Many of the students in Professor Moon’s Marketing class talked about their personal experiences with file sharing and getting music for free.  Many of them expressed a dislike for the music industry for having ripped them off in the past — a sentiment no doubt shared by millions of others who view file sharing as a way to stick it to the labels.  And yet, framed another way, music is highly undervalued.  Of all the media, music is perhaps the most personal. 

Consider how music has touched your life…It lulled you to sleep when you were little.  It expressed your teenage angst.  It helped you meet others like you.  You partied to it.  You made love to it.  It made you cry.  You danced to it on your wedding night.  It makes your daily commute somewhat bearable. 

And yet, consumers complain about music prices.  That’s because they rightly feel the victims of a bait-and-switch:  they’re hooked by the single, but are sold the album.  But what if it were framed differently?  What if you were buying 2 amazing songs, that you could keep the rest of your life; that you would play over and over again, for a measly $15, and got 10 other songs to try out for free?  That would seem like a better deal than paying $10 for a movie ticket, having to sit through a bunch of ads in a crowded theater, and watching a movie that sucks.  Or buying a DVD for about the same price and maybe watching the movie a few times.  Or shelling out $25 – $30 for that trendy new book that you have a 50/50 shot of reading all the way through (but it makes you look smart sitting on the shelf).

Cast in that light, paying $0.99 for a song that I can keep forever seems like the best deal going.

As I’d mentioned, I was lucky to be able to sit in on on of Professor Youngme Moon’s Consumer Marketing classes at HBS.  It is apparently one of the most sought-after classes at HBS, and I believe it.  The case study in question was the old Napster and how it represented an "extreme alternative" — that is, an alternative that emerges for consumers that is clearly cheaper/better/more valued than existing options.  The fact that p2p file "sharing" enabled consumers to gain access to a wide variety of music (and, later, other media) for free surfaced a lot of latent dissatisfaction on the part of consumers vis a vis the record industry.

The years prior to the advent of Napster were high water marks for the record industry.  They were doign well by all of the traditional metrics that they used to measure themselves — units sold, dollar value, market share (the big 5 had 80% of the US market then), and so it is no surprise, and even understandable that they were blindsided by the Napster phenomenon.  Professor Moon’s point, however, was that there was a lot of latent dissatisfaction that consumers were only able to express once they had the means to do so.  For instance, consumers for years had felt ripped off for having to buy a $17 CD only to have 1 or 2 good songs on it.  This wasn’t mentioned in the class, but it’s interesting that consumers don’t harbor nearly as much resentment in blowing $10 for a bad movie.  Enough of a digression; I’ll write more about this in a future post.  Back to the lessons from the class and my spin on them:

-Latent dissatisfaction can lurk in many industries, especially in the "uncontested elements" of an industry, which breeds complacency.  For instance, while there were many elements of the music business that were "contested", such as artist portfolio and distribution network, there were other elements that were lightly contested such as the way music was bundled and priced.  This can spell opportunity.  Professor Moon mentioned the hospitality industry, which she thinks is ripe for disruption.  We as consumers generally pay attention to the contested elements, such as hotel location, price, etc; not so much the uncontested elements.  Consider that one pays a surcharge to use the phone, to use the internet, and there is a fridge full of food that is a total ripoff compared to the vending machine in the hall.  But we as consumers have just assumed that’s the way things ought to be and so this dissatisfaction is laten and doesn’t show up on the metrics that hotels measure.  Interestingly, I recently filled out a survey on a recent stay at a Starwood hotel and some of their questions seemed to be designed to ferret out some of this sort of dissatisfaction (e.g. I was asked to rank what services I’d want such as free long distance, free internet, etc.).

-Consumer satisfaction = consumption experience – consumer expectations.  Extreme alternatives can catalyze a change in either element of the equation, and ultimately surface latent dissatisfaction.  While it wasn’t mentioned in class, I view Skype as playing just such a role in the telecom industry and am sure a b-school case is being written on them if it hasn’t already.

-One can compete with the "free" business model; indeed competing against "free" protects you from lazy marketing.  The bottled water industry is the most obvious example of this, and it was raised by Prof. Moon.  However, she raised an interesting point:  imagine if consumers were used to getting music for free…do you think you could sell CDs?  I’d think so:  the value proposition would be around things like artwork, having a backup to the digital file, having a packaged playlist put together by someone else (so you’re paying for editorial programming).

Anyway, thanks to Professor Moon for a fascinating, if frustrating class (frustrating because I wasn’t allowed to participate in the class discussion that was about a subject I’ve lived and breathed the past 6 years!). 

Within the next 6 months.  This based on a prediction by Matt Wishnow of Insound, which have just launched a download service according to Billboard.  The service, which will most directly compete with eMusic, is notable in that it will only sell full albums in MP3 format.  eMusic has built a good business selling ‘iPod-compatible’ music (ie in MP3), but allows you to purchase singles as well.  But the article’s money quote is Wishnow’s comment on the readiness of major labels to license their repertoire in non-DRM/MP3 format.  To quote:

And whether he’s overly optimistic or prophetic, Wishnow is
confident that major labels will be onboard before too long –
he says there are "two major labels" that he’s "pretty far
along in discussions with."

"Two of the majors have indicated to us that they’d be
interested and willing (to do) a deal for MP3s in the near
future," Wishnow says. "The other two have not given us that
indication. But I think once one company does it, the others
will fall quickly. I definitely believe within six months that
we will have two majors onboard."

That is quite a prediction and, funnily enough, I don’t think it unrealistic.  The major labels have evolved quite a bit in their embrace of all things digital — witness how 3 of the 4 have done deals with YouTube (EMI has not yet done so).  Indeed someone at one of the majors told me that the topic of licensing non-DRM formats comes up in nearly all of their internal meetings.  Without the weight of legacy revenue streams and operations, it’s easy for outsiders to take the majors to task for not having done this sooner.  It is no doubt a tough decision to make.  But there’s no need to take the plunge all at once.  Perhaps find a way to test the concept by licensing some back catalogue with consistent sales to eMusic and seeing if and how it moves the needle. 

So time will tell if and when the majors forego DRM requirements in their licensing and while I don’t know about Matt Wishnow’s prediction, I do know one thing:  if the majors continue to insist on DRM, the clamor for the opposite is only going to grow louder.

Enough has been written about this, so I won’t try to rehash what has been better said by others, except to congratulate the YouTube team and my friend, Chris Maxcy, their VP of Bus Dev, for what is a great outcome.  I remember going to a Celtics game last November with an acquaintance from college who told me that he’d watch Michael Jordan dunk videos on YouTube at work, and I made a mental note to myself that they’d be a site to watch.  Were they ever.  Well, well done guys!

So goes the "wisdome of the crowd" at Intrade:

Contract			Bid	Ask	Last	Vol	Chge
Republican Party 2006 Mid Term Election Control
	SENATE.GOP.2006 Republican Party to retain control of the US Senate in 2006 election	M	73.5	75.7	73.5	18926	+0.5
	HOUSE.GOP.2006 Republican Party to retain control of the US House of Representatives in 2006 election	M	42.0	42.5	42.5	52702	-5.0

Jordan Rohan, the internet analyst at RBC, has famously posited that MySpace could be worth $15 Billion in 3 years’ time.  Read the report here by way of PaidContent.  It is an audacious claim like the one Henry Blodget made about Amazon’s stock hitting $400 during the late ’90s.  He anticipates his critics’ charges and tries to counter them by laying out his rationale for the argument.  I won’t repeat it here; it’s worth taking a peek at the .pdf (only a few pages to read).  He raises good points.  It is indeed a bold claim but not beyond the pale.  My only thoughts to add are:

-He mentions MySpace getting video CPMs of $35-$40 in the exec summary.  It is further noted that these CPMs were cited in the buy for a Simpsons ad from, of course, another Fox company.  Is that a market CPM?  Tough to say because I don’t know the specifics of the deal but I doubt their effective CPM is that high across all their inventory.  On an interesting side note, I met a friend of mine recently whose company sells media to a lot of entertainment advertisers.  He noted that their revenues had taken a hit because of MySpace.  There’s been a direct hit because it appears that Fox is putting most of their internet ad dollars for movies into MySpace to the detriment of everyone else.  Synergy at work.  And clearly MySpace is out there competing for budgets from other advertisers.  I also heard that MySpace is agressively hiring ad sales staff, and paying above market to get them. 

-This could be the report that launches a 1,000 social networks.  Wait a second, there are probably 1,000 out there already.  I remember the days when Jupiter would come out with an audacious prediction for a market (‘Digital music will be worth $XX Billion by 2005′), which would then be quoted in every business plan from then on.

-MySpace’s executives mention 4 revenue streams (display/video ads, performance ads, search and ecommerce).  I think there will be other ways to monetize the assetlike data mining and brand extensions.  I know they’ve taken some steps on the mobile front already but I have to believe that they’ll look into brand extensions like doing an MVNO, notwithstanding ESPN’s botched attempt. 

-They are no doubt on a hiring spree and one of the biggest challenges will be to integrate the new blood and put process in place while retaining the ethos and sensibility that got them to where they are. 

-MySpace has become ‘the new MTV’.  I recently spoke to a new media exec at a label who has a high profile artist.  In the past, this artist would do premieres and other promo on MTV.  Not so anymore.  Forget MTV, the focus for this artist is now on his MySpace page.  MTV won’t take this lying down of course and so the battle is joined.  Should be fun to watch what happens.

[Disclosure:  I hold a small amount of NWS shares.]