Piracy Is Not The (Only) Problem

“The net effect of illegal file-sharing in the UK and elsewhere has been to reduce legitimate sales. This is why spending on recorded music has fallen every year since illegal file sharing began to become widespread.”

- Statement from the International Federation of the Phonographic Industry (4/11/09)

The trials and tribulations of the music industry over the last decade are well documented; a $40 billion industry in the late-90’s which should go down to somewhere around $23 billion this year. If you read most of the headlines over this time period, including the recent statement above from the IFPI, you would think that piracy is the major reason for this drop; in reality this is far from the truth.

This is obviously an unpopular point for someone working within the music industry to be making. As someone who has had a front row seat to the decline of the music business over the last decade, as well as the many mistakes we have made to help bring on this decline, it is extremely frustrating to hear that the blame should all fall on those who pirate music around the world. I do not in anyway condone someone “stealing” music. I wholeheartedly believe that artists, writers, producers and music labels should be properly compensated for their work. However, to turn a blind eye to the real causes of this market decline is a cowardly way to push the blame away from industry leaders who in fact should be held responsible for where we find ourselves today.


Let’s look at some facts:

According to the IFPI, the value of pirated music in 1996 (before P2P/filesharing was even really talked about) was about $5.1 billion. Massive amounts of pirated CDs in China, Eastern Europe, Russia, etc. In 2007, depending on your source (RIAA, IFPI, IPI), that global value was a very comparable $4.2 - $6.4 billion.

Now that is no doubt a significant number, but to blame piracy for a 43% loss in market value over the last 10 years would suggest that the effect of piracy had risen dramatically. This is simply not the case. Piracy has a similar effect on the music industry as it did before the rise of the Internet, and we as an industry work today with a threat similar to the one we dealt with when we were bringing in $40 billion annually.

So how else could the industry have lost so much value in such a short amount of time? To this, I offer a few other factors that we have experienced which are worth keeping in mind. I have little data to quantify the individual effect each one has had on the overall industry, but I suggest in aggregate this effect is substantial; much more substantial than the effect piracy has had on its own.


1. CD Replacement Cycle ends: The compact disc was introduced in 1982. By 1995, the platform shift (people replacing their cassette tape collection with the same titles on CD) had peaked. This replacement cycle, in addition to the fat margins the CD once commanded, was a significant engine for the unprecedented rise in retail sales between 1982 and 1995. Digital has not provided anywhere near the same effect.

2. Channel shifts + SKU Reduction: Over the last eight years or so we have seen a significant channel shift away from music specialist stores (Virgin, Trans World) with average SKUs ranging from 20k to 100k+ toward Mass Merchandisers and Supermarkets (Wal-Mart, Tesco, Borders) with average SKUs from 10k and lower. Fewer titles available, satisfy fewer consumers, and put more pressure on select titles to sell huge amounts of copies; something that has happened less and less over the last decade. Additionally, catalogue titles (older products which require minimal marginal costs to release) have been the hardest hit and thus led to an even greater effect on the labels’ margins.

3. Price Decline: Between 2002 and 2007 the average retail price for a full-length album in the U.S. declined 15.3%. In the U.K., this decline was 24.6%. This drop is especially rampant in the UK market where supermarkets and other mass merchandisers have looked at music as a footfall generator and loss-leader, thus driving their own margins downs as well as those of the labels who sell to them.

4. Unbundling: When the music industry decided to allow a computer company to take control of its product and unbundle its’ format of choice, it drastically altered its overall economic model. As digital grows, revenues drop more and more as people choose to purchase individual tracks at 79p each rather than full albums (label costs have not dropped in line at all). Recent analysis of unbundling for new releases has shown that the value of the average mixed bundle (physical album + digital album + digital singles) has dropped by almost a third because of the unbundling effect. If digital continues to supplant physical in the way we think it will, we may look back one day at unbundling as the most detrimental decision the music industry has ever made.

5. Ignorance and Poor Leadership: Ok, so you can’t really quantify this one, but the way industry executives have handled changes over the last 15 years has no doubt had a negative effect on the overall business. Call it ignorance, stubbornness or a misguided compensation system, but there has been much too much focus on legal aggression and physical format promotion amid drastic change. Not to say that CD sales weren’t, and still aren’t VERY important and that exercising legal action against piracy isn’t either. However, when one’s annual bonus is measured entirely by sales of a traditional format rather than an emerging one, irresponsible decisions are going to be made. These decisions have no doubt played a role in where the industry finds itself today.

Product Innovation: What is Content?

A friend from the Film/TV world called me recently asking about what the music industry has learned in recent years in regards to the growth of digital and what they were doing differently today.  The company my friend works for sits on one of the most valuable collections if IP in the world, so rightfully so, he is trying to figure out how digital can help him utilise it more effectively.

To understand this challenge better, I keep coming back to the same question: What is Content?

I should mention at this point that Mark Mulligan at Forrester Research has recently written a great paper on this topic titled “Music Product Manifesto: The Product Features That Will Save Recorded Music”.


What is the Problem?


It’s pretty straightforward to understand (and no, piracy is not the sole issue).  Content owners are still stuck in a one “primary product” mindset, be it the 10 song album, the 22 minute sitcom or the 100 minute feature film.  Unfortunately, the consumer’s reservation price for these “primary products” is going down and content owners are losing the ability to influence it.  There is massive downward pressure from retailers who look at CDs and DVDs purely as “footfall” drivers and from consumers who via ad-supported streaming services or illegal P2P sites are getting more and more used to content being free.


Pack on top of that the……


• Unbundling of music

• CD and DVD sales falling off a cliff

• No proven ad-based model for streaming or on-demand that makes economic sense

• The economy still negatively impacting ad budgets and consumer’s disposable income

• Industry imposed release windows pissing off consumers

• Piracy


…..and content owners have to really start thinking about how they can get their content to do a bit more for them.


So What Can Be Done??


Change and expand the product offering.  Offer new types of products, targeted at the rights consumers, at a price that the content owners can now dictate more effectively.
But what do these “new” products look like or again…what is content?  Further, what is monetisable content?

Let’s look at four options:

1. Consumers experience content in a variety of ways.

Solution:  Offer “primary” and “secondary” products together.  Make the sum more attractive to the consumer than the individual parts.  Tickets and merchandise are a good start but the key here is convenience – make the purchasing experience easy (don’t make me go to three different websites to get three different products about the same artist/movie/TV show).

2. Some people like to consume a lot more content than others.

Solution:  Give more to the ones that want more and use the extra content to differentiate the product offering.  The basics here include behind-the-scenes content, outtakes, personal home videos as well as live recordings, interviews or bootlegs.  These can include audio, video or photographic content. But how do you maximise its incremental value?  Exclusivity (content that has never before been released) and convenience are key, as is re-building some level of scarcity online (restricting access to only those consumers who really want it and are willing to pay more for it).  Understand your entire release cycle and create content at the start to satisfy each stage of it.

3. Consumers want to engage and interact with their content more.

Solution:  Give them the tools to do so.  In music, the big thing right now is around providing stems that the user can then use to edit and mix in new ways, thus taking a song like “Thriller” by Michael Jackson and giving it a whole new feel and sound.  The same can obviously be done with video content, appeasing the no doubt large group of aspiring filmmakers who would have liked to see a slightly different outcome for a certain character in “The Phantom Menace”.  Social interactivity is also a big play here with communication tools (chat, IM, tweeting) and multi-player gaming providing loads of new ways to achieve consumer satisfaction and value.

4. Consumers want a closer relationship with the artists/characters/celebrities that they love.

Solution:  Change the limits of the artist/fan relationship. Provide “experiential content” that supports the consumer’s desire for status and access.

• Access to a webcam focused on a band’s rehearsal space so they can see live feeds of them preparing for their next tour

• Access to a closed community message board where they can establish a direct communication line with their favourite artist

• A personally written birthday card from their favourite movie star

• The right to see a screening of a new film before anyone else and attend a special party afterwards

All of this can be provided to the consumer.  All of this can be monetised.  All of this can be considered content.  Much of this is can be made available for a low marginal cost, and while each one may only be valuable to a small targeted consumer group, it represents a load of potential revenue that is not currently being captured.

I’ll finish up with a personal example of how I think all of this comes together.  They just started filming “Wall Street 2”.  I loved the original – thought Gordon Gekko was one of the greatest characters of all time. So what kind of product would a “Wall Street” enthusiast such as me like to buy for the sequel??

• Access to behind-the-scenes content of the filming process

• Access to a live feed of what’s happening on set

• Video diary of the stars talking about the filming process

• Some backstory or specially-produced content that gives me an idea of the premise of the film and what’s been going on with Gordon Gekko since we last saw him

• A guaranteed ticket for the first showing of the film in London

• Some kind of high-end, limited edition video product when it comes out on DVD that includes both exclusive content and collectable memorabilia (a month before the official DVD release)

I may not want something like this often, but for the few artists/films/characters for which I do, my price sensitivity would be very low and the opportunity for the content owner to maximise my personal RPU would be very high.  And that is really the point…..product innovation is ultimately about getting the maximum amount of revenue out of each individual group of consumers no matter how big or how small they may be.

What do you think???


One Last Note:


I don’t want to minimise how incredibly difficult product innovation of this nature will be to accomplish (possibly a topic for another day).  Contractual talent obligations will have to be altered in order to allow for broader content creation and a greater level of artist/star involvement. Licensing standards and trusted best practices will have to change.  A company’s infrastructure will need to evolve in areas such as their financial management systems and digital supply chain.  New and old content will have to be organised, reformatted and digitised (no cheap task!) so it can be utilised in new ways.  However, the reality persists and something has to change.  The old media product will not satisfy on its own and while change is always difficult in the short-term, long term survival depends on content owners and media companies keeping up with consumer aspirations much more effectively than they have been.

The Beginning....

So today finds me posting my first ever blog. Rather than jump right into specific topics with the thought-provoking insight and analysis I am no doubt known for (that’s an example of my lame humour – just so you know), I figured I’d post a quick preface to explain my motivation and plans.


I never thought this day would come. I actually hate people sharing too much of their lives and opinions. Don’t really like Twitter or those Facebook status updates. Don’t really care if you are feeling ill this morning, sitting next to some celebrity at dinner or can’t sleep because your favourite sports team lost the big game. So I can promise at the outset that you will rarely see anything here of a personal nature. No deep feelings or regrets, no personal dreams or aspirations and not much about what I did last Sunday.


This blog will be of a professional nature and if a person or two should actually end up reading this (including my wife), I hope we can have some spirited debate and conversation around what is written.

As you will see, I love media….love entertainment….love music….and love what digital technology has done to it in the last 10-15 years. I am constantly intrigued by what will happen next and I strive constantly to be a part of it. Doesn’t matter if you work in music, film, television or print – every area of media and entertainment has been facing historical change (many for a lot longer than they probably realise). There is no escaping it anymore. You can’t hang onto hope that this change will stop. And why would you want to?

I am also fascinated by all the opinions out there. How can there be so many? How can so many be so wrong? Which are the few that will ultimately prove to be correct? Where did all these “experts” come from? What makes them an “expert” other than a long job title on their business card (my favourite one lately was Chief Inspirational Officer)? If I hear one more person sit on a panel at a conference and say “we need to listen to the consumer and give them what they want” I may lose it. The time for evangelizing some high-level theory (I call it fluff) is over. Companies are going out of business. People are losing their jobs. Some “expert” has to start figuring out how these theories start generating profit and providing an operational model that can actually achieve longevity.


So my aspiration I guess, is to use this space as a way to organise the endless data flying through our lives each day and share the results in the hope that we can all mash them up again and try to keep coming a bit closer to what could be the “right” answer.


At the heart of it, I am an optimist and I truly believe that the various media industries will at some point start to successfully crack this digital nut. And won’t it be great when we can experience and digest all forms of media in an organised, efficient and commercially viable manner. Personally however, I am as excited, if not more, about the path that gets us there. And so here is my tiny, little contribution to that path and I invite anyone who makes it to this page (again…quality over quantity I always say) to join me on the journey.

My first "real" post will revolve around product innovation in the media industries and should be up shortly....so look out for it!