HOOKSINC…

This article is a reprint from the KeyInfluencer E-Newsletter (originally published 03.2006). I believe that it is a timely read considering the recent market reports regarding the recorded music industry in general and Warner Music in particular. The IFPI has confirmed that the global recorded music market was down 5% in 2006 and that the value of physical music sales was down 11% in 2006.

HOOKSINC. August 2007.

TAKE THE BLUE PILL:

Downloading the Future Model

And Morpheus told NE-YO, “Take the red pill and your world will remain the same; stagnant, uncreative, unprofitable. You will continue to be beholden to the gatekeepers of corporate culture. You will never reach the masses or your true audience. Your message will be corrupted with issues like payola, quarterly results and compromised artistry. You will receive a penance for your content. And lastly… your message will be owned by the establishment.” NE-YO was stunned. This wasn’t the reason he signed the contract. This wasn’t his purpose. “And if I take the blue pill?” he asked Morpheus. “Take the blue pill, and you will enter the matrix of the future. Your message will travel beyond your wildest dreams. It will reach the masses, ensuring profits and pure content, free from the establishment. You will own your message and your purpose.”

And this is NE-YO’s dilemma. A new artist on the Def Jam roster forced with “The Choice,” at the crossroads of his life. Here he is an artist with great talent and the ability to create great content. He just wants to get his content to the masses and get paid for it. Should he go with the traditional plan, the current model? No, Nada, “Hell to the Nawh!” as Whitney would say. “ALERT!” to NE-YO’s team! Jay-Z, President of Def Jam and Tina Davis, cultural muse extraordinaire - it’s time to reassess the situation.

The 2005 holiday sales season highlighted an old problem in a new format; The Digital Single. This is Napster revisited, where the digital downloading dilemma continues. It was the week after Christmas that highlighted the paradigm shift, where digital singles outsold physical album sales. This is big. This means that digital singles are serving a market need. Consumers no longer want to pay $15.00 - $20.00 for an album with one or two hits plus filler. Now, they have a choice, The Digital Single. The Washington Post says holiday sales saw both record companies and artists experience record breaking downloads. It was DL4’s “Laffy Taffy,” the incessantly sweet song out of the sweet south that shattered Kanye West’s record for “Golddigger” with over 175K units downloaded in one week! Great headlines! Here’s the problem - horrible margins.

Artists, managers and record companies want the consumers to buy the full album, where they make a larger margin. For example, an established artist makes roughly $2.00 per album vs. $0.15 - $0.25 per single. And record labels are trying to maintain their margins too. They yield 5% margins on singles and 9% margins on records. This is the reason the album format was introduced as a product in the first place – much larger margins. The problem is that the industry has forced this on the consumer. And now they’re experiencing a backlash. That 9% margin is declining – rapidly. It’s like trying to catch a falling star. I challenge the newer artists to consider this. The record companies make a lot more than you do. Your interests are not aligned. This is the red pill.

This brings us back to the dilemma for NE-YO and his team. The story of the week is that Def Jam has refused to make NE-YO’s single, “So Sick,” available for digital download. They are withholding rights from iTunes and the like to “insure” that first week album sales are not cannibalized at offline retail outlets. NE-YO’s talent is undeniable. NE-YO’s single, “So Sick,” is in the Top 10 of the Billboard Charts! The Billboard Top 10 means a lot of exposure, huge billings and big money in the traditional model. But as “Laffy Taffy” has shown us, we just witnessed a paradigm shift and the traditional model is no longer effective.

Hits Daily Double poses some important questions to the music industry. What is their position on downloadable singles? Will the major record labels continue to refuse to make singles available? Or will they begin to “strategically” withhold access to hit singles, in the hopes of boosting that bottom line? Will they play the short game vs. the long term game? Do they have a choice?

KeyInfluencers, the industry does have a choice. Instead, they continue to make the short term play. Artist, managers and record companies are missing the big picture. They need to cut overhead, get back to the basics of the music experience and give consumers what they want; great music, great performance, great experience. The current model has these guys in a chokehold. They actually really do need these 9% and declining margins to support the current overhead costs. The thing is, this model is not working and is not going to improve. The hockey puck is moving. And my fear is that the content creators will not move with it or ahead of it. “ALERT!” to Jay-Z and Tina Davis.

Why, oh why can’t we learn the lesson? We are not selling the music, we are selling the brand. You say, “How does this new model work?” “How will we be profitable?” See Artic Monkeys, the UK band who toured extensively, gave away roughly one song a month, then released a traditional retail edition of their music. The album debuted at #1 on the UK charts with over 300K units sold in 1 week. That’s the equivalent of over 1 million units in the US market. The lesson is this - consumers think that they want a song, but what they really want is an experience and they will pay top dollar for it.

NE-YO should look to one of his creative mentors, Prince, for business advice. Prince recognized his lack of freedom, ownership and profitability in the mid 90’s. He has offered MP3 singles and full album downloads through his web site for some time, bypassing the traditional business model. Prince grossed over $100 million off his “Musicology” tour in 2004… without a radio hit. He took the blue pill.

Addendum. August 2007.

*”The economic model for making the investment in artists’ career is no longer sufficient if our return comes only from the recorded music business.”

Edgar Bronfman Jr., WMG’s chairman and chief executive, Wall Street analysts conference call…

* Ne-Yo’s latest mega hit was “Irresistable” performed by Beyonce. He is currently rumored to be in the studio with Whitney Houston, Janet Jackson and Celine Dion. His future is bright…

* Prince gave away 3million CDs in The Daily Mail last month. He refers to this as “direct marketing” for his upcoming 21 dates at London’s O2 Arena…

* It is rumored that Prince received over $500,000 for this promotion from The Daily Mail. Assuming 1) that he negotiated a “superstar” artist royalty rate of 20+% with SonyBMG for the UK release of “Planet Earth” and 2) that he matches his previous sell of 80,000 units in the UK, means that The Daily Mail purse was at least 300% more than he would have received from Sony UK in royalties…

* Prince has sold out his 21 dates at a ticket price of roughly $62.95. A rough profit of $25 million for Prince…

* Moral of the story: You can make a lot of money and gain a lot of fans “giving” away music.

Primetime TV is the new FM radio:

Next Stop Broadband

There are more musical acts breaking on Grey’s Anatomy than the Billboard Hot 100. ABC knows this because they took the opportunity to create soundtracks vol. 1 & 2 plus a highlight reel/video episode for the Emmy Award winning drama! Their top artists include familiar names like The Fray, Lily Allen and Mat Kearny. Grey’s Anatomy is building music brands. This used to be Dick Clark’s job. Watch out ABC, because the next stop is broadband. Yes, broadband is fast becoming the new primetime. Where we will see new programming brands. We already see how trends, politics and social commentaries are exploding out of YouTube like Apple in 1984 and O.J. Simpsons “If I Did It”. Wow.

Online Video:

The next (niche) frontier

NBC/Universal has announced a new online video venture. They were motivated by the popularity of YouTube. More specifically, they were motivated by the use of their video content to drive traffic to YouTube. NBC/Universal figures that they should benefit from any potential advertising dollars that a snippet of “Heros” generates - either offline or online. They are right. Hallelujah, big media is finally coming to the party! With the popularity of YouTube and the advent of niche sites like jumptv, code.tv, maniatv, and GNN, it’s only a matter of time before all the content players come out to play. Why? Because the technology is 1) cheap enough to implement and 2) has proven that it can generate an audience. Yes, times are changing. Technology solutions like Joost, Brightcove and Maven Networks have made significant inroads in the past 9 months. Corporate clients like Viacom and ABC now have deals in place with these technology visionaries. Just 12 months ago they would NEVER have considered distributing their content on the net.

For those who are not NBC/Universal, but who are looking to enter this market - it is all about niche. My advice – find a niche and own it! People are tired of the homogenous programming associated with cable and network distribution. Let’s take the Anna Nicole Smith story for example. We saw around the clock coverage on CNN, ABC, TV Guide Channel, MTV; four very different channels (in theory)… To add insult to injury, they all said the same thing. So why did each of these channels cover the same story the same way? Because it is easy; easy to source from the same news wire; easy to sell advertising on the tabloid story of the moment; easy to be a part of the pack. It is easier to repackage a story than digging deep and addressing issues that inform and/or educate. The internet appears to be the only distribution channel available for targeted original programming.

This is good news for an audience that is looking for substance over sound bites. This is even better news for entrepreneurs, content creators and visionaries with something to say. This my friends is why sites like code.tv, mania.tv, GNN and tomorrow pictures.tv are growing at a breakneck speed.

Shock Marketing:

Is it the only way to break through the clutter?

No. However, shock jocks, shock commercials, shock content seems to be the hottest thing going these days. Car companies are doing it. Broadcasters are doing it. Soon, Proctor and Gamble may implement shock in order to push Tide… Hey, Snickers did it with the infamous homoerotic kiss Superbowl 2007. Perhaps the increased use of shock in advertising and content is because marketers can clearly link a shocking campaign to profits or ROI. As a marketer, I’m always looking for ways to justify a spend. But, what happens when the shock goes left? You get situations like Don Imus “Nappy Headed Ho’s” and Turner Broadcasting’s $2 million “Aqua Teen Hunger Force” Boston Bomb Scare. The costs to corporate parent companies can be significant. The costs to marketers’ reputations can be crushing.

I’d like to proffer this thought. Just as shock marketing can build your customer impressions, it can also erode your customer base. As a culture, we are becoming numb to the shock and therefore, numb to the message. In some cases, the message is so offensive that people just tune out. I think this presents an new opportunity for marketers to deliver a message that actually addresses the customer’s needs instead of the customer’s fears.

Mobile Blogging

The new next big thing is Twitter, a widget that allows you to dig deep on the mobile blog craze. Hmmmmm. People watching mixed with blogging could be interesting. It could also be annoying. Time will tell.

The purpose of this blog is to illuminate business opportunities for media concerns. To show where money has been left on the table. Think Tom Cruise and “show me the money!” I’m specifically interested in outlining new revenue models driven by new technologies. I’m not sure that I accomplished that in this week’s forecast due to a good dose of gloom and doom. I’m determined to take a lighter approach to the recap! The good news is this: there is tremendous financial opportunity for media, content creators, artists, businesses and communities in connecting these dots.

It’s the Media (Stupid) Redux:

Clarification: “loss leader” = a pricing strategy

I’ve had some intriguing conversations this week with intellectual property owners: writers, directors, musicians, producers. They know that they are part of valuable market segments, niches, sub culture affiliates; yes, the long tail. Familiarize yourself with “The Long Tail” when you get a chance. It’s not new, but it’s very relevant to technology and business. My interpretation of the theory is that basically, the concept of scale has been redefined. You don’t need to sell massive amounts of one product to be profitable. There is pint up demand for specialized goods and services on the local level that up until now, we’ve had no way to supply. Technology provides a distribution channel to accomodate or supply that demand.

The economics behind the long tail are real. Google is proof of that. Google is the distribution channel that supplies the demand for local advertising. A 67% increase in total revenues last quarter - brilliant! A $3.2 billion bullseye on Google’s forehead - bummer! Viacom smells new money in the long tail.

So, back to the intellectual property owners and entities that actually create products. I’m convinced now more than ever about the impact of technologies like YouTube and Google for these guys. It’s really very exciting. I think that the entities that actually create products, the content creators have an obvious advantage over those that promote & distribute products. Viacom is playing this card with Google. The irony is that this conversation should not be between Viacom and Google. It should be between Jon Stewart and YouTube.

On the Starbucks & Paul McCartney deal, I say brilliant! There is no more Tower Records, Barnes & Noble’s music selection has always been short on selection, Best Buy’s music selection is morphing into a DVD sale rack. So cheers to Sir Paul! He’s correctly identified a great distribution outlet targeted specifically to his audience.

Subprime Submessage:

Don’t have a lot to say regarding the subprime market but that it continues to dominate the financial news. The upshot is if you’re looking to buy, you’re going to have a fantastic selection to chose from by the end of the year!

Rise of the Widgets: What Exactly is a Widget?

It’s a popular term in Internet jargon that refers to a box or module on your computer screen that allows you to multi-task and/or personalizes your computer screen. For instance, you may have your employer’s website up on your work homescreen, but a small widget, like Google Desktop, embedded in one of the corners that allows you to see weather, news and IM someone. My cool widget of the week is from Evoca. You can basically create a podcast and publish it from your cell phone.

Is The Secret Really A Secret?:

I love the Royal Bank of Scotland “Make It Happen” commercials. I think they’ve hit it the nail on the head when it comes to “The Secret,” pop culture’s most recent self help trend, hype, promotion, Top 10, solution… Positive thoughts are very powerful, but only when they are followed by deliberate action. Example: If you’ve got one of those ARMs and your mortgage payment is set to balloon - REFINANCE NOW!!! I haven’t read The Secret but I can pretty much agree with that. Gotta give The Secret camp an A+ for marketing; it’s everywhere (even this blog…). But I do I hope that their customers can separate the marketing from the product. Watch the RBS commercials and you can bypass the secret.

The Barter System on the web is really picking up steam. www.paperbackswap.com is apparently all the rave with avid readers. The owners have developed quite a cool community of readers sharing the book love. It’s also a profitable business model, which I imagine is a breath of fresh air for the publishing community. Maybe they should expand on that.

Multi-level marketing is the new crack, repackaged in the Internet age (see Burnlounge) for middle America.

It’s the Media (Stupid):

Understanding Media as the Loss Leader

It seems like everywhere I look these days some business entity is making a new play in the media & entertainment space. You would think that there are high margins and unparalleled growth for the taking. Well, I suppose that one out of two isn’t so bad…and the advent of new technologies certainly puts a spotlight on the growth. While record companies and film studios are in a downward spiral rife with high talent and distribution costs, the masses are enjoying more music and movies than ever before - courtesy of P2P sites and your local bootleg DVD operation. The fact is that 1) people will always have a favorite song and 2) people will always need an escape from the real world into entertainment fantasy. With a worldwide population of 6.5 billion with a natural rate of increase at 1.2% annually, the market for growth will be there. What media companies must understand (and very quickly before they miss the boat) is that in media, they now have a commodity. More importantly, they have a commodity with a significant emotional hook. Come on, I’m sure that you remember the song that was playing on your first _______ (fill in the blank). Media is the emotional gift that keeps on giving. The rub for media companies is that it is no longer exclusive. Instead, it is now a bona fide commodity. The charge for media companies is to recalibrate their business models for this new reality. I suggest that they take a page out of every other mass retailer in the game (Target, Best Buy, Wal-mart) and use their media as a loss leader.

Now Starbucks, they seem to understand the media as a loss leader concept. They just recently announced the Starbuck Record Label featuring Sir Paul McCartney. Personally, I don’t think they expect to make goo gobs of money on McCartney’s next release - margins will be too thin. However, they DO expect to make goo gobs of money selling an extra latte or banana loaf when those baby boomers storm the store, i.e. the only distribution channel, to see, hear, and maybe purchase the McCartney CD. This, my friends is the beauty of media as a loss leader.

Then there is Idol Camp. Of course in this example, American Idol uses music as the carrot to get the perennially hip parents, grandparents hooked before they pay an exorbitant amount in camp fees - not including extras. I bet that American Idol will have a fantastic collection of merchandise and extra services available to all those future idols for consumption. These are goodies that no participating parent will be able to say “no” to. Here again, we see that they are not selling the music per se, but all the bells and whistles that make the music an experience to savor for the future.

Even J.P. Morgan is getting in the game, looking to entertainment properties for “significant growth.” Again, who knew that there is growth in entertainment? Well there’s not (really), but there is certainly growth in the distribution of entertainment and all the goods and services associated with that distribution. This is because technology has forced distribution to change and become more efficient. And in a free market system, this means that there’s more money to be made because the market will expand. Translation - not so many mega blockbusters in our future but an avalanche of independent projects a la Crash, Brokeback Mountain and Hustle & Flow on the horizon. J.P. Morgan intends to finance and advise them all; regardless of whether they are seen at the local multiplex or on your MacBook Pro. Yet another example in the beauty of using media as a loss leader where those ahead of the curve now realize money that was left on the table. Yes, there are fully attainable profits to be had in this personalized, niche concept, on-demand and time-shifted culture of media consumption.

I guess the real question on the table is, “How exactly is a content company supposed to make a profit when the very goods that they produce are the ones you’re suggesting that they give away?” “Content is king,” ever heard that comment? Well, take a moment to reflect on it because frankly, now more than ever, it’s true. Today, Viacom announced a $1 billion lawsuit against Google based on copyright infringement by Google’s popular site, YouTube. The truth of the matter is, Google may be in more than a little bit of trouble here. Look at it this way, if you can’t access the latest clip of “The Daily Show” when you go to YouTube, but only a grainy clip of John Doe’s local yodeling contest, then there’s not much of a draw for the average Joe. Now, if only the media companies could come together and aggressively use their own content as a loss leader in this online space we would have a legitimate business model. Here’s a hint, you’re not making money off “The Daily Show,” you’re making money off what people do once they get their daily show fix, pun intended. Media - the emotional gift that keeps on giving.

Real Estate & Investments:

The Subprime Market

I gotta tell ya… it looks particularly bad for speculative real estate investors and the subprime market. It just looks kinda bad for the rest of us. Lenders like Fremont General (FMT), New Century (NEW), Novastar (NFI), Accredited Home (LEND), Indymac (NDE), American Home Mortgage (AHM), American Capital (ACAS) are all on the ropes. The subprime market is the one that uses those “innovative” new financial instruments to lend money to those with shaky credit. You know the loans for people who bought that $500K house with an ARM (adjustable rate mortgage) when what they could really afford was that $175K house with a traditional 30-year fixed rate. It’s the appearance that we’re doing well as a nation with “home ownership at historic highs” when a large percentage of those homeowners should have simply been renters with modest savings accounts. Listen, no one wants to be wrong on this more than I do. I enjoy a robust economy with jobs and free flowing capital in all sectors of the market, but the truth is it’s not all as pretty as the media reports. And the subprime market has implications for the everyday consumer as well as the market as a whole. The shakeout is far from over and its the X factors like mortgage fraud, low savings levels and illegal tax shelters (all monies that were not supposed to be taken out of the system) that will truly determine when we hit the bottom of the market. For those looking for an unbiased dose of detailed reality, make Financial Sense a daily read. One last piece of advice - refinance with a fixed rate, save something and buy gold. In 6 - 9 months, it’s a buyers market.

Idol Charity

Bono’s Story of ~$100 Million Marketing Spend vs. ~$18 Million Charity Spend

Hopefully you’ve heard about American Idol’s initiative to raise monies for impoverished children in Africa and America through their television special, Idol Gives Back. We can only hope that they have a lower burn rate than Bono’s Red Campaign, a “brilliant” public relations initiative that leveraged the celebrity of worldwide brands like Oprah, The Gap, Steven Spielberg, iPod, Christie Turlington and Motorola for a good (no great) cause. I think that by all accounts, marketing executives expected the campaign to be a huge success. Not. Bono and friends spent close to $100 million to garner a meager $18 million in charitable gains. Of course, we don’t know the numbers behind all those red Razors and iPods sold. The issue at hand is whether campaigns like Red and their participating businesses are “pimping charity” for their own for-profit gain. In other words, “Are they using charity as a loss leader?” Shouldn’t it be the other way around?

The Britney Spears Meltdown:

Marketing Asset or Marketing Liability

There’s been some message board debate on the motivation behind Britney Spears’ public meltdown. As if it was motivated by anything other than misguided fame… But can you blame a cynical public for being, well cynical? So much of our media is manipulated and disingenuous, and that’s a problem. It’s a problem because we’ve come to expect Anna Nicole Smith as the lead story on “news” programs like CNN instead of more appropriately a critical debate on the integrity of our attorney general, Alberto Gonzales. But I digress. I’m sure that if Ms. Spears had her druthers, she would NOT have chosen to go down this particular road. But since we do live in a world of Paris Hilton and Anna Nicole Smith celebrity, then misguided fame and public meltdowns are what you get.

My question is this, “Is the meltdown a marketing asset or marketing liability?” Given the aforementioned cultural climate, I vote for asset. In 2007 you can have a public meltdown on the level of Britney and not suffer long-term. In fact, a meltdown on the scale of what we’ve just witnessed is an unfortunate “perfect” set up for the most incredible phoenix rising story of this generation. Why? Because people are numb to the reality of her meltdown and simply see it as entertainment. It also helps that Ms. Spears hasn’t “broken” anything that can’t be fixed with a little help from professionals - hairstyle, social grace and emotional stability included. At the end of the day, this makes it more of an asset than a liability. That is, if she pays her cards right.

Yes, I guarantee you that if Ms. Spears can put together a comeback with these key ingredients:

then you will witness an encore performance for the ages. An encore that citizens around the world will eagerly devour as the lead story on CNN, the BBC, The New York Times and YouTube!