Thursday, October 4. 2007
It feels like a slow news week. While there has been no slowdown on my RSS feed, I have struggled to find something that sparks my interest enough to research. I have a story half written on Capitol v Thomas, but seeing as the trial will probably wrap up this week I will wait until the result is known before finishing it off. Making the best of a slow time I started work on porting the site over to another blogging software. Need I say that this has turned out to be much harder than I expected and I wasn't expecting easy.
My goal was that if I moved, I wanted to keep comments and trackbacks, and to ensure that all the entries kept their time stamps. The time stamps were no problem, but the rest was. This drove me to do some searching on how other people were administering their serendipity sites to see what my other options were. In doing so I found an upgrade version with new features, and a raft of extra plugins that I hadn't seen before.
There are now 2 upgrades to the site. 'Karma' is a post rating system that allows readers to rate stories up or down. I am sure you are all very familiar with this style of technology. I am hoping this will increase the feedback I get so I can tailor the posting style to suit my growing readership. The second one literally saved Serendipity, an autosave feature for the entry screen. This allow me to use the embedded entry tool again without fear of post loss. Writing externally, then cutting, pasting and editing was getting old fast. I have also found an XMLRPC plugin that should let me post from BlogJet, which would be my preference once I get it working.
Next task is to find a better statistics system.
Monday, October 1. 2007
There has been a lot of press about Microsoft's plans to buy a 5% stake in Facebook for between $300M and $500M US. One particularly good analysis of the potential deal can be found at ITPro. This deal would value Facebook at around $10B, and apparently Mark Zuckerberg is hanging out for a $15B figure. Most of the analysis I have seen uses relative modeling to come up with a position on the reasonableness of $15B. This invariably comes up short, especially when no-one is looking to pay anything like as much for Facebook’s rivals. MySpace was bought outright for $580M about 1 year ago, and other web 2.0 sites have not received speculative valuations anywhere near this.
In an absolute valuation it can be hard to see how a company with $150M in revenue, and a guesstimated $30M in profit can be worth $15B. I have been running some ‘back of the envelope’ numbers though, and I am not convinced Mark and Microsoft are insane. If I use a rule of thumb, and say for an unproven technology company I wouldn’t want to see a price/earnings ratio (P/E) of more than 15. This means that the company will make its value in profit over 15 years. Using 15 also makes it easy to work out that for a $15B valuation, Facebook would need to average $1B in profit each year.
This is probably not making anyone feel any better about the valuation yet, until the miracle of compound growth is applied. To get an average of $1B profit over 15 years, facebook needs to grow at an average of 44%pa. If they could maintain that rate, in 15 years Facebook would be generating $5B profit per year (non discounted) and would have averaged the $1B per year. 44% is not a high target for a technology company, there have been many technology companies that have achieved this for sustained periods: Dell, Google, Apple, Compaq, etc. But let me now drop back to relative valuation to test whether 44% growth and a P/E of 15 are reasonable assumptions.
I choose Google as a comparison for two key reasons, it has a demonstrated track record of what is possible, and like facebook its revenue predominantly comes from advertising. Google has currently 9 years old, which is not quite the 15 year window I have chosen for Facebook, but it is already generating around $4B per year in earnings. This proves that $5B a year after 15 years is possible. At this level, Google is still growing at 58% per year, which definitely suggests that 44% is more than attainable. As for whether a 15 P/E is reasonable, Google is currently valued at $177B and has a P/E of 48. This is not a directly valid comparison as Google has many years of proven growth and performance, making it a safer bet. However, a P/E of 15 does not look unreasonable.
Given all this it is clear that it is possible for Facebook to achieve the growth rate necessary to justify an asking price of $15B. It is still a very large gamble for a purchaser to take though, as there is no track record yet to prove that this business has legs and is not just a fad. Facebook has also to prove that they have a business model to capitalise on their popularity, although making a profit is a very good first step. Om Malik puts it very well in his recent posting where he talks about Facebook needing to control their own ads. To get into ad sales they need people, which means they need money. Microsoft don’t necessarily care too much about this though.
Companies like Microsoft buy other companies for many reasons, they only invest in them for one, competitive advantage. They should not be concerned with making a profit from selling their minority stake in the future, that would make them an investment house, and this is not the way companies should use their money. Microsoft want either:
If there are specific technologies in Facebook that Microsoft likes the look of, but they are not yet certain of, then investing gives them a chance to get them preferentially in the future when they make up their mind. If the deal values Facebook at a risky level (like $15B) then this disincents other companies from investing, or buying out Facebook before the technologies are proven. This still risks the $500M they pay, and even though this is only a fraction of Microsoft’s money it is not chump change. There must also be contingency plans for the risk of losing their money. That is probably advertising. If this deal goes ahead, I would expect Facebook to sign up to Microsoft’s advertising system.
Facebook have revenues of about $150M per year, all of this from ad revenue. Even given a very good deal, Google adwords is currently getting at least twice this. Presuming that the Google cut is the same $150M, you can see how Microsoft getting this revenue could pay for their stake in Facebook. With even moderate growth of 30% Microsoft could make $600M in ad revenue in 3 years, not to mention any extra business they could get from marketing their relationship to Facebook, and on Facebook.
So given all this, while a $15B valuation seems high for Facebook, it might not be, and Microsoft's investment is really a quite safe bet. They are almost certain to make their investment back in extra revenue, block others from investing or buying Facebook out, and possibly net a nice windfall if the company succeeds.
Tuesday, September 25. 2007
I saw an analysis in GigaOM on the EMC acquisition of Mozy. I think I have an idea of what their intentions might be though. Before I start, its easy to see from a bit of looking on this blog, that I used to work for an EMC partner, and currently work for an EMC competitor. I have no inside knowledge, but I have my own views on the storage market that may be biased by this history. Pinch of salt and all that.
Mozy is an Internet based backup service, that lets consumers and business back up files across the net to their data center in Utah. From what I can read on their site, they have gone to a lot of effort to set up a fault tolerant DC to ensure as good an uptime as is possible. The program itself looks like it has some good features, like block level incrementals to conserve bandwidth and strong encryption options (including the ability to manage your own private key). They have received lots of good press (Time for example) but I cannot see a great deal about who their customers are. I am sure they are getting some good penetration from consumers and maybe some small business.
Their press release section is a bit telling, as there are no big success stories. If they were getting any medium or Enterprise customers, they would almost certainly be trumpeting them there. Once the next EMC financials get released we may get a better idea, but for now its safe to assume they are mostly a consumer / SOHO business at the moment. This in itself is not a good match for EMC, they are an Enterprise company and look to solve problems for big business. They are stretching their reach down to smaller companies, but the consumer space is not were they can or should play.
EMC has been on an acquisition frenzy the past few years. Since 2005 they have purchased 11 companies (according to their latest 10K), all of which fit into enterprise scale markets (1 replication, 1 professional services, 2 resource management, 3 content management, 2 virtualisation and 2 security). This does not even cover the Legato and Documentum purchases which were earlier. So from all this we can clearly see that they would not have bought this company without enterprise intent. The fact that they paid a premium for the company also supports the claim they are looking at big business, although EMC are not scared to spend big on what they want (over 1/3 of their asset valuation is goodwill – $6B or other intangible assets, $1B, total $7B of $18B)*
The Mozy service as it stands does not look like it would play well in the enterprise, the key to enterprise backup is recovery time, and you cannot guarantee that with a remote backup service. Also the pipes required to do daily backups for different companies would be immense. EMC has been playing around with hosted storage plays, and the take-up on these has not really been huge as large companies need to control their own data. There is one area of a companies data that most are willing to out-source though, off-site tape storage.
Most companies keep an off-site backup (and the ones that don’t are mad). Often companies out-source the handling of this to logistics or document management companies, who collect and store those tapes for them. As a lot of companies investigate removing tape from their backup regimes, the last bastion of tape is this off-site storage. This then gives the clue as to what EMC might want to do with Mozy.
EMC does not do tape, they do disk. They make money if companies move to disk based backups, but in some companies they cannot remove tape completely and retain off-site backup storage capability. A Mozy environment may be able to offer a virtual off-site tape service over the Internet or private network connection to a data center they manage. This then covers a hole in their complete storage option for some customers. They have other technologies from their CAS, backup and security ranges that could enhance this service too.
I don’t know whether EMC will keep the consumer side as well, if they do I would expect the price to change at least. I do expect that within the next 12 months, EMC is going to start talking about virtual off-site tape.
* – Two notes on intangibles, firstly this includes intangibles for VMWare which has been floated independently since the latest 10K.
Secondly, to explain what this means: Intangible assets are those that have no directly measurable value, but help the company to gain revenue. Examples of this are patents and trademarks. These can only be given a value on the books if they are purchased. When one company buys another, they remove the tangible asset value from the purchase price, then as much intangible value as they think they can justify to the auditors, and whatever is left over is called goodwill. This is essentially how much you have paid over the measurable value of the company. For EMC to have $6B of goodwill of their books means they pay premium for what they want.
Thursday, September 20. 2007
A month ago I posted on the ruling that SCO didn't own the copyrights to Unix, and in fact owe part of the proceeds for their licensing to Novell. While the hearing to even decide what the amount owed to Novell has not even occurred yet, SCO has taken the step of declaring bankruptcy. Subsequent to this, the Nasdaq has acted as I expected they would and moved to de-list them. If you read the article on Groklaw linked to, you will also see that SCO approved raises and bonuses for executives the day before they announced the bankruptcy. It is a good indicator of the type of company we are dealing with here.
The interesting thing about this to me is that SCO is not bankrupt. Their latest 10Q shows that in April they had $18.9M of current assets vs $12.5M of current liabilities. And even in their petition claim they have $14.8M of assets and $7.5M of liabilities. This is not bankrupt, according to my understanding bankrupt is when you cannot pay your debts (see the section on chapter 11 in Wikipedia). That’s why when I saw the values on the petition I immediately went to their latest balance sheets. Even if a company is solvent, they can still be bankrupt if their current assets are not enough to pay the bills. But this is not the case either, at least it wasn’t in April.
Either SCO has been playing funny buggers and moving current assets to foreign subsidiaries (which are not covered by the chapter 11 claim), or they believe that Novell are entitled to more than $7.3M. Unless SCO executives have a hankering for prison food, I think it is more likely the latter. Novell would also agree considering they believe they are owed about $30M.
Unfortunately for SCO though, the money they owe to Novell is not a debt, it is Novell’s money, and therefore not protected by bankruptcy. Pamela Jones of Groklaw explains it very well in the article linked to earlier, “If I rob a bank, I can't then run to bankruptcy court and file for protection so I can keep most of the money. That money was never mine, so I can't offer to pay the bank back at 10 cents on the dollar. I have to pay over whatever I stole, 100% or to the limit of what I have left in real life.” So they are either pre-empting to ensure they have the protection in place before the inevitable, or (as Pamela says only slightly tongue in cheek) they are trying to spend Novell’s money before they can get it.
Realistically they know that the game is lost. The motivation behind this is to limit the damage. While the attempt to get an undeserved Linux windfall would have set the company and shareholders up big time, the gamble didn’t pay off, but SCO still has other product lines that they believe in enough to have launched to market. The law suits are under US jurisdiction, so if they can limit the damage to the US operation they can at least still keep the company around to promote these products. They would probably need to re-incorporate in one of their subsidiary locations, but that would not be too problematic. I am not sure what the implications would be of them re-opening a subsidiary in the US, but their new customers aren’t there anyway.
A look at the SCO press release site tells an interesting story. Generally vendors only create press releases for fairly significant sales. The ‘new customer’ press releases from SCO over the last while are all outside the US, and apart from an OpenServer upgrade deal to a Russian bank, quite small. The customers are not exactly flocking to SCO, and the pace is not likely to accelerate after declaring themselves bankrupt. If the Chapter 11 filing won’t protect them from Novell (which all I have read suggests it won’t) then I would expect a ruling from that which would quickly change the reorganization bankruptcy into a liquidation one. Does anyone want the licensing rights to Unix, going cheap. Is that the sound of the fat lady doing vocal warm ups?
Thursday, September 13. 2007
I posted on GNC today about Sun selling Microsoft Server on their commodity boxes. This is on top of them recently signing with Intel to use their chips as well as the AMD's they have from the past. In thinking about this I wanted to expand a bit on the details of how this will effect both their brand and their ability to compete.
As I said in the GNC article, a lot of what Sun is is due to the vision of Scott McNealy. The Brand image of the company was built around technical snobbery. Engineers that were experts on Sun equipment considered themselves an elite group amongst their peers, and to a lesser extent their peers agreed with this. A lot of the anti-Microsoft stance that the company took was around fostering this elite Brand image. This included McNealy testifying against Microsoft in their anti-trust trial.
The issue that has has faced this decade, is that their core Unix business and platform is a closed technology competing against an open one. An open technology spreads its R&D load across multiple companies, allowing it to develop quicker and cheaper. At some point in 2003, and Intel processor passed the Sparc in chip to chip performance, and has continued to accelerate past. While they were able to hold ground against Microsoft (itself a closed technology), the greater acceptance and reliability of Linux allowed competition from a completely open platform, that is cheaper and better performing. The only reason Sun still have a Unix market at all is a mix of elitism and good service.
Scott McNealy and his team recognised this and tried a number of tactics to change the market (N1, thin client, etc) before giving in to the inevitable and entering the commodity market. They managed to do this while maintaining their elitist Brand image. Firstly they used Linux, then they used the AMD processor only to maintain a Geek cred. Finally their release marketing was squarely aimed at denigrating the leading commodity supplier of the time, Dell.
Sun have been allowing customers to install Windows on their AMD hosts for some time, but officially supporting it, and factory installing it is completely different from a Brand perspective. It goes beyond a tacit acceptance and becomes an endorsement. To continue to hold themselves above a platfomr that they endorse will be viewed by all but the true fanboys to be hypocritical. To consider themselves to be in the commodity server market though, they need to be able to conform to a new market dynamic that they are unsuited for.
The table above gives a look at some select pieces of Sun financials from their latest full year results, compared to those from alternative commodity suppliers. This table shows for each company the gross profit on the product sold, and the cost of selling that product, which results in a net profit. These are across all product lines so there is some uncertainty in direct comparison, but they give a very good indication of what is happening.
While Sun make a large profit on their cost of materials, their cost of sale is huge compared to other players in the market. Wintel servers are a cost game though. He with the lowest costs will win. In terms of hardware costs for an Intel or AMD server, there is not much difference for all the players. We can assume that Sun will drop its profit on the hardware down to the same level as its competitors. The cost entailed by the company to sell those servers though is orders of magnitude above its competitors. The figures for Dell give an indication of what the best cost model in the commodity space looks like. But Dell is a volume player and cannot at this time offer anything like the level of service Sun does.
Even against similar companies though (HP and IBM) which both have large services divisions and renowned support quality, they have double the cost of sale. As Sun start selling more commodity, their existing customers will drag the sales in. It will become increasingly difficult for them to drive these customers to the more expensive products due to competitive pressures and their depleting Brand image. The competitive foils of their competitors will become harder to deflect as they start to look less differentiated. In order to compete they are going to have to cut their costs which will reduce even further their Brand identity.
The new management team look as if they have been doing a good job since Scott McNealy left. They have recovered from $800M loss last year to a $473M profit this one, a turn around of $1.2 Billion (link to financial release). Looking into the details, almost all of this difference can be account for by a reduction in costs from the StorageTek merger and in incentive options (maybe Scott's?). I cannot see any inherent or long term improvements to the fundamentals of their busienss model. This combined with their depletion of thier own Brand value spells not good things for Sun. I wonder who will buy them?
Pseudo legal notice - I'm not a financial advisor, this is not advice for your own finances.
Tuesday, September 11. 2007
CCIA is an open source lobby group the recently sued a number of copyright holders claiming that copyright warnings have been claiming greater rights than the holders are entitled to. Now why this needs to be the subject of a lawsuit I don't know. While he is himself a lobbyist on the opposing side for the Copyright Alliance, Patrick Ross' opinion piece on CNet is right in one (and only one) way. There is no reason that copyright warnings should be public service announcements for fair use, nor is there any benefits to the copyright holders or consumers to do so.
Now if copyright holders were actually suing people for breaching these overstatements, or if they materially prevented people from exercising their fair use rights it would be a different story. But none of this is the case so I cannot see a reason for it beyond propaganda. Given some of the utter tripe that is propagated on the other side of the issue (like the heinously misleading studies sponsored by the aforementioned Copyright Alliance) there is probably some value in providing a balance. This issue did succeed however in reminding me of one of the great annoyances of the modern age, the DVD copyright warning.
It has to be one of the most ridiculous, and potentially counter-productive wastes of money the entertainment industry has seen outside of an award show. The only time I see these warnings is on DVDs I have spent money to obtain. Why lecture me on respecting copyright when I already have! I reached maximum frustration with this when I recently purchased season one of "Dead Like Me", a somewhat quirky TV show that I quite enjoyed but missed most of. 14 episodes in the series and after each and every episode the disc played a copyright warning. Not just a little flash up on the screen but over 5 minutes (no joke) of warnings in what must have been half of the worlds languages. The mind boggles at the insanity of this. I am sure that if I had downloaded the episodes from the Internet I would not have been forced to endure the inconvenience, but because I obtained it legally I must. If I tried that trick with my kids, and lectured them every time they did something right it would not take long to train them not to do so.
And just because inane copyright warnings weren't enough, they now have those "You wouldn't steal a car, so don't steal a movie" ads. THE ONLY REASON I AM SEEING YOUR DAMN PROPAGANDA IS BECAUSE I DIDN'T STEAL YOUR DAMN MOVIE". [deep breathes]. In all seriousness though, my annoyance at this ad has recently turned to amusement. At one point in the ad, it shows a person trying to download a movie from the Internet and the progress bar is flying at a rate indicating no more than a minute for complete download. Now maths tells me this cannot be true. A DVD holds 4GB+ of information, and at my general download speed that would have to take several days to download using fairly good broadband. I can imagine some people viewing this ad and being tempted to try downloading after the ad shows them how convenient it seems to be.
Now there is only one reason why movie and TV companies would annoy people like me so much. They must believe that people that download shows and movies also buy them. From research I have done (and mentioned) previously on music downloading, it would not surprise me if this was true. This emphasises for me the shortsighted nature of the tactics the recording and movie industry have taken to piracy. If pirates are also consumers, then the problem is not one of enforcement, but rather of enticement. If they took the time to understand when and why someone makes the decision to pirate or purchase, then this will reveal new strategies for increasing sales. I have said before that any company that fights its own consumers will, if they survive, greatly reduce their profits. Nothing has happened to change my mind yet.
Thursday, September 6. 2007
This was a re-posting of an article I wrote on GNC. While I intend to post links to those articles here in some form, I posted this as is to test something with trackbacks. I am beginning to think that these are a bit of a joke. It all looks good for a technorati rank, and does let a blogger know who is linking to them, but it appears to be too unreliable and too open to spam to be worth the effort.
Todd has disabled the reception of these on GNC due to the extreme amounts of spam he was receiving, too many to conceivably manage by himself. I am thinking I might take his lead on this.
A group of prominent bloggers have proposed a bill of rights for users of the social web.; It is a very concise and focussed statement that accurately covers the issues most people would have regarding their personal information. I have two uncertainties with this document though.
I admit that the first is slightly pedantic; I have a general issue with the overuse of the concept of ‘fundamental rights’. There is no inherent obligation on web site owners to offer any specific freedoms to their users. There are a set of laws to discourage or punish dishonest and corrupt actions. And there is a set of requirements that their potential users have. The closer they meet those requirements the more users they will attract. The title is pretty catchy though, so I could live with it as long as the statements on entitlement and fundamental rights were removed.
Secondly, without an enforcement method this declaration will change little. In fact its presence could be used by social web companies as a tool to deflect users concerns. By claiming they meet the bill they can fool users who do not research the reality. I think I have a way to address this by actually putting IP law to good use.
It’s not perfect, but it would work well for controlling the large sites. The document as it stands is a first draft and will undoubtedly change as it’s merits get debated. It’s not bad for an opening gambit though.
Tuesday, September 4. 2007
I have been regretting my decision of Serendipity as blog software. When I first created this blog I installed WordPress, but didn't really like the interface. I also found it a bit limited in how I could change the look and feel with my limited knowledge of web programming. With my hosting plan at GoDaddy, I get a wide choise of software included and within the user community there, Serendipity had some good feedback. I tried using Xoops to front end WP, but a CMS platform was beyond my abilities then, and I have previously used Joomla for some posting I did for another site.
After installing Serendipity and playing around with it for a while I found it a great beginners tool. It was easy to use and configure, the plugin structure was easy to understand and use and it was easy to apply some skins to make it look a little different. As I have become a bit more sophisticated though I have run into some limitations
- To start with I can't create bullets, or any other text formatting outside of italics, bold and underline. I am sure if I had some HTML skills it would recognise the formatting commands, but I don't.
- The statistics are a bit limited, and managing comments is difficult. Particularly weeding out the spam posts, I cannot get a good balance between auto-moderation and over protection.
- There is no persistence in the edit window. As I posted about last month, if I navigate away from the entry creation screen, or there is an error in the save, then the post is gone. I am currently editing in notepad, which is not ideal.
- I can't work out how to create a site description Google can read and cannot find any help. This doesn't help people that might find my site in search evaluate quickly whether they follow the link.
- Blogging applications don't interface with it. Todd from GNC recommended an application called Blogjet to me, which is a desktop blogging app to manage posts on multiple sites, and offline. I have used it twice and already love it. It won't connect to this site though [curses]. I also tried to use a remote stats program a couple months ago with similar levels of success.
GNC uses Moveable Type, and I have to say that is a far superior product. It's very easy to use and is supported by many desktop apps and websites. It has given me a taste of what life could be like on BusinessGeek, and I like it. Unfortunately Moveable Type would cost me more money than I would like to spend. There are a number of other applications on my hosting plan I could try though. I might take some time to experiment with a few of them on another domain to see how they compare. I am a bit nervous about moving to a new program and the risk of losing my posts and comments.
Maybe there is wisdom in crowds and I should just go with WordPress. Speaking of which, there is an interesting post in Guardian Unlimited that talks about the wisdom of crowds at Digg turning into mob rule. It is a short one, but potentially valid. It reminded me of an article that I read while researching my piece on monetizing Digg, which I didn't use in the end. It was on blogcritic and talked about social sites in general having strategies that actually disrupted the wisdom of crowds rather than enhancing it. It's worth a read if you are interested.
My latest post on GNC.
I was looking at the web site of a new startup from India called NetAlter, they are creating a secure p2p application that they are touting as a possible new Internet. A quick look to the right on their homepage shows the main reason this will not happen, the patents they hold mean this will be a closed environment. You only need to look at AOL or MSN to see what the fate of a closed Internet is compared to an open one. They will potentially have a market in the corporate sector for information exchange applications, but the idea raises an interesting question.
I am trying to get at least one post a day up there.
Monday, September 3. 2007
I have started contributing to another blog, Geek News Central. My posts there will be a little bit different to here. I will be posting links to interesting articles with a brief comment or two, rather than the longer analysis pieces I will still be posting here.
It may slightly change the style of the posts here though. I will be trying to make the opening paragraph a more complete summary to allow me to more easily cross post to GNC. I will be putting a synopsis there, with a link back here for some of the posts I do here. In the words of the late Big Kev, "I'm excited!"
Link to my first GNC post.
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.
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