The Experience of Music

[This entry was originally published as an opinion piece in Music Ally, a European music consultancy.]

The boot print was still clearly visible on my forehead when I stumbled out of Detroit’s State Theatre into the early morning grime of Woodward Ave. I hadn’t been more exhausted, or exhilarated, from a live show since I had played the part of Max at the first Lollapalooza festival a few years earlier. There I had danced for hours with the other Wild Things, high on the grassy hill of nearby Pine Knob Music Theatre, dodging flames from makeshift bonfires radiating the unnatural colors of burning blankets, trash, and suddenly-unnecessary clothing.

At its core, music is communication. Whether experienced with a thousand other people in an amphitheatre, or alone in a darkened bedroom, the value of music is in its ability to connect us all in impossibly complex ways. Like music, mobile communications is all about personal interactions. The way we engage with our mobile device is as personal and diverse as how we experience music. The mobile phone is now at the center of the communication and entertainment universe for an entire new generation, and as we watch the mobile industry converge with the internet before our eyes, we are witnessing the birth of the most empowering personal technology in history. And by providing such powerful and new ways for people to interact, the mobile phone represents an opportunity of unparalleled magnitude for a struggling music industry.

In the business of music, it has become all too common to measure value in ‘units.’ These measures emerged in an era when the production, marketing, and distribution of sound recordings were difficult and expensive problems, forcing the value of the industry to be tied very closely to its ability to solve them. The disruption and chaos that followed the emergence of the first peer-to-peer services on the internet was inevitable: too much revenue came from distribution, and distribution was suddenly completely and utterly free.

But music is not a download. Nor is music a CD, a ringtone, nor any other mechanical representation or reproduction of sound waves. Clearly, no jewel case could contain my Where The Wild Things Are experience of Lollapalooza some seventeen years ago, and no stream of ones and zeros can ever replicate the mingling sensations of ringing ears and metallic taste in my mouth that I associate with that Nine Inch Nails show.

If the music industry is to regain its footing, it must go back to the business of enhancing the experience of music, and break its unhealthy dependency on the mechanics (and, perhaps, monetization) of distribution. Mobile technology is the perfect platform to simultaneously enhance the musical experience while allowing for substantial revenue potential for those who would take a holistic approach.

Ironically, the dominant mobile entertainment value chain today looks a lot like a physical distribution model. High production costs, tightly-controlled distribution channels, and limited retail space are strange characteristics for a digital environment, but they persist in mobile due to a legacy of restrictive and anti-competitive business practices in the telecom industry.

Fortunately this model, like the physical distribution model before it, is quickly becoming an anachronism. Mobile phones have become full-fledged internet devices, and the same market forces that provide the beautiful mess of innovation that is the internet today are quickly converging on the mobile space. Though the promise of a truly open mobile environment remains elusive, there is an emerging new mobile economy that promises to dramatically change the mobile industry for the benefit of all.

Change, especially disintermediation, is always resisted by those with a vested interest in the status quo. But fighting technological advances has historically been a doomed strategy. Indeed, it always will be. By providing zero-cost distribution, technology has fundamentally and irrevocably altered the economic landscape of the music industry. The toothpaste is out of the (you)tube, and no amount of litigation or legislation can change that.

Indeed, society itself is changed by technology. We simply are not the same people we were before the internet, and the mobile generation now coming of age has an identity and set of expectations that are very different from that of their parents.

The fluidity of distribution, and the resulting fluidity of value chains and of society as a whole, has created completely new levels of interaction with music. In mobile, especially, we see emerging artists using text messaging to communicate directly with their fans, harnessing the promotional value of ringtones to virally market themselves, and providing over-the-air downloads of “behind the scenes” videos that fans can enjoy on their phones anywhere. If the spirit of an open mobile ecosystem were embraced fully by the music industry as a whole, we would undoubtedly see huge markets emerge for impulse purchasing of concert tickets, merchandise, and a million other things besides.

Mobile represents an incredible opportunity for the music industry, but the true potential can only be realized by working in an open environment to enhance the experience of music, rather than trying to control its expression. Openness encourages a vastly higher level of engagement, such as my experience at Lollapalooza so many years ago, and can serve as the foundation of a valuable and profitable modern music industry.

By fully embracing the mobile music experience we find more than ample opportunity to compensate for the loss of the industry’s historic profit centers.

Mobile and the Music Industry

The carrier-dominated world of the mobile industry has created a mobile entertainment value chain that, ironically, has a lot in common with physical distribution models. High production costs, tightly-controlled distribution channels, and limited retail space are characteristics we normally think of as being part of the music industry’s past, when records and CDs were the products being sold, but today we find the same limitations in the mobile entertainment value chain.

And so it is perhaps not surprising that the music industry has found some success in this environment. Still struggling with the shift from physical to digital distribution on the internet, the artificial limits imposed on mobile technology have allowed a reprise of many of the same business practices that were honed over decades to sell music in the physical world.

Ringtones, for example, are methodically manufactured, focus group-tested, and released on carefully-controlled schedules that accommodate the weeks or months it takes to get creative to the carrier deck. The ridiculous transaction fees charged by mobile operators, often up to 50% of an item’s purchase price, are tolerated by physical distributors accustomed to giving retailers a similar markup.

But this model, like the physical distribution model before it, is quickly becoming an anachronism. Mobile phones have become full-fledged internet devices, and the same market forces that provide the beautiful mess of innovation that is the internet today are quickly converging on the mobile space. The costs of distribution, storage, and service provisioning are all asymptotically approaching zero, and consumers have developed an appetite for the open access and limitless shelf space that internet economics provide.

It’s now clear that long-term success with mobile music is not going to be achieved $1.99 (or even $0.99) at a time. And the potential for subscription models in mobile has been squandered by the tactics of unscrupulous companies with misleading bait-and-switch tactics that trick consumers into recurring $9.99/month charges they didn’t expect. The scummy underbelly of the mobile content market has damaged consumer confidence to the point where the convenience of mobile payment, already encumbered by ridiculous carrier fees, is often overshadowed by confusion and fear.

The good news is that, in the same way that music is not just an MP3, the mobile industry is not just ringtone downloads purchased through premium SMS. The mobile phone is an inherently personal device, the most personal computer ever to emerge, and the convergence of mobile phone technology with the internet is an opportunity for the music industry unparalleled in its entire existence.

Never before has such an intimate connection between artist and fan been possible; never before have market forces pushed distribution costs to effectively zero; never before has technology conspired to intertwine social expression and interaction so tightly with entertainment.

To take full advantage of this new opportunity, though, requires a mental shift, one in which we stop thinking of music as a collection of discrete units (CDs, MP3s, PSMS purchases, etc.) and go back to thinking more holistically of music as an experience. The limitations imposed by physical distribution (reflected in today’s artificially-stifled mobile entertainment market) have historically driven the music industry as a whole to an unnatural position in which value is represented by the number of units an artist can sell to the mass market.

When one removes the high production costs, constrained distribution, and limited shelf space of physical distribution, a new world is revealed. This has been extremely disruptive and disorienting to the music industry as it comes to grip with the internet. It will be just as disruptive as mobile advances, but this time around the industry has a chance to reflect on lessons learned in the shift to internet and apply that proactively to the emerging new mobile economy.

The knee-jerk reactions of fighting technological advances (suing innovative service providers instead of adapting the technology to one’s own benefit; preaching to consumers and lecturing against their desired usage patterns instead of engaging in a dialog and learning to adapt) have had – can have – no long term benefit. On one level, this is because technology changes the economic landscape such that the industry is fundamentally altered. Technology never moves backwards, so once technology takes us to a new place, the toothpaste is out of the (you)tube, and any attempt to put things back the way they were before is futile.

On a more human level, resistance to technological change is doomed because society itself is changed by technology. We simply are not the same people we were before the internet, and we are changing yet again as mobile takes the torch.

Faced with not just fluidity of distribution, but fluidity of value chains and of society as a whole, the best positioned companies in the music industry are those who have evolved to enhance the experience of music. Labels who work with their artists to create a valuable and sustainable brand that transcends any particular packaging are far more likely to succeed than those that measure value by units shipped on a weekly basis. The musical experience is multi-modal, encompassing everything from live performances to chat rooms to merch to MP3s and a thousand things besides, and new digital technologies provide new ways every day to profit by facilitating the interaction of artist with fan.

One of the reasons mobile technology is so exciting is because it has the potential to bring together so many aspects of the musical experience in a way that has never before been possible. Artists can communicate with their fans using the same tools the fans themselves communicate with each other (SMS); fans enjoy self-expression through music (ringtones); performances can be enjoyed anywhere (over the air video and song downloads); and even merch can be provisioned on impulse (mobile payments). There is no other application better suited than music to take advantage of mobile.

It’s fine for labels to make whatever money they can from ringtones today. But the greater promise of mobile for the music industry lies in its ability to be part of a much more holistic approach to the musical experience. One hopes that the hard lessons of the shift from physical to internet distribution will provide insight to the industry that allows it to take advantage of, rather than fight, the beautiful mess of the emerging new mobile economy.

Pricing of mobile content

I had an interesting discussion yesterday with Lucas Hrabovsky, CTO of Amie Street.  If you don’t know Amie Street, they’re a new independent music store that has a rather unique pricing scheme.  Songs start out free, but gradually rise in price as their popularity increases.  It’s a pretty nifty algorithm, and a hook that’s gotten them plenty of press.

I was talking to Lucas because we’re working on a way for MyxerTones and Amie Street to work together to provide the same kind of variable pricing scheme for mobile content (ringtones) as is currently provided for full track desktop downloads.

In a world where Steve Jobs all but set the global retail price of a digital full track download at $0.99 (oh, he’s just added a $1.29 option for DRM-free tracks…more on this later!), the variable pricing model of Amie Street offers quite a contrast.  But, as I pondered pricing issues with mobile content (thanks to Lucas for a follow-up email that piqued my interest),  I realized that neither the fixed price model of iTunes nor the variable price model of Amie Street really allows the artist any control over the retail pricing of their products.  While I have heard justifications offered up for why fixed pricing is a Good Thing for the Consumer and the Industry, none have been really compelling, and I think it’s really a regrettable accident that isn’t helping anyone.

At MyxerTones, we have a fixed retail price for each ringtone or other mobile content item, but we’ve always let artists choose what that retail price should be.  Let’s call it artist-controlled pricing.   Artists can either give away their content for free, or they can choose to charge between $0.99 and $2.99 per download.  We did this because, well, we had no idea what the right price for an arbitrary piece of mobile content should be, and we suspected different content was worth a different amount of money, so we figured we’d let the artist do whatever they thought was best.

What do they choose?  Well, perhaps not surprisingly, the majority of the content available from the MyxerTones catalog is made available at no charge, as this pacman chart shows:

This means most of the ringtones are used as promotional content; artists create them, then send out MyxerTags in bulletins to their fans on MySpace, or give out MyxerCodes at their shows, so that their fans can load them onto their phones in a show of support.  It’s a great use of mobile technology to connect bands with their fans, and we’re happy to provide these delivery services for free, based on on ad-supported model.  There’s probably similarly poised PacMan chart on some MySpace presentation somewhere, that shows how many bands are chosing to give away their songs as downloads from their profile pages.

But a relatively large percentage of our artists choose to monetize their works by charging for the ringtones they offer . Of this premium (non-free) content hosted by MyxerTones, the distribution of retail prices (chosen by artists) looks like this:

So we see that, more than half the time, artists are chosing the lowest (non-free) price for their content, which is $0.99.  Second in line is $1.99, probably owing to the popularity of that price point for ringtones on the mobile operator’s deck.  Together, those two prices make up more than three quarters of all items; the rest are variously priced up to $2.99.

What’s interesting is that when you look at the actual transactions taking place on MyxerTones, the items being purchased by consumers don’t match up with this pricing distribution at all.  In fact, more items are sold at $1.99 than at any other price point, despite the fact that far more less-expensive content is available on the site:

(Note that this pie chart sizes each slice based on the total number of transactions at the given price point, not based on the total value of those transactions.  This data is from the first three months of 2007.)

You can see the discrepency between what artists are most often asking for their ringtones and what consumers are actually paying when you look at a histogram that compares the two side-by-side:

Despite having only half as many items priced at $1.99 than at $0.99, there were more sales at this higher price point than at the lower. There’s a bit of hypothesizing going on here, but I think what this data means is that, for those people willing to pay for premium mobile content, the difference between $0.99 and $1.99 is relatively unimportant. Presumably, the higher priced content is more desirable in some way (higher quality, more established artist, etc.), but prior to this analysis, it wasn’t clear to me that people would be willing to shell out two bucks for something they really want, even when they can probably get something they just want for half the price (and tons of other stuff completely free on the same site!).

It also leads me to believe that a lot of MyxerTones artists could do better, revenue-wise, if they chose a higher price point (such as $1.99), for their mobile content.

Of course, there are lies, damn lies, and statistics, so one has to be careful about jumping to any firm conclusions with this data.  But what strikes me is that this quick and simple analysis I’ve just done on MyxerTones mobile content pricing and resultant consumer behavior is possible only because we allow artists to set their own prices, and cannot be effectively performed on the dominant pricing models for full-track downloads.  Whereas I was able to take a half hour of work and come up with an optimized trajectory for revenue generation (“encourage more artists to charge $1.99 for their content instead of $0.99 and it should increase their (and our) total revenues”), the music industry is handcuffed and blinded by their existing pricing model.  It certainly seems careless of them.

I’m no economist, but I think a healthy, reactive free market in which prices can float and adjust based on the wisdom (or whim) of crowds, including half-baked analysis like this – will ultimately benefit the industry more than any pricing structure enforced from the top down.

Of course, fixed pricing is probably far from the biggest problem preventing the music industry from continuing its download spiral into lower and lower sales numbers.  The biggest problem is DRM, and it looks like that problem’s finally going to get some attention.  Hopefully I’ll be able to give it some attention here shortly.

For now, Amie Street’s variable pricing is novel and has a lot of benefits, especially for emerging artists.  It isn’t quite a free market, and the feedback loop is rather limited, but it’s certainly a great experiment and I’m looking forward to working with them and others, and playing our part in evolving the economics of mobile content.