The major labels’ digital music dilemma

The following is a blog from Simon Presswell, a consultant for the music industry and the former MD of Ticketmaster UK. Presswell has held executive positions at BSkyB, was senior vice president of marketing and digital at NBC Universal TV, and was MD at Universal Parks and Resorts.

Last week saw the exit of Rob Wells as President of Digital for UMG. It begs the question: what is Universal’s digital strategy?

And, for that matter, what are the other majors doing about digital?

For the last few years the majors have been happy to license or, in some cases, even give away their IP to others who have managed to find compelling business models to monetise this in compelling new digital ways that scale.

The challenger brands of Spotify, SoundCloud and YouTube have managed to build $1billion plus streaming business that are based on three simple drivers:

  1. Delivering a frictionless direct to consumer experience that works and provides a return path of data to help them understand more about the consumer, not less;
  2. Paying the labels (and therefore the artists) a very small fraction of the total prize. Allowing the challenger brands to occupy increasingly more of the distribution side of the value chain, creating yet more distant between IP owner (label) and consumer;
  3. Moving first to reach scale, therefore locking the labels into a financial dependence before they can mount a reasonable defence and reclaim this lost ground.

So have the majors been caught asleep at the wheel again, as they arguably were when iTunes appeared. What lessons, if any, have been learned?

“Universal pictures, disney and fox managed to address the licensing issue in the movies business by founding hulu.”

Sony and Universal appear to have at least been curious about reclaiming the direct-to-consumer ground with their collaboration in Vevo, with some degree of success.

Warner, however, have made the bold move to grasp the nettle with a major new license deal with SoundCloud – who are preparing to legitimise their business and operate outside of the current safe harbour agreement that has allowed them to grow to the current size.

There is, though, one single thing still lacking across all of the majors, and that is a single unified strategy to set the digital standard for rights across the industry; all three majors could collaborate to reclaim their IP, go direct-to-consumer and pay the artist a bigger share of the proceeds.

You don’t have to look too far to see how other industries have successfully managed to find the ‘Unicorn’ that until now has evaded the music industry.

Universal Pictures, Disney and Fox managed to address the very same issue in the moving picture business in a compelling and unique model by founding Hulu. They reclaimed the vast majority of their IP and house it in a direct-to-consumer service that scaled.

The challenge was, however, only resolved in the US – as the US studios have a bad habit of selling their international rights in advance in order to finance production.

So why have the music majors not explored this solution? Simple: ‘quarterly earnings’.

Each of the majors have to report their earnings on a quarterly basis and, in doing so, demonstrate how their business increases shareholder value through a continued increase in the earnings per share (EPS).

This short-term quarterly performance drives decision-making to be more focused on income that grows within the quarter and does not lend itself to the long-term investment required to build a direct-to-consumer business – the kind demonstrated by the deep pockets of the private equity investors who back those challenger brands I mentioned above.

So what’s the solution? A Chief Digital Officer with a direct to consumer attitude who can present a compelling enough business case to unify the majors. Possible? Or just another Unicorn?Music Business Worldwide

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