Music Needs Tuning by Chris Trayhorn, Publisher of mThink Blue Book, July 1, 2006 The complex space needs some harmony before online marketers start to sing. Imagine you’re a publisher trying to parlay your expertise and passion for vacuum cleaners into a performance- based business. You are shocked to learn that sellers don’t compete on price, that you aren’t allowed to see what is in the manufacturers’ catalogs and that if you want to sell in volume, there’s only one partner. Although this scenario seems somewhat over the top, it approximates what publishers looking to participate in the market for digital music downloads and subscription services now face. While online music sales are rapidly rising, the companies with distribution rights will have to revamp the way music is marketed to reach its revenue potential. The sales of digital tracks rose by more than 150 percent from 2004 to 2005 (to 353 million songs), according to Nielsen SoundScan. That is a growth rate that any industry would be proud to have. Global revenue to the record companies from digital music sales nearly tripled, from $400 million to $1.1 billion in 2005, according to the International Federation of the Phonographic Industry (IFPI). Great news, right? Almost. From a glass-is-half-empty perspective, however, the total sales of recorded music (both physical and digital) fell by 3 percent last year, or not in the direction that the folks at Sony BMG, EMI or the other major labels want things to go. Apple at the Core Most of the growth in music download sales can be attributed to Apple’s iPod player and iTunes store. The two most visited online music sites for the final week of January 2006 according to Nielsen//NetRatings NetView, were Apple’s iTunes store, and AOL Music, which also sells iTunes. Depending on which analyst you ask, Apple’s share of music download sales is between 75 and 90 percent. "If you want to be successful [selling downloads], you have to partner with Apple," says Tim Bajarin, president of analyst firm Creative Strategies. iTunes may be delivering sizable revenue for Apple and the major music labels, but publishers aren’t getting much of the action. Apple, which has sold more than 1 billion tracks via iTunes, pays its affiliates a 5 percent commission on the sales of its $0.99 tracks. The company does not have a subscription service. Bajarin says the status quo is likely to continue in music downloads for the foreseeable future. "I don’t see anyone touching [Apple]," says Bajarin, adding that the company has created a "digital ecosystem to acquire, manage and distribute digital content" to iPods that is without competition. Apple declined to be interviewed for this article. AOL Music offers iTunes downloads and a subscription service (AOL Music Now) that is billed separately, according to Erik Flannigan, vice president and general manager of AOL Music, Movies and Television. The confusing structure has AOL Music (music.aol.com) sending traffic to the iTunes store for download purchases, while AOL Music Now (aol.musicnow.com), which will officially launch this summer, is the home of its $9.95-per-month subscription service. AOL Music Now also sells Windows Media format downloads. The company hopes to someday have a single service. "We believe in both models, and would love to see them both together," Flannigan says. He is hopeful that Apple will someday enable subscription service listeners to enjoy music on their iPods. Affiliates aren’t jumping at the opportunity to earn a nickel per sale for downloads when they are accustomed to earning just as much from mere clicks in other industries. Lisa Riolo, senior vice president of business development at Commission Junction, says few affiliates have contacted the company looking to partner with download sites. "We haven’t heard a lot of demand from affiliates for downloads," she says. Subscription services, which can pay between $5 and $15 commissions when a consumer signs up for a trial, can be much more lucrative for publishers, Riolo says. Commission Junction manages the affiliate programs for subscription-based RealNetworks, Yahoo and eMusic, which all offer subscriptions and downloads. Subscription service revenues may not be growing as fast as music download sites, but the number of consumers paying a few dollars per month to listen to catalogs online almost doubled, from 1.5 million to 2.8 million globally in 2005, according to the IFPI. Like Apple, RealNetworks sells tracks for $0.99 each, but the company does not offer affiliate incentives on downloads, instead paying commissions for trial subscriptions, according to Rachel Lazar, the director of consumer marketing for RealNetworks. Focusing on subscriptions provides a better opportunity for publishers to generate revenue than making a few cents per download, Lazar says. RealNetworks recently raised its bounty for trial subscriptions secured by a credit card, from $12 to $15. "It would take a huge volume to make up the money they could do with subscriptions," she says. Although she would not disclose how many affiliates RealNetworks has, Lazar says that during a few recent quarters the number of affiliates doubled. Subscription services have been hampered by a lack of consumer understanding about how they work and the lack of a solution for mobile users. Subscription services allow access to a catalog of music through channels or stations that focus on genres. If consumers want to access music after a subscription is terminated, they must purchase tracks separately. "There is a lot of education that is yet to be done when it comes to subscription music services," and publishers could aid in clarifying that, RealNetworks’ Lazar says. Publishers who are involved in marketing other media, such as movies or audio books, are a good match for promoting music, according to Lazar. Creative Strategies’ Bajarin says consumers aren’t accustomed to paying to listen to music and are more comfortable with owning music. "When you quit [RealNetworks Rhapsody service], your music is gone," he says. "The problem with the subscription model is portability," music industry consultant Barry Sosnick, president of Earful.info, says. Consumers have a "strong desire to have ownership when it comes to music," so having access to songs end with a subscription is a "critical shortcoming," he says. However, music publishers including Napster and AOL Music have addressed this concern with higher fee services that allow consumers to listen on portable devices during the time that they are subscribers. Publishers also have an opportunity to help distinguish competing music subscription services. While services like Rhapsody, EMusic and Napster all claim to have catalogs of more than 1.5 million tracks, identifying which if any service has a majority of an individual’s favorite artists can be a challenge. For example, Rhapsody has an extensive collection of tracks from Indie singer-songwriter Bob Mould, but no albums from classic rock stalwart Bob Seger. The subscription services only permit consumers to search their catalogs after they have subscribed, but affiliates are now getting tools to differentiate the subscription services. Services such as RealNetworks and Yahoo Music are now working with affiliates to promote artists as a method of marketing their catalogs. RealNetworks’ Lazar said the company is now allowing "select publishers" to see the data feed so that they can incorporate track information and album art on their websites. However, Lazar says affiliates cannot publish all of the data online or make it searchable. Similarly, Yahoo Music recently made its product catalog data feed available to affiliates to "allow affiliates to link directly to individual song pages on our music pages from either a search engine or their website," according to Eva Hung, who manages Yahoo’s affiliate programs. "We think this will significantly improve conversions …," she says. For example, publishers can now create collections, such as the best grunge rock tracks, to showcase the depth of Yahoo’s catalog. Earful.info’s Sosnick says publishers can aid the purchasing process by acting as a filter, recommending artists and "separating the wheat from the chaff." He says consumers don’t want to scroll through pages and pages of artists, but prefer to be guided. "If consumers have too many choices, they revolt." Subscription services are attempting to increase their reach by encouraging publishers to participate in search marketing. Both Yahoo and RealNetworks support publishers’ acquiring traffic by purchasing artists’ names or genres on search engines. RealNetworks also encourages publishers to bid on Google for its branded terms such as Rhapsody, according to Lazar. The company works with publishers to build custom landing pages from paid search ads that showcase genres or artists, she says. One Price Gives Fits to All Most online music services have followed the lead of Apple (and its CEO Steve Jobs) in offering the majority of music tracks for $0.99 and albums for $9.99. The rigid pricing strategy has frustrated music executives who prefer a tiered structure, and limited the ability of publishers and marketers to differentiate the services. The "coincidental" pricing across services also has the attention of New York Attorney General Eliot Spitzer and the U.S. Department of Justice, so a change in pricing strategy may occur this year. The $0.99-per-track standard has also prompted inconsistencies in the value of albums versus individual songs. While some albums with 15 or more tracks are a bargain at $9.99, it is sometimes cheaper to buy tracks individually (as in the case of the six-track album Animals from Pink Floyd) than it is to buy the entire album. According to the Online Publishers Association, the percentage of music downloaded as individual tracks rose from 15.4 percent in 2004 to 21.6 percent. While music industry executives would like to raise the ceiling on tracks above $0.99 and lower the prices of other tracks, Earful.info’s Sosnick says consumers would be willing to pay $0.99 for less-in-demand tracks too. "If a consumer is looking for a niche product, chances are they are willing to pay for it," Sosnick says. However, variable pricing would enable publishers to promote related songs as less expensive "impulse buys," according to Sosnick. Publishers are also generating revenue by creating content related to digital music distribution. AOL Music is videorecording concert performances of artists including the Rolling Stones to generate advertising revenue and traffic. Social networking sites such as MySpace, while not selling music directly, have greatly increased their ad revenue by allowing music enthusiasts to create websites and playlists about their favorite artists. Yahoo’s Hung says that music is critical to the company’s affiliate program, so the company consolidated all of the programs to simplify cross-promotion with other services including personals and instant messaging. For example, if a publisher is successful in getting a consumer to try the music subscription service, when consumers download the Yahoo Music Engine and also download Yahoo Messenger or the Yahoo Toolbar, publishers can earn additional commissions. The next musical horizon for publishers is to promote unsigned artists, according to Commission Junction’s Riolo. User-generated videos and commentary are attracting large audiences online, and Riolo says music is a likely progression. She says affiliate programs could generate considerable revenue if they can figure out how to market music from amateurs to a mass audience. JOHN GARTNER is a freelance writer in Portland, Ore. He is a former editor at Wired News and CMP. His articles regularly appear on Wired.com, AlterNet.org and in MIT’s TechnologyReview.com. Filed under: Revenue Tagged under: 12 - July/August 2006, affiliate marketing, Business Models, Downloads, Features, Industry Trends, mtadmin About the Author Chris Trayhorn, Publisher of mThink Blue Book Chris Trayhorn is the Chairman of the Performance Marketing Industry Blue Ribbon Panel and the CEO of mThink.com, a leading online and content marketing agency. He has founded four successful marketing companies in London and San Francisco in the last 15 years, and is currently the founder and publisher of Revenue+Performance magazine, the magazine of the performance marketing industry since 2002.