Tuesday, August 28. 2007
My response to Simon's comment on my Universal music article was threatening to blow out my comment size, so I have placed it into a posting of its own.
Before we castigate these execs for being myopic. Some questions:
1 - iTunes itself has a 9.8% share of the total music market, with digital being 13.8% of total.
2 - Walmart holds a 15.8% share (bigger than the total digital market) figures as of June 2007.
(Best buy - 13.8%, then iTunes, amazon - 6.7%, Target 6.6% round out the top 5). Details can be found here.
3 - 2nd qtr this year, digital sales where up 26% y/y and physical sales down 19.8%, which continues the exponential rise of digital since the launch of iTunes. More and more normal people are signing up. My mother buys iTunes songs. Info from ecommerce times.
Those record industry guys thought they were so smart with their huge profits from CD's and forgot that markets are more pull than push. Companies with established market shares are always myopic to market shifts. Records - CD's, Video - DVD, IBM and the PC market, older retailers to WalMart, Fossil fuel industry to renewables. etc, etc, etc.
I would argue that if artificial barriers were not created for the uptake of digital downloads (DRM, locked platforms, incompatibility between players, uncertain life length of downloaded songs) then the uptake of digital downloads would have been much greater, and there would have been less bleed to black market methods. Allofmp3 should have been a big wakeup call to the music industry. It proved that free music was not the only reason people were downloading music illegaly. If they are willing to pay money, even if it is a token amount to salve their concience, it proves that they will move to legitimate markets if they can get the product they want easily.
According to my maths, the 26% rise in digital, coupled with a 19.8% fall in CD sales, actually equates to 13% of the total music market missing. I would conject that a lot of this market is actually the true loss to the music industry to piracy. I also know that if you build a digital distribution channel that gives this market what they want at a reasonable price you will attract most of them back to legitimate channels. During my MBA I was part of a team that conducted a study of peoples attitudes to piracy. There were 3 distinct groups (of pirates) that we found, 1 used pirated music to sample before purchase typically citing many occasions they had bought albums that sucked based on one good single. The second used piracy to get access to music they could not easily find elsewhere. The third were music packrats that got a level of satisfaction from having huge amounts of music. The first 2 groups were also the highest spenders on music in the study, and would legitimately buy more if it was available in a better way. The packrats would not typically purchase the music they pirate under any circumstances, but they also get very little out of the music they possess outside its presence. There was also, of course, the large group that did not download any music at all. This group contained members that would have bought more music if it was easy to get and relatively cheap.
So my overall point is, the recording industry looked at the same signs in better detail than we did. They also had as much opportunity to look at how markets have changed in the past, even in their own industry in their own recent lifetime. The computer guys were smart, they had a better understanding of the music industry than the music industry had of the Internet, they were heavy consumers of music and were looking at the situation from a consumers point of view. This is always the correct default view. It is trite and slightly hackneyed, but still a good rule of thumb to use the 2 rules of business:
1 - The customer is always right
2 - If the customer is wrong, refer to rule 1
If you fight your own customers, you will lose and that is what the music industry has been doing.
A quick note to Universal execs, I will buy the entire Cure back catalogue as soon as you release it DRM free at a good bit rate, in Australia. The announcement by UMG that they are pursuing a limited trial in DRM free music distribution is clearly a compromise between common sense and internal politics. While the exclusion of Apple iTunes as a participant in this trial appears strange, it does show a glimpse of the strategic intent behind the music industries attitude to Internet distribution of music. In this posting I will be discussing how some of these strategies are manifesting for both good and ill, and why. I will also talk about what the recording industry should have done. The strategic game behind all this is control of distribution channels.
Most of the record companies have some very talented people who are creating strategies for working in the new digital age. Unfortunately these people are not in charge so must sell these strategies internally before they can be implemented. As any person who has worked for a big company knows, getting any sort of change accepted means navigating the political interests of people who can have very different views and interpretations of the world. Within a record company, that includes management with entrenched views on the industry based on history, and some that truly believe that any copying is piracy and take it very personally. The internal politics obfuscates the strategic intent behind policies that hit the public eye.
As I have discussed in a previous article (see link at bottom) the music publisher is beholden to radio stations and music television to get their product known to a wide enough market to make their investment back. The reason the publisher has any appreciable power in this relationship is from their monopoly control of artists. Broadcasters want access to the big selling artists, and the publisher wants their next big things on the air, creating an environment for negotiation. If you want to measure the power of players in a negotiation though, follow the money. Now while they need to pay a regular fee to play copyright music, this is through a legislative process that was laid down many years ago when the power balance was much different. Radio and music television pay absolutely nothing direct to the studios for access to their catalogues, and even smaller radio stations get all their music supplied to them gratis. And how many times have you heard of a radio station bribing a record company for access to a song?
Bribe 1, bribe 2, bribe 3, how many can there be?
This is why the iTunes decision actually makes some sense if you look at it from Universal's strategic point of view. With iTunes recently having passed 3 billion songs sold they are the dominant player in the digital downloads market, and as we all know these 3B songs are almost all tied to an Apple platform. The recording industry greatly fears a single player holding a dominant position in the digital download market, even though it was their own insistence on DRM on downloads that enabled this situation. So Universal are trying to shut the gate, unfortunately the horse has already bolted. The ipod was not the sole reason that iTunes was so successful; it was the first online store that was easy to use and is still one of the best. It is also international with arbitrated pricing. Having a successful trial of digital media without iTunes now is unlikely, in fact Universal is likely to see an overall decline in sales over coming months as buyers wait for the DRM free music to appear on iTunes, you need to be where your customers are, not where you wish they were. There is a solution for the recording industry though, and coincidentally it is the one they should have followed as soon as Napster showed them the potential of digital downloads of music.
So what should they have done? The question of DRM is effectively mute as even the recording companies are coming to the realisation that it was a mistake. The music industry should have taken control of the new channel by building music wholesale sites. Located on their own servers, they would hold their entire catalogues and be available for anyone who built a site to on sell the songs at whatever price they wanted. The music company would control the price they received and ensure that the resellers of the music would be too busy competing against each other to mount an effective challenge to the price the record companies charged. This strategy would have given them control over the encoding, the bit rate, price arbitration between new release and back catalogue, and the direct information about purchase numbers and trends. It would also have allowed them to increase sales of their back catalogue and niche labels. If online music retailers need to create server space for every song they sell, it is only in their interest to stock songs that will sell above a certain volume. If the store can get a margin by linking to the label’s server though, the cost is minimal.
Now this failure can be at least partly blamed on DRM as well. In building an online presence the music industry was not capable to address the complexities of DRM, and the market for DRM was already fractured, and typically linked to a platform/program. Even if they had been inclined to follow my plan, their fixation with using as restrictive a DRM system as possible would have forced them to rely on the IT world to provide them their channel to market. The good news is however, that the nature of the market means it is possible to do this even now, although they would likely have to still cut deals with the existing large players to allow them to continue to use their own servers. It will take time to reign in iTunes, but it would be a better strategy to take than the one Universal is currently following.
Music industry and radio relationship.
Sunday, August 19. 2007
My blog is taking off like a rocket! At least thats what I would believe if I just looked at my visitors counter, which will come close to hitting 2000 this month. Now that is a visitors count, not a page load count. I find this hard to reconcile with the 5 people who actually read this blog! Some of the extras came from a particular article I had a trackback for from a site that is actually popular this month. I am also starting to get a couple of hits through google searches.
Unfortunately I have to face up to the reality my statistics show. One reader subscribed through bloglines, and one through facebook drive fully half of the traffic to the site. These services regularly spider my site looking for updates. This is what surprises me though. My average posting frequency is once a week, so why aren't the spiders sophisticated enough to tell this and drop their scan rate. Even if they only dropped it to once a day that would have to be more efficient than the current once an hour. I know bandwidth is relatively cheap and an RSS feed is a low size, but when you take into account the extremely large number of RSS feeds these services must access, it just seems inefficient.
There is another segment of the traffic that is spiders. I didn't realise how many of these there actually were. As well as the regular search engines you would expect, there are quite a number that are obviously spiders, but do not announce their origins. I'd be interested to know the purpose of those, but not enough to actually do any research on them. One that intrigues me comes from 220.127.116.11. I get a dozen pings from this site a day, but no information on what it is. The IP address is from Canada (supposedly) and browsing there gives me a login screen but I can find no other information. Google searches bring up a few other web admins asking the same bemused question, but nothing else.
The remains of my overinflated traffic figures come from spammers. I'm running about 3-5 spam trackbacks a day which is impressive considering how fast I'm adding words to my ban list. When I disabled trackback for a week as a test I dropped 20 hits per day, which is a good indication of how much crap the filters actually catch.
So I now have no questions as to why spending on Internet marketing is so slow to ramp up. It is so hard to give any credulity to the numbers of visitors you might be getting. I could very well tout that I have a readership of 2000 visitors per month, and a marketer would probably halve that automatically. The reality is though, that I have 5 regular readers and maybe 10 other hits. This is a significant difference and I will be interested to find out whether this ratio is maintained as readership increases. I have a few contacts with larger blogs so I will have to see if I can get my hands on their stats.
Despite the reality I can still look at my visitors stats and feel a momentary thrill at my new found popularity. A true optimist never lets reality get him down too much.
Wednesday, August 15. 2007
I learned a valuable blogging lesson last night. An large article I was writing on the latest Universal no-DRM announcement disappeared when I hit the post button. I am now writing my articles in a tool that can save local drafts then copying and re-formatting them for the blog. This will hopefully prevent my wife and children from being woken up by any further screams of anguish in the middle of the night. And I'll retry the Universal article once I have re-written it
Now where's my white suit, I'm off to Lefty's.
Don't worry I'm not referring to myself, but to that paragon
SCO has made many grandiose claims in press statements and interviews early in the piece and in hindsight were obviously trying to intimidate IBM into settling early. This would have validated at least the perception that the claims were valid and opened up a great little earner for SCO (called SCOSource) charging Linux users license fees for using Linux. This got up the nose of the entire Linux community (including me) and did not work on IBM, who were obviously very confident that they had not done any wrong as they decided to fight rather than settle. No actual proof is given by SCO for its claims and the court goes as far as remove a lot of the claims from the case due to lack of proper disclosure. In effect the chances of them winning were looking very slim.
In the meantime Novell (who had sold the rights to Unix to Caldera and are part owned by IBM) stepped in and claimed that while SCO owned the rights to exploit Unix, the copyrights were explicitly excluded. SCO, who seem to believe that their expertise in making baseless accusations to the press allows them to spot others doing the same, launched a suit against Novell to make them take back the hurtful things they had been saying
Well it turns out that Novell were being completely honest in their statements and the US legal system agrees! This effectively kills the IBM litigation as SCO no longer has anything to sue over. A quick look at the SCO financials shows that they are bleeding money, have continual revenue declines, no profits, and now infinitesimal hope of a big litigation windfall. Their shares have also tanked, which will lose them support in the financial market (and any chance of more capital to prop them up) and put them at risk of being delisted if they can't get their shares back over $1 per share quickly enough. There seems little hope of any other result than a fire sale of their assets or the entire company at a bargain basement price. To any of the people that bought SCO shares in the hope of a windfall win, suffer.
My only problem with this being the likely end of the matter is that the SCO v IBM trial will not go to judgment. There is no doubt in my mind that IBM would triumph, but it will not be explicitly ruled by a court of law. This leaves the whole thing as a not completely settled matter and leaves the door open for similar litigation in the future. We have recently seen Microsoft try to stir the Linux IP FUD pot. I will be interested to see how it plays out, and I am sure that if IB< does not already have counterclaims for costs open, then it will have soon. I hope there is a way that this can be resolved that absolves Linux of any taint on its IP character.
I have linked heavily in this article to Pamela Jones' GrokLaw site. I have been reading this site daily since mid 2003 and it has the most complete coverage of the SCO trials, as well as some other interesting IP trials and issues that you could wish for.
Wednesday, August 8. 2007
I recently created a Facebook account. This is unusual for me as I am usually reluctant to join the social networking thing. The reason is that I have yet to find one that really contributes anything other than a further distraction to my life. At this point I am not sure Facebook will be any different but something about it intrigues me.
From one perspective it gives me another method to connect to my friends and colleagues. I already have many of these, most of which I never use. I regularly use email and the telephone and am currently using this blog but thats about it. I have a linked in profile which I pay attention to only when someone new sends me a link request (not often), I have IM of various flavours, Groove account, many forum accounts, sharepoint, my own website, my own forum site, another blog and a Secondlife avatar (two actually); all of which I don't really get any value out of, or even use for most of them.
Nothing about my current facebook experience suggests that it will be any different. I've wasted some time on some quizes and played some crappy games that are not even as sophisticated as Zork. Something about the platform still gets me interested, which I can only assume is its potential. While some of these features may not be unique I think it is the combination of these that could be sparking my interest.
- You create friendships by mutual consent. I am personally looking at using facebook differently to how sites like MySpace have been used in the past. I am only adding people that I have a genuine connection with, rather that trying to get as many friends as I can. Jason Calacanis is at least in part seeing the popularity problems that are limiting the value he can get from Facebook. I don't have the celebrity factor driving people I have never met to send me requests (so they can namedrop their connection to their friends). I hope this will make my time on the site easier.
- There are multiple layers of organisation possible. Groups and Networks allow my friends to self select themselves into categories. I can then sort my contacts through their common interests (groups) or the segment of my life they are connected to me through (network).
- 3rd party Apps can use the platform. In the article I linked to above, Jason also questions why an application developer would want to use someone else's platform. I can agree with this to a point as it limits the developer in scope and control. However the larger Facebook grows, the more powerful the network effect that can be gained from it. The developer can more easily grow their uptake through word of click, as a user I have less annoyance barrier as I have no additional sign on, and the developer gets access to much more information about me than they would have without Facebook.
Which brings me to my biggest concern with Facebook. As with much social media, the business model is around marketing. Facebook is a bit more sophisticated though as it is building up significant demographic information about me, which it could use to better tune marketing to me. As I have mentioned in previous posts, marketing can be good but is often used badly. As such, I am still cautious about what details I include in my profile. I have only attached my 'spam bait' email address and no phone numbers or addresses. I am not concerned with what people can find out about me, just in limiting how they can contact me. I'm not that hard to find if someone wants to make the effort, but that effort would blow out the cost model of a spammer or mass mailer.
I think then, that my interest is from the potential of the site rather than the reality. While the connection management is good, there are not enough of my friends on the system yet for me to use it exclusively. While the 3rd party apps are a good potential for extension, there are no 'killer apps' that I have come across yet. And of course, Facebook currently comes with its own conspiracy theory, and I am always a sucker for one of those. I think I will stick with it for a while and see what happens. I've added my Facebook profile to the sidebar so you can look me up if you join. Remember my first bullet point before you do though
businessgeek" >Technorati link
Thursday, August 2. 2007
I was dealing with the office sociopath today, there seems to be some unwritten rule that every office must have one. Nothing too horrible outside of the general discomfort of dealing with him, but it did get me thinking of one of my favorite quotes and the lessons this has given me in my business life.
Anaïs Nin was a french author and diarist from the mid 20th century. I do not know much more about her outside what can be read on Wikipedia but I once read a quote of hers that stayed with me.
"We don't see things as they are, we see things the way we are."
This so elegantly sums up a number of things about our nature that we have only recently begun to understand in any formalised way. Essentially our brains can only process so much information at once, so we use mental categories based on our past experience to rapidly process incoming information. This is also unfortunately why we develop prejudices, but that's another story. When it comes time to rapid process other peoples behaviour, the only mental shortcuts available to us involve how we would behave in the same situation.
Hence, everything that we observe is clouded in its interpretation by our own prejudices and world view. If you want to see a great example of this, read "The Pythons Autibiography" and observe how 5 different people can have such widely divergent interpretations of shared events and experiences.
Which brings me to my point which is: you can get an indication of how a person thinks by their interpretations of other peoples actions. When we observe other's direct behavior, our judgement is clouded by the face they put to the world, and the interference of our own mental filters. When they describe the behavior of a third party though, we can sometimes see around the wall. So if a person generally interprets 3rd party actions to you in the best possible light, there is a good chance that person is fairly good natured and likes to do the right thing. If a person is continuously seeing nefarious intent in others behavior, expecially in behavior that seems innocuous to you, watch your back a bit more carefully around them as they are likely worthy of suspision.
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