THE LEFSETZ LETTER: Netflix

Downloads are killing the music business.

There's enough anti-streaming venom in music to kill the industry. Whether it be artists angry at Spotify payouts or labels still holding on to CDs and trumpeting downloads to investors, neither can see that streaming has already won. With Pandora. With YouTube. It's what the customer wants, but the customer is too stupid to realize it.

Take Netflix. What killed the company's stock, driving it down from $298 to $52.81? An admission of the future. A declaration that to rent DVDs you had to pay more. That they were moving the company to streaming.

And now everybody's raving about "House of Cards." I don't know a single person who rents DVDs by mail…that's like carrying gasoline from the station when you can plug your Tesla in by your clothes dryer!

	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.

It's all about scale. Streaming payouts suck now because very few people pay. Yes, when subscribers graduate to the paid-tier, rightsholders get more. What are the rightsholders doing to implore people to upgrade? Telling them to purchase CDs and downloads! Huh?

Downloads are a flawed model, because of the bundle.

Lost in the archaic discussion about the artistic value of an album is the fact that it worked economically. You want to get someone to pay ten dollars for ten tracks instead of a dollar for one. The analogy I like to use is automobiles. You can't pick your options one by one. If you want a sunroof, you need to get upgraded wheels. You can't get heated seats without heated windshield wipers and headlight washers, they're all part of the "Winter Package." Where are the packages in the music business?

Yes, the CD was a package. But those defending the album are disconnected from those listening to music. People cherry-pick their favorites. Artists seem to believe fans listen to their records from beginning to end, over and over again. They're delusional. The key is to get people to pay for the listening experience, via a subscription.

Netflix is a subscription! You pay $7.99 every month not knowing what you'll watch and not possessing anything at the end. But the naysayers say music must be owned. Huh? That's inefficient. We want access, not ownership. Who's got a house full of VHS tapes, ready to be played? When was the last time you played a DVD? New computers come sans drive, and everybody's moving to tablets anyway, where there's no room for a drive.

We've got to charge everybody for access. And split up the cash based on what they play.

Whoa! You mean my music actually has to be successful?

That's not the model we're employing today. Today, you buy it, we forget it. We don't care if you throw it out or delete it. We're all about promotion, convincing you to pay, we're not about holding your hand after the fact. We're automobile dealers with no service department. Once you drive off the lot, we close up shop and move on to the next town.

Yes, music is so afraid of technology, so scared by the Napster episode, that it is now skeptical, now refuses to move forward, as technology mutates and our listeners gravitate to non-music entertainment, like Netflix.

Don't talk to me about the value of music, look at the price of a Netflix subscription compared to the cost of a feature film. It's bupkes.

Not that film companies are not challenged.

But he who wallows in the past is ultimately forgotten.

The music business needs a concerted campaign to drive consumers to pay for subscription services. As for YouTube, yes, it pays, but very little, and once again we've got the cherry-picking problem.

And first and foremost we need an educational program. Steve Jobs would introduce a new product and explain it for an hour. I bet most label heads still don't know how streaming services work.

Bottom line… Playlists transfer to the handset, they sync, so there are no data costs on the run. People understand that their contacts and photos will sync from their computer, it's not a big stretch to convince them that music will too, you just have to tell them! Don't forget, this is the public that was angry at Netflix that they couldn't rent DVDs, and now have forgotten about said DVDs. People can be molded, you've just got to lead them.

Notes:

A. Netflix has 36 million subscribers. Stickiness is provided by new product. It's the same in the music business, where we release a torrent of new product every week. We've got to get people in the habit of checking it out on streaming services. They may reject it, but at least they'll hear it. As always, only a few recordings will win.

B. Netflix's stock price is now $217.69, almost a complete recovery. If you're not willing to make the hard decisions and take a risk, too fearful of a momentary downturn, you're ultimately going to be left behind.

C. Read "Businessweek"'s Netflix story to be blown away by how the company is at the technological bleeding edge: http://buswk.co/18uWT7y

D. Yes, great music is still necessary, that remains the same. But isn't it interesting that recording's a cornucopia of technological breakthroughs, you can do in your home what used to cost a fortune in a big studio. Musicians make their music on the cutting edge, but cluelessly want to distribute it via an archaic model.