Last Music Domino Falls: Sony Drops DRM

Sony BMG has been the last of the major music labels to insist on the use of Digital Rights Management for sales of its music in digital form. Apparently even Sony now has thrown in the towel, according to Business Week.

Sony is expected to start offering some portions of its catalog in a no-DRM format sometime in the first quarter, probably using Amazon.com's download store. Oddly enough, though music labels earlier insisted on DRM as a way of deterring piracy, DRM arguably accounts for Apple iTune's dominance of the download business, as DRM means songs can be downloaded only to specific devices.

Presumably, the announcement will helpl boost sales of downloaded music, as this projection by Enders Analysis suggests.

What Does Music Model Imply for Communications?

There are all kinds of music business models developing these days, including donations, music as loss leader, music as a "free razor," live performance, pay service, merchandising and so forth. People still consume in the old ways as well. Some people listen to radio, buy CDs or singles. People still go to live performances. But lots of people simply download single songs they like for 99 cents, or do so illegally.

The point is that the music ecosystem is developing lots of business models. My kids insist that 99 cents is the right price for a song, based on what a CD costs, and the number of songs on it. But they don't generally buy many CDs, unless an artist manages to pack so many songs on a collection that the incremental cost of buying the CD is quite low. But the business model behind 99-cent songs is the sale of hardware called iPods.

For Target or Wal-Mart, selective deep-discount sales of audio and video are loss leaders for the business model called "retail." Some acts have tried a donations model, with results being that 15 percent or fewer people actually donate.

Madonna, though, illustrates the shift as well as anybody. She last year signed a historically unusual recording and touring contract with concert promoter Live Nation. No record label: a concert promoter.

Traditionally, companies like Warner Music Group have focused on recorded music, while other firms have arranged tours, managed artists and sold merchandise. But shrinking CD sales have led artists and entertainment companies to consider wide-ranging deals that bring all activities under one roof, helping cross-promotion and boosting profit margins.

She is the first major star to choose an all-in-one agreement with a tour company over a traditional record deal. The point is that all albums, tours, merchandise, websites, DVDs, sponsorship, TV shows and films now are seen as parts of the business model.


"The paradigm in the music business has shifted," she is reported by BBC to have said.

In the old days, a musician would go on tour to promote a new album. The new model is more likely to take the form of albums being released for free or very low cost, to promote higher-priced tickets for live performances and other forms of monetization. In the past, promotions such as concerts were intended to sell records. In the future, records might be merchandising to build a reputation to sell concert tickets, create TV shows and sell merchandise.


It isn't immediately clear how changes in the music business might one day filter over into the video business, or how the basic principles might be applied to the communications business. But there's something to be learned here.


Among the insights is that the value users place on something change over time. What is the value of a car radio for someone who does not commute 60 minutes to two hours a day? What is the value of a car radio for somebody who can use an MP3 or CD player in the vehicle? The point is that the value of different types of music listening, as well as the cost, vary from mode to mode.


The "cost" of listening to the radio is virtually free (the radio came with the car), but maybe unsatisfying and rare. The cost of listening to MP3s is the cost of the content purchased and the player (unless the player came with the car), and might cost a bit more, but get used more, both inside and outside the vehicle.


In other cases the cost of music might be a satellite radio subscription and the cost of the receiving hardware (again, unless the hardware was built into the vehicle), but used only inside the car.

Also, the value of the ecosystem surrounding a product can produce more revenue than the actual tangible product. Let's say you buy a $250 phone (subsidized by the carrier to the tune of $200) and purchase a $5 a month insurance policy on the device, on a $55 recurring monthly plan. Say you never actually lose or break your phone, and you use it for three years.

Say a carrier's gross margin on services is about 30 percent (after paying employees, operating and marketing expenses, but before taxes, depreciation or debt service). Before subtracting the handset subsidy, the gross profit would be $16.50 a month on the service, or $198 a year and $594 over three years. Back out the $200 handset subsidy and one derives $394 as the gross profit on service.

Assume the insurance policy has a 90-percent gross margin, equating to $4.50 a month, $54 a year or $162 over three years. In that case, the $5 insurance revenue stream produces 29 percent of the gross profit, compared to the $55 revenue stream for service.

New business models for music are evolving. The issue is whether new business models for communication also might evolve.

Video Will Not Follow Music Disruption Model

There’s a big difference between the music and the video businesses. Music executives unsuccessfully fought the advent of digital distribution. But media and entertainment industry executives overwhelmingly believe that online distribution of TV shows is an opportunity, not a threat.

Video content creators will embrace online distribution, rather than trying to "kill" or "cripple" it, as music executives did.

Of the 100 executives surveyed recently by Accenture, 70 percent agreed that online distribution of TV shows is more of an opportunity than a threat, given its ability to extend the reach of its programming to a much wider audience at a relatively low cost
compared to traditional broadcasting or physical distribution.

“Technology will continue to alter the distribution landscape, allowing people to access content on their own schedule, wherever they are, in all kinds of ways,” says Leslie Moonves, CBS CEO. “Companies that can combine world-class content with powerful national and local distribution will have the competitive advantage.”

If that is the case, broadband service providers will have some role to play. “We see a big transition moment in the industry,” says Accenture managing consultant consultant Diego Mora Ovideo. “Our telecom clients have many questions about the main battleground.”

“A big question mark is how to change the corporate DNA and business structure to really compete,” he says. In large part, that is because the ecosystem is changing.

“Value is shifting away from simple access,” says Mora Ovideo. And there’s a big shift in Europe that North American carriers will have to confront at some point. “To change their DNA, some are looking at “netco” and “servco” models.

You might call this structural separation or functional separation. Sometimes voluntarily, sometimes involuntarily, telcos are creating distinct organizations to handle retail sales and networks.

“Either there is a formal division into a network business unit and service business units, or sometimes separate organizations are created, without a formal separation of business units, Mora Ovideo says.

“It would be very difficult to think the current business model, skills and mindset will work in the new world,” he adds. Different backgrounds and skills and mindsets are required.

And such reorganizations are being conducted even though the amount of new revenue to be earned from new service offerings is necessarily all that large at the moment. “It isn’t about current volume, but building a position for the future,” he says.

“We must move fast enough o position and have a significant role”, is what service provider execs are saying, he notes. A few leaders like Apple, Nokia, News Corp. and Google are moving very fast, and our clients are moving slower, on purpose, to focus on fixed mobile convergence, substitution and other issues, he says. In the media space, service providers will build partnerships, Mora Ovideo says.

“There’s urgency to act fast,” he says, even though over the next two to three years access will remain the main revenue source.

Some incumbents also are moving to disrupt themselves, accelerating the change, in the voice area. As you would expect, the more aggressive moves often are made by smaller incumbents, who have more to gain from disruptive moves. ‘Absolutely, the weaker incumbents in a market are more likely to launch attacks,” he says.

“In any event, within four or five years, voice will not drive revenue,” he notes.

On the media and content front, 62 percent of executives look to “new platforms” as being the most important key to growth, while 31 percent say “new content” will drive growth, and seven percent say “geographic expansion” is the key growth lever.

Of these new platforms, online and mobile are seen as the key platforms, with a combined 43 percent of execs citing online as most important. Online portals were seen as key by 17 percent of respondents, while 13 percent think social networking sites will be important. About 13 percent think e-commerce sites will be key.

Mobile platforms were seen as key by 17 percent of respondents.

Most think (53 percent) of executives surveyed think “short form content” offers the
largest opportunity for “new content,” with “long form” or “full length” video content (greater than 60 minutes) garnering 11 percent of responses.

Video gaming” was viewed as a key growth area by 13 percent of executives. About 57 percent of respondents think “consumer-based competition” or “user-generated” content is the biggest threat to the media business, while 46 percent also are worried about “piracy or IP theft.”

Still, 68 percent of respondents believe that they will be able to harness user-generated content to create revenue within one to three years.

About 70 percent of respondents also think that social media is a natural evolution of today’s business but will be an evolutionary development. About a quarter of respondents think social media will be “revolutionary” in its impact.

More than 90 percent of the executives said that their companies would become
involved in social media over the next 12 months.