C.R.E.A.T.E. An entertainment manifesto

When we first formed MIDiA eight years ago, we saw the new entertainment world was going to require a new joined up approach for entertainment businesses. With the start of the ascent of the smartphone we made an intellectual bet that everything was going to become more interconnected, inter-dependent and inter-competitive. Our vision then, was to build analysis and data that cut across siloes, to help previously unrelated industries understand they were becoming connected. The ‘connecting the dots’ tagline that we launched with in 2014 was right for the time, but now the world has moved on. The dots are now connected. That job is done. Now it is time to decide what to do with those connections.

In more recent years we identified new drivers of the entertainment economy, such as:

• Fragmented Fandom
• The Attention Economy
• The Attention Recession
• Creator independence
• Rise of creator tools
• Reaggregation

When we introduced those concepts they took some time to land, but now are increasingly widely accepted as industry currency. Even other research companies have started following our lead, with webinars and research on the attention economy, the attention recession and fandom fragmentation.

But although those trends will continue to play crucial roles, it is an entirely new set of market dynamics that will shape the future as the world enters a period of uncertainty and disruption unprecedented in modern times:

• Attention inflation: As consumers return to pre-pandemic behaviours, they are trying to squeeze all their new-found entertainment behaviours into less available time. Multitasking is rocketing which means each entertainment minute is less valuable as it is increasingly being done alongside something else. Many more consumption hours than actual hours results in attention inflation.
• The splintering of culture: Water cooler moments may not yet be dead but they are fading. Hits are getting smaller (just ask Beyonce) and audiences are fragmenting. But cultural relevance can actually increase within these fragmented fanbases (again, just ask Beyonce). Culture is splintering but may end up more vibrant as a result.
• Scenes and identity: Underpinning and resulting from culture splintering is the rise of scenes, especially micro scenes which populate platforms like Twitter. Scenes are more than just groups of fans, they a cultural movements that that people look to for identity and belonging. Fandom is merely a subcomponent.
• Lean through: Consumers used to just, well, consume. Now though, every more of them want to participate. The line between creation and consumption is blurring. Leaning forward is no longer enough, now audiences want to lean in and create.
• The creator economy: Perhaps the single biggest shift in entertainment in recent years is the rise and rise of the creator economy, straddling virtually every entertainment format. The creator economy is so much more than vloggers and influencers. It represents a reshaping of culture, remuneration and audiences. As such it will reshape entertainment forever. 
• Post-peak growth: With inflation soaring and a recession looming, consumers will have less money to spend on entertainment and leisure. Some sectors will suffer, some will sustain but others will grow. Whether it is to survive or to thrive, entertainment companies will need to reshape both their strategies and purpose.
• Rediscovery is the future of discovery: The first phase of streaming was all about discovery. Now, with a surplus of supply and demand constrained by the attention recession, what consumers want as much as what is new, is to re-find what they already know and love.

Business as usual is gone. The next chapter of the business of entertainment will require a completely new approach. This is MIDiA’s C.R.E.A.T.E. Entertainment Manifesto for what is required of entertainment companies in this brave new world.

• Cultivate every moment: Multitasking means consumption minutes are losing value. Every moment needs to be made as valuable and as entertaining as it possibly can be. Entertainment companies need their audiences notice what they consume.
• Reward the creator economy: Streaming and social platforms are increasingly dependent on the long tail. The scale economics work for platforms by summing up a multiplicity of niches but they do not work for long tail creators. Platforms and rightsholders need to nurture not just harvest the creator economy.
• Empower the consumer as a creator: Lean through consumers are also super fans. More platforms and services need to give consumers the sort of participation tools that TikTok built is success upon. Not just because it is what audiences want but because it also builds fandom and amplifies entertainment brands.
• Add value and escapism: As consumers’ wallets tighten, subscriptions and ad spend are both at risk. But this need not be an entertainment Armageddon. Instead, entertainment companies should offer consumers what they want: 1) value for money, 2) escape from the harsh realities of daily life.
• Target the middle: While it is tempting to always chase the big hit, the reality is that hits are getting smaller. Success in these coming years will be most easily found by cultivating a collection of mid-sized hits rather than placing all bets on mega hits.
• Embrace scenes and identity: Scenes and identity are the undervalued super power of entertainment. Music, games, sports, creators, books, movies, TV shows – they all move people and they all help define who we are. Truly understanding and harnessing identity will be the difference between survive and thrive. 

We hope that the C.R.E.A.T.E. framework and our new Critical Developments coverage help companies and creators plot their paths through the troubled waters ahead. But even more important, is to develop a sense of purpose, a definition of why you do what you do, and to communicate that to your audiences and partners. The entertainment industries have 

Experience Should Be Everything In 2017

 

2017 is going to be a big year for streaming. Spotify will likely IPO, paid subscribers will pass the 100 million mark in Q1, playlists will boom. 2017 will build upon an upbeat 2016 in which the major labels saw streaming drive total revenue growth. This stirred the interest of big financial institutions, companies that had previously avoided the music industry like the plague. These institutions are now seriously assessing whether the market is finally ready to pay attention to. The implication of all of this is that if Spotify’s IPO is successful, expect a flow of investment into a new wave of streaming services. But if these new services are to have any chance of success they will need to rewrite the rules by putting context and experience at the centre of everything they do.

Why User Experience Often Ends Up On The Back Seat

Putting experience first might sound like truism. Of course, everyone puts user experience first right? Wrong. You may be hard pushed to find many companies that do not say that they put user experience first, but finding companies that genuinely walk the talk is a far harder task. Just in the same way that every tech company worth its salt will say they are innovation companies, only a minority do genuine, dial-moving, innovation. Prioritising user experience is one of those semi-ethereal concepts that may be hard to argue against in principle, but that is much more difficult to actually build a company around. Why? Because the real world gets in the way. In the case of music services ‘the real world’ translates into (in no specific order): catering to rights holders’ requirements, investing in rolling out to new territories, paying out 81% of revenue to rights holders on a cash flow basis, spending on marketing etc.

The distinct advantage that the next generation of streaming services will have is that they will sit on the shoulders of the streaming incumbents’ innovation. Instead of having to learn how to fix stream buffering, drive compelling curation, make streaming on mobile work and define rights holder licenses for freemium, they can take the current state of play as the starting point. They are starting the race half way through and with completely fresh legs. They come into the market without the same tech priorities of the incumbents and also without any of their institutional baggage (baggage that, whether they like it or not, shapes world views and competitive vision).

Streaming Music Is Not Keeping Digital Pace

During the last 5 years, users’ digital experiences have transformed, driven by apps like Snapchat, Instagram and Musical.ly. Video has been at the heart of most of the successful apps, as has interactivity. Music services though have struggled, not only with how to make video work, but also with how to give their offerings a less 2 dimensional feel. They have lagged behind in the bigger race. For all of the undoubted innovation in discovery, recommendation, personalization and programming, the underlying streaming experience has changed remarkably little. We are still fundamentally stuck in the music-collection-as-excel-spreadsheet paradigm. Underneath it all is the same static audio file that resided on the CD and the download. Granted, there have been some major improvements in design (such as high resolution artist images, full screen layouts and strong use of white space). Now though, is the time to apply these design ethics to streaming User Interface (UI) and User Experience (UX).

Successful (non-music) apps are multidimensional, highly visual and often massively social. These are the UX and UI bars against which streaming services should benchmark themselves, not how other streaming services are doing. Of course, a key challenge is that music in not inherently a lean forward, visual experience. Most people want much of their listening time to be lean back, without interruptions. Nonetheless, Vevo and YouTube have shown us that there is massive appetite, at truly global scale, for lean forward, highly social, visual music experiences.

Fixing A Plane Mid-Flight

The streaming incumbents could all do this, but they will be at distinct disadvantage compared to potentially well-funded new entrants. It is no easy task to refit a plane mid-flight. Also, Spotify, Deezer and Napster are built on tech stacks with origins more than a decade old. All have made massive changes to those original tech stacks (Spotify in particular, shifting from a monolithic structure to a modular one) but in essence, all these companies were first built as desktop software providers in an era when Microsoft and Nokia were still technology leaders. They have adapted to become app companies but that change did not come naturally and took a huge amount of organizational discipline and resource. This next market phase will require exactly the same sort of discipline, but more effort and at a time when competition is fiercer and costs are higher.

Streaming Services Need To Know Who They Are Really Competing With

The streaming services might think that they are competing with each other but in reality they are competing in the digital economy as a whole. Their competitors are Snapchat, Instagram and Buzz Feed. Right now, music listening accounts for 36% of consumers’ digital media time but that share is under real threat. Over the course of the millennium, music has relied increasingly on growth in lean back environments and contexts. The rise of listening on the go via MP3 players and then smartphones created more time slots that music could fill, while media multitasking has been another major driver of listening. All of this works well when whatever else is going on does not require the listener to be using their ears. The rise of video is, paradoxically, creating more competition for the user’s ear. Even though we are seeing the 2^nd coming of silent cinema with social video captioning, there are many more calls to action for our eyes and ears. Even a Facebook feed 24 months ago would have been something that could in the large be safely viewed in silence. Now it is full of auto playing videos, willing the user to unmute. As soon as s/he does so the music has to stop. On video-native platforms like Snapchat the view is even starker for music. Killing time in the Starbucks queue is now as likely to involve watching a viral video as it is listening to a song.

Thus streaming music has to create a user experience renaissance, not just to keep up with contemporary digital experiences but in order to ensure it does not lose any more share of digital consumers’ consumption time. This is the new problem to fix. The Spotify generation fixed buffering and mobile streaming, the Apple Music generation fixed discovery, the next generation will fix UX. Just as Apple Music and Google Play Music All Access were able to skip the first lap of the race, launching with what Spotify and co took years to develop, so the next generation of streaming services, when they come, will take all of the recent innovation playlists, curation and user data analysis as the blank canvas. Which in turn will force the incumbents to up their game fast. Until then, the streaming incumbents have an opportunity to get ahead else get left behind.

What The Music Industry Can Learn From The Beer Industry

Over the next few weeks I will be writing a series of posts that illustrate what lessons the music business can heed from other industries. This is the first of these posts. Beer sales have been in steady decline for many years with the big brewers coming to terms with changing consumption habits of consumers and the impact of disruptive new models. Sound familiar? The dynamics of the beer industry bear remarkable similarity to the recorded music business and there are some lessons that can be learned. Beer sales have been declining since 2008 with the core baby boomer consumer base changing consumption habits and drinking more hard liquor and wine. In the UK the amount of beer drunk has fallen by 20% over the last 10 years while US beer sales have been falling since 2008. The number of new breweries went into decline and after years of acquisitions and mergers the bigger-than-ever brewers started to feel the pinch. Again the parallels are clear.

The Rise Of Craft Beers

Against this doom laden backdrop there has been a standout good news story: craft brewing and micro breweries. Predominately small independent brewers this market segment has been growing strongly, albeit from a small base, in the last few years. Craft beer sales in the US grew by 10% in 2012, 17% in 2013 and 18% in 2014. In fact 2014 was the year that craft beers broke through to double digit market share (11%) for the first ever time. Craft beers are catering for a market of discerning drinkers, whether they be hipsters or real ale purists, who are willing to pay more for quality and uniqueness. Craft beer is like the music industry’s indie sector and vinyl sales rolled into one.

Big Brewers Get In On The Act

What gets interesting is that the big brewers are realising that if you can’t beat them then you need to join them. So the craft beer growth is not just down to plucky little cottage industries but also the big brewers opening their own micro breweries and creating their own craft ales. In fact some mid sized brewers have gone one step further and stopped producing their own mainstream beer brands, instead having them brewed on license by the big brewers, allowing them to focus on craft ales. The margins on an increasingly commoditised market simply don’t add up unless you can bring vast scale to bear. So the similarities are clear. But there are differences in all this too. I was careful to emphasise that craft beer is like an amalgamation of vinyl and indie. It is both a product strategy pivot and a business culture pivot. What the beer industry is realising is that while there remains a mainstream majority that will continue to drink mainstream beers, the economics of that sector are challenged which means that it is hard to bear the effect of even modest negative trends. The beer industry hasn’t gone out and started finding its equivalent of playing live and selling t-shirts, instead it has looked at how to reinvent its core product to make it relevant to the new generation of its most valuable customers.    And the effects are beginning to be felt at a market level. Beer consumption actually grew by 1% in 2014 in the UK and US sales were up 0.5%.

Reinvent The Product Not Just The Sales Channel

This is what needs to happen with recorded music, not just reinventing the sales and acquisition channel (which is fundamentally what the entire history of digital music sales has been about). The beer aficionado and the music aficionado are more important to their respective industries now than they have ever been and this will only increase. The beer industry is dragging itself out of recession by super serving its super fans. Artists have been doing the same for years with the likes of PledgeMusic, BandPage and now Paetron. Now it is time for the labels and music services to do the same by working together to create a new generation of music products, such as that I laid out the vision for here.  But this must also be part of a cultural shift, from treating the artist as employee to that of an agency – client relationship, a model that many label services and indie labels are already pursuing. Of course the recorded music industry has to grapple with other extenuating factors such as the contagion of free and competition for spend from live. But even with these considerations, it is clear that music industry now needs to find its craft beer.

Apple’s $1bn Settlement: a New Innovator’s Dilemma

Apple’s $1 billion patent infringement victory against Samsung raises a number of increasingly pressing issues about innovation in the consumer technology space. There is no doubt that Apple has done more than any other single company to shape the smartphone marketplace. It is also clear that the average smartphone form-factor and feature set look dramatically different post-iPhone than they did pre-iPhone.  And there is an argument to be had that those same form factors and feature sets bear more than passing resemblance to the iPhone. But this raises the issue of where the ‘a high tide raises all boats’ market evolution argument stops and the patent infringement one starts.

Samsung is the Buffer State in Apple’s Proxy War with Google

Apple’s case against Samsung was in effect a proxy war against Android.  Samsung became the target because it was doing a better job of making Android compete against Apple than anyone else.   While competitors like Nokia and HTC have laundry lists of product names and numbers, Apple’s elegantly simple iPhone brand cuts through the smartphone name clutter like the proverbial knife through warm butter.  Among numerous other factors Samsung recognized the supreme value of establishing such clear brands (such as the Galaxy) and pivoting their portfolio around them.  Samsung became competitor #1, the Android success story, racking up a 50% share of the smartphone market in Q2012 according to IDC, which compares to just 17% for Apple.

The final impact of the ruling is yet to be seen, with countless potential challenges and subsequent actions likely to come.  There are also interesting geopolitical issues at stake, not least of which is the degree to which a Californian jury and judge will be perceived on the international stage as having the requisite impartiality to rule upon competition between a South Korean and a Californian based company.  But leaving aside the legal permutations for a moment, let’s instead take a look at the known unknowns and their likely impact on the marketplace:

• Competitive patent strategy. Over the last couple of years we have seen an acceleration of the use of patents in the consumer technology and Internet arenas.  Patents have quickly become established as an extra part of competition strategy among big technology firms.  Now, instead of just relying on product development, marketing, pricing and positioning technology, companies can use patent claims to help strengthen their position at the direct expense of the competition.
• Patent arms race. With the rise of patent trolls (companies’ whose sole objective is to acquire patents and then try to sue established companies for patent infringement) the big established companies themselves have started to acquire patent arsenals.  For example, earlier this year Microsoft paid AOL $1.1bn for 925 patents, 650 of which it promptly sold to Facebook for $550m.  Before that, in 2011, Microsoft teamed up with long-time rival Apple as well as with just about anyone whose anyone in the smartphone business who isn’t Android (RIM, Sony, Ericsson et) to spend $4.5 bn on 6,000+ patents from bankrupt Canadian teleco equipment maker Nortel.  Google had been on the other side of the bidding war and lost out with what was seen by some as a whimsical bidding strategy.  Google promptly went onto to buy fading handset manufacturer Motorola for $12.5bn, a company that just happened to have c.17,000 patents in its archives.  There are uncanny echoes of the Cold War with both sides stockpiling nuclear weapons.  The difference here is that the arsenals are being thrown straight into battle rather than being held back for fear of Mutually Assured Destruction.
• Patents no longer fit for purpose? Patents raise as many questions as they provide answers for in the software and technology spaces.  Not only are they subject to legal challenge, the language used in them is often  inadequate.  What gives a piece of technology competitive edge is not having rounded corners, but the digital mechanics underneath the hood. It is the code inside a piece of software that gives it edge, not the broad user behaviour it supports.  That’s why we have market leaders in software and product categories that are crowded with lesser competitors that support the same basic user behaviour. And yet patents focus on the exact opposite of this equation.  Patents are typically vaguely worded affairs that talk about broad behaviours such as “a system for controlled distribution of user profiles over a network” (taken directly from a patent which forms the basis of Yahoo’s case against Facebook). Even the more detailed patents – such as Apple’s recent Haptics filing – have a procedural focus.  And of course they have to. Patent applications are exactly that: applications.  There is no guarantee they will be granted and so a filing company is going to be as secretive as they possibly can rather than give its competition edge.  But even if there was a guarantee there is no way in which a technology company is going to publish its source code on a publically accessible document.

And therein lies the problem, if a company is not ever going to include the secret sauce which gives its product the real edge, then what is a technology patent really going to be able to definitively cover?  If it inherently comes down to a discussion about supporting usage behaviours then we end up with an unusual and potentially restrictive lens placed upon innovation and invention.  The history of innovation and invention is that when something comes along that is good enough, it permeates through the entire market.   Sometimes this involves licensing of patents, more often than not it happens through creating similar but different inventions. Think about any consumer electronics purchase, whether that be a digital camera, a laptop or a TV: the products all have pretty much the same mix of features and form factor in their respective price tiers.  This is what has happened to date with smartphones.

However if the Apple ruling survives all challenges and is then extended it could have the effect of a forced and artificial split in innovation evolution. Instead of the touchscreen smartphone becoming another step on the innovation path it could become the sole domain of Apple and force the competition to pursue entirely different evolution paths.  Now there are obviously both positive and negative connotations of that.  But whatever your view point, it will be dramatically different from how other consumer electronics product categories have evolved.

With its origins in early 18^th century England, there is an increasingly strong case for a major review of the global patent system and whether it is the right tool to strike an appropriate balance between protecting intellectual property and fostering innovation in the 21^st century consumer technology marketplace.

Who’s Competing with Who?

An interesting post-script to the Apple-Samsung case is looking at who else will potentially benefit other than Apple.  Right now there will be a host of handset manufacturers who will be hurriedly looking for a Mobile OS Plan B.  An uncertain Android future doesn’t leave them many places to turn to other than Microsoft’s Windows 8. Historically no friend of Apple but these days of course part of Apple’s Patent Pact. How long that alliance will remain intact remains to be seen, though a cynic might argue that Apple would leave it in place just long enough for Microsoft to get enough of a foothold to fragment the OS marketplace before it renews hostilities between Cupertino and Redmond. By which stage Apple could have billions worth of patent settlement dollars to wage war with…

Music Industry: ‘Product’ Isn’t a Dirty Word

This morning I made a keynote presentation to a Westminster Forum conference on the UK music industry.  Though the focus of my presentation was intentionally gloomy (look out for a post on the key themes later this week) I finished with what I thought was the positive outlook: a call for a new generation of music products.  Regular readers will know that I beat this particular drum with near demented insistency and have been doing so for a few years now.  I used to get strange, puzzled looks but nowadays there is widespread recognition that product innovation is key to the long term health of media businesses.   (Much as I’d love to, I’m not claiming sole credit for the change in outlook permeating media industries).

This morning though caught me by surprise.  A couple of panellists took umbrage with ‘product’ having anything to do with the music industry, that the music industry was about music, not product. In many ways they are right of course, but they also ignore the basic economics of the music industry.   (I say ‘ignore’ rather than ‘misunderstand’ because these particular panellists have been around the music industry long enough to know it inside out and to know exactly what oils its wheels).

Of course the music industry is first and foremost about music. As a musician and a former (small time) recording artist and someone who spends way too many hours each week playing guitar and in his recording studio, I know this as well as anyone.  But product is the beating heart of the recorded music industry.   CDs, vinyl, downloads, apps or subscription services, these are the products which generate the income that allow some artists to give up the day job and focus on making great music.  It is the product wrapped around the music that creates that income that helps support creativity.

Of course recorded music products are not the be-all-and-end-all, and things are changing rapidly, with other revenue streams becoming part of the mix, but many of those are also products (games, clothing, memorabilia etc.).  Live, which incidentally is feeling the pinch of the recession, most of the time depends on the recorded music product as its marketing vehicle.  It doesn’t matter so much whether you choose to give your content away as digital files on BitTorrent (as one artist manager explained they plan to do) or sell it as a CD in a supermarket, both are music products.  And the more of those music products you can get in consumers’ hands, the more chance you will have of selling more concert tickets.

The role of music product in driving live success was underscored this morning when one panellist commented that nowadays there is only a handful of really big rock acts that can headline the major festivals.  The examples he gave were bands who built their success on selling millions of albums in healthier days for the music industry.  Could it be that the slowdown in music sales is moving us away from repeat-multi-platinum artists and thus in turn away from the days of ready-made large addressable audiences for arena tours?  Could the decline in recorded music sales end up dragging down live with it? There are many other moving parts (not least the quality of the artists in the marketplace) but it is an interesting question to consider.

The term ‘product’ seems to have uncomfortable corporate connotations of cynical commercialism for some.  It is an unusual hang up.  Carpenters, jewellers and fashion designers don’t have such hang ups about selling their products.  Some long for the patronage era, when the Prince of Salzburg commissioned Mozart to compose operas for him, or Eleanor of Aquitaine patronized court musicians.  But outside of certain niches (including some classical music), those days are long gone.  To have a paying career as a performing musician usually involves selling music products somewhere along the way.  That doesn’t mean that artists are selling their creative souls to corporate greed.  Indeed there is an argument that creating music-to-order like Mozart did was more of a creative compromise than signing a deal to get your music distributed across the globe.

If Mozart had had music products (other than the occasional sale of dance music score) with which to monetize his creativity he may well have not ended his life in poverty. Creating a set of next generation music products that play to the strengths of the digital age will be crucial to the long term health of the music industry, recorded and otherwise.  Giving consumers products which exceed their expectations rather than just meeting them can only help drive creativity.  Product isn’t a dirty word.

Music Start-Up Strategy 2.0

The music industry needs innovation more than most industries and yet the last two years has seen a slowdown in the number of new licensed music services coming to market and greater consolidation around the Triple A of Apple, Android and Amazon.  In this brave new world music start-ups need an entirely new modus operandi.

There are many reasons for the slowdown in new licensed music services, but a key one is the establishment of the license-advance business model in which record labels issue licenses only upon payment of sizeable, non-repayable advances in anticipation of forecasted income.  Depending on the scale of the risk to the labels presented by the licensed service these payments can range from relatively modest to downright gargantuan (Beyond Oblivion went to the wall owing $100m to Sony and Warner Music even though not a single consumer ever saw the service).  With so few services managing to make a dent on Apple’s market share investors have grown wary of investing in music start-ups that require licenses, some have effectively stopped investing in them all together.  The labels’ focus on partners with scale (and effectively using advances as means of sorting the financially robust wheat from the chaff) may deliver near-term security for the labels but it increases their long term risk by slowing music service innovation.  Hungry young start-ups are often more likely to create transformational innovation than heavily resourced R&D divisions of billion dollar companies.  Thinking ‘out of the box’ is always a lot easier when you’re not actually in the box in the first place.

Music Start-Up Strategy 2.0 Requires A New Set of Relationships

The status quo is a lose-lose for all parties, each of whom find themselves stuck in a Catch 22: labels need new services but also the safety net of advances, services need licenses but can’t pay for the advances and investors want to invest in music services but won’t do so when advances are required.  It is time to change the model, for this cycle of insufficient innovation and market contraction to be broken.

So just how can this circle be squared? The starting point is accepting the position of each of the three constituencies and then building from there:

• Labels want market innovation but with their market contracting they need to mitigate risk
• Services want to innovate but can’t afford to have advances as their core early stage expense
• Investors want to invest in music innovation but want to put as much as possible of that investment in technology and people

Music start-up strategy 2.0 requires each party to think and behave differently, to accept the fundamentals of the new digital music economy.  And this requires a willingness to both embrace some new ideas and to help forge a few others:

Record labels – become investment partners: Record labels – majors and independents alike – deserve great credit for transforming their business in the last few years, but they cannot change the market alone.  Labels need to harness open innovation, leveraging the developer ecosystem.  OpenEMI is an early model of best practice but to fulfil its massive potential the approach needs underpinning with a more equitable alignment of label-developer relationships.  Start-ups are going to help solve record labels’ problem and labels need to not just tap that expertise but accelerate it.  To do that record labels need to apply A&R rules to technology start-ups. On the artist front labels already behave like Venture Capital firms, now they need to translate this appetite for risk to their commercial strategy.  To take the same sort of risks on start-ups as they do on artists. This of course means that labels will routinely require equity stakes – and sizeable ones, but instead of just being a licensing requirement, these will be in return for a new relationship in which labels establish nurturing partnerships with young start-ups, just like those they have with artists.

When a start-up is at pre-launch stage it is probably going to be more appropriate to take a good chunk of equity for licenses than it is an advance that the start-up can ill afford.  Of course it will still be appropriate for advances to be part of the mix in some circumstances – sometimes even the majority of the mix – but the balance of the relationship should be investing to become a business partner.  This means becoming active stakeholders, sitting on boards, working with the entrepreneurs to help make them successes.  In short, the relationship should change from licensee-licensor to investment partners with shared vision and motives for success.

Start-ups – understand what labels need: Though record labels are becoming increasingly confident of their own innovation capabilities, no media company is an innovation agency while technology start-ups have innovation imperatives at their core.  Unfortunately they often get the conversations with labels wrong.  Instead of going to labels with the “we’re going to save your industry” pitch, start-ups should better understand what label priorities are and then propose working with them to help them achieve those objectives, as partners. (This is something that Spotify did incredibly well right from the start).  Just as it is best practice to engage with an investor long before they actually need money, start-ups should apply the same approach to record labels.

However this change of relationship is probably going to take some time to realize, so in the more immediate term start-ups should look at ways to deliver their experiences without licenses.  No I’m not advocating the Groove Shark approach, but instead leveraging the content licenses of digital music services that are pursuing ambitious API strategies.  Music start-ups should think hard about whether they really need to own music licenses themselves to deliver a great user experience, or at least whether they need to right away.  Building, for example, a product within the Spotify ecosystem is a great way to deliver a real-world proof-of-concept, test consumer receptivity and have immediate access to millions of potential customers.  License conversations are a lot easier with proven consumer demand on the table.  (Though start-ups need to be careful with music API strategy, indeed they should treat music service APIs like mobile OS.  Don’t put all of your eggs in one API basket.)

Investors – work with labels as partners and embrace the API economy. Investors might have some reservations about working with record labels at start-up board level but they shouldn’t fear losing influence.  The odds are investors will still make the same scale of Seed and Series A investments, it is just that their money will be working smarter, helping build great technology and hiring better people at those crucial early stages of a company’s life.  Investors and labels often find themselves on opposite sides of the argument.  There is no inherent reason the relationship should be adversarial.

Investors should also think about how well their investment strategy harnesses the capabilities of the API Economy. Of course it is always preferable to invest in a business that owns all of the fuel that powers its engine.  But in the era of integrated music API’s it is no longer crucial for a music service to have its own licenses.  An investor wouldn’t expect a mobile app developer to own Android, iOS or Windows Mobile so they need not expect a music service to own music licenses.

Laying the Groundwork for Transformational Innovation

Some of these changes are already beginning to happen, others are a long way off from being realized.  But this change is needed to enable to next wave of transformational innovation that the music industry so desperately needs.  Freeing up precious and scarce early stage resources leaves start-ups able to focus on developing great, innovative technology.  Which in turn will mean better products, better user experiences and more revenue for everyone.

I first discussed some of the themes covered in this blog post in the Giga Om Pro report ‘Monetizing Music in the Post-Scarcity Age’ which can be found here. 

 

OpenEMI, an Innovation Files Case Study

Following on from Part 1 of the ‘Innovation Files’ series, this post looks at EMI’s OpenEMI initiative and how it could drive transformational innovation within the major record label and publisher.

EMI today announced an interesting developer initiative that aims to revolutionize the way in which developers work with EMI.  Securing licenses from record labels is a notoriously resource intensive and time consuming process that can leave some apps still born: many smaller developers – especially the one man outfits – often simply can’t spare the resources, time (and money) that can be required.

EMI have inserted themselves into the developer value chain

To streamline the process EMI have inserted themselves directly into the developer value chain. They have partnered with the Echo Nest to build a ‘sandbox’ where developers can access a repository of continually updated EMI content including music, videos and artwork. Developers need only sign up to EMI’s API to start working with the assets.

Developers can either proactively develop their own ideas or respond to briefs and requests sent from EMI, who will funnel combined requests from artists, managers and labels.  Developers however do not get to simply build Apps using EMI’s content and then go take them to market.  Instead every app requires EMI approval, and EMI hopes to encourage best practice of developers submitting requests as early in the process as possible.

Clearly not all apps will get approved and there is certainly potential for log jams.  However the process will most likely streamline organically – assuming all partners have the right attitude and willingness to be sufficiently agile.   It will also be a great platform for all the extra content that 360 artist deals now deliver and that major labels too often just aren’t utilizing well enough.

Open EMI can, and should, go way beyond artist apps

Although initially this set up will principally act as an innovative alternative vehicle for sourcing artist apps – with developers playing around with EMI’s APIs replacing the traditional tender and quote process – it has much bigger longer term potential.  The name EMI has given this initiative speaks volumes: OpenEM.  It is a statement of intent.  Even though what we will see in this initial phase is relatively modest, it takes huge amount for an organization like EMI to take what is for them such a radical approach to their content.  More importantly I expect this to be an opening salvo in a broader strategic move.

An API for EMI’s own innovation

EMI have not just built an API framework for developers, they have built an API for their own future innovation.  The challenge for EMI is the degree to which they can fully harness this new innovation toolset and respond to the new approaches and mindsets it will require.

These are the three things I would like to see EMI use OpenEMI to deliver:

• Learn from the OpenEMI developer community to help start building the next generation of music product, not just Artist Apps
• Seed the culture and mindset of the OpenEMI community throughout EMI
• Learn and implement innovation best practices throughout the entire EMI organization

OpenEMI is a brave step that has the necessary senior executive support to be a success. To help ensure success, OpenEMI’s champions will need to win support across all levels of the organization, and to do that they will need to demonstrate clear benefits to the most sceptical of opponents.

Driving Transformational Innovation

Transformational innovation is never easy to implement because its path is littered with the corpses of the products, processes and jobs associated with the old ways of doing things.  But it is exactly this difficult path that all media companies must take if they are to emerge intact out of this unprecedented period of disruption.  The Terra Firma debacle was an unfortunate distraction for EMI at exactly the time they didn’t need it, leaving them at distinct market disadvantage. They need an unfair advantage to start re-levelling the playing field.  Driving transformational innovation through the entire organization, commercial partner relationships, artist relationships and product strategy  is the fuel for that advantage. If harnessed to its full potential OpenEMI can be the first step on that tricky path.

The Innovation Files. Part 1: Rates Of Innovation

[This is the first in a series of posts addressing innovation within the music industry.]

Innovation is a much overused and often misused term, yet when considered in its truest sense it is arguably the single most important issue that the music industry must address if it is ever going to rediscover long term, sustainable revenue growth.

Of course the modern day music industry is a complex and diverse collection of entities with equally disparate innovation trends, not however starting from a base of zero, despite what some may think.

Indeed, we all do innovation.  Even the least innovative of companies do some form of innovation, at some level, at some pace.

The three metrics which determine whether a company is in balance innovative or not are:

1. Degree of innovation pursued
2. Culture of innovation supported
3. Rate of innovation achieved

Performing strongly on all three of these Innovation Performance Indicators (IPI) IPIs will not guarantee a company success (external factors such as consumer demand, marketing, finance will all help determine that).  But excelling at all three IPI’s will ensure that a company has the frameworks for creating product strategies that have the agility and adaptability necessary for success.

The major record labels have been much maligned for not having performed strongly enough across all three IPIs but in recent years they have upped their respective games markedly.  However innovation comes less naturally to some companies than others.  Record labels are like most media businesses in that they have traditionally relied upon channel partners to drive transformational innovation.  The compact cassette, the DVD, BluRay, HDTV, PVRs, Ring Tones, Games Consoles etc. all transformed media business models for ever, but they were shaped by technology companies not media companies.

Apple’s sub-par rate of music service innovation

And this is where the elephant in the room raises its hand.er…trunk: Apple’s sub-par rate of music service innovation is probably the single most important reason why digital music growth has slowed in the last couple of years.   Before you begin thinking I’m losing my mind, let’s be clear, I am not questioning Apple’s innovation credentials, indeed they are the marketplace exemplar, instead, and specifically, their music service innovation performance.  In fact it is exactly the exceptionally high bar set by Apple’s rate of device innovation which throws their rate of music service innovation into stark contrast (see figure).

In this chart each product innovation (or set of product innovations) has been given a score using the scale described in the key.  What is abundantly clear is that Apple’s rate of device innovation has consistently far outpaced its rate of music service innovation, which in turn has also significantly lagged the total market rate of music service innovation.  Apple’s overall rate of innovation has accelerated in recent years driven by the launch of the iPhone and iPad, but interestingly, also by a upturn in music service innovation with new products such as Genius and Ping.

Because Apple is the majority of the online digital music market, the impacts of its rate of music service innovation are felt market, and indeed industry, wide.  When Apple shifted its attentions from music to video and apps – which better demonstrate the capabilities of their devices than audio files – digital music growth began its now established slowdown.  Apple didn’t fall into this position accidentally, it was a series of orchestrated strategic decisions.

Dominant as it may be, market share is not the measure of success for Apple’s music innovation 

As I explained in a previous post, Apple is in the business of selling hardware, not music.   The ROI of music service innovation for Apple is not measured in digital music ARPU, but instead in sales of i-devices.  Dominant market share is a nice-to-have symptom of success, not the measure of it.  So Apple innovates music experiences only as much as it needs to, namely as much as is required to help sell its core innovations.  Apple’s recent mini-flurry of music service innovation happened only because its music innovation rate had fallen so far below the market average that the Apple i-device music experience was beginning to look sub-par.  i.e. there was a risk that i-device sales might suffer without music service innovation.

The music industry needs Apple to start taking music service innovation seriously again because Apple has as its customers the majority of the digital music market’s most valuable customers.  The music industry needs iCloud to be one of a series of near-term music service innovations that are transformational in collective impact, rather than it being a solitary sustaining-innovation that does just enough to keep the i-device music experience sufficiently strong to continue to help drive sales.  And the rest of the market also needs Apple to start playing a more active role because Apple’s innovations drive entire markets, dragging the competition along by the scruff of the neck.  As they say, a high tide rises all boats.

Innovation must engage the untapped market not just re-engage the aficionados

And speaking of competition, the music industry also needs the other two members of Digital Music’s Triple A – i.e. Amazon and Android (Apple makes the third) – to up the innovation ante and play their role – as part of the uber-financed-trinity  – to start pulling new customers into the digital market rather than competing for the same early adopter aficionados.

The rate of consumer device innovation is outpacing that of music services, and that will always be the case but that gap needs narrowing, fast.  That quickness depends upon Apple narrowing the gap between its respective rates of innovation, and the record labels are going to need to give Apple incentive to do so.  They have not always been the most accommodating of innovation partners for Apple (remember when they licensed MP3 downloads to anyone who wasn’t called Apple?) but unless that approach changes they cannot expect Apple’s rate of music service innovation to change either.