Thursday, January 14, 2010

MusicNet, Pressplay and Lost Opportunities

On pages 8-9 of Moral Panics and the Copyright Wars I discuss the aftermath of the shutdown of Napster in 2001. This period is interesting because it presented the music industry with something of a crossroads: Napster had demonstrated there was a huge potential market for digital distribution of singles. I use the word potential because the trick was converting the free Napster model into a paying one. I use crossroads because there were two fundamental choices: either (1) ignore this potential market in the hope that if it was shut off (by having enjoined illegal services and by not offering legal alternatives) the industry could go back to things the way they were, that is, selling CDs; or, (2) realizing that the market for digital singles was the future and had to be served. This latter choice, by the way, did not mean ending the immediate sale of CDs, but it did mean that the industry would have itself have participated in the offering of a product (singles) that made CDs less attractive.

For an industry that is so big on control, one would have thought that the rational choice was to at least participate in the new market at its inception and thereby have some measure of control over the phasing out of one product as the next takes over. As I noted on page 5 of Moral Panics, Ruth Handler, co-founder of Mattel and creator of the Barbie doll observed, "Anyone can manage the upside cycle ... The secret is managing a product down its life cycle properly." And all products have life cycles; suing tens of thousands of your customers may fend off the inevitable decline for a short period of time, but the cycle will win because one thing copyright infringement actions can never do is make people buy a product they do not want. The record industry's failure to adapt to the next product, digital singles, was suicidal.

There is controversy over how the decision not to jump into the digital singles market took place, that is, whether there were collusive efforts to impede the new market. I have no special knowledge on this and therefore have to rely on published sources, whose accuracy is also in question, but by not taking the rational option -- serving the new market -- the industry left the market to be served illegally (and I use "illegally" deliberately, in place of the less judgmental word "unauthorized"). The industry didn't sit back entirely though, two online services were eventually created, MusicNet and PressPlay. These services were doomed to fail, though, because they each only offered music from their respective label partners, because the pricing was high, DRM laden, etc. As I note on pages 9-10 of Moral Panics, the Department of Justice began investigating allegations that the major labels had designed MusicNet and PressPlay to impede the growth of authorized distribution of music on the Internet, through refusing to issue licenses and by refusing to offer genuinely attractive services of their own. The D of J closed the investigation without taking action.

In a spin off of the original Napster case, the VC firm Hummer Winblad (a defendant at that point) detailed allegations that the labels had withheld critical information from the D of J. Judge Patel required the labels to turn over to Hummer Winblad documents which HW alleged the labels had withheld from the D of J. After this order was issued, the case against HW was settled, so we never had the chance to see if the conspiracy theory was of the space alien variety or not. (See pages 9-10 of Moral Panics).

We may get a second shot though. Yesterday, the Second Circuit issued an opinion in a separate antitrust case over price fixing by MusicNet and PressPlay. The court of appeals reversed dismissal of the case by the trial judge. The court of appeals ruling lets the case, and therefore discovery, go forward. Much in the opinion concerns the general pleading standard in the wake of the Supreme Court's opinion in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and in letting the case go forward, the court of appeals did not pass on the merits of the allegations, instead holding that the allegations met the Twombly standard to survive a 12(b)(6) motion to dismiss. The allegations do provide some information on the post-Napster period, though. The court of appeals notes that in the post-Napster period, in order to obtain music from all the labels would have required consumers to subscribe to both services, at a cost then of $240 a year. What did one get for the $240? Each year, consumers were required to pay up again or else all the music they had purchased would have been blocked; songs couldn't be transferred to other devices, like iPods, and the DRM (which the court describes as unpopular) prohibited consumers from copying more than two songs from any artist. The court quoted an industry commentator who accurately concluded at the time that "nobody in their right mind will want to use" the two services. (Slip opn. page 4).

The court also focused on the pricing of the services, noting that while many of the hard costs associated with CDs were dramatically reduced with CDs, "these dramatic cost reductions were not accompanied by dramatic price reductions for Internet Music, as would be expected in a competitive market." (Slip opn. page 4). To the contrary, the complaint alleges that there were parallel prices increases, enforced through MFN clauses that were contained in secret side agreements. (Slip opn. at 12). The case is one to follow, hopefully for the light it will shed into actual, behind the scenes practices during a critical period.


Ann Garrett has written me to correct a number of mistakes in the post regarding MusicNet. Here, with permission, are her comments. (Thanks Ann):

Mr. Patry, in your blog “Moral Panics and the Copyright Wars” related to the entry on Jan. 14 ~ “MusicNet, Pressplay and Lost Opportunities” your premise: “…two online services were eventually created, MusicNet and PressPlay. These services were doomed to fail…”. As for MusicNet there never was a service. MusicNet (dba MediaNet) was and still is a platform that aggregates and distributes premium digital content to companies creating music-centric apps and services, online retail destinations or adding music content to web sites. The notion that the record companies agreed to launch two competing services that excluded content, fixed prices and ultimately failed, makes a compelling narrative. You’ll recall that this storyline was first written about eight years ago and since then has been repeated over and over again until it has become urban legend. But it has little to do with the actual history of MusicNet. Without going into too much detail on that history, here are some key points:

· MusicNet was incubated at Real Networks which was its largest shareholder. Two labels subsequently came in as investors – WMG and EMI. Bertelsmann made an investment as well but this ended up hurting our relationship with the record company, BMG, which had minimal contact and didn’t seem to get along with the Bertelsmann guys. A New York-based private equity company bought out all the original investors and became the sole shareholder of MusicNet (today known as MediaNet).

· Negotiating licenses with all the majors, indies and aggregators was a difficult and time-consuming process then and it still is today. As a rule of thumb we expect it to take about a year to add each new set of rights - subscriptions, download sales, on-demand streams, etc. The available content expanded from about 100,000 tracks nine years ago to ten million plus today but there were key hurdles along the way:

o Record companies had an extremely difficult time initially clearing digital rights with their artists. No sooner did we add Dave Mathews than his lawyer demanded we take it down until his label, RCA records, negotiated an additional advance for exploitation of digital rights. High profile artists like Metallica had full control of their distribution and wouldn’t agree to make their catalogs available. Some artists agreed to offer their repertoire for download sales but not subscriptions and vice versa. Many tracks were in dispute because the artist had changed labels and the labels were subsequently consolidated under new companies, or the content was part of a compilation, or in the case of urban music, samples from other artists were used extensively. Through a long, deliberate process we have whittled down the high profile hold-outs to the Beatles, AC/DC and a handful of others.

o Publishing clearances were a nightmare. It was only last year that the CRB came up with a statutory rate and licensing and payment standards.

o Recorded music was mostly limited to a million or so major label and key indie tracks compared to the many millions available today. This has been due to incredible growth among Indie labels and music aggregators.

· The rumors of our demise have been greatly exaggerated. MusicNet continues to be the most important digital service provider in the industry. Over the years we have powered every major brand from Yahoo and Microsoft in the US , to Tesco and HMV in the UK , and Samsung in Germany & France . Our last quarter was our best ever and with the launch of our new product line, MN Open, we expect good results in 2010.

· MusicNet has never built or marketed a service directly to consumers. Retail pricing has always been set by our customers. We pass through content costs and charge a transactional fee for our services.

Should you need more details behind the growth and success of MusicNet (dba MediaNet), I am happy to connect you with our longtime CEO Alan McGlade. I am hopeful you can clarify MusicNet’s position in your blog entry.

Best regards,

Ann Garrett


Monday, January 11, 2010

Why I Cancelled My Netflix Subscription

There was a time when Netflix had a great business model: instead of having to get in your car, schlep to the nearest video rental store, pay late fees, and compete with others for the latest blockbuster movie (because, as the name Blockbuster Video implied, there wasn't a lot of anything else), you could, from the comfort of your home order movies to be mailed to your house. For a monthly subscription fee, you could keep them without paying late fees (this helped Netflix too, by cutting down on its postage costs), and the selection was also long-tail. As a result, I rented watched many, many more movies than I would have. However, in the wake of its deal with Warner, in which Netflix agreed to a 28 day embargo on renting the latest movies, in exchange for reduced DVD purchase costs, I have cancelled my subscription. Netflix's new business model is, apparently, the old business model of businesses first, consumers last.

I expect the new business model will also be bad for Netflix and the studios. Instead of watching movies, I will do something else. Nor does the business model make sense now: it assumes that consumers want something -- to rent -- but that the studios, by depriving consumers of what they want, will be able to force them to do something they don't want to do: buy. I doubt it. I rented movies to watch them once. If I couldn't rent them, I didn't buy them. Why not? Because movies are just not important in the larger scheme of life or even the smaller scheme of consumer behavior: movies are merely entertainment, and usually trivial entertainment that doesn't warrant going out of your way to accommodate a scheme set up to frustrate your desires.

If I couldn't rent a movie I did something else, and usually did that something else first anyway. Picking up a book, practicing clarinet, reading the New Yorker, are all perfectly fine, and usually better, alternatives. And if I did want to buy a movie, I would do it regardless of whether I could rent it, so the idea that the studios and Netflix can get consumers to buy when they only want to rent, doesn't make sense to me. What does make sense to me is to not give money to those who don't care about offering me what I want, and that's what I have done by cancelling my Netflix subscription; not out of spite or anger (its too trivial to get upset about anyway), but because its the wrong business model.