Business Models to Fight Music Piracy

Ten years back, Napster took the world by storm when it launched its peer-to-peer file sharing service that allowed music fans to share MP3 songs with each other. This service was accused of massive copyright violations as the network was mostly used for song transfer. In 2000, A&M records along with several other companies sued Napster. Napster lost the court cases and had to pay $26 million as settlement and eventually declared bankruptcy in 2002. The outcome of Napster’s case is not important but what is important is that this case highlighted the consumer attitude towards music piracy. It made it evident that if there are enablers, consumers are bound to opt for free music irrespective of their paying capacity. Digital music is the enabler that has killed music.

Over the years, the total revenues from music sales (physical + digital) has declined which indicates the growing menace  of piracy in the music industry (Refer to the chart alongside). Mobile phones have accelerated the decline in music revenues.  According to the International Federation of the Phonographic Industry (IFPI), 95% of downloads are illegal. Synovate survey on music reveals that globally 29% respondents admitted to downloading illegal music.

The decline in music revenues in the last few years does not reflect the lost opportunity due to piracy and I firmly believe that current monetization is just the tip of the iceberg. Though the regulatory authorities and law enforcement agencies have a big role in controlling the level of piracy, it is imperative on the companies (music labels and service providers) to come up with innovative business models that can help control piracy. In the last one year we have seen a lot of action on this front and the new initiatives are backed by improving enabling infrastructure (mobile broadband). I am listing a few interesting business models below which can be broadly be classified into two categories – Subscription and Streaming both of which could be Advertisement supported:

Download/Subscription:

Full Track download is still the most prevalent form of digital music as most of the people like to keep their music on their devices. In emerging markets, the internet infrastructure, esp. mobile internet is slow and unpredictable which makes streaming services less popular. The memory slots are now available in most of the handsets over $30. I have seen many outlets in India that fills the memory card with songs and video for anything ranging from 20 cents to a dollar. In fact it is a good revenue model for the retailers as most of the people do not have access to internet. In the rural markets or in small towns in India, the retailer sells a Chinese handset and makes $4 as margin and then makes around 40 cents every second month on songs download to the memory card. This makes a total of $8.8 margin on a handset which is far more than the margin offered by branded phones (branded phones do not have a memory slot in the cheaper phones). Internet infrastructure issues are only a part of the problem which would get resolved as the infrastructure starts to get better and cheaper. Even in the developed markets where internet access is good, most of the consumers are not willing to pay for music downloads. Certainly, there is a need to make music more affordable. There have been a few attempts to reduce the cost of music to the consumers, e.g. making the songs DRM free which means that the user can transfer songs across multiple devices. A bigger and more subtle business model that is making its way is the subscription model for downloads. The model is mostly being followed by carriers, device vendors or ISPs who want to retain customers and for them the music revenues are secondary. A few examples of this kind of model are:

  • Vodafone Music Subscription service in Europe:  nearly 450,000 subscribers have signed up to Vodafone’s music service since it went DRM-free at the end of last year, with over 2 million tracks available so far. The services are available in all of Vodafone’s Western European operations with two options for the customer. One is through a bundled service where customer can download 10 music tracks for €5 (US$7.05) a month while the other is through an ‘all you can eat’ (AYCE) service for €3 a month if bundled with other data services.
  • Nokia Comes with Music: Comes With Music gives users all the music they want and comes bundled with the device. During the subscription period (usually 12,18 or 24 months) the users can download unlimited free music from the Nokia Music Store to their PC or over the air to their compatible Nokia device. Everything the users download can be kept even after the subscription ends.
  • Google’s Music Link service in China: Google offers links to free music downloads in China, a service it does not offer anywhere else in the world. Google’s service offers some 350,000 songs from Chinese and foreign artists that can be freely downloaded. Google is splitting the advertising revenue share with Sony Music, Warner Music, EMI and Universal Music. In a country where 99% of music download is pirated, this kind of service can go a long way in shifting people to a legal service.
  • TDC’s PLAY service was the first ISP music service to launch. Today it offers TDC’s broadband, mobile and cable customers in Denmark unlimited music streaming from a catalogue of 6.1 million tracks at no additional cost. TDC’s online customer churn was reduced by 50 per cent, for those who used TDC Play.

Streaming Services

One of the key developments of 2009 was the rise of streaming music services. Many companies are sprucing up their streaming services as part of their cloud strategy. Today many of the music lovers may prefer to download music but in a couple of years when the data becomes real cheap, people would not mind streaming services. Even though users of streaming services are not necessarily buying more music, the industry benefits by learning more about fans’ tastes. Steve Purdham, CEO and founder of We7, a music streaming service and download store, said: “They may not buy an album, though they have that opportunity, but you can sell them tour tickets and a T-shirt of their favourite band.” A research in UK, conducted by music research companies Music Ally and The Leading Question last summer, found that illegal music sharing is declining and that teens are now increasingly streaming music online instead. The younger generation just wants to click – not on the download button, but on the play button. Of the 1,000 14 to 18 year olds polled, only 26% admitted to illegally sharing music files, down from 42% in December 2007. Instead, 65% of respondents said they stream music online at least once a month. Spotify and Lala are two leading examples of this kind of business model but there are many other such services like Myspace, Pandora, Groove Shark, etc.

  • Myspace Music: MySpace Music is a joint music venture, with equity stakes from major labels, that allows users to stream music on demand, create playlists, and add widget music players to their profiles. This is an ad supported service.
  • Spotify: Spotify has created a lightweight software application that allows instant listening to specific tracks or albums, with virtually no buffering delay. It has 7 million users in six countries (Sweden, Spain, Norway, UK and France) where it has been launched. The revenue model is based on advertisements and revenues from paid services to users who do not want advertisements. The mobile versions of Spotify was released onto the iTunes App Store and Google’s Android Marketplace in September, 2009, while a Symbian version was made available in November, 2009. The application allows Premium subscribers to access the full music catalogue, stream music and even listen to music when disconnected using the Offline Mode.
  • Lala: Lala is a hub for online music discovery and purchasing. Users can listen for free music, adding tracks to their playlist as they surf.  Members who download a plugin can turn Lala into an online music locker that syncs their desktop music libraries to their Lala account. Long uploads aren’t necessary. If Lala already has the song in their library, they simply unlock the file to you online. Apple recently acquired Lala to strengthen its Cloud strategy and take advantage of Lala’s upload functionality. An upgraded iTunes application will push in the background the entire media library of users to their personal mobile iTunes area. Once loaded, users will be able to navigate and play their music, videos and playlists from their personal URL using a browser based iTunes experience. This would free the users from device and regional limitations.

What would make the users shift to original music?

I believe that it is not possible to completely stop piracy but then there could be innovative ways of keeping it under control. Any business model has to be combination of the following:

  1. Convenience: The music should be easy to acquire over the air, internet or through physical channels. In emerging markets it is important to look at retail outlets as an alternative to internet for music downloads. Across markets, self help kiosks dispensing music (with blue tooth support) would not only help increase the consumption of music but it would also limit the piracy.
  2. Discovery: It is difficult to discover specific song on an illegal site as these site do not invest money on discovery mechanisms. It is heartening to see new emerging services like Shazam help discover the music and then make the buying process so simple. Music purchase is an impulse purchase and if you hear a song that you like, you may want to purchase it right there and sometimes you do not even know the details of artists or understand the lyrics. With Shazam’s mobile application, the user can be directed to the song on the music store if the user holds the mobile phone for a few seconds when the song is playing. Mobile music discovery service Shazam has been used by more than 50 million people across 150 markets who identify 2 million tracks a day and buy 250,000 tracks a day.
  3. Superior Service: I firmly believe that consumers would pay for a service only if it is fantastic and not easily available. Look at TuneWiki, it has an engaging music social networking site with Music Maps. There is a trend of artists getting their own applications on application stores. The artists use the applications to promote themselves by keeping the content more fresh and thereby creating a loyal fan base. Artists such as Lady Gaga, Trent Reznor and 50 Cent among those who have been particularly active in engaging with their fan bases through mobile applications with great success. Another service is Tap Tap Revenge 3 in which users pay along with music tracks by tapping in time to the beat on their phone. This game has been downloaded 2.5 million times since its launch six months back and is generating US$1 million a month in revenues, with royalty fees paid to artists for the songs featured in the game. All these are examples of services where music is being used in innovative ways and is unlikely to be matched by piracy.
  4. Realistic Pricing: Piracy starts only when there are super-normal profits are there in the value chain or when there are multiple entities in the chain leading to high pricing. The music industry needs to look at the value that each entity adds to the product. The internet is supposed to cut out the middle men and reduce the cost of music to the ultimate consumers but sadly the record companies and their agents still are trying to make most of the money.The digital music and its distribution should lead to reduction in cost and hence the pricing. Realistic pricing would dissuade many from selling and buying pirated music. Advertising is certainly an alternate revenue stream. Recently, a survey from Synovate revealed that over 50% of Americans are okay with listening/viewing advertisements in return of free music downloads.

I have tried to list a few business models to fight piracy. It would be great if the readers can add to the list, so would request you to leave your comments on the business models I have talked about in the article and add any other model that I have missed out.

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