Future Business Models for the Pirate Bay and Historical Revenues

Yesterday evening I spoke with Hans Pandeya, CEO of Global Gaming Factory, the company that bought Pirate Bay.  I asked him a few specific questions about his plans for the Pirate Bay.

The plans revolve around building a new  peer-to-peer network from scratch, with a new application that uses smart peering technology to ensure bandwidth usage is as local as possible.   The intention is then to sell this localized peer based distribution capacity to ISPs (though I’m not quite sure why ISPs would buy back this bandwidth when it is theirs in the first place).

Mr Pandeya stressed his commitment to supporting rights holders’ interests and incentivizing users to download legal content.  The direct implication of incentivizing users of course is that they’ll get to chose from unlicensed content also, which suggests that the commitment to rights holders will fall far short of what they’ll need.

Besides likely rights holders problems, the other challenge will be to convince Pirate Bay users to download a new application to run on a new  and unproven network that at outset will have minimal content.

He also explained that he expects to generate strong ad revenues from the Pirate Bay website.  Yet the site, which he positions as a ‘search engine’ is a massive series of links to torrents which have been established in the Swedish court to contain extensive unlicensed content.  So either he removes these and loses his traffic, or he retains them and puts himself on a collision course with the rights owners.  Basically it looks like the Pirate Bay site could just be continuing as is with stronger and more robust financial backing.

My Pandeya was very bullish about the ad revenue potential of the site (though he insisted the peering business would be the main revenue source).  Based upon his calculations of Pirate Bay impressions and page views he expects the site to generate €40 million a month.   (FWIW those numbers feel high to me, but I’m not an online ad expert).  When I asked him what he though the Pirate Bay was currently earning he said he didn’t know because it had been ‘illegal’.  I found it hard to believe he will not have done the due diligence.  Indeed, to have such a strong sense of the inventory and audience of the site suggests he has in fact delved deeply.  So I pressed further, and eventually he said he thought that the Pirate Bay “probably” generated about €3 million a month in ad revenue, but that he “couldn’t know because it was illegal”.

Even if we say that Pirate Bay was earning a third of that, it still gives the site an annual income of €12 million, which doesn’t sit very well with the founders’ claims that it was not a strong revenue generator.  Indeed if you consider the upper end of Mr Pandeya’s estimates the Pirate Bay was a €66 million business.  Not shabby at all for a bunch of Robin Hoods, and far above the $1.2 million estimated in the trial.

 

Why Would Anyone Buy the Pirate Bay?

A small Swedish company Global Gaming Factory today announced the acquisition of the Pirate Bay.  The acquisition poses far more questions than it does answers.

The acquisition was for $7.7 million, which the founders described as “great bit underneath its value”.  Which is kind of interesting considering that they argued strongly in court that the Pirate Bay was not a cash cow.  Of course the fee neatly covers the fines $3.6 million handed out in the trial with over $4 million on top.  And it comes hot on the heels of the ‘bias’ claim against the judge being thrown out and the bid for a retrial being refused.  It isn’t clear whether GGF have acquired the liabilities of the Pirate Bay.  (When Roxio bought the assets of Napster it pointedly left the liabilities with Bertelsmann who then went on to face settlement fees with major record labels.)

GGF claim that they intend to launch “new business models that allow compensation to the content providers and copyright owners.”  This appears to involve some sort of supra-distribution model and GGF are at pains to stress they intend to compensate copyright owners.  Of course it is one thing to argue this and another to do it.  Normally in such situations there is a massive gulf between content owners’ valuation of their own content and that of software companies seeking to build business around it.  Also why buy a site that is diametrically opposed to copyright if you want to build a service which upholds copyright?

The history of file sharing networks and sites ‘going legit’ isn’t exactly a vibrant one:

• Napster sold its brand and mailing list to Roxio.  As a file sharing network it peaked at over 20 million users, as a subscription service it has less than 5% of that.  And really the new business has nothing to do with the old one, nor its user base.
• Grokster closed down in 2005 following legal action, stating that it would be back ‘soon’ with a legal alternative.  We’re still waiting.
• iMesh re-launched, again after legal action, as a licensed service, with modest success.
• Kazaa owners Sharman Networks settled with the music industry $100 million including provisions for launching a legal music service, which we still haven’t seen any sight of.

The trend is clear, and in many ways it is important that the message is clear that you do not get to the content licensing table by building an audience with unlicensed content.  (Though to be fair imeem did push the boundaries).

So why have GGF bought Pirate Bay?  All that Pirate Bay is is a list of locations of files.  It’s not a network, it doesn’t have content per se.  But it does have an audience. If they at some stage want to launch a licensed music service they have a number of problems:

• I can’t see them getting licenses from the majors for a file sharing service (Play Louder have been admirably fighting this battle with little success for years)
• If they do get licenses for some other form of music service they’re unlikely to be able to monetize that successfully with advertising given the current malaise that ad supported content finds itself in.  Not to mention the fact that Pirate Bay users are not the most attractive audience for many advertisers.
• If they intend to charge they’ll have a minimal conversion ratio: Pirate Bay users are there for finding free content, plain and simple.

So what other revenue models are left?  There are a number of possibilities:

• GGF’s CEO is doing this as a philanthropic act because he believes in the cause.  Though he asserts that he sees this as a viable business proposition.
• Pirate Bay has other (cash?) assets that were not revealed in the court case.  The experience of Sharman Networks shows us that owners of file sharing properties tend to have incredibly opaque and convoluted business structure to obscure accountability and ownership.  I have no evidence that this is the case with Pirate Bay, instead I’m simply making the case that this has happened before elsewhere.
• The last, and probably the most likely, option is that GGF will launch an adware business, building a client that tracks users’ behaviour and serves up ads based on context and behaviour, typically superimposed on publishers’ inventory.  This pretty much the Kazaa model.  The fact GGF have additionally bought a peer-to-peer technology company Peerilism points to this also, as does their current internet café ad business model.  The big issue here is around whether the application will run on other networks or a proprietary one.  If it is the former they simply won’t be able to meet content owners’ requirements and if it is the latter, do they really intend to block out all non-licensed content.

Returning to where I started, this acquisition leaves a lot more questions than it does answers.  The only thing that is clear is that the Pirate Bay owners, despite claiming to be modern day Robin Hoods have now become multi-millionaires, making them more like the rich Sheriff of Nottingham than the swashbuckling archer.

 

Michael Jackson Death Drives Digital Album Buying

What does it take to get people to buy digital albums?  A pop icon dying apparently.  Following the death of Michael Jackson the UK iTunes top ten albums is dominated by Jackson, with the entire top ten albums accounted for except for the #3 and #10 spots.  That’s an 80% hit rate.  By contrast, though Jackson claims the #1 single it is the only entry in the top 10.  (Though to be fair he does get a total of 40 out of the entire top 100.)

So what does this tell us?  At risk of over simplifying,  I’d argue that there are two key trends behind these sales:

• Older Jackson fans inspired to reacquaint themselves with his music, buying albums
• Curious new fans wanting to know what all the fuss is about, buying single tracks

The last time Jackson had a UK #1 album was 2001, and that was his first since 1995 (which outsold his 2001 ‘Invincible’ by nearly 1 million).  So there aren’t that many new fans of his new music.  Most of his core fan base was established in the 80’s and 90’s and are thus in their late twenties and upwards, and grew up buying CDs.  So they’re the ones that still revert to the album format when given the chance, and they’ve come out in numbers.  Variable pricing certainly helped (e.g. ‘Bad’ is 4.99) but the the premium priced ‘King of Pop’ (12.99) is at #2.

The younger fans though, who are more used to buying singles, are doing exactly that.  And with the ‘momentum effect’ of hits, this activity coalesced around ‘the Man in the Mirror’, driving it to #1.

So it’s no coincidence then that the top 10 albums chart is dominated more heavily than the top 10 singles.  The  album remains the preferred domain of the CD generation and the single tracks remains the preferred option of the digital generation.

 

Virgin and Universal Announce Unlimited MP3 Subscription: First Take

Today Universal Music and UK ISP Virgin Media announced the launch of an unlimited MP3 subscription service.  Yes, you read correctly, ‘unlimited MP3’.  And, perhaps even more significantly this goes hand in hand with Virgin committing to a graduated response (i.e. Three Strikes and You’re Out) policy for music file sharers.    Universal and Virgin have come to the negotiating table with their highest stakes and in doing so each has got their respective Holy Grail.    And don’t underestimate how high those stakes are for each party – basically Universal and Virgin have each delivered as much as they have to offer and conceded as much as they can give: they’ve both played their Aces.  Once again Universal put themselves in the position of digital trailblazers, leaving the other majors to follow in their slipstream.

Also, there’s no coincidence about the timing of the announcement i.e. the day before the final Digital Britain report is published.  The graduated response approach runs counter to the more modest ‘technical solutions’ that the then Culture Minister Andy Burnham suggested the Digital Britain report will propose.  He even went as far as to say that the graduated response approach wasn’t workable.

But he also told the music industry and the ISP’s to fix their own problems rather than wait for the ‘heavy hand of legislation’.  Given that this is exactly what has happened, it will be interesting to see how the government responds.  Its also worth noting that the release is at pains to stress that disconnections will be temporary and that Virgin will not use its own traffic management technology to enforce the action.  Thus the ISP’s arguments that their traffic management technology isn’t well suited to dealing with individual accounts remain in play.

The service itself will come in two tiers: a premium tier which is the unlimited MP3 offering, in return for a 1 year broadband bundle subscription commitment, and a second lower tier that has limited MP3s.  Unlimited streaming is available on both also.  The 12 month MP3 model is what I’ve been advocating should happen with music subscriptions for some time now, and leaves Napster’s UK offering looking even more in need of fundamental revision.

The pricing of course will be key.  UK consumers have historically shown little appetite for premium subscription services: HMV and Virgin Megastores both tried and failed – though HMV is back for a second stab, Napster has failed to break out of a small niche, Wippit closed shop and Yahoo and Rhapsody didn’t ever bother to launch here.  Of course, none of those were as compelling an offering as this, and this is smartly targeted at households not individuals.  But pricing will be key.  Price it too highly and you’ll miss the disengaged music households this and just switch over already high spending ones.  Price it too low and CD sales will be cannibalized.

It will also be interesting to see whether this announcement means that the UK’s other major label backed unlimited MP3 offering Datz will be breathed new life.

Whatever the political fall out of this announcement, there is no doubting that this is a massive step forward and shows that where there’s a will there’s a way.  If the other majors come on board Virgin Media will have a market leading digital music service that will bring real value to their subscribers.  At the same time the labels will get a major ISP implementing a twist on their preferred anti-piracy measures without needing the government to do it for them.

 

Unlimited Mobile Music Gains Momentum in Singapore

This weekend saw the launch in Singapore of SingTel’s unlimited music download service Amped in partnership with Universal Music.  The service is available with a SingTel data plan, so is very much a data revenue driver for the operator.

Although a relatively small market, Singapore is fast becoming the global capital of unlimited mobile music subscription services.  Nokia’s Comes With Music and Sony Ericsson’s Play Now plus are both already live in the market and enjoying some success: Nokia reported more than three million CWM track downloads in less than two months, making it the best performing global CWM music.  The early momentum in Singapore illustrates that each market has its own digital sweet spot, its own unique digital music consumer footprint.  In the case of Singapore, unlimited mobile music downloads looks like it is the slipper that fits.

 

Three Strikes: Two Strikes Out and Counting…

Today the French Constitutional Court threw out the controversial Hadopi bill, better known as the ‘Three Strikes’ bill due to the provisions for terminating Internet accounts of repeat file sharers.  The bill already fell at the first hurdle of the Parliamentary vote, requiring a redraft and revote.  Now with this development you could say it’s Two Strikes Out and counting for the Three Strikes bill.

This isn’t the end of the road by any means.  In fact there’s every chance it will end up implemented….some time.  And there’s the rub.  By the time this bill has cleared the successive challenges of domestic legislature, domestic courts, European legislature, European courts etc. the very nature of online piracy is likely to have morphed to such a degree that the Hadopi provisions could be left looking hopelessly outdated and insufficient.  This is in microcosm the history of file sharing: every time the industry finally catches up with file sharing via courts and legislation the problem has moved on.  This was exactly the process with Napster and Kazaa.

The danger with relying upon legislation and the courts to drive your business ends is that you lose control and become subject to others’ priorities and agendas, which are not always complementary to your own.  The bottom line is that it is always preferable to solve business problems with business solutions.  It is in the interests of music companies and ISPs alike to reach commercial solutions to their common-interest problems.

At last week’s Music Week conference the then Culture Secretary Andy Burnham (who is now tackling NHS waiting lists as Health Secretary) advised the labels not to rely up government to do their work, but to find common ground with the ISPs and push ahead with solutions.  His exact words were:

Don’t wait for the heavy hand of legislation, just do it.

The experience of the much maligned Hadopi bill to date is evidence that legislation alone cannot be relied upon to solve the problem.  It simply isn’t agile enough.  I will say that there remains a strong case for revising legislation to better protect intellectual property in the digital age.  So the legislative process is important, but it should be the foundation and the framework for commercial solutions, not instead of them.

 

Making Online Music Pay – Round Up

Firstly let me apologize for not having posted for a while on here, and thanks to the messages and emails from those prompting me to get posting again.  I’ve been snowed under with project work but normal service will now resume!

Today I ran a series of panels (well, a succession of thinly disguised vendor presentations) at Music Week’s Making Online Music Pay conference in London.  Here are my highlights of the day.

First up was Andy Burnham, the UK Secretary for Culture, Media and Sport.  I have to say I was really impressed by him, he came across as a genuine guy with a real interest in and understanding of the media business.  His speech was a master class in how to land a series of killer punches by nuanced implication.  He was keenly aware that the audience was hoping for some pointers on what the final Digital Britain report is going to look like.  He said he wasn’t going to be able to do so, but went on to give some pretty solid indications, largely by ruling out what wouldn’t be there.

He built up a case for broadband access being comparable to water and electricity as a basic necessity of modern day existence and cited his ideological belief that access to information was key to enabling the right of equality of opportunity.  So it was no surprise that he then explained he didn’t believe that the graduated response or ‘Three Strikes Approach’ would work, that it was “too abrupt” and that “you don’t go straight to a solution that cuts people off.”

But just as the head of the ISP association guy started to visibly lift and the shoulders of the label execs sag, he delivered this:

“One option we are considering is giving Ofcom (the telecoms regulator) reserve powers to compel ISPs to apply technical measures to limit and restrict activity [of file sharers]”,

So in short, ‘Three Strikes You’re Out’ is, well, out, and ‘Speed Bumps’ are in.

As with any good compromise both sides will doubtlessly be dissatisfied with the solution, but my first instinct is that this is a workable, realistic, solution that should deliver results.  Assuming of course (and this is crucial) that these measures are backed up with compelling legal services for the ISPs.  The BPI’s Geoff Taylor suggested that ISPs may be able to get compensated for converting file sharers to legal services.  This is innovative thinking that shows understanding of the need for their to be meat in the game for the ISPs (who when it comes down to it are facing a similar race to the bottom as the labels are).  Here’s a left field thought (well, wild hypothesizing): Spotify’s long term future road map incorporates MP3s and the viability of the business model is defined by becoming part of subsidized ISP bundles.  Just a thought….

Back to the real world and Andy Burnham.  He made an apparently harmless well meaning comment that the debate needs to be “internationalized” and that “we need to find the right balance and then internationalize that”.  Which is all well and good, but when coupled with his comments about graduated responses effectively dismisses the recently pass French ‘Three Strikes’ legislation as bunkum.  What we might be seeing here is the start of a political digital face-off between France and the UK.  France used its Presidency of the EU to drive the debate on defining European policy on ‘creative content’ in the digital arena.  It looks like the UK government might be planning to use the “Digital Britain” report as a blueprint for a “Digital Europe”….and perhaps beyond.

Geoff Taylor also asked Andy Burnham whether the government was still committed to reducing music file sharing by 70-80% within 3 years, now that we’re 1 year into that commitment.  The response was that the government would absolutely “not retreat”.  Something pretty drastic is going to have to happen in the next 24 months to deliver those results.  More realistically the government will change and targets with it.

The following panel took the discussion a bit farther though back within the more familiar realms of debate that have characterized the MOU-related process.  The Music Publishers Association’s Stephen Navin was nothing short of hilarious (though insightful also).  He delivered my favourite quote of the day (in the context of device manufacturers and digital content:

“The fine wines of Bordeaux are not just content for the glass manufacturers.”

He also highlighted the different state of affairs for the music publishing business compared to that of the record labels, expressing his continual surprise at

“spending 95% of our time making 5% of our business pay.  The business of making music available is still a buoyant world.”

In my first panel we had representatives of many of the current bright hopes of digital music (Spotify, Last.FM, We7, 7Digital).  Though each of the ad supported guys tried to paint a bright picture for the rude health of ad supported, they each in fact highlighted its failings, albeit unwillingly and by implication rather than directly.  For example Last.FM talked about the hundreds of markets which had now become subscription markets i.e. the ad supported business just didn’t work in those territories.  When I pressed on this issue Last.FM’s Miles Lewis cited the example of Poland, which had accounted for about 10% of their streams but where the “online ad market was worth about three pence” and the affiliate market even less.  When I asked whether this was a short term necessity or long term strategic shift he said that it was likely to be the latter unless the online ad market suddenly exploded.  Similarly Spotify’s Paul Brown emphasized the importance of their premium models succeeding and spoke about the mobile offering which will likely include 30 minute stream caching.  (Which by the way I’ll be interested to see if they can convince rights holders that this should be considered as stream rather than a download.)

Joining the dots, the consensus from those right in the mix is that the dynamics of ad supported digital music still need further revision if this second wave of ad supported services isn’t to go the same way of Spiral Frog.

I had a few people come up to me and question why I hadn’t given my panelists a harder time with more probing questions.  They had a point.  On reflection perhaps I’m feeling empathy for them in these difficult times? Either way, that’s no excuse.  I’ll be back to my old probing ways at the next conference. Thanks for putting me back on course!

Oh, and Apple hardly got a mention….even though they account for 75%+ of online digital revenues….times are a changing.

 

Why Napster’s New Pricing Strategy is More than Just Price Cuts

Napster has overhauled its pricing strategy in the US, selling pre-stored value cards in retail stores. It’s being widely reported as ‘Napster slashing prices’ but it’s more than just that.  The key things of note here are:

• It shifts the consumer focus onto downloads: each card has a pre-stored value for MP3 downloads as the headline.  Unlimited streaming is the sub head.
• It targets iPod owners: MP3 downloads and easy synching make iPod owners a core target
• It lowers barrier to entry to subscriptions: by using a Pay As You Go solution Napster makes subscriptions more attainable to more consumers, even if they are sneaking them in through the back door
• It tacitly acknowledges the dire state of premium subscriptions: the focus on MP3s moves the focus away from the subscription business, but the latter is still Napster’s core business.  To really thrive in the imeem and Spotify age they need to be unlimited MP3

This is an innovative move by Napster, and should widen their market appeal, but I can’t help but feel that it is almost embarrassed of its core value proposition (on demand streaming).  Positioning the streaming component as a freebie with MP3 tracks will weaken perceived value.  They’ll need to be careful with their positioning, or risk further weakening their ability to sell their core product, unless of course they can fire the silver bullet of unlimited MP3s.

 

Comes With Music Finally Gets Its Route To Market

Orange today announced they will be ‘exclusively’ providing Comes With Music on the Nokia 5800 in the UK.  Finally Nokia’s Come With Music gets the route to market it needs.

I’ve long been a strong advocate of CWM and that belief remains intact despite reportedly poor sales to date.  Nokia always needed strong channel partner participation to make the service a success. Without the route-to-market, marketing support and – most crucially – subsidy support that the operators provide CWM is left looking like an overpriced, under featured oddity.  But with the support of an operator it comes into its own.

Orange packages start at just 25 pounds a month.  For this consumers not only get a decent number of voice minutes and texts, but they also get the handset for free and unlimited music that they get to own for ever.  That is a compelling proposition and offers genuine value for money. Unsubsidized, the cost in Italy for the same handset and music service, but without a voice and text tariff is just short of 500 Euros.  The comparison is stark and is central to why CWM has under-whelmed thus far.

CWM is an exciting product because, when packaged correctly, looks and feels like free to the consumer.  In this context DRM restrictions and a phone that falls short of iPhone sexiness are entirely tolerable.  But with a premium price point they become non-starters.

CWM, along with the likes of Spotify, We7, Last.FM and imeem, is one of the key weapons that the music industry has in its armoury to fight free with free itself.  CWM may not be free, but packaged like this it ‘feels like free’ and that’s enough to have real potential of pulling young music fans away from illegal downloading on a scale that hasn’t yet been achieved.

 

Spotify and Spiral Frog: Spot(ify) the Difference

Spotify reached another milestone at the weekend, clocking up a million users in the UK. As I’ve mentioned in previous posts Spotify’s success lies in doing what it does simply and well, not by doing anything particularly revolutionary (advanced caching technology arguably aside). But it is imperative that Spotify doesn’t go the way of Spiral Frog. Remember Spiral Frog built up a million strong user base also. Granted, Spotify’s consumer proposition is superior, but whilst both user experiences are products of their respective times, their business models are less distinct. In short they both depend upon advertising income to be larger than license fee and technology costs. As Spiral Frog proved, having a million users is no guarantee of achieving that equation.

Spotify is probably in a much stronger position now than Spiral Frog ever was, but to paraphrase the Conservative leader David Cameron’s comment to then Prime Minister Tony Blair “it was the future once too”. Spiral Frog may look like a fundamentally flawed business model now, but the bottom line is that if it had struck a better cost to revenue ratio it would have fared much better. With a more vibrant balance sheet it’s reasonable to assume that the DRM-download model would have ultimately been shunned for streaming as user bandwidth augmented. When it comes down to brass tacks, Spiral Frog and Spotify aren’t as different as you might think.

Which all underscores how crucial it is that Spotify both successfully develops a premium (probably mobile) business and builds its ad business in a softening online ad market. Both are easier said than done. Consumers have proven for years that they’re just not willing to pay for content in meaningful numbers. Also the likes of imeem, Last.FM and Pandora have all set the standard for mobile streaming music apps to be free, not paid. With the softening ad market Spotify will not only need to think carefully about how aggressively it grows its user base but may also need to reassess some of its business relationships. Many content providers are finding themselves unable to afford their audiences growing because ad revenue is not growing as quickly as the increased license fee costs are every time their audiences listen to more music or watch more video. Which basically means many online content providers are finding themselves in the paradoxical situation of not being able to afford to have their audiences to grow. (I just wrote a report on this topic which Forrester clients can find here).

All this said, Spotify are in a better position than many to be able to navigate these troubled waters than many. They’re the right service in the right place at the right time. They’re a high profile success story that the labels will not want to fail. But it’s equally important that the rest of the market succeeds also. Just in the same way it’s as equally important that imeem’s streaming business model is as sustainable as MySpace Music’s. An uneven playing field will simply tilt the balance in favour of the bigger players. The one-size-fits-all shiny disc days are gone. The future should be all about choice, but that may yet require a little ‘behind the scenes give and take’.