THE LEFSETZ LETTER: Bundling

The recorded music business must switch to subscription, it's its only hope
of economic survival.

The iTunes Store is killing the music business. Sure, it provides a legal
alternative to theft/copyright infringement, but the economics make no
sense. Because instead of spending $10-$20 for an album, people are now
purchasing $1.29 tracks. And it takes many $1.29 tracks to reach the
equivalent of an album. Essentially ten. So, you're asking the public to
make ten purchases instead of one. Get it? Can you imagine someone saying
yes ten times in a row? Imagine buying the White Album a la carte. How
many people do you think would have purchased "Revolution 9"? But we did,
as part of an album, there were no singles from the White Album, and
therefore we know "Revolution 9", because oftentimes we were just too lazy
to jump up and lift the needle past it, and we ended up hearing it, it's in
our DNA, like the rest of those album tracks.

	Bob Lefsetz, Santa Monica-based industry legend, is the author of the e-mail newsletter, "The Lefsetz Letter". Famous for being beholden to no one, and speaking the truth, Lefsetz addresses the issues that are at the core of the music business: downloading, copy protection, pricing and the music itself. His intense brilliance captivates readers from Steven Tyler to Rick Nielsen to Bryan Adams to Quincy Jones to music business honchos like Michael Rapino, Randy Phillips, Don Ienner, Cliff Burnstein, Irving Azoff and Tom Freston. Never boring, always entertaining, Mr. Lefsetz's insights are fueled by his stint as an entertainment business attorney, majordomo of Sanctuary Music's American division and consultancies to major labels. Bob has been a weekly contributor to CelebrityAccess and Encore since 2001, and we plan many more years of partnership with him. While we here at CelebrityAccess and Encore do not necessarily agree with all of Bob's opinions, we are proud to help share them with you.

But it makes no sense to complain that people should buy albums instead of
singles, you're pissing in the wind, the Internet has unbundled the album.
That doesn't mean you can't try to get people to buy as many of your tracks
as possible, it just means that the concept of paying once for ten tracks is
something that no one has to do, and almost no one wants to do.

So, inherently, we're selling less music, and making less money.

Who do we want to blame? Apple, the customer? That makes no sense, as
stated previously Apple is providing an alternative, and without customers
you've got no business. The key is to get more cash from each individual
consumer, so in the aggregate, we end up with a lot of money.

The classic example is c. You cannot buy your cable channels a
la carte. You must buy them in tiers. Which drives you nuts. Why am I
paying for something I'm never going to watch? But economically, it makes
sense. For if the channels were unbundled, the cable system wouldn't be
able to make enough money, so it would have to raise the price of each
individual channel substantially, to the point where you'd be paying just as
much. According to this article in the "New Yorker", at most you'd be
saving thirty five cents. And you'd give up the ability to surf all those
extra channels, and possibly find something interesting.

That's what we want people to do. Surf the music and find something
interesting. That was the old album paradigm. Since you paid four or six
or ten bucks for the LP (the price went up with inflation), you listened to
it, and found out you liked cuts other than the hits, to the point you
wanted to see the act live, to hear it perform all these songs, and bought
the next album not worrying about a hit, because you were a fan of the band.

I hope these days can return. But we've got to switch the game in the
interim. We've got to make people fans of music!

Yes, instead of paying ten bucks for an album, you pay ten bucks for music.
And technology allows everybody access, so instead of charging our good
customers more, we charge everybody one low flat fee, kind of like cable
television, the provider doesn't care if you watch all day long or not at
all, it's the same price.

And speaking of price, we can argue whether ten bucks is appropriate, we can
argue price all day long, but we can't argue paradigm. The key to survival
is charging everybody something. Not breaking it down by track, but
providing the whole smorgasbord for a single price.

Now the Spotify trick is to get you hooked for free, then upsell you.
That's a good concept, works in sampling across all wares. Don't think it's
about giving music away for free, it's ultimately about getting a chance to
convert many people. It's just like a retail store. The first key is
getting traffic, then, once people are in the store, you do your best to
close them. Hell, sometimes you do giveaways just to get them in!

Not that Spotify is the only solution. But the labels must see they need to
drive subscriptions, or lose the bundling war. That site allowing you to
get tracks for experiencing ads? That's economic death. As is Apple's
concept of letting you stream the tracks you own via the cloud. If either
of these take hold, the odds of subscription winning go down, and you want
them to go up, because the pool is so much larger.

Don't see this as a music problem. Don't see this as a value problem. See
this as an economic problem. How do we get the most money? Certainly not
by selling tracks. Definitely by selling low-priced subscriptions.

Furthermore, if the music is streamed (with thousands of tracks on your
hand-held in case you're out of range, Spotify provides this today), there's
no issue of someone stealing everything and then disconnecting. What's
there to steal? People believe YouTube clips will live in the cloud
forever, very few people save them to disk. We have to migrate music to
this same sphere.

Please read this article about bundling. It will make the concept clear to
you. The cable companies and content providers are tempting unbundling by
fighting their silly wars in public. We have the reverse problem in music.
Our content has been unbundled. Only by bundling it again can the industry
regain health.

http://www.newyorker.com/talk/financial/2010/01/25/100125ta_talk_surowiecki