This is very clever on the part of both KFOG and Apple...

"The exclusive digital EP From KFOG to iPod by The Thrills is available now on Apple's iTunes Music Store, less than 36 hours after the band recorded the tracks at a KFOG-FM Emerging Artist Concert...The entire EP can be downloaded for $4.95 or single tracks are available during a limited four-week period for 99 cents each."

They've combined two strategies that I have long been a proponent of. I'll elaborate on each of them separately in a future article, but let me mention them both briefly here.

First, KFOG has had a long tradition of releasing true recordings - as Ani Di Franco calls them "a record of an event / the event of people playing music in a room" - with their Live from the Archive series. The product is as much memorabilia as music, a "take away" for the experience of listening to special live performances just for KFOG listeners. In this sense the Live From the Archives CD and the new Thrills Live EP muddle the boundaries between CD and merchandise. The purchase is made as a marking of a personal experience which greatly increases the value of the product. This phenomenon is illustrated when people buy CDs and T-shirts after seeing a live band. KFOG, has replicated the experience (perhaps improved upon it) on the far broader medium of terrestrial radio.

Secondly, this release does not face the quandary of cannibalizing CD sales. Effectively, Virgin can fully sell out the demand for digital version of Thrills without worrying about sunk costs in CDs. Based on the success or failure of the digital downloads, they could subsequently release the EP on CD, without worrying that ripped versions of the tracks would circulate on the net. Why? Because anyone who would have paid for a digital copy has likely already bought it. Futhermore, anyone who really wants a CD will still pay for it, especially if there was some sort of trade-in or upgrade path. In essence, the Thrills would have issued a free minimum quality version of the performance in the form of radio, a medium quality product in the digital downloads, and a high quality product in the form of CDs. Releasing the music on those formats, in that order, they gain piece of mind about piracy and a low-cost retail test market (iTunes).

You can read the original text on http://www.kfog.com/

Lifestyle brand sponsorship of digital music are bubbling over. Three services now have soda pop brand to bootstrap usage in the early stages

* OD2 has Coca-Cola and is already live.

* iTunes and Pepsi will launch at halftime during Superbowl XXXVIII.

* MusicMatch has teamed with Sprite.

We've officially entered the primary season for the new retailers. I contend that whoever is unable to secure a corporate sponsor will fall far behind the others in this competition. The strategy of using someone else's money to make legal music essentially free is what will give digital retailers monetary parity with P2P services and allow them to quickly increase usership.

It remains a question whether corporate sponsorship of music purchases becomes the norm.

Now this is interesting. Lyor Cohen is leaving Island/Def Jam to take the top spot at Warner. Lyor is an interesting blend: truly opportunistic creativity and the ability to play power games as well as anybody. He had to be remarkably savvy and determined in his youth to end up being a the only white kingpin in the black-dominated rap industry. He's not prefect and had a barely publicized, but still major, slip-up in December. And, now he's head of the second largest music company in the world at what may be the transition point between old-school and new. I wonder if he can see that the newest trend has nothing at all to do with what goes in your ears.

According to Bernhard Warner, the global music industry has only lawsuits, lay-offs, and laziness planned for the year ahead.

* They plan more P2P lawsuits: "a zero tolerance philosophy against online piracy will see the industry take its legal clampdown on individual song swappers...to Europe and elsewhere"

* With or without consolidation, lay-offs are the only plan to improve margins: "Cash-strapped music companies have vowed to continue cutting staff and B-list artists"

* The laziness is apparent in their "growth" strategy: "The record labels are betting on first-half releases from reliable chart-toppers U2, George Michael and Norah Jones"

Bernhard also reports token nods to online stores ("The "fight-back" campaign also calls for a massive roll-out of new online music stores"), new artist development ("are promising to promote more guitar-edged rockers to boost sales"), and optimism ("There are high expectation that iTunes and Roxio's Napster (news - web sites), which are expected to launch in Europe by summer, can turn music downloads into a vibrant international business").

I'm not sure if the record labels should be happy or not that they can continue their strategy of suing "egregious" file sharers. At the end of last year, ISP's won the privacy of P2P users on their networks. Today the RIAA issued 532 "John Doe" lawsuits where the accused are only identified by IP addresses. Previously, the RIAA claimed a right to get the names of ISP customers before filing the lawsuits. Now they will subpoena the names from the ISPs after filing the lawsuit. This is a much more expensive route to take and I worry (if this wasn't true before), that the RIAA is spending way more on the prosecution of these cases than they can hope to receive in settlement/decision money and increased sales. According to Pew half as many people are downloading music now, but the NDP report showing increased activity clearly indicates that the trend is far more complex than the RIAA thinks. A portion of the much-touted drop might be attributed to kids going home for the summer and coming back to school networks that prohibit P2P usage - an effect that would disappear as soon as kids managed to arrange a private ISPs. Also, the people who stopped file sharing didn't start buying CDs again. Yes the drop in CD sales was smaller than in past years, but not in proportion to the reduction in file sharing. Instead of looking at the nuances of their situation, the RIAA has adopted a potentially costly ideology - file sharing is bad and lawsuits can stop it, period, no matter what the statistics say.

Let's put the proposed Warner Music Group (WMG) restructuring in perspective. Warner posted revenues of $4.2 billion in 2002 about 10% of its parent company's (TWX) numbers according to the annual report. Let's assume that the $24 billion cost of revenue is proportional across all segments of TWX. That means WMG would have had approximate costs of 2.5 billion. By this estimate Brofman's task force goal of $225 million is approximately a 10% reduction in costs by the time the deal is closed (60 days). There are about 5000 people working at WMG, so the average per employee reduction is 50K and they claim to have already identified ways to do it. The short term benefit is obvious, WMG will enjoy a 10% increase in profit margins, but I have to wonder if the move will severely curtail their ability to continue producing good product. If the restructuring results in long-term health, I just have to marvel and how much fat the company must have had! Good luck, Edgar.

Maybe the guys at Goldman know something I don't (that wouldn't surprise me) but, the increased rating on EMI doesn't make sense. Perhaps it's an after the fact coronation, since, "EMI's stock has soared more than 40 percent since the beginning of the year, bolstered by a report that discounted CD prices pushed UK album sales up 7.6 percent in 2003." If so, it's a sad exhibition of irrational exuberance, since the reasoning behind the 40% stock price increase seems faulty.

Okay, so record companies have perhaps taken off their blinders and recognize lower pricing can increase CD sales. Of course, they'll still complain about the downloading menace, but maybe they'll also fess up that most people and even some downloaders like buying music, they just don't want to spend $20 on CDs. Surely, part of that 7.6% increase is probably pent up demand by purchasers previously discouraged by the $20 price. But the biggest reason this is just a one-time sales bump is that label cost structures prevent any future price reductions. Since it is doubtful EMI will be able to use the same trick next year, I don't think a 40% stock price increase is justified.

This year's positive numbers do not derive from a deep systemic improvement in the industry's economy, but there is a major shift afoot that is not good for business as usual. Let's introduce two other key facts. First, EMI enjoys consistent popularity for it's $15 "Now That's What I Call Music" series of hit compilations. Second, unit sales of digital downloads have exceeded all expectations. The simple explanation for both is that consumers want to pay $1 per song only for the songs they want. That's the straight deal with digital downloads and the implicit deal for purchasers of the Now compilations ($1 per song multiplied by 15 songs).

This $1 per song premise also explains the increase in full length CD sales. For most people, downloading isn't an option (no iPod) and the Now compilations are a bad fit (they don't like all the songs on them). So the option they are left with is buying a 15 song CD with only one song they definitely like (the one released to radio). Let's say they bought a $20 CD and learned they only liked 9 of the other songs. From their perspective, they just paid $2 per song. In fact it's impossible to get down to the $1 per song levelwith $20 CDs, so it's no wonder fewwer and fewer people risked the money. If CDs are priced at $10, however, the chance of a satisfied customer is much higher. If they like 9 other songs, they're acheived the $1 per song nirvana. Anything on top of that is gravy, so I'm not surprised consumers were 7.6% more likely to take the risk.

So what's the problem? Record labels have grown fat on the premise that people will pay $20 for a CD that contains only one song they like. Even now, they only need to guarantee that the one hit song released to radio is good enough to convince people the $10 CD is a good risk, therefore almost all of their production and marketing investment goes into that one song and they essentially bank on getting paid $10 per unit. More and more of the other songs on the album are filler. But, in a world where all consumers can buy just the one song they like, labels will suddenly only get $1 per unit - a 10x drop in revenue. It gets worse when the price point per song drops below $1. That's the source of the implosion.

Now the implosion isn't going to happen overnight, so the industry has some time to adjust, but the changes need to be structural. Albums, if they continue to exist, need to be listen-through experiences: all the tracks need to be worthy and the sum of them needs to be greater than the parts. If an artist has only one song worth selling, they'll need to do so with one tenth the marketing and production they get now or share a large budget with 10 other artists. Finally, labels need to find intelligent ways to increase their hit rate and diversely invest in more bands so they can capture the nine dollars they are missing per mega-hit by cross-selling similar acts. The tough part is: these sorts of adjustments can't happen overnight, and the labels are in a race with their own demise.

Geez, wasn't it just yesterday that I was saying the existing industry structure would collapse? I didn't know my blog could be so powerful after just one post ;)

Warner Music Warns of 'Significant Restructuring'

This isn't the first time a music company has signaled the hatchet man, but usually he comes around after a merger or after a bad quarter, as happened at Warner less than a year ago. This time the company is just changing hands. Bronfman is no idiot, nor is he flippant about cutting more jobs from a company that already went through the wringer to make it attractive to buyers. He clearly bought the company with the intention of gutting it. Why? Because it was the only way to make it viable.

Many analysts suggest that the survival of record labels this year will depend on more mergers, acquisitions, and restructurings. That's a good strategy for increasing margins in the short term, but not a good way to grow a business. What's missing from this analysis is how to increase the productivity of the remaining people. Otherwise, the company is just prolonging the agony of dissolution.

There is one line of argument that says "if you can fire these people now, what were they doing there before?" That's a fair question. It suggests that either the company was fat before or the company is too thin now (neither is a good thing). I think the more important question is "what are the people you keep going to do now?"

If they keep on with the same way of working, Warner will just be a smaller company (even of the remaining people are on average more talented than the laid-off people). They will only have the hands to properly release half the records they released last year. In a hits business, this seriously spoils your chances at success.

Maybe Bronfman has some special sauce up his sleeve and I wish him the best of luck - if only because I have friends who work at Warner. My advice would be to find a way to release double the records next year even with fewer people. In fact, I've got a few ideas on how he can do it, but I'll save those for later.

Anytime I reveal that I work for a music company, I get a mixture of intrigue and pity in response. When I add that it's a start-up music company, shock and awe get added to the mix. People can't fathom the risk of starting a business in an industry that is imploding under intense margin pressure. And since it is a start-up, I don't even have the glamour of a rock-and-roll lifestyle as consolation. So, people are left with the impression that I must just love music so much I don't mind starving.

It's true that I love music, but perhaps the more relevant truth is, music is important. Of course, it's not as basic as the physical needs of food and shelter, or the emotional need of love. In fact, its value is that it transcends basic existence, as a universal source of inspiration and a reminder of what imagination makes possible. It's also fun: a reminder of what makes life worth living. I'm in this business to keep the people dreaming and dancing.

I also think there is a better way to structure the music industry: more music, cheaper prices, more longevity. I think few doubt that the current system is ill-fated. To that end I've devoted my work days and this blog. GarageBand.com is just one piece of an emerging puzzle and can't do everything that needs to be done. My hope is that my ideas will get picked up, circulated, discussed and maybe implemented by all the others out there who want to see a better future for music. To paraphrase a one-time boss of mine, we're either geniuses or idiots and history will decide which.