumers would
have fewer cultural products to enjoy tomorrow.
Copyright has been placed on the national curriculum and The
Korea Copyright Commission (KCC) trains teachers so that they can
tackle the subject in the classroom. The KCC also uses music to
communicate, engaging well-known singer-songwriter Kim Tae-Won
to write The Copyright Song, which a range of artists sing when they
appear on TV or radio. Artists and comedians have been engaged
by the government to act as “ambassadors for copyright”, explaining
the new law and its benefits to consumers in broadcasts and other
public appearances.
There is a Copyright Academy for those working in the creative,
technology and other relevant industries, running eight courses tailored
to their specific needs. The courses explain how these professionals
can keep on the right side of copyright legislation as they are engaged
in their business. More than 350,000 people a year receive some
form of education or training from the KCC.
www.copyright.or.kr
A Guide to Music, Film, TV and the Internet
IFPI and its right holder partners in
the international alliance Pro-Music
first launched a guide for parents and
teachers in partnership with international
children’s charity Childnet in 2005.
The guide provides simple and practical
advice for parents and teachers advising
young people how to enjoy music safely
and legally online. The most recent
edition of the guide was rolled out
internationally in 2011. In total, the
three editions of the guide have been translated into 17 languages
and made available in 21 countries. Copies of the third edition were
sent to the head teachers of every secondary school in the UK and
endorsed by the Ministry of Culture in Spain. In Italy, the government
of Milan Province backed the campaign by issuing copies of the guide
and producing posters to be placed in staff rooms of senior schools
across the region.
www.childnet.com/downloading; www.pro-music.org
Pop4Schools
Pop4Schools is a programme designed
to help teachers use the medium
of pop music to teach pupils about
curriculum subjects from mathematics
to art by bringing the concept of a
record company into the classroom. Children write, produce, market,
promote, distribute and sell a piece of music, role-playing the process
that takes place in the real world. Teachers can match pupils’ skills to
certain tasks, such as performing the song, designing the artwork or
writing sleeve notes. Pop4Schools launched in December 2010 and
rolled out over the course of 2011.
www.pop4schools.com
France: 3 million campaign to support Hadopi
A major campaign supported the launch
of Hadopi, the French agency tasked
with protecting copyright online. The
campaign also introduced PUR, the
website dedicated to promoting certified
legal digital services. The €3 million
campaign is Hadopi’s first marketing
campaign and ran across television,
radio, cinemas, online, on public transportation and through leaflets
and direct mail. Aymeric Pichevin of H.O.M.E Media helped to craft the
strategy for the campaign. A series of short clips depicts imagined hit
films and music of the early 2020s, ending with the common message
that without the work of Hadopi these might never be realised.
28
andorra
Deezer
Argentina
BajáMúsica
Faro Latino
iTunes
Personal Música
Sonora
Ubby Música
YouTube
Australia
Anubis.fm
Bandit.fm
BigPondMusic
Cartell Download
DanceMusicHub
Getmusic.com.au
Guvera
Hutchison “Three”
Inertia
iTunes
Jamster
JB Hi Fi
Liveband.com.au
Mobile Active
Music Unlimited
Nokia Music
Optus Music Store
Qtrax
Rdio
Samsung Music Hub
Songl
The In Song
Third Mile
Ticketek Music
Virgin Mobile
Vodafone
YouTube
Austria
3MusicStore
7digital
A1 Music
AmazonMP3
Artistxite.com
Deezer
DG Webshop
eMusic
Finetunes
iTunes
Jamba
JUKE
Ladezone
Last.fm
Musicbox
Musicload
Mycokemusic
MySpace
Nokia Music
Austria cont.
Orange
Preiser
rara.com
Simfy
SMS.at
Soulseduction
Spotify
Telering
T-Mobile
Weltbild
YouTube
Zed
Zero-Inch
Zune
Belarus
Yandex Music
Belgium
7digital
Beatport
Dance-Tunes.com
Deezer
DjTUNES
Downloadmusic.nl
eMusic
Fnac
iTunes
Jamba
Jamster
Junodownload
La Mediatheque
Legal Download
Nokia Music
Proximus
rara.com
Simfy
Spotify
We7
YouTube
Bolivia
iTunes
Brazil
Claro Music Store
Ideas Music Store
Ideas Musik
iTunes
iMusica
Mercado da Musica –
Transamerica
MSN Music Store
Mundo Oi
Nokia Music
OI Rdio
Power Music Club (GVT)
Sonora
TIM Music Store
Universal Music Loja
Brazil cont.
UOL Megastore
Vivo Play
Warner Music Store
Yahoo! Music
YouTube
Bulgaria
4fun
7digital
eMusic
Hitbox.bg
iTunes
M.Dir.bg
mp3.bg
MTel Music Unlimited
Musicspace
Canada
7digital
BBM Music
Bell Mobility
Classical Archives
eMusic
Galaxie Mobile
HMV Digital Canada
iTunes
Motime
Puretracks
rara.com
Rdio
Slacker
TELUS
urMusic
VEVO
YouTube
Zik
Zune
Chile
Bazuca
Claroideas
Entel-Napster Mobile
iTunes
Mimix
Nokia Music
Portaldisc
China
Baidu
China Mobile
China Telecom
China Unicom
Douban
Google Music
Netease
Nokia CWM
Renren
Sina
Tencent
Todou
Top100
Youku
Chinese Taipei
Emome
Ezpeer+
Far Eastone
Hami Music
iNDIEVOX
iNmusic
KKBOX
muziU
Omusic
Taiwan Mobile
VIBO
YouTube
Colombia
Codiscos
ETB Musica
Ideas Comcel Music Store
iTunes
Música
Prodiscos – Entertainment
Store
Supertienda Movistar
Sonora
Tigo
Costa Rica
iTunes
Croatia
Cedeterija
Fonoteka
Cyprus
7digital
eMusic
iTunes
Czech Republic
7digital
eMusic
iTunes
MusicJet
Nokia Music
O2 Active
Stream
t-music
Vodafone
YouTube
Denmark
3musik
BibZoom.dk
Bilka Musik
Billigcd.dk
CDON Danmark
Deezer
DSB
DVDOO.dk
Ekstrabladet.dk
eMusic
GUCCA
Inpoc
iTunes
M1
Music Unlimited
PlayNow Arena
(Sony Ericsson)
rara.com
Spotify
TDC Play
Telia
TouchDiva
TP Musik
VoxHall
WavesOut
WiMP
Dominican Repbulic
iTunes
Ecuador
iTunes
Egypt
Alamelphan
Mazzika Box
El Salvad or
iTunes
Estonia
7digital
Deezer
Estonia cont.
eMusic
iTunes
Muusika24
Faroe Islands
Deezer
Finland
7digital
City Market CM Store
Deezer
DNA Musiikkikauppa
download.MTV3.fi
Download.NetAnttila
Downloads.cdon.com
eMusic
Equal Dreams
iTunes
Meteli.net
MTV Music Shop
Music Unlimited
Nokia Musiikki
NRJ Kauppa
Poimuri
rara.com
Spotify
Store.radiorock.fi
France
121 MusicStore
7digital
Allomusic
Amazon
Beatport
Beezik
Carrefour
cd1d
Cultura.com
Deezer
Disquaire on line
Dogmazic
E-Compil
eMusic
Ezic
Fnac.com
Gkoot electronic
iTunes
Jamba
Jamendo
Jazz en ligne
Last.fm
Lazy Live
MiooZic
Mondomix
musicMe
Musiclassics
Musicovery
Music Unlimited
MyClubbingStore
MySurround
Neuf Music
Nokia Music
Nuloop
Off TV
Orange Music
Qobuz
rara.com
SFR Music
Spotify
Starzik
Virgin Mega
YouTube
Zaoza
Digital Music
Services Worldwide
The featured list of legitimate digital music services appears on the
Pro-music information resource (www.pro-music.org). This is the
most comprehensive up-to-date directory of the world’s legitimate
music website. The list numbers around 500 legitimate services
in 78 countires.
29
Germany
7digital
Akazoo
Amazon MP3
AOL Musik
Artistxite.com
Beatport
boomkat
Clipfish
Dance All Day
dancetracksdigital.com
Deezer
Deluxe Music
digital-tunes
djdownload
djtunes
elixic.de
eMusic
e-Plus unlimited
Eventim music
Finetunes
Highresaudio
iMusic1
iTunes
Jamba
JPC
Juke
juno
Justaloud
Last.fm
Linn Records
Mediamarkt
Medionmusic
MP3.Saturn
MTV/VIVA
Musik-Gratis.net
Musicload
Musicbox
Music Unlimited
MyVideo
Napster
Nokia Musik
o2 Music
othermusic.com
PlayNow
primalrecords.com
Putpat
QTom
rara.com
Rdio
shop2download
Simfy
soulseduction
tape.tv
T-Mobile Music
trackitdown
traxsource
UMusic
Videoload
VidZone
Vodafone
Weltbild
whatpeopleplay.com
WOM
Yavido
Zaoza
zero-inch.com
Zune
zwo3.net
Greece
123play
7digital
Akazoo
Cosmote
eMusic
Greece cont.
EMI Downloads
iTunes
mpGreek
Viva
Vodafone
Wind
Gibraltar
Deezer
Guatemala
iTunes
Honduras
iTunes
Hong Kong
3Music
China Mobile HK
CSL Music
Eolasia.com
hifitrack
KKBOX
Moov
Musicholic
MusicOne
MusicStation
Musicxs
PCCW Mobile
Qlala
SmarTone iN
YouTube
Hungary
7digital
Dalok
iTunes
UPC Music
Vodafone Live!
Iceland
7digital
Gogoyoko
Tonlist.is
India
7digital
Artist Aloud
Gaana
In
IndiaONE
Meridhun
My Band
Nokia Music
Raaga
Radio One
Saregama
Saavn
Smash Hits
Ireland
7digital
ArtistXite
Bleep.com
CD World
Deezer
Eircom MusicHub
eMusic
Golden Discs
iLike
iTunes
Last.fm
Meteor Music Store
Music Unlimited
MUZU.TV
MySpace
Nokia Music
rara.com
Ireland cont.
Universal Music
Vodafone Music
We7
YouTube
Israel
YouTube
Italy
7digital
Azzurra Music
Beatport
Cubo Musica
Deejay Store
Deezer
eMusic
Esselunga MusicStore
Fastweb
GazzaMusic
IBS
InnDigital
iTunes
Jamba
Last.fm
m2o.it
Mondadori
MSN Music
Music Planet 3
Music Unlimited
Net Music Media World
Nokia Music
Playme
rara.com
Sorrisi Music Shop
TIM
Vodafone Live
YouTube
ZED
Jamaica
REGGAEinc
Japan
Aniloco
Beatport
Best Hit J-Pop
clubDAM
Dwango
Hudson
ICJ
iTunes
Lismo
Listen Japan
mora
mora win
mu-mo
Music Airport
Music.jp
Musico
Musing
Naxos Music Library
Oricon ME
OnGen
Reco-Choku
Yamaha Music Media
Corporation
YouTube
Kazakhstan
Yandex Music
Korea
24hz
Bugs
Cyworld BGM
Dal
Daum Music
Korea cont.
Joos
Melon
Monkey3
Musicsoda
Naver Music
Ollehmusic
Latvia
7digital
Deezer
eMusic
iTunes
Liechtenstein
7digital
Deezer
Lithuania
7digital
Deezer
eMusic
iTunes
Luxembourg
7digital
eMusic
iTunes
rara.com
Malaysia
7digital
Celcom Channel X
DigiMusic
Gua Muzik
Hypptunes
Maxis Music Unlimited
U Mobile Planet Music
Wowload
malta
7digital
eMusic
iTunes
Mexico
BBM Music
Coca-Cola FM
Entretonos Movistar
EsMas Movil
Flycell
Ideas Music Store Mexico
Ideas Radio Mexico
Ideas Musik
Ideas Telcel
iTunes
Mientras Contesto de
Iusacell
Mixup Digital
Nextel Shotsonline
Nokia Music
Seven 7 Music Shop
Sigue Tu Música Corona
Music
Terra Sonora
Terra TV
Universal Music Magazine
YouTube
Monaco
Deezer
Netherlands
7digital
Countdownload
Dance-Tunes
Deezer
Downloadmusic.nl
eMusic
GlandigoMusic
Netherlands cont.
iTunes
Jaha
Jamba
Last.fm
legal download
Mediamarkt
Media Gigant
Mikkimusic
MP3 Downloaden
MSN Muziek Downloads
MTV
Muziek.nl
Muziekweb
Nokia Music
Radio 538
rara.com
Saturn
Sony Ericsson PlayNow Plus
Spotify
Talpadownloads
TMF
TuneTribe
Vodafone
You Make Music
YouTube
zazell.nl
Zoekmuziek
New Zealand
7Digital
Amplifier
Bandit.fm
Digirama
Flybuys Music
iTunes
Marbecks Digital
Music Unlimited
MySpace Music
rara.com
Telecom Music Store
The In Song
Vodafone
YouTube
Nicaragua
iTunes
Norway
7digital
Beat.no
Bulls Press
CDON.com Norway
Deezer
iTunes
Jamba
MTV
Music Unlimited
Musikkonline
Musikkverket & Playcom
NetCom
Nokia Music
Platekompaniet
rara.com
Spotify
Telenor Musikk
WIMP
Panama
iTunes
Paraguay
Claro
FeelMP3
iTunes
Personal
Tigo
30
Peru
iTunes
Philippines
Globe
myMusic.ph
Smart
Star Music
Star Records
Poland
7digital
eMusic
iplay.pl
iTunes
Last.fm
mp3.pl
Muzodajnia
MySpace
Niagaro
Nokia Music
Orange World
Soho.pl
YouTube
Portugal
7digital
Beatport
Deezer
eMusic
iTunes
Jamba
Music Box (TMN)
Myway
Nokia Music
Optimus
Qmúsika
SAPO/ Musicaonline
Vodafone
Romania
7digital
Best Music
Cosmote
Dump.ro
eOk
Get Music
iTunes
Music Mall
Music Nonstop
Orange
Trilulilu.ro
Vodafone
Russia
Beeline
Deezer
Fidel
iviMusic
Megafon
Mp3.ru
MTS
Muz.ru
Nokia Music
Tele2
Yandex Music
YouTube
san marino
Deezer
Singapore
7digital
M 1 Music Store
Nokia Music
OBuddy
Samsung Mobile
Singtel AMPed
Singtel Ideas
Singapore cont.
Starhub Music Store
YouTube
Slovakia
7digital
eMusic
iTunes
Music Jet
Nokia Music
Orange
YouTube
Slovenia
7digital
eMusic
iTunes
mZone
South Africa
DJs Only
Jamster
Just Music
Lookandlisten.co.za
MTN Loaded
Music Station
Nokia Music
Omusic.com
Pick n Play
Rhythm Online
ThatGig
Vodafone Live
Spain
7digital
Beatport
Blinko (Buongiorno)
Dada
Deezer
eMusic
Fnac
IbizaDanceClub.com
iTunes
Jamba
Last.fm
Los40.com
Magnatune
Media Markt
Movistar
MTV
MUZU.TV
Music Unlimited
MySpace
Nokia Music
Olemovil (Jet Multimedia)
Orange
rara.com
Rockola.fm
Spotify
Tuenti
Vodafone
Yes.fm
Yoigo
YouTube
Zune
Sweden
7digital
Beatport
Bengans
CDON
Check-in music
Deezer
eClassical
eMusic
Enjoy
Gazell Digital Store
iTunes
Sweden cont.
Klicktrack
Last.fm
Mr Music
Music Unlimited
Musikbiten
Musikshopen
MySpace
Nokia Music
Omnifone
rara.com
Sound Pollution
Spotify
WiMP
Switzerland
7digital
AmazonMP3
ArtistXite
Cede.ch
Deezer
Ex Libris
Finetunes
Hitparade.ch
iTunes
Jamba
Musicload
Nokia Music
Orange
PlayNow Arena
rara.com
Simfy
Soundmedia
Spotify
Sunrise Joylife
Weltbild
Thailand
AIS
DTAC
i-humm
Music Combo
Music One
N-content
Shinee
ThinkSmart
Total Reservation
True Digital
W Club
Turkey
Avea
Fizy.com
Gncplay.com
İzlesene
Müzik İçin Efes
Muzikin.com
Mynet
Nokia Music
Orjinalindir.com
TTnetmuzik
Turkcell
Vodafone
YouTube
Videonmusic
Vidivodo
Ukraine
Djuice
MUZon
Yandex Music
YouTube
United Kingdom
3V Music Store
7digital
Amazing Tunes
AmazonMP3
United Kingdom cont.
ArtistXite
Babelgum
BBM Music
Beatport
Bleep
Boomkat
BT Vision
Classical.com
Classical Archives
Classics Online
Coolroom
Deezer
DJ Download
Drum & Bass Arena
eMusic
Fairsharemusic
Historic Recordings
HMV Digital
iLike
Imodownload
iTunes
Jamster
Jango
Joost
Juno
Karoo
last.fm
Linn
Mewbox (Android)
mFlow
Mobile Chilli
MSN
MTV
Music Anywhere
Music For Life (Talk Talk)
MusicStation
Music Unlimited
MUZU.TV
Musicovery
MySpace
Napster
Naxos Music Library
Nectar Music Store
Nokia Music
O2
Ooizit
Orange Music Store
Orange Monkey
Partymob
Passionato
Play.com
PlayNow
Pure Music
rara.com
United Kingdom cont.
Spotify
Tesco Downloads
Textatrack UK
The Classical Shop
T-Mobile UK
Track It Down
Traxsource
TuneTribe
Vevo
Vidzone (PS3 only)
Virgin
Virgin Mobile
Vodafone
We7
Yahoo! Music
YouTube
Zune
Uruguay
Ancel Musica
Butia
Claro Music Store
La Rocola
Tmuy
USA
7digital
AmazonMP3
AOL Music
Artist Direct
BearShare
eMusic
iLike
iMesh
iTunes
MySpace Music
MOG
MTV
Music Unlimited
Muve Music
Pandora
rara.com
Rdio
Rhapsody
Slacker
Spotify
Vevo
Yahoo! Music
YouTube
Zune
Venezuela
iTunes
Música Movistar
This is a list of digital music services from around the world that
appears on the Pro-music website (www.pro-music.org). Pro-music
is endorsed by an alliance of organisations representing international
record companies (majors and independents), publishers, performing
artists, and musicians’ unions.
The list is compiled by IFPI based on information from its national
groups at time of publication. It does not purport to be exhaustive
and IFPI cannot guarantee its 100 per cent accuracy. Readers
should consult the www.pro-music.org website for the most up
to date information.
31
Recording Industry in Numbers
The recorded music market in 2011
(2012 edition)
n Features recorded music sales data for 2007-2011
n Available in PDF, hard copy and now also data in Excel format for 50 territories
n Free to IFPI members
n To be alerted when the report becomes available please contact ritco@ifpi.org
Recording Industry in Numbers 2011
(2011 edition)
n Features detailed data on the recorded music market from 2006-2010
n Country level data for 50 territories
n Splits for physical, digital and performance rights revenue
n Key market trends, the broader music industry, evolution of new models and bestsellers
n Free to IFPI members
For more information go to www.ifpi.org/RIN
For advertising opportunities in the 2012 edition please contact laura.childs@ifpi.org
Photo credits:
Page 5: Frida Gold. Photo by Robert Wunsch, Natasha Bedingfield..Photo by Rankin, Professor Green. Photo by Desmond Muckian, Shakira. Photo by Marc Baptiste, Tal. Photo by Pierre Dal Corso, MiMi. Photo by Richard Stow, Van Ness Wu. Photo by Zo Sun Hi,
Lee Ritenour. Photo by Rob Shanahan.
Page 7: Bruno Mars. Photo by Andreas Laszlo Konrath, LMFAO. Photo by Stephanie Ma, Jennifer Lopez. Photo by Warwick Saint, Adele. Photo by Mari Sarii, Lady Gaga. Photo by Meeno.
Page 22: MC THE MAX. Photo by Kim Hyeong-sun, Yiruma. Photo by Choi Bo-yoon, BEAST. Photo by Mok Na-jeong (Eco Studio).
“At a time when the music industry is seeing new avenues of business opening almost daily, the IFPI's Recording Industry in
Numbers proves itself to be a consistent source of accurate and insightful data.”
Rob Wells, president, global digital business, Universal Music Group
Available
April 2012
Available
now
Upcoming IFPI reports
© IFPI 2012
www.ifpi.org
All data, copy and images are subject to copyright and may not be reproduced, transmitted or made available without permission from IFPI.
Designed by Band: www.bandlondon.co.uk

The Problems with Spotify

2011-12-11T20:04:00.000-08:00

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Why Spotify can never be profitable: The secret demands of record labels

By Michael Robertson, MP3tunes Dec. 11, 2011, 9:00am PT 24 Comments

Imagine a new hot-dog selling venture. Let’s also say there’s only one supplier to purchase hot dogs from. Instead of simply charging a fixed price for hot dogs, that supplier demands the HIGHER of the following: $1 per hot dog sold OR $2 for every customer served OR 50 percent of all revenues for anything sold in the store.In addition, the supplier requires a two-year minimum order of 300 hot dogs per day, payable all in advance. If fewer hot dogs are sold, there is no refund. If more than 300 hot dogs are sold each day, payments to the supplier are generated by calculating $2 per customer or 50 percent of total revenues, so an additional payment is due to the supplier. After the first two years, the supplier can unilaterally adjust any of the pricing terms and the shop can never switch suppliers.
Would this imaginary hot dog establishment be able to generate a profit? Never, because the economics are one-sided. The supplier will always elect the formula that captures the largest amount of money for themselves, completely disregarding the financial viability of the store. If the store miraculously managed to generate a profit, the landlord would simply raise the rates after two years.
Such economic demands may be imaginary for the hot dog business, but they are the stark reality that every digital-music subscription service such as Spotify, Rhapsody, MOG, Rdio, and others must confront. These details aren’t well-known because digital music service deals are always wrapped tightly with strict non-disclosure agreements.
For the first time, people are talking, and these previously secret demands are being made public. The specifics are even more onerous than the hot dog example cited above. Together they doom online audio companies to a life of subjugation to the labels, as you will learn below.
Here are some specific demands that digital music companies are compelled to agree to:

General deal structure: Pay the largest of A) Pro-rata share of minimum of $X per subscriber, B) Per-play costs at $Y per play, C) Z percent of total company revenue, regardless of other business areas. As stated previously, this means labels de facto set retail price (they also regularly negotiate floors on price, giving even less wiggle room), which limits the ability of the music service to develop ancillary revenue streams that aren’t siphoned off by the labels.
Labels receive equity stake. Not only do labels get to set the price on the service, they also get partial ownership of the company.
Up front (and/or minimum) payments. Means large amounts of cash are necessary to even get into the game. In my experience, this further stifles innovation in services and business models.
Detailed reporting, including monthly play counts. This seems rational enough — you would assume this information is necessary to pay artists and make other business decisions. The problem is, the labels each make additional demands, including providing additional reports unrelated to payment, including overall market share of sales in various categories. I doubt that, for example, phone manufacturers demand Best Buy provide the percentage of sales of competitors’ phones. The labels effectively offload their business analysis (and the cost of such analysis) onto the music services. I can’t think of another industry where that is standard practice.
Data normalization. Labels all provide their data and files in different formats. That data is constantly changing as labels make available new material and make unavailable old material. This might seem trivial. It’s not. Without standard naming conventions and canonical methods for referencing artist, tracks and albums (ISRC and UPC don’t cut it), the services are left to try and match artist, track, album names provided by one label with those of another. It’s incredibly inefficient, as each service must undergo this process separately (although there are now companies that provide a service for doing this for the retailers).
Publishing deals. Once you’ve signed deals with the labels, you then need to cut deals with the publishers. Determining ownership is a complete nightmare and there are huge holes in the licensable catalog. The data issues here are worse than with the labels. The long and short of it: Although you may have the rights to stream from labels, you sometime can’t get the rights to stream from the publisher, or worse, even find the publisher.
Most favored nation. This is a deal term demanded by every major label that ensures the best terms provided to another label are available to it as well. This greatly constricts the ability to work out unique contractual terms and further limits business models. It is a form of collusion since each label gets the best terms the other label negotiates. It’s also why it’s easy to get one label (typically EMI) because they’ll provide low-cost terms knowing that others will demand higher rates, which EMI will then garner the benefit from.
Non-disclosure. Every contract has strict language prohibiting the digital music company from revealing what they pay to the labels. If they speak publicly about any of the licensing terms, they jeopardize invalidating their license which would torpedo their business. Since labels license on behalf of the artists any payment to the artist comes from the labels not the digital music company. This is the main reason music services, not the labels, have been getting heat from the artist community. Music services can’t defend against accusations about low artist payments because they pay the labels who don’t disclose what they’re paying to the artists.

With most other businesses, if a supplier makes unreasonable demands, a retailer can turn to other providers. Since copyright law gives record labels and publishers a government-granted monopoly, no such option is possible with music. Digital vendors have only two options: Accept the terms or not include those songs in their offering.
The sale of EMI to other music companies means there will shortly be only three major labels. If a music service rejects terms offered by a label, then that service’s offering will have an enormous hole in their catalog of 25 percent or more of popular songs. In the business world, a monopoly leads to lopsided economics, and the subscription digital music business is a poignant illustration of that.
Final note: Online radio services such as Pandora take advantage of a government-supervised license available only to radio broadcasters thus sidestepping dealing with record labels. While the per-song fees are daunting, they bypass virtually all of the terms listed above.
A 15-year veteran of the digital music business, Michael Robertson is the founder and former CEO of MP3.com and is currently CEO of personal cloud music service MP3tunes as well as the radio recording service DAR.fm. He can be reached at michael@michaelrobertson.com. He would like to thank Paul Petrick for his contribution to this piece.
Image courtesy of Flickr user walknboston
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Netflix Culture Presentation.. 126 page slide show

2011-09-10T18:09:00.000-07:00

http://www.slideshare.net/reed2001/culture-1798664

Culture - Presentation Transcript

Netflix Culture: Freedom & Responsibility
We Seek Excellence Our culture helps us seek excellence
Seven Aspects of our Culture
- Values are what we Value
- High Performance
- Freedom & Responsibility
- Context, not Control
- Highly Aligned, Loosely Coupled
- Pay Top of Market
- Promotions & Development
Lots of companies have nice sounding value statements displayed in the lobby, such as: Integrity Communication Respect Excellence
Enron, whose leaders went to jail, and which went bankrupt from fraud, had these values displayed in their lobby: Integrity Communication Respect Excellence (These values were not, however, what was really valued at Enron)
The actual company values, as opposed to the nice-sounding values, are shown by who gets rewarded, promoted, or let go
Actual company values are the behaviors and skills that are valued in fellow employees
At Netflix, we particularly value the following nine behaviors and skills in our colleagues… … meaning we hire and promote people who demonstrate these nine
You make wise decisions (people, technical, business, and creative) despite ambiguity You identify root causes, and get beyond treating symptoms You think strategically, and can articulate what you are, and are not , trying to do You smartly separate what must be done well now, and what can be improved later Judgment
Communication You listen well, instead of reacting fast, so you can better understand You are concise and articulate in speech and writing You treat people with respect independent of their status or disagreement with you You maintain calm poise in stressful situations
Impact You accomplish amazing amounts of important work You demonstrate consistently strong performance so colleagues can rely upon you You focus on great results rather than on process You exhibit bias-to-action, and avoid analysis-paralysis
Curiosity You learn rapidly and eagerly You seek to understand our strategy, market, customers, and suppliers You are broadly knowledgeable about business, technology and entertainment You contribute effectively outside of your specialty
Innovation You re-conceptualize issues to discover practical solutions to hard problems You challenge prevailing assumptions when warranted, and suggest better approaches You create new ideas that prove useful You keep us nimble by minimizing complexity and finding time to simplify
Courage You say what you think even if it is controversial You make tough decisions without agonizing You take smart risks You question actions inconsistent with our values
Passion You inspire others with your thirst for excellence You care intensely about Netflix‘s success You celebrate wins You are tenacious
Honesty You are known for candor and directness You are non-political when you disagree with others You only say things about fellow employees you will say to their face You are quick to admit mistakes
Selflessness You seek what is best for Netflix, rather than best for yourself or your group You are ego-less when searching for the best ideas You make time to help colleagues You share information openly and proactively
Seven Aspects of our Culture
- Values are what we Value
- High Performance
- Freedom & Responsibility
- Context, not Control
- Highly Aligned, Loosely Coupled
- Pay Top of Market
- Promotions & Development
Imagine if every person at Netflix is someone you respect and learn from…
Great Workplace is Stunning Colleagues Great workplace is not espresso, lush benefits, sushi lunches, grand parties, or nice offices We do some of these things, but only if they are efficient at attracting and retaining stunning colleagues
Like every company, we try to hire well
Unlike many companies, we practice: adequate performance gets a generous severance package
We’re a team , not a family We’re like a pro sports team , not a kid’s recreational team Netflix leaders hire, develop and cut smartly , so we have stars in every position
The Keeper Test Managers Use: Which of my people , if they told me they were leaving, for a similar job at a peer company, would I fight hard to keep at Netflix?
The Keeper Test Managers Use: Which of my people , if they told me they were leaving, for a similar job at a peer company, would I fight hard to keep at Netflix? The other people should get a generous severance now, so we can open a slot to try to find a star for that role
Honesty Always As a leader, no one in your group should be materially surprised of your views
Honesty Always Candor is not just a leader’s responsibility, and you should periodically ask your manager: “If I told you I were leaving, how hard would you work to change my mind?”
All of Us are Responsible for Ensuring We Live our Values “ You question actions inconsistent with our values” is part of the Courage value Akin to the honor code pledge: “I will not lie, nor cheat, nor steal, nor tolerate those who do ”
Pro Sports Team Metaphor is Good, but Imperfect Athletic teams have a fixed number of positions, so team members are always competing with each other for one of the precious slots
Corporate Team The more talent we have, the more we can accomplish, so our people assist each other all the time Internal “cutthroat” or “sink or swim” behavior is rare and not tolerated
We Help Each Other To Be Great
Isn’t Loyalty Good? What about Hard Workers? What about Brilliant Jerks?
Loyalty is Good
- Loyalty is good as a stabilizer
- People who have been stars for us, and hit a bad patch, get a near term pass because we think they are likely to become stars for us again
- We want the same: if Netflix hits a temporary bad patch, we want people to stick with us
- But unlimited loyalty to a shrinking firm, or to an ineffective employee, is not what we are about
Hard Work – Not Relevant
- We don’t measure people by how many hours they work or how much they are in the office
- We do care about accomplishing great work
- Sustained B performance, despite “A for effort”, generates a generous severance package, with respect
- Sustained A performance, despite minimal effort, is rewarded with more responsibility and great pay
Brilliant Jerks
- Some companies tolerate them
- For us, cost to effective teamwork is too high
- Diverse styles are fine – as long as person embodies the 9 values
Why are we so insistent on high performance? In procedural work, the best are 2x better than the average. In creative/inventive work, the best are 10x better than the average, so huge premium on creating effective teams of the best
Why are we so insistent on high performance? Great Workplace is Stunning Colleagues
Our High Performance Culture Not Right for Everyone
- Many people love our culture, and stay a long time
- Some people, however, value job security and stability over performance, and don’t like our culture
- We’re getting better at attracting only the former, and helping the latter realize we are not right for them
Seven Aspects of our Culture
- Values are what we Value
- High Performance
- Freedom & Responsibility
- Context, not Control
- Highly Aligned, Loosely Coupled
- Pay Top of Market
- Promotions & Development
The Rare Responsible Person
- Self motivating
- Self aware
- Self disciplined
- Self improving
- Acts like a leader
- Doesn’t wait to be told what to do
- Picks up the trash lying on the floor
Responsible People Thrive on Freedom, and are Worthy of Freedom
Our model is to increase employee freedom as we grow, rather than limit it, to continue to attract and nourish innovative people, so we have better chance of sustained success
Most Companies Curtail Freedom as they get Bigger Bigger Employee Freedom
Why Do Most Companies Curtail Freedom and Become Bureaucratic as they Grow?
Desire for Bigger Positive Impact Creates Growth Growth
Growth Increases Complexity Complexity
Growth Also Often Shrinks Talent Density % High Performance Employees Complexity
Chaos Emerges % High Performance Employees Chaos and errors spike here – business has become too complex to run informally with this talent level Complexity
Process Emerges to Stop the Chaos Procedures No one loves process, but feels good compared to the pain of chaos “ Time to grow up” becomes the professional management’s mantra
Process-focus Drives More Talent Out % High Performance Employees
Process Brings Seductively Strong Near-Term Outcome
- A highly-successful process-driven company
Then the Market Shifts…
- Market shifts due to new technology or new competitors or new business models
- Company is unable to adapt quickly
- Company generally grinds painfully into irrelevance
Seems Like Three Bad Options
- Stay creative by staying small, but therefore have less impact
- Avoid rules as you grow, and suffer chaos
- Use process as you grow to drive efficient execution of current model, but cripple creativity, flexibility, and ability to thrive when your market eventually changes
A Fourth Option
- Avoid Chaos as you grow with Ever More High Performance People – not with Rules
- Then you can continue to mostly run informally with self-discipline, and avoid chaos
- The run informally part is what enables and attracts creativity
The Key: Increase Talent Density faster than Complexity Grows % High Performance Employees Business Complexity
Increase Talent Density
- Top of market compensation
- Attract high-value people through freedom to make big impact
- Be demanding about high performance culture
% High Performance Employees
Minimize Complexity Growth
- Few big products vs many small ones
- Eliminate distracting complexity (barnacles)
- Be wary of efficiency optimizations that increase complexity and rigidity
Business Complexity Note: sometimes long-term simplicity is achieved only through bursts of complexity to rework current systems
With the Right People, Instead of a Culture of Process Adherence, We have a Culture of Creativity and Self-Discipline, Freedom and Responsibility
Is Freedom Absolute? Are all rules & processes bad?
Freedom is not absolute Like “free speech” there are some limited exceptions to “freedom at work”
Two Types of Necessary Rules
- Prevent irrevocable disaster
- Moral, ethical, legal issues
Mostly, though, Rapid Recovery is the Right Model
- Just fix problems quickly
- We’re in a creative-inventive market, not a safety-critical market like medicine or nuclear power
- You may have heard preventing error is cheaper than fixing it
“ Good” versus “Bad” Process
- “ Good” process helps talented people get more done
- “ Bad” process tries to prevent recoverable mistakes
Rule Creep
- “ Bad” processes tend to creep in
- We try to get rid of rules when we can, to reinforce the point
Example: Netflix Vacation Policy and Tracking Until 2004 we had the standard model of N days per year
Meanwhile… We’re all working online some nights and weekends, responding to emails at odd hours, spending some afternoons on personal time, and taking good vacations
An employee pointed out… We don’t track hours worked per day or per week, so why are we tracking days of vacation per year?
We realized… We should focus on what people get done, not on how many days worked Just as we don’t have an 9am-5pm workday policy, we don’t need a vacation policy
Netflix Vacation Policy and Tracking “ there is no policy or tracking”
Netflix Vacation Policy and Tracking “ there is no policy or tracking” There is also no clothing policy at Netflix, but no one comes to work naked Lesson: you don’t need policies for everything
No Vacation Policy Doesn’t Mean No Vacation Netflix leaders set good examples by taking big vacations – and coming back inspired to find big ideas
Another Example of Freedom and Responsibility…
Most companies have complex policies around what you can expense, how you travel, what gifts you can accept, etc. Plus they have whole departments to verify compliance with these policies
Netflix Policies for Expensing, Entertainment, Gifts & Travel: “ Act in Netflix’s Best Interest” (5 words long)
“ Act in Netflix’s Best Interest” Generally Means…
- Expense only what you would otherwise not spend, and is worthwhile for work
- Travel as you would if it were your own money
- Disclose non-trivial vendor gifts
- Take from Netflix only when it is inefficient to not take, and inconsequential
Freedom and Responsibility
- Many people say one can’t do it at scale
- But since going public in 2002, which is traditionally the end of freedom, we’ve substantially increased talent density and employee freedom
Summary of Freedom & Responsibility: As We Grow, Minimize Rules Inhibit Chaos with Ever More High Performance People Flexibility is More Important than Efficiency in the Long Term
Seven Aspects of our Culture
- Values are what we Value
- High Performance
- Freedom & Responsibility
- Context, not Control
- Highly Aligned, Loosely Coupled
- Pay Top of Market
- Promotions & Development
If you want to build a ship, don't drum up the people to gather wood, divide the work, and give orders. Instead, teach them to yearn for the vast and endless sea. -Antoine De Saint-Exupery, Author of The Little Prince
The best managers figure out how to get great outcomes by setting the appropriate context, rather than by trying to control their people
Context, not Control
- Context (embrace)
- Strategy
- Metrics
- Assumptions
- Objectives
- Clearly-defined roles
- Knowledge of the stakes
- Transparency around decision-making
- Control (avoid)
- Top-down decision-making
- Management approval
- Committees
- Planning and process valued more than results
Provide the insight and understanding to enable sound decisions
Good Context
- Link to company/functional goals
- Relative priority (how important/how time sensitive)
- Level of precision & refinement
- Key stakeholders
- Key metrics / definition of success
Managers: When one of your talented people does something dumb, don’t blame them Instead, ask yourself what context you failed to set
Managers: When you are tempted to “control” your people, ask yourself what context you could set instead Are you articulate and inspiring enough about goals and strategies?
Why Managing Through Context? High performance people will do better work if they understand the context
Investing in Context This is why we do new employee college, frequent department meetings, and why we are so open internally about strategies and results
Exceptions to “Context, not Control”
- Control can be important in emergency
- Control can be important when someone is still learning their area
- Control can be important when you have the wrong person in a role
Seven Aspects of our Culture
- Values are what we Value
- High Performance
- Freedom & Responsibility
- Context, not Control
- Highly Aligned, Loosely Coupled
- Pay Top of Market
- Promotions & Development
Three Models of Corporate Teamwork
- Tightly Coupled Monolith
- Independent Silos
- Highly Aligned, Loosely Coupled
Tightly Coupled Monolith
- Senior management reviews nearly all tactics
- Lots of x-departmental buy-in meetings
- Keeping other internal groups happy has equal precedence with pleasing customers
- Mavericks get exhausted trying to innovate
- Highly coordinated through centralization, but very slow, and slowness increases with size
Independent Silos
- Each group executes on their objectives with little coordination
- Work that requires coordination suffers
- Alienation and suspicion between departments
- Only works well when areas are independent
#3 is the Netflix Choice
- Tightly Coupled Monolith
- Independent Silos
- Highly Aligned, Loosely Coupled
Highly Aligned, Loosely Coupled
- Highly Aligned
- Loosely Coupled
Highly Aligned, Loosely Coupled teamwork effectiveness depends on high performance people and good context Goal is to be Big and Fast and Flexible
Seven Aspects of our Culture
- Values are what we Value
- High Performance
- Freedom & Responsibility
- Context, not Control
- Highly Aligned, Loosely Coupled
- Pay Top of Market
- Promotions & Development
Pay Top of Market is Core to High Performance Culture One outstanding employee gets more done and costs less than two adequate employees We endeavor to have only outstanding employees
Three Tests for Top of Market for a Person
- What could person get elsewhere?
- What would we pay for replacement?
- What would we pay to keep that person?
Confidential
Takes Great Judgment
- Goal is to keep each employee at top of market for that person
Titles Not Very Helpful
- Lots of people have the title “Major League Pitcher” but they are not all equally effective
- Similarly, all people with the title “Senior Marketing Manager” or “Director of Engineering” are not equally effective
- So the art of compensation is answering the Three Tests for each employee
Annual Comp Review
- At many firms, when employees are hired, market compensation applies
- But come comp review time, it doesn’t apply
- At Netflix, market comp always applies:
Confidential
No Fixed Budgets
- There are no centrally administered “raise pools” each year
- Instead, each manager aligns their people to top of market each year – the market will be different in different areas
Compensation Over Time
- Some people will move up in comp very quickly because their value in the marketplace is moving up quickly, driven by increasing skills and/or great demand for their area
- Some people will stay flat because their value in the marketplace has done that
Compensation Not Dependent on Netflix Success
- Whether Netflix is prospering or floundering, we pay at the top of the market
- Employees can choose how much they want to link their economic destiny to Netflix by deciding how many Netflix stock options they want to hold
Bad Comp Practices
- Manager sets pay at Nth percentile of title-linked compensation data
- Manager cares about internal parity instead of external market value
- Manager gives everyone a 4% raise
When Top of Market Comp Done Right...
- We will rarely counter with higher comp when someone is voluntarily leaving because we have already moved comp to our max for that person
- Employees will feel they are getting paid well relative to their other options in the market
Versus Traditional Model
- Traditional model is good prior year earns a raise, independent of market
- Consistent market-based pay is better model
Employee Success
- It’s pretty ingrained in our society that the size of one’s raise is the indicator of how well one did the prior year
- Employee success is still a big factor in comp because it influences market value
Good For Each Employee to Understand Their Market Value
- It’s a healthy idea, not a traitorous one, to understand what other firms would pay you, by interviewing and talking to peers at other companies
Efficiency
- Big salary is the most efficient form of comp
- Health benefits: employees get $10k per year
Optional Options
- Employees get top of market salary, and then can request to trade salary for stock options
- Some people take all cash, some people request half their comp in options
- This is consistent with freedom and responsibility, and lets employees decide how much risk/reward is comfortable for them
Details on Stock Options
- The options are fully vested and are 10-years-to-exercise options, independent of how long one stays at Netflix
- These fully vested options are granted monthly at the then current stock price, so employees get price averaging on their exercise price
- These options cost employees less than half of what such options would cost in the open market, and are from pre-tax salary, so are a great deal
- Employees can change their option request annually
- Options become valuable only if Netflix stock climbs
- Big rewards if stock goes up a lot: $1000 per month into this program starting after our IPO in May 2002 would be worth $7,036,410, as of end of May 2011
No Vesting or Delayed Comp
- We don’t want managers to “own” their people with vesting – all comp is fully vested
- We want managers to be responsible for creating a great place to work, and paying at the top of market
- Employees are free to leave us anytime, without penalty, but nearly everyone stays
- Employees stay because they are passionate about their work, and well paid, not because of a delayed compensation system
No Ranking Against Other Employees
- We avoid “top 30%”, “bottom 10%” type rankings amongst employees
- We don’t want employees to feel competitive with each other
- We want all of our employees to be “top 10%” relative to the pool of global candidates
- We want employees to help each other, and they do
Seven Aspects of our Culture
- High Performance
- Values are what we Value
- Freedom & Responsibility
- Context, not Control
- Highly Aligned, Loosely Coupled
- Pay Top of Market
- Promotions & Development
In some time periods, in some groups, there will be lots of opportunity and growth at Netflix Some people, through both luck and talent, will have extraordinary career growth
Baseball Analogy: Minors to Majors
- Very talented people usually get to move up, but only true for the very talented
- Some luck in terms of what positions open up and what the competition is
- Some people move to other teams to get the opportunity they want
- Great teams keep their best talent
- Some minor league players keep playing even though they don’t move up because they love the game
Netflix Doesn’t Have to Be for Life
- In some times, in some groups, there may not be enough growth opportunity for everyone
- In which case we should celebrate someone leaving Netflix for a bigger job that we didn’t have available to offer them
Two Necessary Conditions for Promotion
- Job has to be big enough
- Person has to be a superstar in current role
Timing
- If a manager would promote to prevent an employee from leaving, the manager should promote now instead of waiting
- Both tests still have to be passed
Development
- We develop people by giving them the opportunity to develop themselves, by surrounding them with stunning colleagues and giving them big challenges to work on
Career “Planning” Not for Us
- Formalized development is rarely effective, and we don’t try to do it
We Support Self-Improvement
- High performance people are generally self-improving through experience, observation, introspection, reading, and discussion
We want people to manage their own career growth, and not rely on a corporation for “planning” their careers
Your Economic Security is based on your Skills and Reputation We try hard to consistently provide opportunity to grow both
Seven Aspects of our Culture
- Values are what we Value
- High Performance
- Freedom & Responsibility
- Context, not Control
- Highly Aligned, Loosely Coupled
- Pay Top of Market
- Promotions & Development
We keep improving our culture as we grow We get better at seeking excellence

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Why Content Isn't King -- The Story of Netflix

2011-09-10T18:00:00.000-07:00

Business July/August 2011 ATLANTIC MAGAZINE

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Why Content Isn’t King

By Jonathan A. Knee

Netflix famously engenders fierce loyalty from its ever-growing customer base. This year, it even beat out reigning champion Apple, among 528 other brands, in Brand Keys’ annual survey of customer loyalty. In more-rarefied circles, however, the company provokes equally intense but quite different emotional reactions. Among traditional-media executives and investors who like to bet on the fall of high-flying stocks, Netflix’s continual share-price appreciation and accelerating subscriber growth have sparked aggravation and even anger. Last December, Time Warner CEO Jeff Bewkes famously likened the relentless march of Netflix to the Albanian army’s trying to “take over the world.” That same month, in a widely read 7,000-word missive, the respected investor Whitney Tilson provided an exhaustive justification for making a huge bet against Netflix, and then had to cover his short position after the stock reached a new high a couple of months later.
Netflix recently announced that with nearly 23 million U.S. users, it is now the largest video service in the country. Most observers expect the company to have more than 30 million subscribers by the end of the year, generating well over $3 billion in annual revenues. Arguments abound about why Netflix should not be as successful and as highly valued as it is. But the animating force of the perceived Netflix Paradox is disbelief that a company that does what Netflix does can thrive amid the wreckage of the media industry. Netflix is primarily in the business of aggregating entertainment content created by other companies and selling access to it as a subscription service to consumers. In a media culture committed to the proposition that “Content is king,” the robust success of a mere redistributor is something incomprehensible and, frankly, a little unnerving, especially while those responsible for the creative lifeblood that flows through its veins struggle for profitability.
In fact, the dirty little secret of the media industry is that content aggregators, not content creators, have long been the overwhelming source of value creation. Well before Netflix was founded in 1997, cable channels that did little more than aggregate old movies, cartoons, or television shows boasted profit margins many times greater than those of the movie studios that had produced the creative content. It is no coincidence that although, say, 90 percent of the public discourse surrounding Comcast’s recent $30 billion acquisition of NBC Universal involved the Conan O’Brien drama or the shifting fortunes of Universal Pictures, in reality, 82 percent of the new company’s profits come in through the cable channels.
The economic structure of the media business is not fundamentally different from that of business in general. The most-prevalent sources of industrial strength are the mutually reinforcing competitive advantages of scale and customer captivity. Content creation simply does not lend itself to either, while aggregation is amenable to both.
Take scale. Because making a blockbuster movie is expensive, people assume that it is a scale business—that is, the bigger you are, the more cheaply you can produce something. But the defining characteristic of scale is high fixed costs that can be spread most efficiently by the largest player. Moviemaking is not this kind of business. The cost of a blockbuster does not vary based on the size of the studio producing it. Creating hit-driven content in any medium does not require significant fixed costs. Some series-based or other kinds of continuously produced content may have a larger fixed-cost component, but they are the exception, not the rule. Aggregation, on the other hand, by its nature requires a large fixed-cost infrastructure to collect, manage, market, and redistribute content. This is why a cable channel with 20 million subscribers loses money but an identical one with 100 million subscribers might have 50 percent margins.
Customer captivity—the “stickiness” of the company-to-consumer relationship—is similar. If Universal had a successful slate of movies last year, customers aren’t more likely to seek out Universal films this year. Again, series or franchise films may be slightly different, but even with that content, the company is much less likely than the talent to be able to reap the benefits of captivity. Just ask the producer at Lionsgate responsible for negotiating with Mad Men mastermind Matthew Weiner, or the Sony executive in charge of enticing Tobey Maguire to make Spider-Man 4, or whoever at Viacom has the unenviable task of discussing new contract terms with the cast of Jersey Shore. Contrast the lack of customer captivity among pure content companies with the leverage cable companies seem to enjoy, by virtue of their loyal viewership, when they threaten to pull their signal from a cable operator.
Time was when the content giants in the movie, music, and book industries could earn superior returns. But their ability to do so had nothing to do with content’s being king. It was a function of the scale and captivity inherent in their aggregation business: the massive marketing and distribution networks that they rented out to smaller, independent content producers, often at usurious rates. The decline of these enterprises does not reflect any change in the nature of content generation—it was as unattractive a business then as it is now. Instead, their decline reflects the loss of their advantages in aggregation—a loss resulting from a combination of external forces and self-inflicted wounds.
The obvious external force has been advances in technology. One reason that every major book publisher owns huge, half-empty warehouse and distribution facilities is that more books are being delivered electronically. The impact of technology on the music industry is the stuff of legend at this point, but even if companies had discovered a sustainable piracy-free pricing model for digital distribution, the business would still be less attractive than before. Without the fixed-cost requirements associated with producing and distributing CDs and managing racks at Tower Records, the barriers to entry into music-selling are not what they used to be. The detriment of increased competition from newcomers simply outweighs the benefit to established businesses of lower fixed costs.
It would be a mistake to give media managers a pass based on technological developments beyond their control. In industries like media, where a few large players share the same advantages of scale, the key to long-term success is avoiding destructive competition in pricing, costs, and capacity. In the mostly forgotten era of the MCA/Universal chief Lew Wasserman, being a media mogul meant enforcing a culture of informal cooperation, where the bottom line mattered more than one-upping your peers. Wasserman was not literally “the Last Mogul,” as multiple biographers have dubbed him, but he may have been the last one who didn’t think the defining genius of moguldom was out-bidding all the other moguls for the hottest talent, technology, or property of the moment. While technology has certainly accelerated the challenges of the book industry, the mindless race to build more and better warehouse and distribution facilities ensured chronic industry overcapacity, even before the advent of Amazon or e-book readers. Similarly, a culture that rewards “stealing” established authors from competitors the old-fashioned way—by overpaying—will never earn its shareholders a decent return, regardless of the technological environment.
Netflix’s success in streaming video is therefore hardly paradoxical. The company sits squarely in the tradition of the most-successful media businesses: aggregators with strong economies of scale and customer captivity. Netflix used its leading position in its legacy subscription business to quickly develop scale in the streaming business. The company had fewer than 9 million subscribers in 2008, when it began offering video streaming directly to the TV for its existing customers. That move has spurred 10 consecutive quarters of accelerating subscriber growth, and it supported the introduction of a streaming-only service last November. Netflix’s ability to spread the fixed costs of content, marketing, and technology across a subscriber base vastly larger than any other competitor’s is continually reinforced by superior customer service, a powerful recommendation engine, and a great, habit-forming product.
Even if the Netflix business model is not original, some cultural and structural aspects do distinguish it from most media companies. Culturally, it is a remarkably well-run company that takes pride in both its operating efficiency and its customer focus. CEO Reed Hastings’s 128-slide PowerPoint presentation on Netflix corporate culture has been viewed by well over 720,000 people, presumably not all employees. By contrast, media-content companies seem to feel that efficiency necessarily suggests a lack of commitment to artistic integrity. Media-distribution companies, particularly in the cable and telephony markets, have among the worst customer relations in any industry: J. D. Power ranked the cable companies 18th out of 19 industries in service. And most media aggregators, such as cable channels, structurally act as wholesalers, whose customers are not the individual consumers but the cable operators who manage the pipe to the home. Netflix is the rare aggregator that manages the direct customer relationship itself, which allows it both to excel in customer service and to perfect the product by harnessing customer feedback.
These company characteristics are unusual, and yet they hardly constitute a puzzle. But whenever the evidence contradicts conventional media-industry wisdom, the media cognoscenti aggressively resist any reassessment. Better to dismiss any uncomfortable fact as a “paradox” and move on. The media analyst Craig Moffett coined the term “Dumb Pipe” Paradox to describe the fact that a shift of consumer habits from cable television to online video streaming could actually help the economics of the cable operators. Moffett correctly pointed out that cable companies would be far better off if they could charge customers based on direct bandwidth usage from video streaming without having to invest in cable boxes. Only in the media industry, however, would it seem a paradox that owning the exclusive broadband pipe into the home at a time of exploding usage makes for a good business. Relying on dumb pipes instead of expensive content or talent is always the smart bet.
Netflix may indeed be overvalued: as the company acknowledges in its candid public filings, it is certain to face more rather than less competition. Retailers like Walmart, various content companies with their Hulu joint venture, distribution companies like Dish Network, and Internet stalwarts like Amazon have either launched or announced a competing subscription product. In each case, the company involved is starting way behind, and in most cases it’s had limited experience either managing subscribers or developing compelling aggregated entertainment. Consider Amazon’s recent foray: its Amazon Prime product has far fewer subscribers than Netflix (estimates are around 5 million). Furthermore, those subscribers are largely paying for “free” shipping of books and electronics, so they make up a different market from those who are primarily interested in a video-streaming service. Amazon Prime provides much less content and saves a user who’s primarily interested in streaming video just over $1 a month from what Netflix charges. As the subscriber base supporting the Netflix marketing machine gets larger, offering consumers a competitive proposition of price and product will only become harder.
Some have pointed to Netflix’s recent announcement that it will finance a new original series as an indication that the company knows the jig is up. Content providers will come to their senses and no longer sell Netflix so many of their valuable streaming rights, the argument goes, and that’s why Netflix is going into the content business. Netflix has always relied on a deep inventory of long-tail content, sprinkled with some newer material, and a great recommendation engine. The company’s willingness to finance a new original series, as part of the tapestry that makes up the Netflix experience, does not make it primarily a content player—any more than the exclusive 101 Network makes DirecTV one. Netflix needs to offer only a very small portion of newer releases to support its overall value proposition; those who would compete with it for exclusive streaming rights do so with far fewer subscribers funding the bid. Netflix will very likely be able to secure more than enough content to keep its customers happy.
Investors and media companies who write off Netflix’s success as ephemeral—a function of a one-off content deal that will not be renewed, or of short-term user euphoria, for instance—will be disappointed. Netflix flourishes because of deep-seated competitive advantages fully appreciated and exploited by superior management. Media companies that fail to recognize the true size of the barriers to entry in aggregated streaming video are likely to make matters worse for themselves. Rather than denying the relevance of this new force, they should focus on how to manage it. Investors looking for media companies to bet against would probably do better to focus on those that dismiss Netflix rather than on Netflix itself.

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2011-09-06T07:42:00.000-07:00

Nataly Dawn's first solo album

A Music project in Los Angeles, CA by Nataly Dawn • send message

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About this project

I know that I risk jinxing myself in saying that I have very high hopes for this album, but it's the truth! Over the last year, I have written songs that I'm proud of and that I believe represent a cohesive body of work. They've taken a lot out of me (in a good way), and I'm looking forward to sharing them with you.
It helps that I have so much faith in the musicians I'll be working with. Between the drummer, the bassist, the guitarist and the engineer, I couldn't tell you who was the most talented. They are the ones who will turn my bare bone songs into full-fledged works. They are the magic makers. I would tell you who they are, but you would probably get too excited and forget to give me money.
Everything is ready to go: the songs, the musicians, the studio. All I need is a little help from you! Every dollar will go towards the album: paying the musicians and the people who will be filming the recording process, reserving the studio and hotel rooms, renting gear etc. And if by some miracle there's anything left over, I will buy myself a brand new Jaguar...or the money will go towards promoting the album. I haven't decided yet.

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How do I tell you what size shirt I need or anything else you might need to know?
Don't worry about it! As soon as the project is over (September 6th) I will send you a form to fill out, and you will be able to give me all of your info!
Last updated: Saturday Sep 3, 12:33pm EDT
I am from outside of the US! Do I have to pay extra for shipping?
No you do not! You CAN if you REALLY WANT TO, but no one will make you do it. :)
Last updated: Monday Jul 18, 1:48am EDT

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SPECIAL EDITION SIGNED POSTER AND ONE-OF-A-KIND POLAROID OF ME TAKEN IN THE STUDIO WHILE RECORDING + special edition t-shirt + signed hard copies of "Her Earlier Stuff" and the upcoming album + a digital download of the album before it's released

Pledge $150 or more

54 Backers • Limited Reward (46 of 100 remaining)

LYRICS OF ONE OF MY SONGS HANDWRITTEN ONTO A SPECIAL EDITION POSTER + t-shirt + signed hard copies of "Her Earlier Stuff" and the upcoming album + a digital download of the album before it's released

Pledge $250 or more

10 Backers SOLD OUT (0 of 10 remaining)

TALK TO ME, IT'LL BE FUN! (on the phone or on skype) for a half hour + poster + t-shirt + signed hard copies of "Her Earlier Stuff" and the upcoming album + a digital download of the album before it's released

Pledge $300 or more

12 Backers SOLD OUT (0 of 12 remaining)

TWO TICKETS TO ANY OF MY SHOWS AND A MEETING BACKSTAGE! + poster + t-shirt + signed hard copies of "Her Earlier Stuff" and the upcoming album + a digital download of the album before it's released