What the ISPs and the Record Labels Need to Do Next

The UK music industry and ISPs have been working towards the goals of the government-brokered Memorandum of Understanding since last summer but we’ve yet to see concrete results, in particular with regards to new music offerings. All stakeholders recognize the crucial importance of having a big fat carrot to accompany the stick. Yet we still seem to be some distance from the ISPs being empowered with truly compelling music services they can offer to their subscribers as a genuine alternative to file sharing.

On the surface of things this week’s reported tie up with Sky and Omnifone for a music subscription services seemed like a positive step forward. However, the lightest of scratches beneath the surface reveal it to actually be a microcosm of broader problems. Omnifone’s press announcement pointedly doesn’t even mention Sky as a partner for their new ISP white label offering. Although many press reports imply Sky have signed up, the only actual substance is that Sky are considering using Omnifone to power some of the technology on its offering.

The nuanced specifics here are important. Last year Sky and Universal Music proudly announced a music JV. Details were scarce in the extreme but the strategic ambition was bold. Sky has since then not been able to add any of the other 3 majors onto the JV roster. Part of this may well relate to the other majors getting increasingly narked about UMG’s highly proactive (even aggressive) digital strategy. But more broadly it talks to the fact that there is a lot of distance between what Sky wants to be able to offer its customers and what the labels feel they can provide for the financial terms Sky are willing to consider. This follows on the heels of Virgin Media dropping pursuit of PlayLouder’s MSP offering due to label concerns and also 7Digital so far failing to get any ISP to take up their white label offering.

The root of the problem is that the ISPs want to offer consumers more content and flexibility for less money (and pay the labels less) than the labels are willing to countenance.

But most UK ISPs have good reason for having high demands, as do many other continental European ISPs. They’ve been burnt once, launching poorly featured, weakly differentiated services near the turn of the century. Their inadequacies (and the subsequent failures) weren’t the fault of the ISPs per se, rather they were products of their time, restricted to the terms that the major record labels were willing to countenance back then. (e.g. 99 cents downloads that could only be played on your computer)

Apple changed the rules of the game and the failings of the ISP services were only accentuated.

The ISPs know now that if they get back in the game they have to be differentiated and be able to compete with Apple. But they also know that most of their file sharing subscribers are unlikely to be able or willing to pay much either. So the ISPs want compelling (ideally MP3) services that cost little or nothing to consumers. The labels business models can’t support that model without the ISPs picking up a lot of the cost, which they can’t afford to do due to falling broadband ARPU.

So we’re in a stalemate that nobody really expected to be in. (Indeed back in the summer of last year BMR CEO Feargal Sharkey said he expected to have something to announce “within a matter of weeks”). The labels thought the ISPs would lap up what they had to offer, and the ISPs thought they’d get more. The record labels are not about to change the fundamentals of how they value their IP, but there are some viable mid term compromises that can get us out of this malaise:

  • A series of Joint Ventures: MySpace have created a blue print for using this approach to get favourable licensing terms to deliver free music that wouldn’t have been financially viable otherwise. And the labels get lots of potential upside and to extend their role in the value chain. JVs would bind the ISPs and labels closer together, create common purpose and engender greater strategic flexibility.
  • Focus on free, not MP3: the success of Spotify has shown that MP3 isn’t everything. Free music streaming with good catalogue and easy to use UI is actually a winning formula. The business case for hiding the cost of a streaming service in the access subscription is a lot stronger than for MP3 downloads
  • Leverage all elements of the multiplay: ISPs typically have multiple products (TV, mobile etc.). Fully leverage these. Creating a compelling music offering means going beyond a balkanized online vs mobile vs TV strategy. Fully integrate and actually drive other business areas in the process e.g. extending a streaming music offering to mobile via an on-handset app will drive mobile data usage

Time is of the essence: every day that goes by, file sharing grows in popularity and becomes more entrenched. So agreeing on intermediate solutions with a view to a longer term roadmap is far favourable to stalling until the perfect solution can be agreed upon.

2 thoughts on “What the ISPs and the Record Labels Need to Do Next

  1. It is good to see someone criticize both the record labels and ISPs for their relative inflexibility when they tried to partner the first time around. The potential compromises you have created seem like very viable models that would have good benefits for both sides, especially streamlining their products across all sorts of media, whether that is through online, mobile. Etc. However, regarding your compromise between downloading and streaming, I think you may be understating the most important aspect of MP3’s in that they are highly portable. In today’s age where almost everyone has an Ipod or other MP3 player, portability is a key issue that at least at this stage has not been resolved by streaming music. There was a study done in Los Angeles on driving habits, and although it is a little dated (1999 to be exact) it showed that 95% of people listen to music while driving. It seems that having streaming music ignores this important aspect of people’s listening habits. Because of this fact, do you think the idea of having an ISP surcharge that would go toward record labels should hold more sway? Granted it would take a lot of work from government bodies to oversee the pricing and dissemination of these fees, but if they can get together and continue to update the pricing for mechanical royalties every couple of years, the surcharge does not seem totally unfeasible.
    Additionally, do you think that the record labels will get their act together quick enough to all create deals with the ISPs before the next wave of technology comes through? Because it is not just one body that controls the music, I am sure that each major label will jockey with the ISPs to get them the most favorable deal splits. It seems like the time that it would take to get everyone to agree to any kind of deal could render that deal obsolete. It could be a Napster situation all over again where the labels do not see future and respond to late. I think this problem is especially pertinent based on some of the new technology we are beginning to see, including the new high speed internet that CERN developed that would be about ten thousand times faster than current broadband. Labels could be cutting deals with ISPs that are only profitable for a very limited amount of time before being stuck in an old way of disseminating music once again.

  2. Pingback: OzBlog::music & more » Blog Archive » What the ISPs and the Record Labels Need to Do Next

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