Subscribe This Way

The recent New York Times piece about Rick Rubin has stirred discussion of the wisdom of subscription services. Unfortunately, that’s not the really important part of the article—the most profound discussion was Rick Rubin’s approach to making records. That part of the article should be required reading for every A&R person and also every record company accountant.

The history of subscription services is somewhat checkered. The cynical view (that is not entirely implausible) is that subscription services were devised by a music industry that was trying to get consumers to do the digital equivalent of replacing their CD collections—monthly. Yet there is a certain appeal to having a wide variety of music available on a convenient device—Professor Goldstein’s “celestial jukebox”.

Let’s think about the value of subscription services. In any discussion of online music distribution it is important to realize that illegal p2p and Bit Torrent music distribution platforms are still churning out billions, and I do mean billions, of downloads a month. (For a little Sunday morning reading, try “The True Cost of Sound Recording Piracy to the U.S. Economy” by the Institute for Policy Innovation, an independent think tank).

So, there are essentially two different music audiences that are at opposite ends of a continuum of consumer behavior. At one end there is the music fan who only buys legit—they will buy music in a number of channels—at shows, online, and at a decreasing rate, in music stores. Then there is "Generation L", the “can buy, won’t buy” crowd that would rather download for free than pay, even for artists they supposedly admire. Somewhere near the middle, there is a fan who buys a little from legitimate sources, but downloads the rest from illegal sources, and vice versa. (There are some very good focus group studies by Music Ally demonstrating these behaviors.)

When deciding what policies to implement and business models to support in developing online businesses, it is important to realize that the audience is fragmented in a new way. We are used to dealing with niche musical tastes, geography, online vs. offline, touring vs. music stores. We are used to reaching fans and introducing them to new music. This was often accomplished by making the music available for free or near free initially, and then increasing the price--if the artist finds an audience (a big if). Of course, there usually isn't a need to cut prices for venue sales as the fan has already been introduced to the music through the best sales tool out there--live shows.

But until the Morpheus era there was always a belief as well as a commercial reality that once you had a fan excited about the music, that fan would buy a record. Thanks to an abundance of moral relativism and a complete and utter failure by government to enforce the law, there is yet another hurdle to get over—not only does a fan have to like the music they are introduced to, but in many cases fans have to like it enough to not steal it, particularly for Generation L members. This is true regardless of whether the ultimate purchase is in the form of a subscription or a permanent download and is a new burden on the already overburdened artist.

But how do most fans get their music? Whether they buy it or steal it, they typically download it for use on their iPod (statistically speaking), or to other mp3 players that let them listen to what they want, when they want.

It is this part of the equation that is the key factor in understanding why subscription services have failed. So--the overwhelming evidence is that consumers want to download (or rip) music for use on portable players that they can carry with them, plug into their car, plug into their sound system at home, listen to in airplanes, at the gym or yoga class, and so on. This is how many people people acquire and listen to music in the 21st Century.

The service that most closely approximates this behavior is the iTunes Music Store/iPod one-two commercial punch. iTunes is still the best online music experience out there and—not surprisingly--produces around 95% of digital revenue (excluding ringtones, ringbacks, etc.). The service that least approximates this behavior is Napster/Rhapsody/MusicNet. And the part of the Napster/Rhapsody/MusicNet service that is completely opposite to this behavior is the subscription part.

The answer is very simple—you can’t put streaming subscription tracks on an iPod. That may change over time, but you can’t do it now. I know there are “Fill in the blank” To Go products (including that XM player that the company unfortunately clings to), but it’s not an iPod, the overwhelming choice of music fans around the world.

Not only do these services ignore the billions and billions of instances of evidence of consumer behavior freely observable in the wild without need of some consultant who couldn’t write a song or make a record if their lives depended on it gibbering and jabbering about a business they know less than nothing about—subscription services do virtually nothing to compete with the downloading behavior that is rapidly destroying an important sector of the U.S., and eventually the global, economy while Washington, London and Brussels stand idly by.

Another problem with subscription services in the U.S. is clearing the publishing for on-demand streams. Until there is an easy to use agreement (compulsory or voluntary) that allows online services to make available a robust offering of tracks for streaming, it is unlikely that any services will be all that enticing.

What are the attributes, then, of a potentially successful subscription service? I would suggest that they are likely to include the following:

Easily accessible from anywhere. Even if you had a portable device that could store or receive streaming audio over the air, solving the reception problem is not trivial. You can start with airplanes and cross-border transmissions, so that if I subscribe in Croatia, I can still listen to my music service in Uruguay over the air, even if the service is not available in the country where I am traveling.

Resolution of Music Publishing Licensing. Until the publishing problem is solved (which the Recording Artist Coalition, the Songwriters Guild and the National Music Publishers Association tried to resolve in the last session of Congress), it is unlikely that the actual consumer offering is going to be all that appealing.

Reasonable Royalty Pricing for Recordings and Retailer Margins. The current licensing model for subscription is usually a variant on a “greater of” model that is mind-numbingly difficult and costly to administer. At the moment, the only way any retailer can make any money on a subscription service is due to “breakage”, or the gym membership model—people who pay but don’t use the service. So important is breakage to the economics of subscription, licensors often seek a share of breakage as part of the royalty deal, a sad state of affairs.

Simplified Sales and Royalty Accounting. I know of some indie labels who are pulling out of subscription services because it costs them more money to breakdown the reporting from the service in order to account to their artists than they make from the service. The current "greater than" formulas imposed on retailers are absurdly costly to calculate by everyone in the chain and highly likely to be inaccurate because they are so cumbersome. On the artist side of the equation, simplified sales accounting should--ahem--should--lead to more transparent royalty accounting to artists.

Reasonable Consumer Pricing and Value. It is an oversimplification, but it's well to remember that fans demand value for money. This doesn’t necessarily mean that the current subscription pricing is the market clearing price for subscription services by a long shot--it's fairly safe to say that current subscription services haven't found an audience, despite the success of the iPod. At such time as a service can be offered to the fan in a more exciting delivery method, pricing may adjust upward or downward. If delivery is over the air, there will need to be some data connection charge built in that the copyright owners may or may not participate in, but must be taken into account when determining a monthly subscription price whether it’s mobile or satellite. My first day of business school I was taught--and still believe--never compete on price. I still believe that price competiation--as opposed to value competition--is a bad idea, even with free. If you give consumers a service that they value, some of them will pay for it. It's the entrepreneur's job to find a way to identify what's valuable to consumers and think of even better ways to package it in an attractive manner.

Elimination of Free Riders. While it will be very unpopular with device makers, the Consumer Electronics Association and the "Digital Freedom" campaign, it does seem abundantly fair that there be some participation by the creative community in the wholesale pricing of devices that are designed to benefit from the sale or downloading of music. If that deal is made, it would also be nice to avoid internecine squabbles about how much each interested copyright party should get, by the way. Hopefully we can take some of the existing precedents as a guidepost.

I really wish it were more complicated than this, but I don't think it is. Subscription services have failed because consumers prefer to get their music another way. A very, very large number of consumers would rather steal than buy—would rather steal than pay anything at all for music. So even if you were to lower the price of subscription to zero or below (meaning that you gave away the music plus something else), it's likely that you would not be able to attract what I call "Generation L" (for Lessig. Generation L is more a state of mind than an actual age group.)

That is the problem. The destructive powers at work on the market place for music are largely unparalleled in the global economy—our business has one foot in the rapidly shrinking offline legitimate market, and one foot in an online wild west where all the marshalls are having coffee and donuts. Online, there are essentially no property laws, even in the United States. I agree with Senator Diane Feinstein (D-Calif) that the organized music industry (including Apple) frequently seem to be the only ones playing by the rules in the slithery--and so far anonymous--darkness of the Internet. (For an argument for the benefits (or some would say the absolute requirement) of the rule of law to a disordered market, try the Mystery of Capital by Hernando De Soto.)

The illegal services, lionized and defended by the Electronic Frontier Foundation, the Consumer Electronics Association’s “Digital Freedom” campaign, and Stanford Law School professor Lester Lawrence Lessig III in his many books, blogs and speeches, not to mention lawsuits, are largely the competition for all legal music sales whether online or offline. Have a drink at Mirabelle on Sunset Boulevard in Los Angeles sometime and look out the window at the parking lot where Tower Records used to be and you’ll get the idea.

Sumner Redstone recently disclosed in a speech to the graduating class at the Boston University law school that he “…exhorted [his] peers in the media hardware and software industries to exercise their responsibility to wipe out piracy by not selling tools that enable copyright infringement or sanctioning the unauthorized use of licensed content.” (I made a similar argument for the imposition of serial copy protections on computers in 1994. Oh, well.)

One would think that this would be part of the price of admission for legitimate companies—particularly publicly traded companies like Google—to have access to the public markets for financing and to operate in a free market. Until the supporters of the “Digital Freedom” campaign accept responsibility for the entirely foreseeable consequences of their actions, it is exponentially more difficult to develop a legitimate online market for the creative community, be it music, films, television, books or visual arts.

The entry of Google and its billions into this situation is making it significantly worse by the minute. Rather than using its vast resources for good and trying to stabilize the market, Google does the opposite—it uses its bottomless wealth, largely derived from the public market for its stock as well as its dominance in the global advertising market, to give our business what may be the final kick with YouTube, Google Print and god only knows what else we haven’t heard about yet. It sounds like the only way Google can compete with Apple is to cook up flimsy legal theories that allow YouTube to take what Apple pays for--particularly for the independent artists who are largely ignored when they complain about their rights.

Lawsuits alone are not going to solve the problem, whether brought by industry groups or Prince. But if we cannot rely on the government to protect us from rampant thievery, which even the most hard core free market libertarian would agree is the basic task of government, the lawsuits must continue if for no other reason than maintaining a belief in the legal system that copyright law should not be jettisoned before the onslaught of the mob.

So if subscription services do not address the current consumer behavior, there is no reason to believe that subscription services will get anyone to substitute away from iTunes, much less illegal downloading. And if there is no sustained effort by governments around the world to severely reduce illegal downloading, then online retailers will continue to have to try to play by the rules in an environment where users are not, and many tech companies directly profit from wrongdoing.

We all admire Rick Rubin as a creator, I’m sure, and I can't say enough good about his views on the creative process. If we all took his lead, we'd have a much smaller and much less hit driven and frantic industry that would very likely produce the great artists we all crave. While I can agree with him about subscription services in an idealized sense, I can’t see the design and implementation problems with subscription being overcome anytime soon as a practical matter.