March 18, 2002

New Technology Has Big Media Players At Crossroads

The new media has contributed to creating new headaches for giant media companies who have been accustomed to status quo monopolistic control for numerous decades. Here is an excellent CNET story detailing what strategies media heavyweights such as Bertelsmann, Vivendi and Virgin are deploying in their efforts to profit from new technologies such as the internet.

According to Bertelsmann CEO Joel Klein, "For 'content' and media companies, creativity is not enough anymore. Those with truly global ambitions must embrace the 'transforming' changes wrought by technology by making acquisitions and adapting their business plans accordingly." Evidenced by their investments in peer to peer file sharing pioneer Napster and online retailer CDNow, Bertelsmann has been actively exploring ways to work with the new media.

Klein states rather accurately that both AOL Time Warner and Sony have been unsuccessful in properly utilizing the internet for optimum financial gain. In particular, Warner and Sony's music departments have suffered because they are unable to formulate an effective online marketing plan to properly promote their artists.

Although piracy issues may play into loss of revenue, a more siginificant factor is the ineffective cultivation and promotion of artists by the labels. Ironically, the labels' wounds are self-inflicted and have little or nothing to do with piracy. The labels are using piracy as an undeserved scapegoat to cover their financially suicidal new media tendencies.

The labels' reluctance to license their music to numerous independent online distributors has proven extremely damaging. When music is not being distributed because it is made "off limits" by archaic business practices and copyright laws, new potential revenue cannot be generated.

A recent preliminary arbitration decision would enact outrageous webcasting rates and reporting requirements for internet radio broadcasters (webcasters). If adopted, these rates and reporting requirements will only serve to suffocate an industry already in severe need of oxygen. If music does not get played and promoted, it does not get purchased. Believe it or not, it is that simple!

The labels should be providing digital companies with incentives to sell and promote their music, not attempting to deter them from it. In the long term, such incentives should spur economic growth for an industry which is currently in a tailspin. One can argue that if traditional radio was forced to pay to play music from the beginning, the industry would have never taken off.

According to the story, "global competitiveness and the increasing cost of talent have taken a toll on traditional broadcasting." Since most of the labels are supposedly having financial difficulties, it would only make sense to permit third parties such as online music distributors and webcasters to build their own business models. This would take the financial burden of building and running such essential music companies off the labels' backs.

In addition, an explosion of online music companies will also assist in promoting the music industry for the long term. It only makes sense - the more music sites you have on the internet, the better for business. The labels' controlling and monopolistic practices (such as enacting unreasonable licensing and webcasting rates) have paralyzed the music industry.

The story goes on to state, "Among the various entertainment disciplines, music is different. It has always been more international than other media, noted Craig Bamsey, a senior vice president in strategic planning and business development at Universal Music Group. But since 1996, he said, growth rates have been flat to down around the world, forcing music companies to be more cost-conscious about the artists they take on and what they promise. In addition, of course, a digital-music tsunami has been building.

Companies are realizing, Bamsey said, that they can't set up an impenetrable envelope around digital music, along with a watertight rights system, but that listeners will pay to download music from the Internet if the price is right."

If companies are having financial difficulties promoting artists, maybe artists should look elsewhere for promotion. Anyone who follows the industry closely knows there are more than a few artists out there who are less than pleased with their label. In fact, several big names have even left their labels for similar reasons.

Mr. Bamsey (of UMG) states companies are finally realizing it is not as easy as they thought to profit from the internet? Much to the labels' surprise, the old media way of doing business just will not cut it with the new media. So what is the labels next move after making such a realization?

Here are some suggestions for the media companies:

1) Stop all of the litigation against digital companies. In addition to saving legal costs, such a move will promote good will and improve business relationships between the labels and the digital firms. The two need to work well together to forge furture partnerships and agreements beneficial to both.

2) Work out agreements with online peer to peer (p2p) file sharing companies. The agreements should constitute the p2p companies paying the labels a fair percentage of revenue being generated from their sites (subscription payments, software sales, banner advertising, etc.). There is no need to worry about p2p sites which are not generating any income since they will probably go out of business.

3) Scrap the current webcaster proposal of paying per song per listener with outrageous reporting requirements. Work out agreements with webcasters where the webcasters would pay the labels a fair percentage of advertising revenue received from internet broadcasts. Such an agreement would spark new startups since webcasters would not have to pay the labels until they become profitable.

Stick to the same formula which helped make conventional radio a successful marketing machine for the labels. Even if webcasters fail to generate revenue, at worse, they will be giving the labels and artists priceless worldwide promotion. Remember, the webcasters are footing the expensive broadband bill for the internet broadcast, not the labels.

4) The labels should concentrate on developing their own web sites and generating revenue from advertising, in addition to music sales. This is a new revenue opportunity for the labels which has to be explored to a much greater extent. If the labels can generate advertising revenue, they can make their monthly subscription rates more affordable for the consumer.

5) The labels should dive into the internet by investing advertising dollars into online music web sites or other entertainment sites. For the most part, the labels have only advertised on a few select mainstream sites which limits their consumer reach. If the labels permitted new digital media companies with opportunity, they would have a wealth of new valuable resources available to push their product.

6) Copy protection and other anti-piracy technology should be stopped by the labels. This has proven to be an expensive venture with few, if any, positive results. Besides the fact that any hacker can break the copy protection scheme with little effort, the idea has brought a backlash of bad publicity against the labels.

If the labels want effective copy protection, they should go back to pressing vinyl. Think about it, how many people are going to take the expense, time and effort to go from vinyl to mp3? Most people do not even know how to do this. In contrast, encoding a compact disc to mp3 is as easy as popping it into your computer's CD player.

In addition to having superior sound over the CD, vinyl albums provide a larger physical space for labels to market their wares. Ever try to read album lyrics and credits on CD packaging? The vinyl can even be packaged with copy protected CDs, which would draw in the younger consumer. Nobody will have the right to complain about copy protected CDs if they are also provided with the non copy protected vinyl in the same package.

Since the industry has been talking about getting the older listener back into the market, what better way than to offer them something they are already familiar with. Most of today's older listeners grew up with vinyl and will not have a problem making the transition back. In fact, most will welcome it.

Today's media companies face a multitude of challenges which require diligence and careful planning. Up until now, many of the decisions made by the companies (especially the music labels) have caused additional fiscal damage to the industry.

The labels must employ individuals who have knowledge about both music and new technology. New ideas are not an option, they are a necessity for adaptation to the new media. If the labels continue to take direction from old media types, they will continue to be lost in cyberspace.

Sphinx
"There's Only 1 Station"

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