I just wrote a guest post, posted below, for GigaOm and that was Om’s headline – one thing he’s taught me is that it’s all about the headline!  Anyway, Shan left a comment on GigaOm about how the post didn’t really explain much of what was going to change, to which I noted that he was right and then went on to point to a couple of implications, namely that OTA download stores and providers like Groove Mobile will need to step it up and also that ringtone business could be at risk if there are apps that let users easily set ringtones from their own music collections instead of purchasing them for $2.99 from their carrier.  Anyway, enjoy (or not)…

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The introduction of the iPhone
later today will signal a sea change for the music industry, especially
mobile music. It won’t solve the music industry’s woes immediately, but
it will herald a new era in which music can elegantly coexist with a
phone on the same device.

Music-enabled phones have been around
for a few years, but they have been woefully inadequate — little
storage capacity (64 MB – 128 MB has been standard for flash cards),
disabled side loading, and mobile storefronts with convoluted
navigation and over-priced songs. It’s a small wonder that consumers
ever used any of these phones for music. According to JupiterResearch almost 30 million US consumers will have music capable phones by the end of 2007, but very few will sideload or purchase music over the air.

The carriers have been largely to blame for shoddy music phones,
with their walled garden approach. Though, the labels have also had a
hand in the expensive and confusing pricing and licensing schemes. But
both are actually starting to see the light. For instance, Sprint
recently announced that they will sell songs from their download store
for $0.99 instead of the $2.50 they had been charging. I guess their
customers didn’t think the convenience was worth paying such a premium.

I’ve been a member of Sprint’s Ambassador program and have tried out a few music-enabled phones and found all of them lacking.  To be fair, the latest one, the Samsung Upstage ,
isn’t bad — good, dual-sided design and the ability to accommodate 2 GB
flash memory cards (though it only comes with 70 MB of internal storage
and a 64 MB card).

As much as I’d love to carry around one fewer gadget, however, the
Upstage isn’t enough of a music or podcast player for me to give up my
iPod.

Nokia’s converged N series phones are a bit closer to an iPod
experience, with the N91 getting an 8GB (like the iPod Nano). The N95
and the N800 Internet tablet offer Rhapsody subscription music service.
And I tested the N95 music service and had an awesome experience.

Maybe the iPhone will be the ultimate device that can cannibalize
its sibling. Like the iPod, the iPhone promises to provide a
significantly better consumer music experience:

• You’ll be able to easily synch the music on your PC or Mac via iTunes.
• It will have 4 GB or 8 GB of storage – orders of magnitude greater than existing phones.

There are drawbacks to be sure. For instance, it will only be
available on AT&T/Cingular, meaning that a large part of the market
won’t even consider the iPhone due to being locked into a contract with another carrier (which I think
is one reason why Apple announced the phone so far before the ship date
— so that consumers with other carriers could let their contracts
lapse).

It is also unclear whether podcasts will be supported and synched to
the iPhone over-the-air (for instance, when the phone connects to a
Wifi network, which I think is an under-appreciated feature). Then
there is the price, $499 or $599, which is way more than most
consumer-focused phones.

The ultimate success of the iPhone as a music device, and as a hit
in general, will depend on a number of factors: how far the price
points can come down; whether consumers go for the touch screen; when
it will be available on 3G; what sorts of applications will run on
it…The prospect of widgets and other apps such as Last.fm,
Pandora and iLike being available on iPhone will only make it that much
more appealing to consumers. And how quickly will automakers support
docking in new cars? That would be powerful indeed.

The launch of the iPhone won’t directly impact artists or labels
right away. They will indirectly benefit from more music being
purchased via iTunes since it will expand the portable music player
market.

If the iPhone will mark a new age of mobile music, it’s one that coincides with a shift in power away from the carriers.
As others have observed, the iPhone won’t have links to AT&T’s
content deck. AT&T is essentially being relegated to providing the
pipes and data delivery instead of taking a piece of everything that
happens on their pipes.

This is markedly different than how the carriers have operated to
date and could set a precedent for other carriers to open up their
walled gardens. That could make the US mobile content market look a lot
more like Europe’s where revenue from off-deck content accounts for 80%
of the overall market.

At any rate, if the iPhone performs as advertised, the music
listening experience will be far better than any existing option, which
will force existing handset makers to answer with comparable devices or
risk losing significant market share to Apple.

So even if the iPhone is a bomb, it will have raised the bar for the
entire industry and we will mark June 29th as the day mobile music took
a giant leap forward.

It looks like BurnLounge has agreed to remove the network marketing aspect of their business model in order to placate the FTC. 

Other related posts are here and here.

Okay, so that was a terrible pun, but the FTC is trying to shut BurnLounge down calling it a pyramid scheme. Their CEO just resigned, as the Company continues to defend their business model and practices. 

I wrote about BurnLounge’s multi-level marketing scheme a year ago here (let’s just say I’m a bit skeptical of the model).   Sean Ryan doesn’t think the margins in digital music are high enough  to support one level of retailer let alone multiple levels.

Fred Wilson writes a manifesto of sorts with his thoughts on how the internet demands a free business model due to the marginal cost of distribution going to zero, and that the music business should migrate to an ad-supported business model.   The labels are definitely moving in this direction, at least in video (and for full disclosure, this has been something I’ve worked a lot on at my employer, Brightcove, and our music label partners).  Fred points out that the labels get paid a per-play fee every time a song is played on internet radio or listened to on-demand via a service like Rhapsody.  Lala.com recently announced its intention to create an ad-supported on-demand listening service.  But the existing economics make it hard to make it a real business:

• If the on-demand license involves a minimum per-play fee of $0.01, as has been widely reported, it equates to a $10 break-even effective CPM per song streamed just to cover the content license fee.  [By effective CPM, I mean the weighted average of all inventory -- so if you sell 30% of your inventory at an average gross CPM of $30, your effective CPM is $9].  Add to that other variable costs such as bandwidth and ad sales costs and the break-even CPM goes higher.
• Note that this is per-song streamed….but are you going to serve an ad after every song?  I don’t think users would go for that. 
• Lastly, don’t forget that the point of all of this is not just to break-even on operating costs but to build a real business, so that makes the CPM requirements rise even higher!

These are rates that large companies can afford to pay to operate a music service that can be justified as a loss-leader to acquire users that they can then funnel to more lucrative areas and services on their site.  Fred thinks the labels should go to a straight revenue share model.  This sounds good but t I think that can be unfair for the labels who could have all of these startups use their music to build services that defer revenue generation in favor of attracting a bunch of users and then flip to another company with the labels not getting adequately compensated for their music…not to mention the opportunity cost represented by those users not frequenting other sites that do a better job of monetizing and thus paying the labels.   

The good news is that, if it’s just a matter of economics, this can be solved through price/economic terms.

But I also think that Fred’s right in that it’s going to take a while to get there.