Throwing the Mechanical Out with the Apple Juice

Sept 12, 2012

I can’t turn on Twitter of my RSS reader without seeing a debate about the revenue of Spotify, its contribution to artists, Apple/Pandora, the future of iTunes, etc.

Stepping away from the dialog and din for a bit, if I look at my purchasing habits I see a disturbing trend. I have 14,000 tracks in iTunes. I “bought” on iTunes maybe a quarter of that. The rest came from CD’s, demos, promo CD’s, etc. I’ve accumulated a collection over the course of the last 15 years (the age of the oldest file).

I have not bought a track in over 6 months.

Being from the music business, and knowing the internals, this is frightening. This means that I have not contributed a lot of money to the artists I have enjoyed, as I bypassed the last vestige of recorded music revenue: the non-streaming mechanical royalty.

A digital download is considered to the be the same thing in terms of royalty accounting as a CD, and subject then to the artists standard royalty rate, usually 8% to 25% of MSRP. Digital downloads, like CD’s are nice and tidy revenue streams. You have a 1:1 on purchase to revenue, margin, wholesale/retail costs, etc. It’s a great business.

Just look at the chart.

33% from mechanical from CD’s, 31% from downloads. Again: a tidy and traditional retail model. Everyone is comfortable with this, and it still makes a lot of money.

But it’s based on a lie.

It’s a conflation of access with ownership. The assumption that permanence, ownership and the sanctity of an “original” are predicates for a great customer experience and “value.” It’s a granted fiction that the act of downloading a file translates a permanence that is not granted through any other means. “This is your file, keep it and enjoy it forever.”

This argument starts to break down however over time and technological progress.

To me right now, there is no difference in the permanence of owning 14,000 tracks vs. having paid access to 15,000,000 songs that disappears if I don’t pay.

I’m never going to near the limits of either. It becomes less of an issue of permanence, and more of a convenience issue. I’ll pay for what allows me to save time without sacrificing enjoyment.

It used to be paying for a track made it accessible offline, on my iPod, etc. All these arguments have disappeared to the point where there is no quantified difference between access and ownership. Both are infinite in limits (for most people), and gated by access unlocked through monetary means (whether purchase, subscription, devices or bandwidth).

So when Apple goes subscription streaming it won’t be a surprise. And it is inevitable.

Apple has had a subscription product ready for a while. The issue is that releasing it at this point does two things: eliminates what is to them a high margin business, and effectively kills the recorded music business by slaughtering mechanical revenue from retail.

Their hand will be forced when this pain is less than the pain of ignoring it. Meaning when the ARPU possible from a subscription product (and associated sundry profit centers) eclipses their ARPU from a la carte download revenue.

Their impact on the market will be catastrophic.

Consumers will love it. You can even write the ad copy: “All the world’s music, in your pocket. Say hello to iCloud Music”

For competitors though, Apple would have more paid subscribers within hours of announcement than they’ve ever seen in their entire existence. For the labels, the short term gains in terms of breakage and minimums will be great. Especially because the artist deals for streaming royalties are more favorable to labels than to artists. Long term though, it tosses traditional artist mechanical revenue off the cliff, including CD’s.

Look at that WMG chart again. Now imagine it without retail physical and digital download revenue. The pie has to shrink in the absence of pieces, as there is no other revenue stream that will fill that gap. The constriction will force innovation and product development, but it is irreversible in terms of what was maintained with mechanical royalty being a “thing.”

Where will the money go then? Apps? Touring? Direct to Fan?

I have no clue.

Once mechanical dies, we’re in the wild west again for a bit.


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