Friday, February 12, 2010

WMG's Unbusiness Model

Two stories broke this week about the Warner Music Group (WMG) that are very much related.

First story: WMG to stop licensing music to free ad-based streaming services.
Second story: iTunes variable pricing cited for slowing WMG download sales.

How they're related: In both cases, WMG ignores the way the market is, and tries to impose their will on how the market should be. And in both cases, the change results in lost real revenue. And in both cases, WMG is returning to a business model that they've lost money on before.

So Warner is no longer going to license to streaming services. According to Chief Exec Edgar Bronfman, Jr. "Free streaming services are clearly not net positive for the industry."

Clearly? These services do pay licensing fees to the labels -- but they don't generate as much revenue as music subscription sites. And that's really the issue.

Bronfman said, "The number of potential subscribers dwarfs the number of people who are actually purchasing music on iTunes. [There are] hundreds of millions if not billions of people, most of whom are not today either buyers or certainly heavy buyers of music."

Which simply shows that WMG does not understand what these services are, and how people use them. A streaming music feed paid for by ads inserted into the programming. Sound familiar? Yep, it's the same as radio -- and listeners use it the same way.

Look at WMG's logic in light of radio. "We're not going to let our music be played on the radio because people are listening to our music for free instead of buying copies at the record store. Instead, we like satellite radio. We're going to put our efforts into persuading everyone to subscribe to satellite radio. Imagine the profits!"

Imagine epic fail.

But this isn't the first time. The major labels for years have been pushing subscription services -- some even had their own in the beginning -- with indifferent results. Because that's not how most people want to get their music. There are many casual listeners, few serious buyers. That's the reality.

Which leads us to the second story. What made iTunes so successful in the first place? Uniform pricing, in part. For years Apple insisted that it was 0.99 or nothing, and 0.99 it was. Now before iTunes, the labels had their own download services -- with variable pricing. And none of them did particularly well.

Once the major labels forced iTunes to do variable pricing, guess what? Sales went down. Steve Jobs understood that under a dollar was the magic price point. When it comes to downloads, the price to beat is "FREE." Ninety-nine cents for the convenience of the iTunes interface? Fine. Over a dollar for a song vs. free? No deal.

WMG didn't get it when they ran their own download service, and clearly, they don't get it now.

The market's moving on, with or without WMG. Right now, it's looking like "without."

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