Value Equation™

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Subject: January 2002 ECMgt.com: Transition to VMS3.info (the Value Equation)
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January 1, 2002 *4,300 subscribers* Volume 4, Issue 1
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Inside this Issue:

Reinventing Music - Business Model Analysis Using the Value Framework™
by Mitchell Levy, Author, E-Volve-or-Die.com
and the Value Equation
and Bob Cormia, Faculty Member Foothill Community College and E-Business Consultant

Ten years after the invention of the World Wide Web, a second revolution appeared on the Internet, the reinvention of the music industry. For over 50 years, radio had enjoyed unparalleled reach to consumers. Equal to television in user adoption, radio had the ability to deliver focused content to a multitude of user products and locations. Radio had reach into automobiles, homes, personal appliances, business and shopping (Muzak). Ironically, radio was a distribution channel without the ability to "distribute". Transistor radios in the 1960s brought portability and audiotape the ability to capture, but only with preparation, careful timing, and no easy way to mix. The convergence of computers, CD-ROMs, and large hard-drives allowed for manual cutting and mixing of music, but with poor quality, and high storage demands. Ubiquitous networks brought a revolution in discovery and distributed downloading, Napster. With a proliferation in file types and personal electronic players, the course of the music industry seemed to change overnight. Record labels, radio stations, artists, and the courts grappled with legal and copyright issues, standards in file-types, and reinventing business models that leveraged technology and consumer expectations. Far from a state of chaos, the value equation makes sense of the various models, and suggests strategies that protect stakeholders while offering insights into the future. In many respects, this is a "publishing" problem.

Radio was possibly the first "portal". A large and loyal audience, a place to "login" and receive wireless content, and syndicated content, editorially freshened and combined with advertising. With 50 million daily listeners, CBS - Infinity rivaled Yahoo and AOL together in total "members". Ironically, radio never understood their portal status, and focused on advertising as a single business model. Napster was able to do an end-run around radio and CD-ROMs as a distribution model, but ironically, never focused on the legal distribution and sale of single tracks as a business model. With music currently a $40 billion industry, and over two thirds of all Internet users downloading at least one music track, the timing seems perfect for a new business model. But first, let's reexamine the term "convergence" combined with the value equation.

Convergence usually speaks to technology, rather than business models. Music may challenge that premise. With content as a common denominator, it appears that the value differentiator is in how files are "streamed" to the user, whether those file formats can be captured, and if transactions can be designed to legally "bind" ownership to the captured content. Technology is focused on a single problem, how to facilitate legal ownership of content once the intellectual property becomes fragmented into a multitude of physical and digital distribution channels. Music labels and artists, radio, and Internet portals are seeking definition and revenue streams to capture value as consumers are capturing content. Satellite XM subscription radio may actually be a faster pilot for a subscription network model, while radio experiments with streaming websites, and Yahoo and AOL launch music as syndicated content. Networks will factor in discovery, delivery, and transaction medium for music, but will take time for consumers to adopt. Strategy has shifted from simply using legal action to prevent illegal trading, as the music industry now grapples with defining their business, unique value provided, and how to favorably leverage network effects. Future music will be recorded in one format, and distributed across many channels. Labels will become venture arms for artists, and vertically integrate with distribution channels that include traditional CDs and Internet music portals, the "new radio".

Value equation analysis:

  • Process - discovery, negotiation, delivery, payment
  • Transaction - spot buy, recurring model (subscription) dynamic (option to buy) exchange (trade)
  • Participants - Music labels, (venture arm) artists, legal owners, pirate, ripped CDs

Process phase - consumers "discover" music media primarily through radio, but purchase physical media through retail outlets. Internet consumers discover music through Napster-like services, download but do not purchase, and often play tracks once and then discard. A careful analysis of the entire music industry indicates that passive push from radio is a weak form of discovery given a single channel, but much stronger when the typical selection of 50 local channels is considered. XM band subscription radio will deliver hundreds of channels, and test a $10 monthly subscription model. Amazon.com has moved to hybrid delivery of traditional CD-ROM purchase coupled with Liquid Audio download of single tracks, allowing "pre-sampling" prior to purchase. AOL / Time-Warner and Yahoo are slowly launching music content as a way to generate subscription revenue. Currently Yahoo is hosting 140 "radio" stations. It is clear that many listeners enjoy downloading but not paying for MP3 formats, and the proliferation of MP3 players are purchased mostly for minors, who can not legally use a credit card for purchase. To maximize process, a significant move from traditional radio to XM band and radio portals will need to happen. Additionally, Napster like technology will need to encapsulate binding payment.

Transactions are the key to solving many of music's business model issues. "Spot buy" purchases of single-tracks currently represents a small market for labels, as aggregation across artists is a challenge, and distribution is not coordinated from the label through the music portal. Replenishment only factors in if 30-day keys expire, and surveys of consumers have indicated that they are unlikely to pay simply to keep a few tracks alive in their players. Coupling keys to tracks burned on CDs is even more problematic, as connecting a payment interface to a CD player is almost a non-starter. The best hope for revenue models is an extended or hybrid subscription model that connects consumers to streaming media, including traditional radio (XM band) with the option to download, at tiered pricing, a certain number of single tracks per month. The XM band approach, extended from satellite to broadband Internet, may solve the product adoption hurdle that portals like Yahoo and AOL Time-Warner are struggling with.

Participants - Music artists, labels, portals, and consumers, all connect by "networks" are players. Consumers have need for discovery of new music and artists. They typically only connect to networks through radio, occasionally for music downloads, and purchase solely through retail outlets. Artists and labels need a "discovery-distribution" medium larger than current radio. To connect to more consumers, labels need to extend the reach of their content through the new XM radio model, alliances with portals, and creating a new "single track" product that can be downloaded in high quality formats over the Internet. Streaming MP3 can be a loss leader, but a subscription model, allowing access to a dozen or so tracks at $5 a month would create the most profitable reach. Traditional retail has seen a decreasing revenue stream, while Internet retailers including Amazon have moved to hybrid sales of both CD-ROMS and Liquid Audio downloads. Retailers will need to move to a digital delivery of singe-track music, but may find channel conflict with labels and artists seeking the same advantage from the Web.

Current strategy shows that networks allow for discovery, transactions, and novel file extensions that add value to the IP already created, and extending that value into new player devices. Managing strategy will require negotiation, delivery, and payment to condense into two steps. Low-resolution music formats with 30-day expiration dates will serve as loss leaders for higher quality formats that are specific to individual players, and purchased at the point of download. The XM satellite radio band is a strategy to manage the global reach of wireless networks, aggregate a larger audience of listeners for each music genre. XM can not deliver downloads for replay, and will need to create an Internet site specifically for that. An evolving strategy would include a tiered-pricing model that blends subscription radio with access to high quality downloads. An issue involving credit card payments by minors must be resolved, and could present a serious business issue for a large consumer audience. Without that, spot buy and recurring revenue models will be limited to 18 year-old and above consumers.

Summary: Music today has a value chain problem, channel conflict, and is not taking advantage of network effects and reach. Radio was a passive push portal, not active pull portal. Internet file transfer has revived the "singles" market, but mostly for a fragmented player market. Satellite XM subscription radio may actually be a faster pilot for a subscription network model, while radio experiments with streaming websites, Yahoo and AOL launch music as syndicated content. Networks will factor in discovery, delivery, and transaction medium of music, but will take time.
· Strategy deployed - use legal action to prevent illegal trading. Music industry grapples with defining their business, unique value provided, and how to favorably leverage network effects.
· Strategy managed - Labels form alliances with portals. Start to emulate the 75-year-old "radio model".
· Strategy evolved - Music is recorded in one format, and distributed across many channels. Labels become venture arms for artists, and vertically integrate with distribution channels that include traditional CDs, Internet portals. Radio industry is redefined by members, focused / syndicated content, and ability for members to have control / ownership over content.

Goals of a business model for music are to:

  1. Protect labels
  2. Protect artists
  3. Cover bandwidth costs
  4. Reach a larger audience
  5. Aid in discovery and personalization
  6. Create and support new package formats
  7. Create more convenient distribution models
  8. Build brand based on performance and reliability
  9. Scale to content formats beyond music - software, text, art
  10. Integrate and support new peripheral devices / IP channel nodes

The value equation shows that focusing on PTP (Process, Transactions, and Participants) moves music from the passive radio push portal to high quality satellite brand radio for broad discovery that protects IP. Napster like technology was a free-for-all technology that moved the music industry to the reality of network effects. PTP shows that labels and artists must embrace a value chain approach to content ownership that transcends file types, and offers consumers multiple discovery, download and purchase models.

Strategy deployed:

  • Networks have changed how consumers discover, negotiate, and deliver music
  • Product has changed - from CD package to singles, and often a digital medium
  • Player has changed - Browser players, MP3, many new file formats, non-unified
  • Too many methods to "publish" the document, no method to "wrap" intellectual property
  • Music industry hasn't embraced the Internet as a transactive content mechanism (Forrester)
  • Labels are now venture arms, and need to craft revenues based on all distribution formats
  • Radio stations are amorphous portals, and can distribute in traditional and "direct" delivery
  • Radio portals like Infinity have fragmented 50 million members over a 1,000 radio brands
  • Portals like Yahoo and AOL own the most of the Internet members, and embrace music

Strategy Managed:

  • Yahoo with 80 million members has an alliance with Sony, and 140 "radio stations"
  • AOL Time-Warner owns content, proprietary browsers, and a "membership" mentality
  • Time Warner wants to leverage the AOL brand to sell subscription content
  • No single entity "owns" the customer any longer.
  • Music labels and artists scrambling to retain ownership of content
  • Distribution channels have vague legal status. Need to look to radio for historical models.
  • Encryption, transactions, copyright, and music encryption standard are very new, clunky
  • Subscription models are new, portals struggling to sell syndicated content
  • The new radio XM band may be a better pilot for subscription radio / syndicated content
  • The legacy of FTP, as seen in Napster, keeps the "free model" alive

Strategy Evolved:

  • Music labels embrace the multitude of publishing formats and one encryption standard
  • Portals license streaming content like radio, with payment options for premium formats
  • Players partner with portals for heavily discounted premium content and search services
  • Independent artists join portal affiliates like Yahoo with Napster-like technology
  • Larger radio stations focus on customer trends and personalization services
  • Smaller radio stations continue to deliver local news, traffic reports, and advertising
  • Digital art builds on music industry success, adds encryption to media file content
  • Radio evolves to mass merchandizing over a period of several years


About the Authors:

Mitchell Levy, is President and CEO of ECnow.com (http://ecnow.com), an e-commerce management consulting company helping start-up, medium and large enterprises transition its employees, partners and customers to the Internet age through strategy, marketing, and off-the-shelf and customized on-line and on-ground training. He is the author of E-Volve-or-Die.com (http://e-volve-or-die.com), Executive Producer of VMS3.info (http://VMS3.info), an on-line E-Commerce Management (ECM) eZine, Chair of comdex.biz at Comdex Fall and the Founder and Program Consultant of the premier San Jose State E-Commerce Management Certificate Program (http://ecmtraining.com/sjsu), VP of education for the Silicon Valley Web Guild and the Chairman of the Pay-per-Performance PR Agency Media Attention Now TM (http://ecnow.com/mediaattention) and the on-line learning content production company Transition Learning (http://transitionlearning.com). Mitchell was at Sun Microsystems for 9 years, the last 4 of which he managed the e-commerce component of Sun's $3.5 billion supply chain. Mitchell is a popular speaker, lecturing on ECM issues throughout the U.S. and around the world.

Read more about Mr. Levy: http://ecnow.com/ml_bio.htm
Public speaking appearances I've given: http://ecnow.com/speaking.htm
Read about ECnow.com's media coverage: http://ecnow.com/media

Bob Cormia, is an Internet technologist and e-business consultant. Working at SuperBusiness NET, Bob developed strategic positioning, product definition, and account management. Bob developed the e-commerce curriculum at Foothill College while working as a market analyst for G2R, specializing in IT strategy development for Fortune 5000 enterprises. Bob joined eCongo.com in Fall 1998, developing corporate strategy, product development, and launching FreeCommerce on the Internet. In March 2000, Bob joined Calkey.com as an advisor in training and education development in using UML (Unified Modeling Language). In Fall 2001, Bob will join Foothill College as a full-time instructor in the Computer Technology Information Systems division, where he will teach e-commerce, Web strategy, Internet projects, and XML.


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