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Disney and Apple’s UV FUD March 26, 2014

Posted by Bill Rosenblatt in Business models, Technologies, United States, Video.
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Last month Disney launched Disney Movies Anywhere, a service that lets users stream and download movies from Disney and associated studios on their Apple iOS devices.  You can purchase movies on the site or from the App Store app and stream them to any iPhone, iPad, or iPod Touch.  You can also get digital copies and streaming access with purchases of selected DVDs and Blu-ray discs.  And you can connect your iTunes account to your Disney Movies Anywhere account so that you can gain similar streaming and download access to your existing Disney iTunes purchases.

A couple of things about Disney Movies Anywhere are worth discussing.  First, this is yet more evidence of the strong bond between Disney and Apple, a relationship formed when Disney acquired Pixar from Steve Jobs, who became a Disney board member and the company’s largest shareholder.

More particularly, this service is a way for Apple to experiment with video streaming services without attaching its own brand name.  Disney Movies Anywhere works with only iOS devices, and there’s little indication that it will add support for Android or other platforms.  For whatever reason, Apple has shied away from streaming media services until quite recently (with iTunes Radio and the latest iteration of Apple TV).

More importantly, Disney Movies Anywhere is the first implementation of Disney’s KeyChest — a rights locker architecture that is similar to UltraViolet, the technology backed by the other five major Hollywood studios.  The idea common to both KeyChest and UltraViolet is that when you purchase a movie, you’re actually purchasing the right to download or stream it from a variety of sources; the rights locker maintains a record of your purchase.

One of the main motivations behind UltraViolet was to prevent content distributors or consumer electronics makers from dominating the economics of the digital video supply chain in the way that Apple dominated music downloads (and Amazon may dominate e-books), and thus from being able to dictate terms to copyright owners.  By making it possible for users to buy digital movies from one retailer and then download them in other formats from other retailers, the five studios hoped to create a level playing field among retailers as well as interoperability for users.  UltraViolet has several retail partners, including Target, Walmart (VUDU), and Best Buy (CinemaNow).

The problem with these technology schemes is that it is very hard to make them into universal standards.  Just about every software technology we use settles down to twos or threes.  In operating systems, it’s all twos: Windows and Mac OS for desktops and laptops; Android and iOS for mobile devices; Unix/Linux and Windows for servers.  Other markets are similar: in relational databases it’s Oracle/MySQL (Oracle Corp.), DB2 (IBM), and SQL Server (Microsoft); in music paid-download formats it’s MP4-AAC (Apple) and MP3 (Amazon); in e-books (in the US, at least) it’s Amazon, Barnes & Noble, and Apple iBooks.  Antitrust law prevents a single technology from dominating too much; market complexity prevents more than a handful from becoming roughly equal competitors.

It would be a shame if this also became true for rights lockers for movies and TV shows.  It does not help the studios if consumers get one flavor of “interoperability” for movies from all but one major studio and another flavor for movies from Disney.  Disney surely remembers the less-than-stellar success of its last solo venture into digital movie distribution: MovieBeam, which launched around 2004 and lasted less than four years.

And that brings us back around to Apple.  The only plausible explanation for this bifurcation is that Apple is really in charge here.  UltraViolet is not just an “every studio but Disney” consortium; it is also an “every technology company but Apple” initiative.  The list of technology companies participating in UltraViolet is huge, though Microsoft occupies a particularly important role as the source of the UltraViolet file format and the first commercial DRM to be approved for use with the system.  In other words, the KeyChest/UltraViolet dichotomy is shaping up to look very much like Apple vs. the Microsoft-led Windows ecosystem, or Apple vs. the Google-led Android ecosystem.

Still, the market for digital video is still in relatively early days, and things could change quite a bit — especially if consumers are confused by the choices on offer.  (Coincidentally, there’s a good overview of this confusion and its causes in today’s New York Times.)  UltraViolet is enjoying only modest success so far — compared, say, to Netflix or iTunes — and the introduction of Disney Movies Anywhere is unlikely to help make rights lockers any clearer to consumers.

In that respect, the UltraViolet/KeyChest dichotomy also has a precedent in the digital music market.  Back in 2001-2002, the (then) five major record labels lined up behind two different music distribution platforms: MusicNet and pressplay.  MusicNet was backed by Warner Music Group, EMI, BMG, and RealNetworks, while pressplay was backed by Sony Music and Universal Music Group.  MusicNet was a wholesale distribution platform that made deals with multiple retailers; pressplay was its own retailer.  In other words, MusicNet was UltraViolet, while pressplay was Disney Movies Anywhere.  Yet neither one was successful; both suffered from over-complexity (among other things).  Apple launched the much easier to use iTunes Music Store in 2003, and few people remember MusicNet or pressplay anymore.*

In other words, there are still opportunities for new digital video models to emerge and disrupt the current market.  And consumer confusion is a great way to hasten the disruption.

*The two music platforms did survive, in a way: MusicNet is now MediaNet, a wholesaler of digital music and other content with many retail partners; pressplay was sold to Roxio, rebranded as Napster (the legal version), and resold to Rhapsody, where it still exists under the Napster brand name outside of the US.

 

Awareness Grows over Digital First Sale February 19, 2013

Posted by Bill Rosenblatt in Business models, Law, Publishing.
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What would happen if the law were to definitively decide that users should get the same rights of ownership over digital downloads as they do with physical media products such as books, CDs, and DVDs?  A growing crescendo of events over the last few weeks indicates a growing awareness of this fascinating topic.

Let’s start with late last month, when Amazon was granted a U.S. patent on a scheme for reselling digital objects.  The patent describes a scheme for transferring “ownership” of digital content objects from one user to another, possibly with limits on the number of transfers, and handling the e-commerce behind each such transaction.

Digital resale is possible now. For example, the startup ReDigi is doing it for music downloads from iTunes and Amazon.  The question is not whether it’s technically feasible to support digital resale with reasonable safeguards against abuse of the process (i.e., “reselling” your content while keeping your own copies).  The question is whether doing so requires a license from content owners, or whether users have a legal right to resell their content without permission.

In the former case, any service (like ReDigi) that facilitates resale would have to pay royalties to copyright owners on every transaction.  In the latter case, it need not pay anything.  Since resold digital content is identical to “new” content, this would have highly disruptive implications for publishers and others in the value chain.  The law is not clear on this point, but it may become clearer within the next couple of years through litigation, such as Capitol Records’ lawsuit against ReDigi, and the efforts of a lobbying group called the Owners’ Rights Initiative.

Amazon’s patent does not take a position on whether digital resale requires the copyright owner’s permission; it simply discloses a mechanism for doing digital resale.  And of course just because Amazon has a patent does not mean it intends to implement such a system; Amazon was granted about 300 patents in 2012.  Still, the issuance of the patent prompted Wired to run an article about digital first sale and its implications two weeks ago.

That brings us to last week, when the O’Reilly Tools of Change for Publishing (TOC) took place in NYC.  TOC is the preeminent conference on technology and innovation in publishing.  Just before the conference, the TOC folks held an invitation-only Executive Roundtable featuring John Ossenmacher, CEO of ReDigi.  O’Reilly Media, a publisher of books and other information for IT professionals and a bellwether of technological innovation in publishing, confirmed that it is in talks with ReDigi to take the company into resale of e-books.  The room was filled with traditional publishing executives who had a more skeptical view, though Ossenmacher survived the ordeal well.

The TOC organizers had asked me to give a talk on digital first sale at the conference; I did so later in the week (slides available on SlideShare).  The room was packed with a broad mixture of editorial, business, and technology folks from the publishing industry.  Publishers Weekly, the leading trade publication of the book publishing industry, decided that the topic was important enough to feature in an article summarizing my presentation.  Most of the attendees were surprised at the highly disruptive implications for publishers, retailers, and libraries as well as users, though a few expressed the idea that digital resale is yet another inevitable type of change to legacy business models in the content industries.

Music Subscription Services Go Mainstream September 17, 2012

Posted by Bill Rosenblatt in Business models, Music, Services.
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While revisiting some older articles here,  I came across a prediction I made almost exactly a year ago, after Facebook’s announcement of integration with several music subscription services at its f8 conference.  I claimed that this would have a “tidal wave” effect on such services:

I predict that by this time next year, total paid memberships of subscription music services will reach 10 million and free memberships will cross the 50 million barrier.

So, how did I do?  Not bad, as it turns out.

The biggest subscription music services worldwide are Spotify and Deezer.  Let’s look at them first.

Spotify hasn’t published subscribership data recently, but music analyst Mark Mulligan measured its monthly membership at 20 million back in May of this year.  Judging by the trajectory of Mulligan’s numbers, it ought to be about 24 million now.  In fact, Mulligan shows that Spotify’s growth trajectory is about equal to Pandora’s.  Furthermore, that’s only for users whose plays are reported to Facebook.  A redoubt of users — such as yours truly– refuse to broadcast their plays that way (despite constant pleas from Spotify), so make it at least 25 million.

Deezer, based in France, is Spotify’s number one competitor outside of the US.  A month ago, PaidContent.org put Deezer’s numbers at 20 million total but only 1.5 million paid, and added that Spotify’s paid subscribership is at 4 million.

Rhapsody is the number two subscription service in the US market.  Unlike Spotify and Deezer, Rhapsody has not embraced the “freemium” trend and has stuck to its paid-only model.  Rhapsody passed the 1 million subscriber milestone last December.

The next tier of subscription services includes MOG, Rdio, and MuveMusic (where the monthly fee is bundled in with wireless service) in the US; regional players including WIMP, simfy, and Juke (Europe); Galaxie (Canada); various others in the Asia-Pacific market; and Omnifone’s recently launched multi-geography rara.com.  These should all be good for a few hundred thousand subscribers each.

So among all these services, 50 million looks pretty safe for the number of total subscribers..  As for the number of paid subscribers, IFPI put it at 13.4 million for 2011 in its 2012 Digital Music Report, published in January.  Given that this represents a 63% increase over 2010, we can be confident in saying that the figure now is more like 17-18 million, but I’d back it off somewhat because IFPI probably counts services that I would not categorize as subscription (such as premium Internet radio).  So let’s say 13-15 million paid – way past my prediction of 10 million.

It’s also worth noting that if these figures are correct, the percentage of paid subscribership is in the 26-30% range.  That’s in line with the 20-30% that readers predicted here when I  ran a poll on this a year ago — the most optimistic of the poll answer choices.

To put this in perspective, 50 million still falls far short of the audiences for paid downloads, Internet radio, and even YouTube, which are all well above 100 million worldwide.  But it proves that the public is catching on to the value of subscription services, and they are no longer a niche product for “grazers.”

Who’s Subsidizin’ Who? February 9, 2012

Posted by Bill Rosenblatt in Business models, Music, Publishing, Services, Uncategorized, United States.
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Barnes & Noble has just announced a deal offering a US $100 Nook e-reader for free with a $240/year subscription to the New York Times on Nook.  Meanwhile, MuveMusic, the bundled-music service of the small US wireless carrier Cricket Wireless, passed the 500,000 subscriber mark last month.   MuveMusic has vaulted past Rdio and MOG to be probably the third largest paid subscription music service in the United States, behind Rhapsody and (probably) Spotify at over a million each.

MuveMusic isn’t quite a subsidized-music deal a la Nokia Ovi Music Unlimited, but it does offer unlimited music downloads bundled with wireless service at a price point that’s lower than the major carriers.  (The roaming charges you’d incur if you leave Cricket’s rather spotty coverage area could add to the cost.)  Cricket is apparently spending a fortune to market MuveMusic, and it’s paying off.

It looks like the business of bundling content with devices is not dead; on the contrary, it’s just beginning.  The fact that both types of bundling models exist — pay for the device, get the content free; pay for the content, get the device free — means that we can expect much experimentation in the months and years ahead.  Although it’s hard to imagine a record label offering a free device with its music, we could follow a model like Airborne Music and think of things like, say, a deal between HTC and UMG offering everything Lady Gaga puts out for $20/year with a free HTC Android phone and/or (HTC-owned) Beats earbuds.  Or how about free Disney content with a purchase of an Apple TV?

As long as someone is paying for the content, any of these models are good for content creators. device makers, ane consumers alike.  Bring them on!

Facebook: Making the World Safe for Music Subscription Services September 25, 2011

Posted by Bill Rosenblatt in Business models, Music, Services.
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Facebook’s announcement of the integration of several music services at its f8 conference last week attracted a lot of hype and even more breathless press coverage.  But what exactly will it do for these services?

A lot.  A huge amount.  In fact, this could be a tipping point in favor of subscription services against the iTunes paid-download model.

First I must get some personal bias out of the way: I have always been a fan of subscription services, and I’ve never had much use for iTunes.  I’ve tried them all.  I feel that subscription services have suffered from a lack of marketing resources and from negative treatment in the press, which — at least until the hype started to build around Spotify’s US launch — dismissed them as “rental” and thus inferior to the iTunes ownership model.

I always felt that this was a naive and unfair characterization of subscription services, which offer a value proposition that happens to be unfamiliar to people who are used to radio and record stores.  iTunes is a digital version of a record store; Pandora is digital radio, taken to the limits that the law (specifically Section 114 of the Copyright Act) will allow.  That familiarity is why each of them have more than 100 million users today.

But subscription services have languished at a lower order of magnitude.  Even Spotify, with its free, ad-based offering, claims total membership somewhere between 10 and 15 million.  Paid subscription service membership is said to total around 5-6 million worldwide, with the top two (Spotify and Rhapsody) making up at least half of that total.

And it’s true that even if people understand the value of subscription services — the celestial jukebox, with libraries of over 10 million tracks available on demand at any time, for the price of about one downloaded album per month — they are not for everybody.   They aren’t good deals if you have a few favorite songs that you want to listen to over and over again.  They are much better for “grazers” like myself, who like to try all sorts of music before (in most cases) losing interest and moving on to something else.

But I wonder about cause and effect here.  Do people listen to the same few songs over and over again because they have been conditioned to the record-store model — where every song represents a financial investment —  or would they still do so even if the model changed?  (Did I become a grazer while being a radio DJ for 12 years and enjoying access to large music libraries at three radio stations?)  It’s hard to say in general, but I bet that at least some people will change their habits once they see the advantages of the alternatives.

That’s where Facebook comes in.  Subscription services have competed with each other by offering more and more features that are likely to appeal to the same core audience, attempts to be all things to all people, or pure bloatware.  Rhapsody, MOG, and Napster in particular have become many-headed beasts that try to appeal to all types of listeners while not succeeding in attracting many beyond the cadre of grazers.

Facebook integration should change all that.  The basic idea of Facebook integration is that whenever you play a song on one of the integrated services, it shows up on your Facebook page for all your friends to see. They can click on a link and play the same song on the service on which you are playing it.  The participating services have set up various flavors of free trials and restricted free tiers of service a la Spotify.  This will introduce subscription services to a vast new audience of people, many of whom would otherwise not have considered subscription services at all.

Subscription services have “share” features, through which users can post their songs playing or playlists to Facebook, Twitter, blog posts, email, etc.  But how many people actually do this, and how many people actually respond?  Not very many.  It’s not consistent, it doesn’t scale well, and most users probably treat this kind of thing as an annoyance, a form of spam.  The new Facebook integration amounts to an opt-out version of this: if you connect with Facebook, all of your plays get posted there.  Given Facebook’s enormous reach, that’s one hell of a lot of “I’m listening to this song” posts; they will become a fact of life on Facebook and virtually impossible to ignore.

I don’t know of any financial terms between the participating services and Facebook (e.g. commissions on paid subscriptions), but as they say, you can’t buy this kind of publicity.

Yet I am a little concerned about how all of the subscription services are falling over each other to offer freemium deals to take advantage of all that publicity. There are just too many subscription services now.  Spotify and Rhapsody are the top two, and there are enough differences between their feature sets to keep them both viable for a while. I worry that second-tier services like MOG, Rdio, and Slacker will try to compete on price or by extending their free offerings to the point that the public will come to expect more and more for nothing.  

I have little doubt that the market can’t support more than two or three of these services and that the others will wither and die.  (Rdio, which depends too heavily on features that Facebook integration now renders redundant and has a lackluster mobile client, ought to be the first to go.) Let’s just hope they don’t take the entire industry down with them by setting public expectation that they should be free while hemorrhaging money all the while.

Facebook integration is the marketing tidal wave that subscription services have needed ever since Rhapsody became the first to launch with major label licensing back in 2002.  I predict that by this time next year, total paid memberships of subscription music services will reach 10 million and free memberships will cross the 50 million barrier.  iTunes and Pandora certainly aren’t going away, but subscription services will finally join them as the viable music business model that they deserve to be.

How High Will Spotify’s Paid Subscribership Go? August 10, 2011

Posted by Bill Rosenblatt in Business models, Europe, Music, Services, United States.
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More on the direct consumer revenue trend: the first set of results of Spotify’s US launch are in, courtesy of the Wall Street Journal’s All Things D.  As of earlier this week, only a month into the service’s US presence, Spotify has signed up 1.4 million subscribers, of which 175,000 are paying.  At 12.5%, that’s a bit lower than the 15-16% paid subscribership Spotify is enjoying in Europe, but it doesn’t change Spotify’s overall paid-subscriber rate very much.

All Things D’s Peter Kafka points out that the US conversion rate from free to paid is likely to be lower because US subscribers get more free music during the first six months of the US launch than European free subscribers do.  But I would also argue that the conversion rate is lower because Spotify is new in the US, and people are just trying it out — many of whom may already subscribe to a competing service such as Rhapsody.

Given that the addressable market for Spotify increased by 150% when it launched in the US (about 150 million Internet users in the seven European countries in which Spotify operates vs. about 220 million in the US), Spotify’s total subscribership could end up in the multiple tens of millions fairly quickly.  But to me, the more important question is: given the steep growth in its percentage of paid subscribers, where does that growth stop?

Here’s a poll:

 

Good News for the New York Times July 22, 2011

Posted by Bill Rosenblatt in Business models, Publishing, Services.
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A short postscript to yesterday’s article on the strong recent uptake in paid subscription music services:

Today the New York Times revealed that 281,000 users are paying to receive its content digitally, including 224,000 in its new Digital Subscriber program and the remaining 57,000 paying for Times subscriptions through e-readers.   The Digital Subscriber service launched in March.  The Times has already beaten its stated goal of 200,000 digital subscribers by the end of the first year. 224,000 is 26% of the paper’s daily print circulation; the figure does not include the 756,000 print subscribers who also have digital subscriptions.  The 26% ratio is about the same as the percentage of digital to print subscribers to Cook’s Illustrated.

To put those numbers in context: the goal that the Times surely has in mind is 400,000.  That’s the number of paid online subscribers to the Wall Street Journal.  The other interesting number in the periodical publishing space is that of Consumer Reports, which is the largest paid online publication at 3.3 million online subscribers (as of November 2010).  Neither Consumer Reports nor Cooks Illustrated carries advertising.

Different subject: How do you like the new site layout?

Do Paid Music Subscriptions Indicate a Tipping Point? July 20, 2011

Posted by Bill Rosenblatt in Business models, Music, Services, United States.
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Maybe it’s reflective of consumers’ generally increased willingness to pay for content, now that more paid models are out there.  Maybe it’s the launch of legal content services that are really easy to use and represent what users, as opposed to record labels or online retailers, want.  Maybe it’s both factors and more.  But whatever the reasons, consumer sentiment towards respecting copyright and paying for legitimate content seems to be moving in a positive direction — at least for music.

Let’s get one thing out of the way quickly: yes, digital copyright infringement is still massively rampant, and it’s not going away.  And the changes I’m observing are small in magnitude.  But they indicate trends that could become larger.

I’m seeing comments to stories on mainstream tech sites such as CNet News.com and TechCrunch that are more balanced than they have been about the need to respect copyright and ensure that content creators can get paid. As I mentioned last week, the reaction to the recent Copyright Alert System announcement from major ISPs and content owners was more measured than I would have expected.  There were even anodyne statements such as “Educating users about copyright is a worthy endeavor”  and “…important educational vehicle that will help reduce online copyright infringement” from EFF and Public Knowledge respectively. Could this be a sign that extremism in the “copyright wars” is mellowing?

The biggest quantitative sign of a tipping point is that the music industry has reversed its long slide and reported an increase in revenue for the first time since 2004.  The overall increase is only 1%, but digital sales are back on the rebound too, at double-digit increases.

Yet there’s a more telling statistic that no one seems to be talking about: the dramatic uptake in paid subscription music services over the past year.  This chart from Spotify data, culminating in 1.6 million paid subscribers on the eve of its recent US launch, tells the story best:

Rhapsody’s subscriber numbers are up, too, reversing a decline that bottomed out in early 2010 before it spun out from RealNetworks as an independent company:

Pandora’s revenues from paid subscriptions also rose dramatically in the last year. The company’s recent IPO filing documents indicate an increase in revenues from subscribers to its Pandora One paid service (no ads, better sound quality, unlimited skips) from 6% to 9% to 14% over 2008-2010.

Pandora’s percentage of paid subscribers (as opposed to revenue) is much lower than that of Spotify; it’s only about a third of a percent.  But it is also growing much faster than overall subscribership.  And interestingly enough, that’s exactly the same as the New York Times’ percentage of paying online subscribers, when expressed as a ratio of paying subscribers to unique monthly website visitors.   (The Times figure was released in April 2011, only a month after the paid service went live.)

The difference between subscription music services on the one hand and the Times and Pandora on the other is easily explained as a matter of consumer expectations.  Newspapers and “radio” are services that consumers expect to get for free.  Getting them to pay was always going to be a tough proposition.  But subscription music services have no such legacy in the pre-digital world; they represent a new value proposition.

Rhapsody only operates in the US; until now, Spotify only operated outside the US.  Now they’re direct competitors.   Before its US launch, Spotify had paid subscribership that amounted to about 1.1% of the Internet-connected populations in the seven countries in which it operated.  Rhapsody’s subscribership in the US is 0.36% of the net-connected population.  Of course, Rhapsody has more direct competitors in the US, including Napster, Rdio, and MOG, though their subscription numbers are smaller.

The burgeoning Rhapsody-vs.-Spotify rivalry is generating a healthy buzz about subscription music services that should buoy all of the players.  You can see the nature of the competition in blogs and support forums.  Rhapsody has more features and a steadfastly loyal subscriber base.  But Spotify has a cleaner design and, more importantly, a far better mobile experience than any of the US-based competition.  Music has been enjoyed on portable devices ever since the advent of the transistor radio over half a century ago.  The use of PCs and Macs for playing music will soon be viewed as a detour from its natural evolution.

It will be interesting to see how high paid subscription service subscriber numbers climb.  It’s the first born-digital business model for music that actually makes money.  It may even become a keystone in the re-stabilization of the music business.   I’ll report back after Spotify has been in operation in the US market for a year.

Music Forecast: Cloudy April 5, 2011

Posted by Bill Rosenblatt in Business models, Mobile, Music, Services.
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The latest trend in online music services is a feature set sometimes known as “cloud sync.”  With cloud sync, users can upload their MP3s to an Internet server, which will copy the files onto the user’s other devices, stream the music onto devices with MP3 players and Internet connections, or both.

Cloud sync is not a new concept.  It has been incorporated into several music services, including MP3tunes, DoubleTwist, Audiogalaxy, GrooveShark, Spotify (paid version), Catch Media, Rdio, and MOG.  But last week’s launch of Amazon Cloud Player has thrust cloud sync into the limelight and raises some interesting legal and economic issues.  Cloud Player is the client side of a cloud sync service that also includes Cloud Drive, Amazon’s existing online storage facility.

The legal question is: does a service provider need a license from music companies in order to offer this set of services?  The answer appeared to be yes… until last week.

Music industry provocateur Michael Robertson initiated the cloud sync trend in 2005 with MP3tunes.  MP3tunes let users stream their music to any MP3-enabled Internet device.  It also went a step further by identifying music in users’ collections and letting them skip the upload step if the music was already in MP3tunes’ server library; essentially all you had to do was prove you owned the music and it would be available online.  The music industry sued MP3tunes, alleging that it did not have the rights to do this.  The suit is unresolved at this writing.

Other services, such as Rdio, MOG, and Spotify offer cloud sync features as part of their paid subscription streaming services.  One would assume that cloud sync rights were included in the license agreements they negotiated with the record companies to supply music.

Yet other services, including MP3tunes, don’t actually supply music; they just work with users’ own files.  So does Amazon’s Cloud Player; it is separate from Amazon’s MP3 retail store (for the most part; more on this shortly).  And thanks to Ars Technica, we now know that Amazon doesn’t have music licenses for Cloud Player.

Amazon claims that it doesn’t need any additional license.  Its position is that it is merely helping users play music they already own and do what they could do with any number of existing online storage services.  Sony Music, for one, has raised concerns about this.

Amazon launched Cloud Player quickly in order to get to market before similar services from Apple as well as Google.  As David Pogue points out in the New York Times, Amazon is trying to give consumers reasons to use its music services instead of iTunes.  The major record companies gave Amazon licenses to distribute music in DRM-free MP3 format back in 2007 in order to create a viable competitor to iTunes.  It’s also noteworthy that Cloud Player uses Flash, so it won’t run on Apple iOS devices.

From that perspective, some record companies might want to welcome any features that Amazon can add that attract users away from iTunes — at least until Apple launches its own streaming services.  Amazon is most likely betting that the combination of offering record companies a better competitor to iTunes and “we have big lawyers, so go ahead and sue us” will deter the majors from taking legal action where they had done so before.

Yet there is another aspect of the legal argument.  As I argued in my discussion of Catch Media a few months ago, the odds are that most of the files that users upload to cloud sync services don’t contain music that they really own in the first place: it’s illegal downloads or ripped CDs from friends.  Record companies are concerned that cloud-sync services merely encourage unauthorized copying by making the copies more valuable.

Of course, a suitable license fee could ameliorate or eliminate those concerns, as it has done for Catch Media.  That brings us to business model issues.

Amazon offers Cloud Player for free… up to a point.  Users can store up to 5GB for free, enough space for roughly 1200-1400 songs.  If you want more space, you have to pay Amazon for it, US $1 per GB per year or about a third of a cent per song per year.  Yet if you buy MP3s from Amazon, Amazon includes the online storage space for them at no extra charge.

This mostly-free standalone cloud sync model, as opposed to those offered as part of paid monthly subscription services, will wreak havoc on other standalone cloud sync providers that depend on revenue from direct consumer payments (Catch Media),  advertising (GrooveShark, Audiogalaxy, DoubleTwist), or both (MP3tunes).  Catch Media’s one retail partner (Carphone Warehouse in the UK) charges users about $4/month for unlimited use.  That’s not sustainable pricing.

It’s pretty clear where this will end up: once Apple and Google enter the streaming market, cloud sync will be a “bullet list item” for all music services and will be expected to be entirely or mostly free.  Music services will need to find other ways to create value that consumers will want to pay for.  Sell T-shirts, maybe?

E-Book Lending: The Serpent in the Garden of Eden March 3, 2011

Posted by Bill Rosenblatt in Business models, DRM, Law, Libraries, Publishing, Services, United States.
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I wrote my previous article about e-books and libraries in response to an article by my colleague Thad McIlroy on his Future of Publishing site.  The news that HarperCollins had put restrictions into its e-book licenses for lending library services so that each “acquired” title could only be loaned out 26 times was fresh and appeared as a side note in my article.  HarperCollins (a division of Rupert Murdoch’s News Corp) is one of the world’s largest trade book publishers.  So, what about this major development?

First, let’s quickly review the technical and legal backdrop to what HarperCollins is doing.  Libraries normally buy (acquire) books to lend to library patrons.  This is made possible through the copyright law, specifically section 109, which is known as First Sale.  Section 109 says that anyone who legitimately obtains a copy of a copyrighted work (e.g., a book) can do whatever she wants with it, including resell it, lend it, or give it away.  Eventually physical books in lending libraries become worn and damaged; libraries may repair them or dispose of them.  Libraries control lending abuses by collecting fines from patrons who return books late or not at all.

In the world of e-books, libraries don’t buy titles; they license e-books in order to license them to patrons.  A license is a contract, the terms of which are ultimately up to the publisher.  Copyright law allows libraries to lend digital works to their members, but DRM-packaged e-books are governed by licenses, and thus contract law, not copyright law.

Of course, it takes no effort to make a copy of an e-book.  That’s why library services use DRM to ensure that e-books are loaned only to properly credentialed users (i.e. members of the library) and that those users can’t make copies for their million best friends.  Service providers like Overdrive and NetLibrary have arisen to make it possible for libraries to “lend” e-books in a way that is very similar to the way they lend hardcopy books: you get access to the e-book for the library’s lending period (perhaps a couple of weeks, or for a reference work, a few hours), and then it “disappears” from your device and becomes available to another library member.  Libraries can license multiple copies of popular works so that more than one patron at a time can borrow them.

The noted library technologist Eric Hellman calls this the “Pretend It’s Print” model — a characterization I don’t quite agree with, but leave that aside for the moment.  Hellman characterizes “Pretend It’s Print” as a reasonable model, at least for the time being.  But HarperCollins appears to be taking “Pretend It’s Print” quite literally: they seem to be trying to emulate physical wear and tear on a book that leads some libraries to discard books after a while.  Still, Hellman’s blog post on the subject drips with contempt for HarperCollins.

I also believe that HarperCollins has done the wrong thing, but for a different set of reasons.  Let me preface my reasons with a couple of caveats: I have no access to statistics on the expected lifespans of library books, though I found a couple of data points that expect between 20 and 35 loans until a book must be either discarded or repaired at a cost that may exceed its value — thus making HarperCollins’s 26 seem like an appropriate number (or did they find the same two articles I did?).  I also have no insight into a library book’s promotional value to a publisher, but I suspect it’s not very high.

HarperCollins’s 26- loan limit is just a bad decision.  It is bound to please absolutely no one.  It is a lose-lose-lose proposition.  The library community is up in arms on Twitter and elsewhere about the decision.  Many are calling for libraries to boycott HarperCollins material in hardcopy as well as e-book format.

Yet at the same time, two other major publishers, Macmillan and Simon & Schuster, never licensed e-books for library lending in the first place.  Librarians complain about this, but not very much.

As I said previously, I had heretofore considered e-book lending to be one of the real success stories of DRM.  Libraries get to lend e-books, publishers get paid for those e-books, and library patrons can read them on a wide range of devices (pretty much anything but a Kindle) without leaving their homes or offices.  Everybody wins.

Furthermore, let me be clear that some form of content protection is absolutely necessary for library e-book lending.  To allow library patrons to make additional copies of “borrowed” digital materials with even relative impunity is just plain unfair to publishers and authors.  (Yes, DRMs can be hacked; people can make digital scans of hardcopy books too.)

Yet HarperCollins is making two serious mistakes in DRM implementation.  One is to try – too literally – to use DRM emulate a physical product in the digital domain.  This has never worked, because a digital emulation will always contain one or more shortcomings with respect to the original physical model that will not meet user expectations.  “Pretend It’s Print” may be a convenient point of reference for consumers, but it is more effective to focus on the content access model rather than the physical product in designing digital content services.  (As far as I know, record labels aren’t experimenting with DRMs that gradually introduce clicks, pops, and skips into digital music files.)

In this case, the HarperCollins model will fail to meet “user expectations” by angering librarians, who don’t like DRM in principle.  Either the e-book will suddenly become unlendable without warning or the DRM system will warn librarians that they will soon have to pay for another license to keep lending the e-book.  How many libraries will re-up?  Not many, I suspect.

Furthermore, this move defies logic regarding publishers’ strategies for their backlists (catalogs of older content).  Publishers believe that their backlist titles have less value than frontlist titles, and they constantly seek ways to invigorate sales of their backlists.  By making it unlikely that e-books will be available for library lending after a year or so, HarperCollins is both cutting off access to products that it presumably does not value highly in the first place and hurting its ability to invigorate its backlist.  This makes no sense at all.

The other mistake that HarperCollins has made is to introduce complexity into a DRM implementation in a way that adds no value for users.  Many early digital music services failed to gain user acceptance because they were too complex for users to understand.  Some, for example, had Byzantine pricing plans – X permanent downloads, Y timed downloads, and Z streams per month – that resembled the bad old days of confusing cell phone plans.  iTunes won because it kept things simple.  Nowadays, as music services take on more and more new features in their attempts to unseat the iTunes juggernaut, they risk similar user confusion and alienation (most egregious current example: the feature-overloaded MOG).

If HarperCollins wanted to try something different with licensing terms, it should have done something that offered value or choice.  It could, for example, have offered a choice of limited-loan titles for less money or unlimited-loan for full price.  (Eric Hellman tried polling this question; the responses he got prove little more than how emotional everyone is over this issue — which is exactly my point.)

If HarperCollins does not get value from e-book lending, then why not just pull its catalog entirely and join Simon & Schuster and Macmillan as library holdouts?  If they do that instead, librarians need not bother boycotting HarperCollins’s e-books; and any threats to boycott the publisher’s hardcopy releases will surely ring hollow.

The end result of a move like this can only be the slow and painful death of library e-book lending.  HarperCollins may hope that other publishers will follow its model – though not so closely as to invite antitrust scrutiny.  This will only lead to further confusion for librarians and users alike: HarperCollins allows 26 loans, Random House allows 35, Penguin allows 20, etc.  There is no way that a model like this can lead to the growth in library e-book lending that libraries need to survive as e-reading grows in popularity.   `

Libraries are highly unlikely to reverse the tide in the market alone.  Boycotts may be emotionally satisfying but will have no practical impact.  Instead, the library community’s best hopes lie in the legal system.

The most likely route would be to try to get the Copyright Office, at its next DMCA rulemaking in 2013, to approve an exemption that would allow libraries to circumvent (hack) DRMs in order to lend e-books as long as they re-package them for the library patron with the same type or strength of DRM.  This would be a more elaborate exception than any that the Copyright Office has granted in its four DMCA rulemakings to date.  It also has various disadvantages: it could only last three years under the DMCA rulemaking rules (every exception only lasts until the next triennial rulemaking); it could cost libraries more money to support than they pay Overdrive or NetLibrary, which benefit from scale economies; and it could induce publishers to demand (and perhaps even pay for!) DRM that is more difficult to hack.

But perhaps it’s worth a try.  Unlike the Section 108 Study Group — a body that recommends changes to the part of copyright law that covers libraries, which ironically has little bearing on the issue at hand — it is possible for anyone to submit a request for a DMCA exemption to the Copyright Office without first having to run a gauntlet of copyright industry lobbyists.

If the Copyright Office were to grant such an exemption, it would mean that a library could be free to purchase any e-book — not just those that the publisher decides to license — and lend it to its members on its own terms while respecting copyright.  The result would be a better version of “Pretend It’s Print” — in the business model sense, where it counts.

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