The Music Biz: Something Important Is On The Horizon

Having ceded the file based music opportunity (mp3s and DRM’d file formats) to Apple (AAPL), the recorded labels are now getting hip to the much bigger opportunity - streaming music.

Yes, it’s true that listeners will still want to own files for a few more years. There are places and devices that can’t get high bandwidth wireless Internet access, like my Macbook Pro which I am using to write this on the plane ride home to NYC. I am listening to mp3s (no DRM for me) in iTunes all the way home.

But over the next five years, the number of places and devices where you can’t get a speedy wireless connection is going to dwindle to maybe the car. And you’ve always got radio in the car, which is going to get better and better because it has to in order to survive.

Like everything that has happened in digital music, the rights holders have been once again been forced into dealing with an emerging technology. Companies like Last.fm (CBS) and imeem and others have, over the past year, done deals with the leading rights holders to give them permission to stream pretty much any song they want to listeners over the Internet. They can do this “on-demand”, meaning you want to listen to the new Jack Johnson song, you tell your favorite web music service that and it plays. They can also stream music in various forms of smart playlists, either the tracks you have marked as your favorites, or the tracks your friends have suggested to you, or the tracks that people who like the same music as you like. Each and every service has a different take on these playlists. I happen to like Last.fm and Hypemachine. You may like Pandora. Someone else might like Jango. Your kid’s Myspace (NWS) page might have an imeem playlist on it.

And because of all this innovation in streaming music over the past year, the number of people actively listening to music streamed over the Internet is rising quickly. It’s becoming a mainstream activity, particularly among the younger set.

I think of these web services as the new radio stations. Everyone of my generation has had their favorite radio stations. Everyone of my kid’s generation will have their favorite web music services. There will be hundreds of them. All supported by advertising, just like traditional radio stations, and all of them licensed by rights holders (eventually), and all of them paying the rights holders a little coin every time their song is played. And because these services will be free to anyone who wants to listen, they will be very popular. Never before have you been able to decide you want to listen to something you don’t currently own and then just play it. No searching on Limewire or Bittorrent, no waiting for the download - you type in the name of the song you want to play and you hit play.

These services are coming to mobile phones. Probably in the next year we’ll all be listening to pandora or last.fm in the gym on our phone instead of our limited library on our iPod. That’s when this new form of listening is going to explode. And that’s when Apple is going to wish it had thought more about streaming and less about file based music. But you can’t feel too badly about Apple because a good number of people will be listening to Pandora or Last.fm on their iPhones.

Two things happened this past week that may be important to this emerging market. First, MySpace got in the game. They cut deals with most of the major labels to allow them to offer their own streaming service. It’s MySpace, and as Bob Lefsetz points out, they have their own set of challenges with technology and user experience. But music is a HUGE part of the MySpace experience and they have over 100 million people a month coming to MySpace, often for music, and that’s a much bigger audience than anyone else has for a streaming service. And they’ve been in the business of streaming for a long time, not in a particularly easy to use way, but they play a lot of music to a lot of people every day. So I think MySpace will be a meaningful player in the emerging streaming music business.

The other thing that happened is Ian Rogers left Yahoo (YHOO) Music where he had been leading the charge for the past couple years and joined a small startup in LA that has some ideas about this emerging market. Ian is a super smart guy, one of the few people I’ve met in the web music business who really gets where this is all going.

What Ian knows is that the fans are the most powerful distribution points for music. He gets the power of mp3 blogging. He understands that the HypeMachine has built a terrific new age radio station by aggregating all the music that is being posted onto mp3 blogs and he understands that further enabling that kind of behavior, where the fans are the ultimate arbiters of what gets played and what gets popular, is the end game for all of this.

I don’t know much about what the company Ian joined does. And I haven’t been told about any of their plans. So this is all just conjecture on my part. But watch what they are going to do closely. I think something important may come of out that development.

Here’s what we need. We need someone to create an easy to search streamable library of all the recorded music in the world. We need to be able to grab a track and embed it on our blog. We need to be able to see how many people played it. We need others to be able to crawl these user pages with the embedded music and create algorithms based on who posted it, how often it was played, and how often it was reblogged and linked to. The services that do all of that need to be able to play the music that flows out of these social algorithms in the same way.

This all has to be licensed and legal and it has to result in money flowing to the artists. If you put the music on your blog, you should have two choices. Allow the ads to be served into your music or your page or both by the service you got the music from. Or deal with the monetization yourself and pay the royalties you owe. Most people will do the former but some will do that latter.

When this platform is built and served up, a million flowers will bloom. Everyone who wants to be a radio station will be one. And it will be simple to do it. And it will be legal. And we’ll be able to listen in our homes on our home stereos, at the gym, at work, at the library, and some day in the car.

That’s the future of the music business. And we’ve made a lot of progress in the past year getting there. I am excited as a fan, a listener, a technogeek, and an investor.

Note: Sorry for the absence of links in this post. I wrote it on the plane home last night and didn't have time this morning to fix it up.

Comments

[Phil G.]

How do you think Apple is going to respond to this? Certainly they are aware of it... maybe the iPhone will be optimized to a streaming form of iTunes?

[Thinkingahead]

The iPod fidelity is allready terrible. I can't imagine what the quality will be on these hundreds of cheap amatuer on-demand stations. At some point the public will reawaken to the concept of musical fidelity. When that happens, there will be a rush back to high quality playback gear and software. Sort of like when people discovered HDTV.

[dithers]

Sorry, just not going to happen. File this with flying cars - and pigs, for that matter.

This prediction needs so many components to occur,not the least a large chunk of human behaviour change, and a total lack of profit for all this streaming.
No chance.

[nukldrager]

Thinking ahead... I would argue that "iPod fidelity is terrible". Would you clarify what fidelity level you are referring to? High end MacIntosh, and comparable systems, are designed to deliver sound through the air in a room to your ear. Very different from an ear bud which basically uses the air in your head (no disrespect or pun intended) and has more than enough immersion to be enjoyable. I haven't heard any of the streaming music offerings, and I wouldn't listen to them if I didn't like the sound. Having said that, I would love more fidelity on my iPod. I can't hear the bass farts on Chick Corea's "La Fiesta" with my iPod like I could with a Walkman. Trade off I guess to having hundreds of favorites on a thin little device instead of 13 tracks on a bigger less usable portable cd player.

[anatolew]

One giant impediment to all this is going to be the ISPs and carriers like AT&T. My AT&T service agreement (for my iPhone) says that even though data is unlimited, I can't stream video or radio stations on the phone. I can understand that they're trying to limit the costs of offering unlimited data. What this means, though, is that the telecoms won't let this happen until they figure out a way to make a profit from it, which means--I think-- that the cost of streaming is going to rival that of owning songs outright, and customer behavior won't change.

[isayusay]

The stereo quality on Samsung Instinct, coming in June, is superb. While waiting for a streamable music libaray and new infrastructures, we can focus on helping musicians to build their fans and tracking related activities.

[wyly]

There is one huge horsefly in the soup: illegal peer to peer file stealing. Why aren't you writing about how this has to be stopped? It's the first and foremost thing necessary to move the digital music space into an environment capable of supporting profitability. All the new so called "business models" cropping up are going to end up burning more VC money than the online bakeries and shoe shine shops funded at the turn of the century. Copyright law must be enforced. We are on a slippery slope that could lead to a long and painful decline of creativity and business application of all things digitally filable. Fans don't steal, thus record labels are not suing fans, just common thieves.

[NLM]

"... the fans are the most powerful distribution points for music. ...where the fans are the ultimate arbiters of what gets played and what gets popular, is the end game for all of this." - So true!

[draggot]

As you can see, the world is full of naysayers trying to keep a good thing down and funell everyone to their personal favorites. I think the bottom like of this article is uplifting. I would love to see a world filled with music instead of all the restrictions and incompatibilities currently about. If I could pay a reasonable fee to play what I wanted and there were compatible and quality devices out there, well that would be enough. Untill then I will continue to build (steal?) my mp3 library so I can continue to listen to all the quirky things I enjoy.

[listenthinkreact.com]

Have you guys ever heard of Rhapsody? They have been doing this for years and they are leading the revolution. Hands down, the best, most comprehensive streaming music source online. If the y only had the marketing genius of Stevie J they would be on top of the heap right now.

[KCJD]

People are avoiding the already too annoying advertising by using DVR's to speed by ads on their TV's. I can't imagine having to listen to commercials before I listen to MY music. That is why a lot of people buy music in the first place...to avoid the talk and ads that make up 40% of music stations.

When lay people get the tools to do what professionals do everyday, the result is less than we are used to. This is evident with personal web sites and self designed advertising. As soon as the public have the tools to create something, they think they are accomplishing the task as well as the pros do. They are not.

I guess we will have to wait and see.

[MikieV]

"Everyone who wants to be a radio station will be one. And it will be simple to do it. And it will be legal."

I want broader access to music, legally, not more "middle men" flogging the same product.

If the technology is truly interactive i.e. submitting a request or playlist, and having it streamed to me... then why would I want to deal with anyone other than the content owners/providers?

And, I agree with an earlier post: The ISPs are going to want a piece of this, especially if it starts adding significant traffic to their networks.

The ISPs must already be trying to figure out a way to get revenue from Vudu & iTMS movie downloads, Skype phone-calls, and Hulu streaming TV-shows.

[K. Lewis]

Here's the truth of the matter. There will be new choices for music consumers at some point in the future and people will not stop creating new music as the current business model continues to break down. Original music will continue to be created and someone will figure out how to charge those willing to pay. Out of the shuffle in the coming years there will emerge a small set of choices that'll represent exactly what the market will bear. Any person who's every encountered a persistent sales pro has heard the term "well how much you got to spend?" Soon enough the music and movie businesses will learn how to ask that question and collect whatever happens to be the answer. They'll collect at the delivery channel, or the hardware device and they'll collect from whatever form we choose to consume be it single, album, streamed, leased, or "owned." AND there'll still be people stealing content.