Executive Turntable: Can Classic Label Talent Transition to Digital Formats?

Warner Music Group Grammy Celebration Hosted By InStyle
Lyor Cohen knows all about how to rub elbows with artists like Elvis Costello and Diana Krall, but how will that rub off on YouTube?

Old-school record executives seem to be joining new-school digital music companies in increased intensity.  In the past few years WMG’s Stephen Bryan (Soundcloud), Interscope’s Jimmy Iovine (Apple), UMG’s Amanda Marks (Apple), super-manager Troy Carter (Spotify) have all been wooed to some of the most prestigious companies.  Last week, the big kahuna Lyor Cohen, former CEO of WMG and founder of Def Jam, joined YouTube as head of music for the company. And  it isn’t some honorary title, where he deals with artist and industry relations. He’s running the whole thing!

What’s going on here? Obviously these companies all know they need to beef up their ranks with people who know the ins and outs of the music business. After all, a good relationship with your content supplier is extremely important. But it’s only one factor in building a successful music company. There are other essential skills that being a good label executive doesn’t necessarily provide the appropriate experience.

First let’s get something straight. All these label execs are eminently talented. You don’t get to the top of  label orgs without a herculean work ethic, serious business chops, and massive brain power. But getting to that level doesn’t  necessarily mean you can run other complex companies. After all, CBS Records’ Svengali Walter Yetnikoff might have built the company into a powerhouse, but it doesn’t mean he was qualified to do Russ Solomon’s job at Tower Records.

Record companies do many things; but at its core is scouting, locating, and developing talented artists. It’s a tough job we discount too often. You have to have a great understanding of art and a finely tuned ear to what people will respond to. But digital music companies have different needs: product development, technical acumen, and a keen understanding of what users will find compelling enough to open their pocketbooks. You also must know how to lead tech teams and understand how people use and adopt new products.

While there obviously is some overlap between these two diverse core skills, there’s a lot that doesn’t fit. We’ve seen this manifest when companies try to move into the other’s turf. Labels time and time again have failed at direct to consumer offerings. The efforts have gotten considerably more ham fisted as technology has played a larger role in the  industry. From its inability to secure files on CD and all the way up to the ridiculous Now! subscription service that rolled out just last week, nearly every label’s tech initiative  or direct-to-consumer offering has underperformed or been an outright disaster (Pressplay, anyone?). Likewise, digital music services struggle with artist relations, leading  to wary feelings between artists and digital services, or straight-up hostility.

DNA Mismatch

Both labels and digital services struggle to meld because they’re so different. At their essence, labels are about artists. Everything is built around finding and developing great artists. Talent is also the core talent of most senior execs at labels. Sure, there are probably great dealmakers, technologists, and marketing whizzes working at UMG, but ultimately, it all serves the artist. Meanwhile the digital services are all about the customer. And yes, artists are vital for services, but if push comes to shove, product development, not artist development, wins.

So when labels end up going directly to consumers, they’re on unfamiliar turf. Likewise, when Tim Westergren says something that sounds awfully stilted to the artist community, it’s because he’s not capable of fully serving both sides. Ultimately, he must side with his listener. You can bring in label talent to the music services to help co-mingle the two sides. But it won’t change the DNA of the company.

Free Advice

Look, I’m not telling you that digital music services are the model of how to build the modern company. Spotify isn’t Jack Welch’s GE or even Reed Hastings elite-level Netflix.  There’s a tendency to rely too much on technical solutions and not enough focus on customer problems, which leads to a functional–but not a very warm–product.

So if I were to give advice to say, a new executive at, say, the world’s largest free music listening service, I’d suggest following a few axioms about how to build his or her new team.

  1. Empower Product Leaders
    Too often we end up hiring product development professionals but don’t empower them to make decisions. Product is the core of what these companies do and to fully take advantage of this, you need great product talent in leadership positions. When you don’t own the content, you have to win on product, full stop. And yeah, I’m a product guy, so I’m biased. But I’ve seen what happens when you don’t prioritize the right talent in the right roles, and it’s not pretty.
  2. Practice Design Thinking
    Although tech products are much better today than even five years ago, we have a long way to go in building out thoughtfully designed products. You can tell a massive difference in Spotify versus a company where design is front and center like Airbnb. If you start with design solutions, rather than technology ones, it will resonate a lot more with your users. Cool tech is just that. Cool. Solve problems first and foremost, my friends.
  3. Different Analytics For Different Goals
    Labels have invested in analytics teams in varying levels. Most of these  efforts– including UMG’s exceptional data analytics team and Lyor’s start-up The 300– used data to identify artists that will perform best, which is just an evolution of what labels always have done. Spotify and YouTube have both invested heavily in solutions to solve ‘what to play next.’ While YouTube’s recommendation products are good, they don’t have the sheen of Spotify’s Release Radar, Daily Mix, and Discover Weekly, perhaps the best of all the technology centric recommendations. The lesson here: using data science and machine learning to create superior user experiences is the foundation of any successful digital music product.
  4. Market Like A Retailer
    If there’s been one element missing from most services, it’s figuring out how to sell them to mass audiences. At its core, the pitch seems to be “Hey, you like music. Well we’ve got lots of music. Come get some!” Okay then! The services need to get better. While it’s clear that music services are different than retail, the attention to detail and stronger relevance to the customer’s life would help the services define a) what they are and b) who they are for. Without that kind of definition, mass consumers will continue to pass.

None of this stuff is surprising. Let’s just file it under ‘doing the basics really well.’ But the labels, and the people who built their careers with them, still seem like they are steeped in another era. Digital is different, and building an elite team that can navigate this competitive market requires a different skill set. A phenomenal product team is today’s A&R. Invest wisely.

Billboard: Lyor Cohen’s Move to YouTube: Good Or Bad For The Music Industry

Hypebot: Music Industry Uncharacteristically Silent about Lyor Cohen to YouTube

Bobby Owsinski: YouTube Misses The Point With Lyor Cohen Hire

The Roaring Mouse: Rhapsody Faces Its Future

Mark Mulligan recently commented on an announcement from Rhapsody that trumpeted the Seattle-based granddaddy of streaming music’s impressive growth over the past couple years.

His analysis:

Enter investment firm Columbus Nova who acquired an undisclosed stake in Rhapsody in September 2013. A reorg and a repositioning process followed paving the way for strong subscriber growth. Rhapsody had 1.5 million subscribers one year ago. If it continues to grow at its present rate it should hit 3 million by July this year. And if it sustains that growth into the start of 2016 it could find itself the second biggest subscription service globally. Current number two Deezer appears to be slowing so 2nd place could be a realistic target for next year. Quite a turn around for a service that looked like it was falling by the wayside 5 years ago. 

Surprisingly, Mark’s blog piece was extremely thin on the particulars about Rhapsody’s turnaround. I was surprised as he is one of the sharpest analysts in digital music.

Rhapsody’s growth is impressive. But the seeds of Rhapsody’s recent growth were sown years before Columbus Nova showed up to the party. When the company spun out as a standalone entity from its parent, Real Networks, it was given a few on-air marketing dollars from its other owner, Viacom Networks. Previously Viacom had poured hundreds of millions of dollars in advertising credits to Rhapsody, which it used to advertise the service on MTV, Comedy Central and other on-air properties. The efficacy of those dollars was questionable, as the company had around 800,000 paying subscribers. It was just too early to market on-demand music to a mass audience.

After the spin-out, Rhapsody was left without a sizable marketing budget nor the money to invest in a free tier like Spotify or Pandora. So the company was forced creatively figure out how to attract customers. One of the hardest things streaming services faced then–just like now–is getting consumers to plop down their credit card to pay to them. The president at the time, Jon Irwin. opted to partner with companies who already had access to credit cards—cellular carriers.

Precarious Partners
Before we get into that, here’s a little bit about the economics and goals of partnerships between carriers and music services. These kinds of deals have been seen by the music industry as the answer to building mass audiences of subscribers. Customers might ask themselves why they are paying $10 a month for Rhapsody, but if the charge is included in their cellphone bill, they might never see it. It’s always considered better to tap someone else’s customers than build your own.

Deals like these are extremely difficult to navigate. Labels are terrified of offering discounts for the service, which is a requirement to get carriers to agree to the deal. Carriers are reticent to pay for content that customers may or may not use. And everyone wants someone else to take a margin hit. It’s up to the streaming service to get everyone on board and craft a deal that will be successful.

The best deals are ones where all parties–and the consumer–are happy.

Sometimes it works, sometimes it doesn’t. A couple terrible examples: Deezer has built a massive worldwide audience of paying subscribers, and yet the rate of people who actually use the service is pathetic. Mark Mulligan reported that it could be as low as 20 percent. A low active rate infuriates subscribers and, therefore, carriers. While there will always be some level of inactives in a service, when it becomes huge, you aren’t building a distinct brand and service. Muve Music, which previously was offered through the Cricket pre-paid cellphone service, also had massive inactive users and really awful economics due to licensing deals it signed with music labels.

It’s critically important to build the right offering when selling the service. Music services on carriers come in two varieties: a bundled offering and a bolt-on service. In a bundle the consumer is buying a tiered plan that includes the music service. So for $70 a month, you subscribe to the Cellphone + Music and a bunch of other services. The bolt-on is much simpler and cleaner: add music for $5 or $10 a month. As a product guy, I much prefer the bolt-on. Why? Most of the inactives reside in the bundle and all those people represent a time bomb just waiting to blow up. Customers who quit in droves are expensive for everyone, but it tolls the death knell for the service.

And that’s the weakness with the marketing and distribution partnership through carriers. Specifically:

  • Sure the music service gets the massive benefit of not having to capture the credit card, but it also cedes control of the relationship with the customer.
  • With two parties involved, the company’s already thin margins selling music get deeply eroded, requiring the music service to rely on its own retail customers to prop up the distribution costs.
  • The service is completely reliant on the carrier to market to their customers, and the carrier may not be very motivated to do so.
  • The service can quickly lose brand equity, as the carrier might just call the service ‘Comes With Music’ instead of promoting its brand. If the customer is just subscribing to a generic music service this is a very bad thing, as the carrier could replace it at any time.

So the music services must walk a fine line:

  • Build and hold onto a strong brand presence that will motivate the carrier to do the deal in the first place.
  • Make sure the carrier does the right thing in selling the service and focus on the brand.

Do it wrong, and you end up like Muve Music, which AT&T sold to Deezer at auction prices earlier this year after acquiring what was left of the struggling Cricket Wireless. Do it right, and hockey stick growth follows.

A former colleague thought the relationship between the powerful carriers and little music services reminded him of a blend between Aesop’s fable about the lion and the mouse and the Roald Dahl story about the crocodile and the dentist mouse. In my colleague’s telling of it, the powerful and hungry lion wants to eat the mouse, but to do so will ruin his only hope for repairing the tooth. So the mouse has to convince the lion to not eat him before he can fix the tooth. I’m sure you can imagine who is the lion and who is the mouse.

Dialing Up Deals
After months of negotiations, Rhapsody announced its first partnership with the pre-paid carrier MetroPCS in 2011. In the next few years the company announced deals with European carriers, followed by a global deal with Telefonica and then T-Mobile’s offering.

So far, so good. Solid growth. But it’s an open secret that Rhapsody’s brand has been fading for quite some time now. And the partnership strategy isn’t helping develop a strong brand identity. In their thirst to make the deal, the company is making their brand look more like a quilt than something unified. The service is known as Rhapsody on MetroPCS, Unradio on T-Mobile, MTV in Germany, Napster in Greece, Spain, Sonora in Latin America.

It’s an open question if it will be able to maintain its presence with Spotify taking up all the oxygen in the room with customers while YouTube Music Key and Apple’s iStreaming launches. The company has faced issues before and has been written off time and time again. It remains to be seen if it can grow, in particular in the U.S.

As the partnerships ramp, expect the company to face downward margin pressure. Those thin margins will start to eat into the overall revenue of the company. Growth is fantastic, but it could also harm the company’s bottom line.

Maybe even more important, the company needs to answer the hard question about what position it seeks to occupy in the marketplace. There probably is room for a white label music service that works well with big distribution partners like carriers and cable companies. But without a solid brand and a strong direct retail subscriber base, the company could start to see more pressure to deliver meaningful value. It’s far from clear if a mousy little Rhapsody can roar in a den full of lions.

Disclosure: I worked at Rhapsody for nine long rewarding, frustrating, awesome and ridiculous years before last year’s layoff.

More Rhapsodizing

Music Industry Blog: How Rhapsody Became A Top Tier Player Again

Music Ally Rhapsody’s Napster expands across Europe and plots ‘laddered’ pricing strategy

Billboard Why Streaming (Done Right) Will Save The Music Industry

GeekWire Rhapsody Tops 2.5M Subscribers, Up 60% From Last Year

I'm going to make you an offer you can't refuse

Welcome To The Content App Era

Good news! We’re starting a new epoch in the titanic shift technology has foisted upon content creation and consumption. No longer are we stuck under the thumb of huge behemoth companies like Spotify, Facebook, YouTube and Pandora. Those dinosaurs are on their way out.

Oh what’s that you say? ‘Jon, have you been sniffing glue again? YouTube is flexing its muscles and bossing around creators. Didn’t you see the headlines about how poor Zoe Keating is being so mistreated?’ Yep. I sure did. And I say good riddance. Because it is done. Kaput. Collapsing. Sure, maybe not today or in the next couple years. But when bullies like YouTube start dictating insane terms to artists, it forces creators to look at different ways to distribute their work and that creates new opportunities. And companies are already starting to sprout up to take advantage.

Just last week the startup Vessel announced a new model designed to provide a much larger percentage of revenue for content creators than YouTube offers. Of course Vessel must build audience to create big buckets of revenue, which is far from a simple task. But as Peter Kafka of Re/code reported, Vessel is offering a much better experience, including a new advertising product that might mean the end of the dreaded video ad pre-roll. Vessel’s CEO Jason Kilar has long wanted to improve the experience for both viewers and advertisers, which is way overdue.

And Vessel is just the start. We’re at the beginning of the Content App Era. Just like how industries have been affected by the tech boom, there will be a phalanx of highly focused content apps of all different kinds to take on the big guys. In music this phenomenon is already taking shape with the recent launch of the Christian focused Overflow app.

Are all the upstarts going to succeed? Absolutely not. Most will fail spectacular. But a few will find the right audience with the right content and product innovations. They’ll learn from their mistakes, get smarter, and start making more money for creators. There will be a healthy competition for best content and talent. So sure, we’ll still have the big guys, at least for some time. But all these small players will throw enough stones at these monsters until they become a shell of their former selves.

An example of how this might go? Take a gander at broadcast television. For decades, three players dominated ratings. Nearly all Americans watched CBS, ABC or NBC. Advertisers paid a massive premium to reach, well, everyone. And then the audience started to erode away as all kinds of options for casual time came on the scene. Nowadays consumers have the choice of cable, satellite, Call Of Duty, Netflix, Crunchyroll, and hundreds of other services.

So what can these Goliaths do? How about starting with fair policies? YouTube grew monstrously big by ripping off all the video content in the world and allowing their audience and creators to remix it. Its popularity built a massive reach. Now it’s taking that audience hostage by demanding creators grant the company most favored nation status in order to get access to Content ID, which–as a reminder—was first designed to allow creators get at least some compensation for the videos that YouTube users posted without paying creators in the first place. It’s like YouTube is saying: help stop us from stealing your life’s work by just giving us all your life’s work and get paid whatever we decide. That’s some Orwellian logic.

I’m sure as a business school case study you’d get an A+ for devising such a brilliant strategy. But in terms of real life business ethics, it is unconscionable.

More News About Bullies

Music Industry Blog Zoe Keating’s Experience Shows Us Why YouTube’ Attitudes To Its Creators Must Change

Stratechery Dear Zoe Keating: Tell YouTube to Take a Hike

Hulu Blog The Future of TV

Growing Pains: Can YouTube’s Plans Power Music Revenues?

This was originally included in Billboard’s print edition dated March 4, 2014. The entire article is not available online without a subscription, but I’m reposting it to my network.

And no, I didn’t write the headline or the deck.

Opinion Column: Screwed By YouTube?

40 percent of its plays are music – even as its rights payments remain disproportionate

Do billions of YouTube views of Gangnam Style translate to millions for Psy?
Did billions of YouTube views of Gangnam Style translate to millions for Psy?

First it was broadcast radio, then MTV. Now YouTube? Could it be that the music industry is a three-time loser in getting its fair share for distribution of content? Did it give away the golden goose by not suing the bejeezus out of YouTube when it was a startup, or at least cut better deals when Google acquired it in 2006?

Of course it’s not a simple question. At first glance it’s clear that today YouTube isn’t delivering the goods. During a MIDEM panel this year, YouTube vp content Tom Pickett said the company had paid more than $1 billion to music rights holders during the past several years. Well, that’s sweet. Hey, you know who else has done that? Spotify. The difference: Spotify did it with a fraction of YouTube’s audience.

Let’s face it: When the worldwide market is $16 billion annually a billion isn’t that much, not when you consider the size and scope of YouTube’s mighty reach and insatiable thirst for more and more fresh content. While there have been some holdouts on paid streaming services, no working artist would dare skip YouTube — one of the world’s largest promotional channels — and limit his or her reach. According to comScore, YouTube’s 159 million active monthly U.S. users watched 13 billion videos in December 2013. And YouTube says nearly 40 percent of all videos were music-related.

But YouTube doesn’t just represent a promotional channel. It delivers a burgeoning stream of advertising revenue, and could soon find more ways to monetize its massive audience. YouTube does pay a split of ad revenue with rights holders, although the rates for ads are paltry when compared with such established players as broadcast radio. The company is trying to boost its revenue-per-impression rate with premium content, but this will take time.

By comparison, Spotify looks more attractive to rights holders, since it already delivers multiple revenue streams. Like YouTube, Spotify pays a low per-stream ad-supported fee for a play by a free consumer, but its average payout is much higher because it offers premium subscription fees as well. That’s why YouTube has long planned a paid subscription service that is finally expected to launch this year. If the company can convert even 1 percent of its active users to pay for on-demand music, it would be the largest service in the United States. At least that’s the theory.

In practice, converting these free users to paying customers could be much harder to execute. Why? Every all-you-can-eat music service has similar pricing. Want to stream your music on the desktop or on your phone? It’s free. Want to save your music to your Android phone? That’ll be 10 bucks. Asking for $10 from a customer base that has become accustomed to accessing all the music they want for the low, low price of free is a steep hill to climb.

The industry and Google will need to partner to create a new value proposition at a variety of price points. What could it offer the music fan for a buck a month? How about a top 40 app for $3? What about a catalog slice, say indie/alternative, for $6? How about a $2 Vevo subscription?

The truth is, all consumers are not alike. Defining those price points and offers will require innovative thinking and risk-taking by both sides. Remember, yearlong Spotify Premium subscribers pay more than three times what the average customer spends in a year for music.

The industry needs to think of ways to serve a mass audience. But if instead consumers see the same old offer of 20 million songs for $10 a month, we could end up with another Google Play All Access Music, which hasn’t blown the doors off with subscriber growth. That would be disappointing for the entire industry.

Perhaps the industry is learning. Certainly holding out content from YouTube would have made it much more challenging to build new revenue streams, so it was the right decision to bring the service into the fold.

Now it’s time to supercharge it.

Note: I have corrected an error. YouTube was acquired by Google in 2006, not in 2005 as it appeared in print. I regret the error.