Rethinking Music: What The Industry Could Learn From Netflix

It seems fair to say that no one in the music business right now is happy with how it’s being run. As streaming, including both paid and ad-supported, has replaced CD sales as the industry’s main economic engine, the record companies have seen gross revenue decline sharply, artists and songwriters have seen their royalty income diminished, and the companies doing the streaming are losing so much money they’re losing the ability to raise more of it.

In an interesting thought experiment at the Future of Music Policy Summit in Washington this week, musician and CEO of touring van rental service Bandago Sharky Laguana, considered how one component of the industry’s current business model — how subscription revenue Music_Festivalfrom paid streaming services is ultimately allocated to individual artists — might be made more fair, if not necessarily more lucrative.

In very broad strokes, of the $10 a month most subscription services charge consumers, the streaming service keeps $3 (30 percent) and $7 (70 percent) is paid out in royalties (theoretically to artists and songwriters but in practical terms to labels and publishers who are supposed to then distribute them). The portion of that $7 accruing to any one label is calculated based on how many times songs recorded by any of the artists under contract to the label are streamed by subscribers, typically resulting in a per-stream value of a fraction of a penny. Read More »

Search Me, Search Me Not: Apple TV And The Battle For Screen Time

At $149, it’s hard to say at this point whether the new Apple TV will gain much traction against less expensive competitors that do substantially the same things. But as I and others have noted, Apple TV will have at least one potentially compelling feature the others don’t have: universal content search via Siri, with deep links into individual apps.

Users will be able to search for titles, actors, directors and other criteria by voice command across multiple apps and then choose which service to use to watch the content you were looking for. As confirmed by Apple CEO Tim Cook in a recent interview with BuzzFeed, Apple TV will be able to tell you with a single search that the hulu_nocbs-1first three seasons of a five-season series you’re binge-watching are available on Netflix while the fourth season is available for purchase through iTunes and the fifth is available only on HBO, a provide you deep links to each without having to go through any particular service’s native UI.

Initially, universal search will only be available with iTunes, Netflix, Hulu, Showtime and HBO. But in the same BuzzFeed interview, Cook said Apple will open an API for any developer that wants their app included in Universal search.

“[W]e’ll have five major inputs into universal search initially. But we’re also opening an API, so that others can join in,” Cook said. “I think that many, many people will want to be in that search.” Read More »

Competing With Free

The RIAA reported had some good news and some not-so-good news this week about the state of the music business. The good news is that while sales of CDs and permanent downloads continue to fall, revenue from paid-streaming subscriptions through the first half of 2015 was up a solid 25 percent from the first half of 2014, to $478 million. The not-so-good news is that the number of Americans actually paying for music subscriptions is growing much slower, up a sluggish 2.5 percent, or 200,000 subscribers, to 8.1 million.

Optimists noted that the first-half data did not include Apple Music, which launched June 30th, and that second-half numbers should be show faster growth. The New York Post reported this week, citing “music industry sources” that 15 million people had signed up for Apple’s paid-streaming service during the three-month free trial RIAA_paying_subscribersperiod, which ends Sept. 20th, and that roughly half those folks — 7.5 million — had not (yet) turned off the automatic payment feature the will soon turn them into paying subscribers. It wasn’t clear from the report, however, how many of those 7.5 million are in the U.S.

The optimists also note that while the number of paying subscribers was relatively flat, average revenue per subscriber was up 21.6 percent, to $118, perhaps reflecting a shift by consumers to more expensive services like Jay-Z’s Tidal.

Yet while growth in the paid-subscriber base flags, free, ad-supported streaming services like Pandora and Sirius XM continue to be hugely popular. Pandora claims to have 80 million active monthly listeners, only a tiny fraction of which pay for its ad-free tier. Due to licensing issues, Pandora is only available in the U.S., Australia and New Zealand, so the bulk of those 80 million users must be in the U.S. Read More »

Hulu’s Ad-Free Epics

Those looking for evidence that Hulu is getting ready to introduce an ad-free, premium-plus tier got a big helping of it Sunday when the streaming service announced a deal with digital movie network Epix after Netflix decided it would not renew its expiring, five-year old deal with the three-studio consortium.

The deal brings to Hulu films from Paramount, MGM and Lionsgate, including such recent hits as  “Hunger Games: Catching Fire,” “Transformers: Age of Extinction,” “Teenage Mutant Ninja Turtles,” “Star Trek: Into Darkness,” “World War Z,” and “Wolf of Wall Street,” marking a major expansion of Hulu’s movie offehulu_nocbs-1rings.

“Hulu already offers some of the best and biggest titles in television programming, but our subscribers have been asking us for more, and more recent, big movies. We
listened,” Hulu’s senior VP and head of content, Craig Erwich said in a statement. “Through this new deal with Epix, we are proud to now be able to offer a huge selection of the biggest blockbusters and premium films. This is a landmark deal for Hulu and it marks a huge expansion for our offering of premium programming.”

Added Epix CEO Mark Greenberg: “Hulu has become one of the most popular premium streaming services and Epix’s agreement is evidence of their understanding of the value that our blockbuster Hollywood films, deep library of classic film titles and original programming brings to consumers.” Read More »

Netflix Flexes Its Muscles

Having played a pivotal role in persuading the Federal Communications Commission and the Department of Justice to reject Comcast’s attempted merger with Time Warner Cable, Netflix has seemingly done an about face and given its blessing to Charter Communications’ bid to acquire TWC. In a letter to the FCC dated July 15, VP of global public policy Christopher D. Libertelli said, “Netflix  supports the proposed Charter – Time Warner Cable transaction if it incorporates the merger condition proposed by Charter.”

reed_hastingsKey to the apparent change of heart was precisely that “merger condition proposed by Charter,” specifically a commitment by Charter to offer settlement-free peering with edge providers like Netflix across its entire expanded footprint.

“Charter’s new peering policy is a welcome and significant departure from the efforts of some ISPs to collect access tolls on the Internet,” Libertelli wrote. “Charter’s policy will promote efficient interconnection with on line content providers and with the transit and content delivery services that smaller online content providers rely on to reach their consumers. Charter’s endorsement of the policy as an enforceable merger condition will ensure that consumers will receive the fast connection speeds they expect.”

Charter outlined the new policy in a separate filing with the FCC, also dated July 15.

Comcast’s successful effort to impose interconnection fees on Netflix was the main reason Netflix aggressively opposed Comcast’s bid for TWC. Peering agreements were also the main focus of Netflix’s lobbying in support of net neutrality, urging the FCC to require open interconnection policies as part of its Open Internet order (in the end the FCC did not include specific rules for interconnection arrangements in its order, but set up a process for reviewing complaints against ISPs brought by consumers or edge providers). Read More »

Apple’s Non-Disruptive 4K Strategy

For all the disruptive innovation Apple has unleashed on the markets for devices and software it has not been particularly disruptive to the content markets it has entered. Often just the opposite.

By the time Apple introduced the iTunes Music Store the record business was already reeling from the impact of Napster and its progeny. Rather than disrupt the business, Apple’s entry created a new market for paid downloads. The record companies later came to rue the terms of Apple_TV_portsthe deals they made initially with Apple, the iTunes store helped restore legitimate commerce to digital music platforms and on balance has been a net positive for the incumbent rights owners.

Apple is now trying to do the same thing in music streaming, relaunching a paid-only Beats Music service as the record companies try to marginalize free streaming platforms. Read More »

Net neutrality disconnection?

As ISPs, both large and small, gear up to sue the FCC over its forthcoming net neutrality order, even strong supporters of net neutrality have begun pointing to potential legal problems with the proposal outlined by FCC chairman Tom Wheeler earlier this month. One of biggest we-can-haz-net-neutralitypotential problems, as far as OTT providers are concerned, was flagged by Free Press policy director Matthew Wood. Read More »

BlackBerry’s two-sided view of net neutrality

Say what you will about BlackBerry CEO John Chen’s blog post last week calling on policymakers to include application/content neutrality as part of any carrier-centric net neutrality rules — and the reviews have been brutal — but there is an important insight about the evolution of the over-the-top video market lurking inside what is otherwise an impractical proposal.

classic_black_frontChen suggests that broadband providers today “are like the railways of the last century, building the tracks to carry traffic to all points,” but notes that “the railway cars travelling on those tracks are, in today’s internet world, controlled not by the carriers but by content and applications providers.” Read More »

TV vs. Cable

The Media Wonk spent last week in Las Vegas at the Consumer Electronics Show where, everybody said, 3DTV would be the big story. And sure enough, nearly everywhere you went on the show floor folks were sporting either polarized shades or the full Geordi La Forge wraparounds and squinting at the new 3D displays tucked into carefully light-controlled alcoves of the display booths, like so many bug-eyed NFL refs going under the hood.

Yet for all the hoopla over 3D, the really important TV story out of CES was the explosion of embedded applications on Internet-capable HDTVs and Blu-ray players for bringing over-the-top (i.e. Internet-delivered) video into the living room. A year ago at CES there were only a few such TV sets on display, from a handful of manufacturers, and about all you could do with them was run a few Yahoo widgets and stream Netflix movies. At this year’s show, it was hard to find a home entertainment device that wasn’t Internet-ready, and if it didn’t come with its own app store it came embedded with one of the growing number of online content platforms from the likes of Vudu, DivX, Rovi and Boxee, among others.

Far more than 3D, set-makers’ growing commitment to enabling over-the-top video delivery to HDTV screens holds the potential to shake up the future evolution of the TV business. Read More »

Coming full circle on video rentals

I have covered the home video industry for as long as it’s been an industry. And it never ceases to amaze me the lengths to which the Hollywood studios will go to try to deny the reality of consumer demand. The latest case in point: their scheme to stop the shift in consumer spending from DVD purchases to DVD rentals by carving out a sales-only window before movies would be widely available for rental.

Since the studios can’t legally bar retailers from renting the “sales-only” copies (the First Sale Doctrine, and all that) they would have buy the rental outfits off, presumably by offering them a lower wholesale price for DVDs if the retailers agree to delay the rental window. In his third-quarter earnings call last week, Netflix CEO Reed Hastings suggested the DVD-by-mail service might agree to go along.

“If we can agree on low-enough pricing, delayed rental could potentially increase profits for everyone,” Hastings said.

If Netflix were to go along, it wouldn’t be hard to imagine Blockbuster getting on board as well; it could use the earnings boost even more than Netflix could.  The trickiest case would be kiosk operator Redbox, which has been growing rapidly on the strength of dollar-a-night rentals, much to the chagrin of the studios. Relations are tense between Redbox and Hollywood, so a deal might be tough to negotiate. But it might be a way to resolved the litigation between the kiosk company and the studios.

Independent retailers would probably balk at the deal, seeing instead an opportunity to grab some market share back from the big boys by offering earlier rentals. But Netflix, Blockbuster and Redbox, along with perhaps a few other large chains (Movie Gallery/Hollywood) have enough market share among them at this point that the system might basically work.

Ironically, creating a protected sales window would completely invert standard industry practice back in the VHS days, when the studios maintained a protected rental window by pricing videocassettes at an un-sellable $99, before knocking the price down to twenty bucks or so three to six months later. But it would be no more consumer-friendly.

How about this, studios: Price all DVDs at $10, out of the gate, and make them available in 70,000 supermarket outlets nationwide. If consumers still wanted to rent, they could rent. But how many of those supermarkets would be putting in Redbox kiosks if they were simultaneously selling cassettes for $8.99, on sale? I’d guess about none.

You want to sell a gussied-up version with a bunch of extras and try to get $15 for it as a second SKU, go ahead. Knock yourselves out. Maybe you could get that for the Blu-ray, too. But a $10 base price would triple (or greater the size of the retail base for DVDs and make it easier for consumers to spend their money on packaged movies than on other entertainment options.

OMGZ! OUR MARGINS, I can hear the cries from Century City to Burbank. But what’s the point of protecting your margins if  you’re driving consumers out of the category? Why would you assume, at a time when aggregate consumer spending on DVDs is in free-fall, that you could convert any large number of Redbox renters into buyers at $15 – $25 a pop by actively frustrating their ability to rent?

The studios have been mis-pricing DVDs for a long time — from long before consumer spending started to decline — just as they’ve completely mismanaged the Blu-ray roll out (to say nothing of the high-def format battle that preceded it). They’re now paying the price for that mismanagement. Doubling-down on the same strategy isn’t going to fix the problem.

Blockbuster: Closed for renovation

It’s long been clear that there were too many video stores in America for anyone’s good. In the go-go years of the early 1990s, national chains like Blockbuster, Hollywood Video and Movie Gallery were adding stores at a clip of nearly one a day, each. Regional chains and independent operators expanded as well, until there were something like 10-15,000 video superstores in the country and probably twice that number of stores overall.

The numbers back then were compelling. Video stores were considered good tenants by strip-mall devlopers, stores ramped up quickly and threw off enough cash that much of the expansion could be financed internally. In addition to absolute growth in the market, the national chains could easily take share from incumbents when they entered a market, by virtue of their broader and deeper selection of titles, preferable locations and greater marketing clout. Read More »

Redbox, RealDVD and Hollywood’s long stuggle with consumer demand, Part I

There’s something about the video rental market, to borrow a phrase from Barack Obama, that causes the studios to get all wee-weed up.

Back in 1983, not long after the Hollywood studios began, ever-so tentatively, to release movies on the newly introduced half-inch videocassette for watching at home, they were horrified to discover that some enterprising video shop owners had begun renting the cassettes for a few bucks a night, sparing their customers the need to shell out $30 or $40 for a movie they might watch only once. Worse for the studios, the video shops had not licensed the right to rent movies and were not sharing any of their rental earnings with the studios.

Hollywood huffed and it puffed but, in fact, the video shops had the law on their side, specifically Section 109 of the U.S. Copyright Act of 1976, which provides that:

[T]he owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.

In other words, the rental shops didn’t need a license, and the studios couldn’t stop them from renting. So Hollywood did what copyright owners had done at least since the introduction of radio: they went to Congress to get the law changed more to their liking.

Never mind consumers’ manifest interest in renting movies.

In the sausage factory of Capitol Hill, the repeal of Section 109, known colloquially as the First Sale Doctrine, became twinned with a separate studio initiative to outlaw the use of VCRs to record TV programs, or, short of that, to impose a royalty levy on VCRs and blank tapes to “compensate” copyright owners for such copying.

In 1984, however, with the legislative battle still raging, the U.S. Supreme Court threw a wrench into the works by handing down its decision in the famous Betamax case, which held that recording TV shows off the air with a VCR for private use was perfectly legal and that no royalty payment was required. With that, the studios’ effort to ban or tax recording equipment died in Congress, and with it its legislative twin, repeal of the First Sale Doctrine.

The studios were not ready to make their peace with rentals, however. Their next move was to implement a series of ever-more baroque “rental plans,” which involved various schemes to try to distinguish between “rental” cassettes and “sale” cassettes, including the use of different color plastics for the cassette shells. Thus, “rental” cassettes were red, while “sale” cassettes were blue.  The idea was that “rental” cassettes would not actually be sold to rental stores but licensed, thereby pulling an end-run around the First Sale Doctrine. Since the stores would never legally own the cassettes, they could not unilaterally exercise their right to rent them under Section 109 of the copyright statute. Instead, they were compelled to pay a “royalty” to the studio on each rental transaction. Read More »

Scared hens in the Fox house

Somewhere, Tom Freston is laughing.

murdochRemember when News Corp. was supposed to have figured out this New Media thing way better than the other media empires, and Sumner Redstone was firing Freston for letting Rupert Murdoch snare MySpace? These days, not so much. New Corp., in fact, appears to be getting a bit panicky over the whole New Media thing.

Yesterday, the company announced pretty ugly second-quarter earnings (fiscal Q4), low-lighted by a $403 million impairment charge against Fox Interactive Media, which consists primarily of MySpace, as well as a $228 million “restructuring” charge due mostly to layoffs as MySpace. That’s $631 million in charges for the same “prize” News Corp. snatched away from Viacom for $580 million in 2006.

In the earnings call, Murdoch declared that he intends to start charging people to read all News Corp. newspaper content online, from the Wall Street Journal  to the Page Three girls in the Sun, a sure sign that the company really doesn’t know what it’s doing online. Unless there’s some other strategy for leveraging the network economics of the Internet Murdoch hasn’t told us about yet, simply throwing up paywalls around everything isn’t a business plan. It’s taking your marbles and going home.page3girls

On the same call, newly appointed vice-chair and COO Chase Carey took a whack at Redbox, the $1 a night DVD rental kiosk outfit owned by Coinstar. “I think making our content available for $1 grossly undervalues it,” Carey said.

According to the Journal (sub. required, natch), Fox has told DVD wholesalers like Ingram Entertainment and VPD not to sell its movies to Redbox until 30 days after their initial release, the same anti-competitive-ish stunt Universal pulled earlier this year.

The fact that News Corp.’s No. 2 is spending his time worrying about dollar-a-night rentals tells you all you need to know about how far the studio is from figuring out to respond strategically to precipitously declining DVD sales.

If I were Carey (or Fox video head Mike Dunn) I’d be worrying about why Blu-ray, which Fox championed, hasn’t arrested the massive outflow of consumer dollars from the packaged media business. And I’d be focusing on how to structure my deal with Netflix before it finishes the job of remaking the online video-on-demand business into a non-transactional subscription business and Reed Hastings ends up with all the leverage, rather than risking litigation over my deal with Redbox. The DVD business is term-limited. Getting digital distribution right now will do a lot more for earnings in the long run than bashing a few kiosks to make yourself feel good.

Petulance is not a strategy.