Mobile Music

Great article over at Wired magazine by Frank Rose on the Battle for the Soul of the MP3 Phone (not just about the ROKR failure but that explains a lot as well)

One piece of information I learned that explains a lot is that the record companies are demanding a consistent percentage of the revenues from downloaded songs. Today that figure is around 70% of the revenue. Fair enough you might say. But then the cost of distribution comes in. Frank quotes a figure of between 15 and 50cents just for the bandwidth cost of downloading a track. So, the record companies want the same share again, which means the distributor must add between 45cents to as much as $1.50 to the price of the track just to keep the labels happy! Now, I would imagine SOME people might pay a premium to have SOME tracks downloaded instantaneously. But if that premium is essentially 2 or even 3 times the price from a normal online store, they just ain't going to do it that much. And remember, most people getting it to a mobile will also want to have a track downloaded to their computer for back-up purposes at the least. That also costs money.

The labels want more (more than they get from Apple, and even more from the telcos). The telcos need/want a premium price but would of course rather share less. And the phone manufacturers would want something for making a decent phone that does it all. The labels maintain people are willing to pay more than 99cents a track. And indeed they probably are for SOME material. There are certain bands I like that I would pay more for their music. But then there are others I wouldn't try if they cost more than I pay today. And indeed, there are some I just don't try today because it's not worth the experiment. The labels trot out Robbie Williams or a few other examples, but really, there's no point in using 0.1% of your artist roster to justify a point. Jupiter Research have consistently maintained the sweetspot is around 99cents per track. That is what will generate the biggest volume. And that in the end is what is best for the industry. $3 tracks are not going to fly - at least in volume terms.

So, the telcos are pretty stuffed as far as music goes. Until they can agree a reasonable deal with a greedy cartel of labels, they can't really do much to get into the volume market. Is there any sign of that happening? I don't think so. Even then I think there is a fundamental flaw in the telcos thinking they are going to have a real business selling downloads.

Take the UK. There are 5 mobile telcos not including the virtual operators (eg Virgin). People are not super-loyal for the most part towards any one brand. Even if they are, why on earth would they choose to buy music from the Orange music store for example? This would tie them in much much more than they would want. The phone co's think they'll go for this but they won't. So, surely using WMA and MS DRM would make this less painful? Perhaps, but so far that's unproven. Who in their right mind wants to pick up a collection of online music from multiple stores? Do they really expect it to keep on working for a long long time on whatever gadgets they own and whatever networks they are on? And from what I've seen, different stores offer different DRM's. That's a recipe for customer confusion.

Even then, let's assume the telcos strike a good deal with the labels and can offer a competitive download service. Assuming the market is split 20% each in the UK to the 5 operators and ignoring the virtual operators, that means the very best any operator can do is to corner 20% of the market (after all, an Orange customer is not going to be downloading their material from a Vodaphone music store). To get 20% of the market, you'll need to do so well that ALL your customer base uses your service in preference to any other music service (Apple, Napster, Real, Yahoo....) To limit yourself to your own customer base is not the way to make this successful. So, all the companies are destined to have a niche business which in the end cannot be sustainable.

Why, oh why, don't they realise this? They could do a deal with a major company (such as Apple, or maybe Real or Napster if Apple's too greedy) and offer a compelling service. Don't try and brand it OrangeMusic for goodness sake. You didn't brand it OrangeText did you? It was called SMS and it worked, whatever the network. Your customers think you know NOTHING about music, so don't try and pretend you do. Make sure people get a good price for all their music but pay a premium for having it NOW; Offer value-added services which can utilise the value of the network; understand people want the music on their phone, on their mp3 player and in their home; and they want it securely and with reasonable DRM; and they want a decent phone to play it on - one that has real benefits from being a converged device, not a compromise.

The longer they take in getting this message (and hampered by the greed of the labels) is manna to Apple to make the iTMS/iTunes/iPod so completely ubiquitous that the only deal they'll be able to do is with Apple on it's own terms. Music would have been a great way for phone companies to get a lot of their customers using data services. Once you've used your first data service, it's easier to do others. They are missing (and perhaps have completely missed?) a compelling opportunity to get their customers using the networks they've paid so much to license and create.

No wonder Apple is quietly (ha!) going about adding more and more features in smaller and smaller packages at price points the whole market can take in. The only other competition as Apple has rightly said time and time again is from the pirates. And that's what will happen with mobile music too. I suspect a lot of people in the business know all this (as the Wired article suggests), but that Corporate greed fanned by stupid lawyers "protecting" their clients' interests are what will prevent the right business model emerging and everyone missing out.

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