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How does Spotify make money for the record industry?
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roadsweeper
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15th March 2009
Old 15th March 2009
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How does Spotify make money for the record industry?

Ok, I have been trying to find a decent answer for this for some time now but still haven't found one that satisfies me. People are saying that Spotify is a great new idea that benefits the record industry. I just don't see how. I'm assuming that it works in the same kind of way that radio stations operate where a section of their playlist is analysed and the appropriate people paid by the relevant royalty associations for that country. But with a site like Spotify which is growing at an exponential rate, surely these royalties would be in the billions. Therefore, who is paying for these royalties? It's not the consumer and advertising income would not come anywhere near paying that. Also, with this method, only the songwriter gets the royalties because in the old days it was assumed that people would go out and buy the cd/vinyl/tape when they heard it on the radio which would therefore gain income for the recording artists/producers etc.
I understand that Spotify have contracts with record labels but surely the cost of these contracts cannot come close to being sufficient in respect to the quantity of music being contracted. I understand that this may be ok for artists from the 60's/70's as a lot of money will already have been made from album sales. But what about new music? If the industry progresses in the way that is predicted then no-one will be buying albums anymore.

So where does the record industry (this includes us, engineers, producers etc.) get it's money from? Or is it just a bit better than having our work stolen by millions and we are just rolling over and succumbing to the fact that our work is considered to be almost valueless?
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15th March 2009
Old 15th March 2009
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I really don't get what you are worried about. If the person owning the rights to a song wants to play it on spotify it's their right to do so even if they don't get any money for it. The producers, engineers should work out their deals before doing their job. And if spotify don't pay as good as radio you can still be played on the radio, it's just a bonus that it exists.
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15th March 2009
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But do Spotify get permission for all of the tracks that they list? I work for a songwriter who owns all of the masters to his many albums. I just checked on Spotify to see if his work was on there and sure enough, all of his albums are listed. I know for a fact that he never gave permission for his music to be on there and was not once informed about it. I also know that he is not receiving any royalties for it either.

I understand that Spotify is better for everyone than people downloading music illegally but do people actually agree that music should be free? For example, if a band comes into our studio, works there for a month at £x a day, I spend days mixing the album, a mastering engineer works on it, a graphic designer creates artwork for it etc. how is this money and time spent on the product going to be recouped in the future if music is free for everyone?
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15th March 2009
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if you are truly interested in where things are going and how they work (or actually don't work) than check this out at this at least once a week:
Digital Music News — Digital Music News

Spiral Frog tried this (owned and backed by Universal Music). Labels are looking for ways to redirect the monetization of music by giving it away in exchange for advertising revenue which there is no direct coorelation too. Genius if you are Universal.

I'm not sure of the Spotify model (not available in the US yet according to the web site). But we do have Playlist.com.

With WMG shares at or under $2.00... I'd say it's just a question of time until these dino assets are offloaded to tech as a loss leader.

Hello Google Music Group, Microsoft Music Group, AppleTunes Music Group, etc. Maybe 5 to 10 years... Smaller tech companies needed content assets will aquire or make deals with indie labels...
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15th March 2009
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Thank you redvelvet, was unaware of that website, has some interesting stuff on there. It seems that I am in a small minority of people these days that don't think music should be free and it is always interesting to keep up to date with the way the financial world is affected by this.
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15th March 2009
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To expand upon the OP's original points (for those just joining us) Spotify sells advertising - radio-style 30s spots and banner ads that slide into the program every now & again.

However, even with my limited knowledge of all this, it sure doesn't seem like they're selling ENOUGH advertising to make it worthwhile. Half the ads that play are for other album/artists, which would be paid for by the ad agencies contracted by - you guessed it - the record labels. It's like the snake eating its' tail.

That said, it is still in beta I guess, so perhaps the variety of ads will increase heavily once Spotify can show potential advertisers what the demographic/uptake is like.
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15th March 2009
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Quote:
Originally Posted by terminal3 View Post
That said, it is still in beta I guess, so perhaps the variety of ads will increase heavily once Spotify can show potential advertisers what the demographic/uptake is like.
This part I'm a little sceptical about... If other people are like me, the Spotify browser will be running in the background while typing e-mails, or reading stuff on the web. I can't see anyone ever clicking on the ads with this system.
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15th March 2009
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I guess there's a possibility that if you're signed to a major label that some of the Spotify revenue that they accumulate from subscribers and advertising will filter through to the artists, but as far as I'm aware there is no current play count and appropriate royalty distribution.

At present I also do not see how Spotify helps musicians get paid from online music, but it is a step in the right direction in helping people understand that streaming media is the way forward and that there is no point to downloading and storing media files if they can just be streamed at any time.

The next steps are:

1) working out how to monitor how many different devices around the world are playing each piece of media,
2) billing the internet service providers who are broadcasting this amazing multimedia service and
3) distributing the royalties accordingly.
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I have just finished watching the lecture by Gerd Leonard at Digital Music News: Insider Blogs — Digital Music News

It is very interesting and worth watching for anyone with an interest in the future of the music industry. However, I disagree with some of his points (or possibly just don't understand fully.) For example, he refers to the time when the music industry was trying to stop radio as they thought that this would mean a dramatic drop in album sales. As we all know, radio actually boosted the market by a ridiculous amount due to people hearing songs they liked and then buying the records. Leonard highlights a similarity here, where the internet is the new radio. The idea is that although music will be completely free, this will generate interest for the music and so therefore people will pay to download the music, go to their gigs and buy the merchandise which all creates revenue for the industry. However, people simply won't pay to download music when they can hear it for free at any time that they want. And while the other forms of revenue might work for a lot of artists, what about the artists that don't tour and don't sell merchandise. For example, Tom Waits hardly ever tours and does not sell any merchandise. Yes, he does get money from his music being in films but will film companies continue to pay artists for their music in the future if content is always free?

I understand the concept of Leonard's lecture and I can see how it can work to an extent. But if this is what the future becomes, who will want to pay a lot of money to have their albums recorded at a top studio by a top engineer? I still can't see how the industry can survive in any professional context. It's all very well having amateur musicians recording amateur albums in their homes with an SM58 and an interface but how is the industry ever going to maintain quality?

If anyone who has viewed this lecture can enlighten me with some information that may have gone over my head I would be very grateful. After a lot of research I am still no closer to understanding how, realistically, professionals like us can continue to make money.
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15th March 2009
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Quote:
Originally Posted by roadsweeper View Post
I am still no closer to understanding how, realistically, professionals like us can continue to make money.
Neither is anyone else.



It's even worse in the film world. While you can conceivably make great music on very low budgets (though how to filter, select and market are major problems) I doubt if a movie worth seeing can be made for under tens if not hundreds of thousands of dollars. And if people wont pay for DVDs, how will movies be funded? Probably the only way is by major companies advertising in them. Perhaps huge budget (and huge audience) movies will survive, but small thoughtful ones? I doubt it.

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17th March 2009
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To put it short: The money Spotify distributes to the labels/producers/songwriters are based on the amount of money they get from subscriptions and then divided with the actual number of times a song has been played. In reality, the model probably is a little more complicated than that but this is the basic concept. If I've understood it correctly, the actual subscription fee is vital, not the income from advertising.
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17th March 2009
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Quote:
Originally Posted by roadsweeper View Post
I have just finished watching the lecture by Gerd Leonard at Digital Music News: Insider Blogs — Digital Music News

If anyone who has viewed this lecture can enlighten me with some information that may have gone over my head I would be very grateful. After a lot of research I am still no closer to understanding how, realistically, professionals like us can continue to make money.
Well I've not watched his lecture but I've read his book and have been reading DMN daily for the past 3 yrs. I can't enlighten you but I will give my take

How does one monetise the internet when (at present moment) there is no legal framework nor viable technology that can introduce accountability? Accountibility as in being able to pinpoint who accessed / distributed which file and BILL him for it?

The answer I think is not to try to monetise the internet, but as he said, use it as the new radio. What is the thing that people couldn't get taping songs off radio? Why did records/CD still sell despite that? What is the differentiating quality - now? What makes you feel different if you had 10,000,000 page views on your band's video on youtube versus your band played on a TV show which would be syndicated to 18 countries worldwide? Which means more to you?

Do you really think selling purely music by units (downloads, discs whatever) is still viable in the near future for every musician / band? Why are there musicians who make a living creating music you never really hear (only in the background) and those who still sell albums in quantities six figures in the 1st week? Who are the people who are directly and indirectly paying them? Content will be be tiered naturally. This rule will never change - just lke how crude oil is refined - different grades are for totally different uses. We may have 1000X the bands you can readily hear online now compared to 10 yrs ago, but it's the same cream of the crop who will have their paymasters be the music consumers themselves. The rest? Of course their music can be monetised, just not in the form of selling CDs and downloads. The thing to bear in mind is consumers want multi-dimensional, and varied entertainment now. And the majority of musicians in future will have to increasingly rely on a much larger palette of avenues (live touring, merchandise, sync licensing etc) to make a living.

Slowly the world is moving towards subscriber based on-demand ("pull") entertainment. Its proliferation and adoption rate (i.e. the number of people who would pay the minimal amount for these services to be financially sustainable) is only hindered by the lack of the mass of content available at the viewer's disposal. Imagine a world whereby someone in Africa can at 8:30 pm watch a live soccer match in UK and straight after switch to a delayed transmission of a street carnival in Brazil and then accidentally find a prerecorded music concert in Japan while channel surfing. It only takes "secured channels" to make it happen. These channels can be subscriber TV, mobile platforms or anything they haven't "invented" or coined a buzzword for.

And a purely ad-supported entertainment platform I think is not viable, simply because advertising always have to take into account different demographic profiles and product variations, which can vary from regions within even a country. Advertisers will pay less and less for untargetted reach. And it's different advertising on nytimes.com versus on a site where the viewers' eyeballs are following the moves of the artist's body and the ears are enveloped in heavily limited audio. Branding will be more viable.

Therefore the key lies in music stakeholders developing "billable content" for "secured" channels and continuing to enlarge the difference between these billable content and the free content on the internet. What could be this difference? Transmission quality? Curated content (ratio of good stuff vs chaff)? "Liveness" (we tend to forget this traditional stronghold of TV that has yet to be superseded by the internet)? There are still a lot of "elements/qualities" in the user experience that people can't find on Youtube / bitorrent/ itunes / lastFM etc that hasn't been explored and commercially exploited.

One day internet, mobile and cable whatever will all converge in terms of user experience. It's just a matter of creating a new conduit, how and through where the money flows back to the content owners themselves. Now investors are throwing money at startups who are paying nosebleed amounts upfront to record companies to acquire content that they can't get anyone to pay for. Collection societies are demanding payment from internet radio and sites where there is astronomical traffic but mediocre advertising income. Doesn't take a genius to know something is wrong with the models here

There are too many "stakeholders" simultaneously asking for a piece of a tiny cake. These remnants of the old world music business are trying stubbornly to enforce their rules on a different game. They all claim to be acting on behalf of the artist, but their actions are actually hindering the evolvement of the new game which if allowed to play out, will create a cake that is 100x the size for the artist.

If those media corporations are smart enough they should be now looking at buying up / merging with the people who own the infrastructure : ISPs, cable broadcasters, telcos. If the new generation of artists are smart enough they should be demanding deals whereby they are partners with these super-corporations (content + delivery) and no more obsolete middlemen roles getting in the way.

It's only a matter of time when the lawless frontier of internet will be a memory, when the correct combination of stakeholders finally realise they could make even more money banding together. The same people who allowed the internet to grow so powerful will make the internet less powerful by limiting its influence to being only an informal / amateur / user-generated platform. They will find a way to make the internet nothing more than a promotional viral machine, where the citizen media can fart and broadcast themselves all they want but nobody really takes it very seriously That will be the day of (borrowing a phrase from Gerd) the end of the end of control.

Sorry for the long post
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18th March 2009
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Quote:
Originally Posted by Raygun View Post
To put it short: The money Spotify distributes to the labels/producers/songwriters are based on the amount of money they get from subscriptions and then divided with the actual number of times a song has been played. In reality, the model probably is a little more complicated than that but this is the basic concept. If I've understood it correctly, the actual subscription fee is vital, not the income from advertising.
If that is genuinely how it works then they are f*cked.

I'm not paying for any music I don't own, for example, so I'm happy to support the ad-funded model only for stuff that I'm just going to stream. I know I'm not alone in that, friends and colleagues feel the same way. Their real money will still go to iTunes and CD stores, but Spotify fills a nice gap and also allows for better auditioning of stuff one *might* purchase later on.
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18th March 2009
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Why I use Spotify:

It launches in under 5 seconds
I can immediately hear something I want to hear in near perfect quality
I can make playlists
I can share playlists with others
I can create collaborative playlists
I can get quick info on bands and their other releases

Why I don't use iTunes anymore unless I have to:

It launches in way over 5 seconds
I've lost everything in it and I'm fed up housekeeping
It's a 'fat' client and uses resources, unlike Spotify, which is super lean
I can't share playlists
I can't create collaborative playlists
There is no real info on bands

** The only real reason I use iTunes is to get stuff into my iPhone. But within a few years, even this will seem 'quaint'

Also:

I am never offline, not even on my iPhone - and not many people are nowadays
I want music when I simply think of it, not just whether I 'own' or 'have a copy' of it

The only thing that is monetizable now is convenience - services that are transparent and allow people to interact and socialise with music in ways that they want are not that hard to charge for, and people don't mind adverts if the SERVICE is good

I used to use YouTube to find songs that just popped in my head, and now I use Spotify because it's better audio quality, and I can bookmark, and share

Merlin:

I have all the paperwork and ftp details on how to get our stuff up on Spotify sitting on my desktop. Merlin represents the independents and has a deal in place with Spotify. If you want to get your stuff up on Spotify, join Merlin and they will forward you the details on how to get it working.

Money:

Spotify is very new. It's going to take a while before advertisers jump on board - it's new for them too. It needs to prove that people love it before it can start bringing in serious money, but it's the best model out there by miles.

Ownership:

I'm done with owning things. It's not convenient. I don't own U Can't Touch This. I can watch it on YouTube. I know where it is. Heck, I can bookmark it. I can watch it on my iPhone streaming off the 'net. Why the heck would I want to download it and fill up my iPhone with stuff that's instantly accessible from the cloud? It's not going anywhere. I can't lose it.

Done with ownership. It's not useful, or fun, or interactive, or any of the things that 21st Century social networking is about. I don't mind paying for the tools. But the next generation of music lovers is hardly going to understand the concept of 'owning' music. When we're all old and grey, our children will laugh at us going through our hard drives of 'downloaded' music which we get hold of 'back in the day of mp3s'.

Next.
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18th March 2009
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BevvyB- I think you really hit it. Good post!

Also, I think the mobile version of Spotify is a few months away, not years.
I'm just afraid Apple won't sell the Spotify iPhone app that's currently in development..
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18th March 2009
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Thank you for all your comments, particularly saudade, very informative stuff. I think that I am slowly understanding the entire concept although there are still things that baffle me slightly. I also understand people's opinion of ownership although I do not feel the same myself.

Perhaps another question here would be:

Does free, easily obtainable music create less value for an ancient artform?

I personally would say yes, definitely. I will create a new thread for this however as it is a different discussion altogether.

In response to previous comments on ownership, I personally really enjoy having an extensive collection of CD's and vinyls that I have collected over the years, as I do with my collection of literature and poetry. I like the fact that if I want to listen to music, I have to sit through an entire album, enjoying every aspect of an artists work. Yet another discussion here could be, does this mean the end of albums as a combined piece of work because people just don't want to listen to a whole 45 minutes of the same artist when there may be a couple of tracks which they don't like as much as others.

Thanks again for all your information.
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18th March 2009
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As a general statement, many of these music services will not succeed, due to many of the points raised in the posts above. I doubt that over the long term, Spotify will succeed either. It would be really interesting to jump ahead in time by ten years to see where we are then, wouldn't it?
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18th March 2009
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No one thought iTunes would succeed.
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18th March 2009
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Quote:
Originally Posted by BevvyB View Post
No one thought iTunes would succeed.
Oh, I don't agree. There were some doubters, but others (like myself) thought it would be wildly successful. Why? Because it was a workable business model...everyone got paid, the process is very transparent, good deal for the consumer, etc.

With Spotify, like so many other music portals, it is most likely not sustainable once the venture capital that funded it runs out. These companies all start with a bang and then reality sets in and we find that the model is not workable over time.
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18th March 2009
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@roadsweeper

You are not going to get your answers quick enough by asking us lot, you need to do a lot of reading up on copyright, creative commons etc and go and read some of the works of Lessig. This is a good book:

Amazon.com: Remix: Making Art and Commerce Thrive in the Hybrid Economy: Lawrence Lessig: Books

And here's his blog:

Lessig.org

Asking people in the biz or connected with the music industry (like us lot) is actually a sure fire way of getting the wrong answers. The answers lie with the consumers of today but mainly with the consumers of tomorrow and the tech/computer industry. They are the ones making the tools and services of tomorrow, not us and not the current music industry.

Here's some more stuff, hope it helps:

Here's how NiN did what they did - they trusted their fans, and created alternatives, and understood the relationship, while still caring about the music:

YouTube - Michael Masnick The Trent Reznor case study

You probably know what Creative Commons is, but getting a bit more into what it's for is useful:

Creative Commons

Andrew Dubber is usually good for a debate or three:

New Music Strategies

And follow Hypebot:

hypebot

Merlin website (how independents get their stuff on Spotify)

Merlin Network - Representing the rights of independent record labels worldwide

Lefsetz is always good for a rant:

http://lefsetz.com/wordpress/index.php

Got to read Mashable just to keep up to speed with what's going on with social networks:

Social Media News and Web Tips – Mashable – The Social Media Guide

Kevin Kelly has some good takes on things:

Kevin Kelly -- KK* Lifestream

and I guess you could follow my band on Twitter and see what we get up to:

Twitter / georgiawonder
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18th March 2009
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The royalities from Spotify aren't even in the hundreds of thousands let alone billions. It's entirely dependent upon revenues.... generated and paid as a license fee...
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23rd March 2009
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There was an interview with the boss of Spotify on the unsigned guide website where he said something about the subscriptions being less than expected. As great as it is for pulling up any song (which isn't too alternative, why are there less than 3 Fugazi songs?!) I have a feeling it'll die within a year or two without enough subscribers.

After reading this thread I wondered what Apple are thinking of doing for this new streaming 'revolution' or era or whatever. Perhaps a paid iStream app, £20 and you can stream any of it straight to iPhone? Sales of it would be nuts. Think of all the millionaires from 59p games from the app store that got lucky last year - Apple are probably having a serious think about this kind of product.

I doubt they'll allow a spotify app. They let last.fm on but it's not on demand, it's radio style playlists.
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23rd March 2009
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Quote:
There was an interview with the boss of Spotify on the unsigned guide website where he said something about the subscriptions being less than expected.
Do you have a link ? i can't find it
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24th March 2009
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http://www.theunsignedguide.com/onli...4&pid=7&sid=31

Think you need an account so I'll paste bits. Turns out I remembered wrong:

Quote:
—How many paying subscribers?:
Spotify hit the million-user mark last week, but that’s across its ad-supported free option, £0.99-a-day service and £9.99 unlimited offering. Ek wouldn’t break it down: “The vast majority are in the free, ad supported model, but we’re positively surprised by the number of paid-for subscribers that we have. Rest assured, we haven’t really started doing the kind of features that we think will really drive adoption of becoming a paid user.”
...but there was something which made me doubt his confidence:

Quote:
“We have invested about €8 million of our own money so far, but we’ve also taken in venture capital from Northzone Ventures and Creandum. We don’t have any plans to raise money - I don’t expect us to be needing any money at all, actually. We expect, with the money we have, to be profitable this year, that’s our hope, though it’s impossible to say, especially in these market conditions.”
I couldn't tell you how often I've heard failing businesses that that last sentence in the last six months.
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24th March 2009
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Quote:
Originally Posted by Savernake View Post
http://www.theunsignedguide.com/onli...4&pid=7&sid=31

Think you need an account so I'll paste bits. Turns out I remembered wrong:



...but there was something which made me doubt his confidence:



I couldn't tell you how often I've heard failing businesses that that last sentence in the last six months.
there's no doubt with such an old school business model AND trying to get a .com being "new and innovative" in 200 holds very little chance of being the next big online success. I see spotify going away as quickly as it marginally appeared. Bit like Peoplesound......
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24th March 2009
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SpiralFrog has just closed for good. So much for the viability of the free-ad-supported music concept..
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24th March 2009
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Great links Bevvy.

Thanks for that.

And I reckon Narco has some inside info/experience that he's not always letting on about! :-)

Cheers guys,

R.
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12th April 2009
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whether ownership exists or not, a couple things are clear;

1) "quality" music will not continue to be produced at a loss (although probably 95%+ of all music is produced at a loss anyway).

2) the result of your proposal without a sufficient profit motive will recreate the massive music wasteland once known as MP3.com... All quantity, no quality.

keep in mind, no matter how one would argue about "quality" the label system provided the research and development of artists as noteworthy as Led Zeppelin, Pink Floyd, Metallica, right up to popsters like Brittany, etc.

Labels have provided filtering for consumers who do not have an infinite amount of time to research and discover new artists.

###

"Ownership:

I'm done with owning things. It's not convenient. I don't own U Can't Touch This. I can watch it on YouTube. I know where it is. Heck, I can bookmark it. I can watch it on my iPhone streaming off the 'net. Why the heck would I want to download it and fill up my iPhone with stuff that's instantly accessible from the cloud? It's not going anywhere. I can't lose it.

Done with ownership. It's not useful, or fun, or interactive, or any of the things that 21st Century social networking is about. I don't mind paying for the tools. But the next generation of music lovers is hardly going to understand the concept of 'owning' music. When we're all old and grey, our children will laugh at us going through our hard drives of 'downloaded' music which we get hold of 'back in the day of mp3s'."
#29
12th April 2009
Old 12th April 2009
  #29
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Quote:
Originally Posted by redvelvetstudios View Post
...no matter how one would argue about "quality" the label system provided the research and development of artists as noteworthy as Led Zeppelin, Pink Floyd, Metallica, right up to popsters like Brittany, etc. .
I disagree that labels provided the R&D. The ability to earn a living wage at local venues is what provided artists with the performing experience that when combined with their talent produced great music.

Labels are also not why we have the quality issues we have today. Music has become almost totally dependent on advertising in order to break even. He who pays the bills is he who chooses the music. We have a complete disconnect between fans and what can get exposed. Local venues, locally programmed radio and locally-owned record stores used to be the end run around corporate national advertising support.

We need a new end-run and not just another MP3 dot com or Clear Channel on the Internet.
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#30
13th April 2009
Old 13th April 2009
  #30
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I don't know about this Bob.

Isn't that the point of Itunes and the Internet in the first place? No big brother? The leveling of the playing field? Anyone can put a page up on myspace, anyone can have their music on Itunes. Anyone can have a "hit" video on youtube?

The gate keepers of past are just not what they were when the labels and radio had a top down line to consumers. The problem today is qauntity over quality - no filters. Everyone who can, does, whether they should or not.

The new model is bottom up. So now everyone is equal, equally poor.

###

"I disagree that labels provided the R&D. The ability to earn a living wage at local venues is what provided artists with the performing experience that when combined with their talent produced great music.

Labels are also not why we have the quality issues we have today. Music has become almost totally dependent on advertising in order to break even. He who pays the bills is he who chooses the music. We have a complete disconnect between fans and what can get exposed. Local venues, locally programmed radio and locally-owned record stores used to be the end run around corporate national advertising support.

We need a new end-run and not just another MP3 dot com or Clear Channel on the Internet."
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