There were two pieces of news this week that demonstrated the other side of this coin, namely that people who download free stuff also spend money on music and that it’s possible to make money out of free anyway.

Exhibit 1 is provided by the music industry themselves in the form of the IFPI (International Federation of the Phonographic Industry) and report they published online. As Torrent Freak points out

Compared to music buyers, music sharers (pirates) are…

* 31% more likely to buy single tracks online.
* 33% more likely to buy music albums online.
* 100% more likely to pay for music subscription services.
* 60% more likely to pay for music on mobile phone.

The implication of this for me, is to confirm empirically what I’ve observed anecdotally, that file sharing is very often used to preview music, the best of which they go on to purchase. Obviously, there are many citizens who don’t conform to that model, but I wonder how much music they’d actually buy if they couldn’t get it free anyway?

Meanwhile, Moco News reports that Tapulous’s Tap Tap Revenge enjoyed 2.5 downloads of their App in the first two months, but that 1 million were pirate downloads. However, Tapulous knows who these users are and treats them slightly differently to ordinary customers by showing them more ads. This results in many converting to their best customers for virtual goods they sell in the game and for paid music downloads.

So there you have. File sharers pay for music. And you can make money from people who start off by thinking they won’t pay you. Who would have thought it?

I find this a little surprising, judging by my anecdotal and personal experience, but perhaps it’s possible. I think just as it’s helped get the mobile internet some exposure, the iPhone’s done the same for mobile music, raising awareness that it’s possible on a range of handsets. I’ve also noticed lately some AT&T ads pushing Walkman phones.

As Russell noted last week, the experience of getting music onto a phone, by and large, is not a pleasant one (though it’s getting better). This makes me wonder to what extent people here in the US are availing themselves of streaming services, which are fairly widely available. Just as Russell said, listening to the radio on mobiles is a popular (and growing) activity. I doubt that many people in the US are listening to a lot of broadcast radio on their mobiles, but I’d echo his sentiment and venture a growing number of folks are listening to the streaming equivalent, whether it’s baseball game play-by-play or content supplied by one of the satellite radio companies or something similar.

A number of things are changing:
- Plenty of people are using their phones as music devices. That’s the first hurdle, and it’s largely been conquered. Lots of people are listening to music on their phones, which means lots of people know what a pain it can be to get music onto their phones — so they’ll be open to services that make it better and easier.

- Operators (some of them, anyway) are realizing what they’ve offered so far really hasn’t been very good. Yes, there’s plenty of underwhelming stuff out there, but on the other hand, you have some operators who seem like they get that they can’t put crap out there and expect people to like it and pay for it. For instance, an Orange exec labeled its efforts to date as “nothing to write home about,” and another said it expects to offer all sorts of new, DRM-free services within the next six months.

- Labels are changing their tunes, as they realize that if they don’t, they’re going to destroy their businesses. Would a major label have entered into a licensing agreement like Universal’s with Nokia for its Comes With Music program a year ago? I doubt it. They’re becoming a little more relaxed, they’re giving up their insistence on DRM (which, probably more than anything, has held this market back), and they’re exploring new business models.

- Flat-rate data plans are becoming more common, and more services are emerging that circumvent the mobile networks.

Slowly, the barriers are starting to disappear, making this a good time to be a startup with a cool mobile music service (if you are one, by the way, drop me an email at carlo at mobhappy dot com, as I’d love to take a look). What do you think?

The big news out of the keynote this morning is the new “Comes With Music” offering, which gives buyers of certain Nokia handsets a year’s free access to some music (currently only from the Universal label).

The big difference here is that after the year’s up, consumers will get to keep the music they’ve downloaded, they’ll just lose the ability to download more. For a label-backed service, that’s pretty astounding (though presumably Universal’s getting nicely compensated by Nokia, though execs wouldn’t discuss the numbers). The move will we widely seen as yet another attempt to unseat Apple’s dominance of the paid music download market, but that’s sort of debatable. For one thing, Apple’s dominating a fairly small market, really, and perhaps one that’s not got a really bright future. If this sort of free-music-with-device-purchase model catches on, will paid download stores be all that important?

The important thing for Nokia with this move is to drive usage of mobile handsets as music players. The company says that 20% of people who are buying its devices compatible with its new music store are registering for the service, and of those 20%, a quarter of the tracks they download are pulled down over wireless networks (ie not downloaded to PC and sideloaded to a mobile device). That’s not many users of its music services, honestly, and offering people free tracks should be a good way to get them using the service.

The common thinking will be that Nokia hopes that after a year, people will begin paying to download music from the Nokia Music Store, though that seems fairly unlikely; there’s a bigger chance they’ll just seek out other free sources of music like P2P networks. What seems more likely is “hey, this phone’s a year old… if I get a new one, I’ll get my access to the free music back… okay, I’ll upgrade to the latest model.” And that’s far more valuable to Nokia than somebody buying a few songs from their music store. Being the leader of the paid download market will be increasingly irrelevant, and perhaps Nokia recognizes that; being the leader of the legitimate download market, in which a lot of music content will be free, will be much more important.

The mobile version of Social.FM’s service stands somewhat in opposition to operator-based all-you-can-eat mobile music services like Vodafone’s MusicStation, but really, it complements them. It’s certainly cheaper, but offers other advantages as well — the biggest being that users can access their personal collection of music files through Social.FM as well as genre-based and personalized streams. The current iteration requires users’ home PCs to be on and connected to the Internet for them to listen to their own tracks; a future version will do away with this necessity.

I like that Social.FM changed its name from Mercora, because what it’s doing very much feels like radio updated for the mobile era. Gone are the annoying DJs and commercials; in is personalized streaming, either by a user’s specific preferences or by a genre in which they’re interested. It’s easy to pooh-pooh old-school radio since it’s got a lot of now-undesirable features, but it still has some benefits, such as turning listeners on to new music. Offering streams built around genres (such as those offered by other providers like XM or Music Choice) can do this, while personalized streams can also do this for each individual listener. Furthermore, something like Social.FM lets a user’s stream be informed and shaped by their friends’ playlists and recommendations.

While giving users the ability to download individual tracks has its own benefits, it makes the experience of finding new and different music — as well as the social aspect of listening to music and sharing it with friends — much more difficult. In this sense, Social.FM really offers something different, and not necessarily better or worse, just different, than download systems.

Social.FM is running a promo where its service is free through the end of November, not that it leaves you a lot of time, but it’s well worth checking out if you’ve got a compatible device (and data plan). For operators, it’s also worth looking into Social.FM or other similar services to position alongside their download offerings, since they can augment and enhance the experience they offer.

So apparently in an effort to counter “the iPhone Effect”, Vodafone’s going to offer free access to MusicStation — to users spending 40 pounds a month on contract. That’s really generous, and hardly seems likely to really stop anybody from jumping over to O2 to pick up an iPhone if they really want one.

The problem here is that first, users haven’t shown a lot of interest in subscription services on their PCs. They seem resistant to the rental model for music — and it’s hard to see that really changing all that much on mobile. There are a few advantages here, such as not having to worry about device compatibility. But the bigger point is that offering this service for free probably isn’t enough to overcome the better user experience that the iTunes/iPod model offers users. As Russell pointed out earlier, “in order to launch a new product into a market, it needs to be hugely better than any incumbent – being as good as the competition, or just slightly better, doesn’t hack it.”

Is MusicStation hugely better than the sideloading, ownership model used by the iPod and iPhone? The subscription model really doesn’t seem like much of a lock-in for users, since it’s unlikely that Vodafone will have any sort of exclusive on this type of service for long. Never mind the fact that offering the free service only to people on plans of 40 pounds a month and higher seems like it will miss most of the users that really care about music on their mobiles.

What I don’t quite understand is that the response to the iPhone in the UK market would seem to be to emphasize the functionality of other handsets plenty of which meet or exceed those of the iPhone — not some 2 pound a week freebie.

Obviously a concern is if it will work commercially. In general, I’m a fairly big supporter of the idea of ad-supported content, but I’m not sure it’s going to work here. It’s really something best suited to goods and services with low marginal costs, something I’m not sure applies to commercial music, with publishing and artist royalties. While a record label can adjust its acceptable level of profit margin, royalty rates don’t exactly change like that, so every additional download carries a level of marginal cost beyond bandwidth. And with the low CPMs and clickthroughs sites like MySpace are reported to command, it’s not clear just how well-suited the ad-supported model is to this content. SpiralFrog and its advertisers will have to work particularly hard to target the ads and make them relevant and compelling to users (just to emphasize: “compelling” does not mean “intrusive and unavoidable”).

However, I think a bigger issue is that this service doesn’t sound like it’s going to be particularly appealing, least of all to users already getting their music from file-sharing networks — the users it’s supposed to lure over to the lawful side of things. And is it at all surprising that much of this will stem from the use of DRM? A SpiralFrog exec says it will work by using a desktop-based downloader for Windows Media files — so no iPods, and more crucially (for MH readers, anyway), few mobile phones. By cutting out the iPod, it’s eliminating its appeal to a huge chunk of today’s portable music market. By limiting its interaction with phones, it’s ensuring it won’t take a piece of the portable music market of the future.

Here’s the thing that the labels don’t seem to understand: this music is already available for free, and if people don’t want to pay for it, they’re going to get it from wherever it’s easiest, and whoever delivers the best user experience. For now, that’s P2P networks and other illegal means (or means of dubious legality like AllofMP3). Getting them to switch isn’t going to happen just because there’s now a legal alternative — it’s got to be better than the P2P services. The promise of malware-free files is a start, but really not much of one. Having to log in to the service once a month to renew the license so the files will continue working (and so you have to watch some more ads) doesn’t help, and makes me wonder what happens should the site shut down, or the company go out of business (guess I really know the answer to that one).

Ditching DRM would make this service significantly more attractive. Part of the reason this is so forward-thinking, for a record label anyway, is that it shows some understanding that it can’t simply wish the file-sharing services away, it’s got to out-compete them. Granted, it sounds like the first iteration of that attempt to compete is fairly flawed, but they’ve got to start somewhere. But make the service more attractive by making it available to as many users as possible: at the very least, get rid of the DRM, and at best, support a wide range of formats, or at least give users tools to convert them. At the end of the day, this content is still going to be available from P2P networks, not to mention the label is giving it away, so adding in the copy-protection is rather pointless. Also, keep in mind that DRM is never uncrackable, and it doesn’t stop piracy, it just frustrates legitimate users.

Now, before you start calling me Cory Doctorow, keep this in mind, too: the use of DRM raises the cost of each song the label gives away (Microsoft don’t license that PlaysForSure goodness for free, you know). When margins are already going to be tight, why commit the double-whammy of increasing costs and limiting your revenues by cutting off a large chunk of the potential audience? Not using DRM means cheaper giveaways, to a bigger audience — including all those mobile users.

[tags]mobile, music, mobile music, vivendi, universal, spiralfrog, p2p, filesharing, legal downloads[/tags]

Geriatric rockers The Rolling Stones have hopped on board the mobile music train — sort of. Through a service called Listen Live Now!, fans will be able to listen live to their concert today in Paris via their mobile phones. And when I say via their mobile phones, I don’t mean some sort of streaming audiocast — they call in and get a feed from the mixing board piped across a standard phone connection to their handset. Sounds brilliant. But it gets better.

Users will be charged $1.99 for 7 minutes, and there doesn’t appear to be a way to simply buy the whole thing at once — so users who actually want to shell out the $40 or so to hear the whole thing will have to do it $1.99 and 7 minutes at a time. The Stones’ manager says the move will help deter bootlegging — seriously — and that “It’s passive income, and they’re helping fans enjoy the experience without affecting ticket sales.” Somehow I expect the “passive income” bit, rather than the “enjoy the experience” is what they’re focused on. But then again, when concert tickets are $150 or more, it’s not really about the music or the fans, is it?

Update: As Colby points out, the site says “On Friday July 28th at 3:00PM EDT (start time is approximate)”. What happens if they’re seven minutes late?

[tags]mobile, mobile music, rolling stones[/tags]

Yahoo’s been getting a lot of attention this week because they’re selling a Jessica Simpson single for download. It’s not just any single, though, there’s hundreds of customized versions of the track, and users can download the one that’s got their name in it. But that’s not what’s generating all the interest — the big news is that the tracks don’t have any DRM. Yahoo’s saying all the right things, that they want to sell more unrestricted tracks, but can’t because of the labels, and so on. I think their sentiment is pretty genuine, if for no other reason than they realize that unrestricted tracks are worth more to consumers, so they can theoretically charge a higher price (they do admit $1.99 for the Jessica Simpson songs are steep, but it’s because of the personalization, not the lack of DRM). It’s doubly great for them that skipping over the DRM also reduces their costs.

Where this gets a little interesting is that by selling these songs DRM-free, they’re selling not just the full-track, but they’re selling a ringtone, too. There are plenty of “personalized” tones available from ringtone sellers, and what could be better for some teenager infatuated with Ms. Simpson than a ringtone where she’s singing to them?

That’s the rub. Now, by selling the kid a $1.99 full track they can copy to their phone and use as a ringtone, Yahoo’s pre-empted the label, or a ringtone vendor, from selling them a $4 version to play on their phone. This illustrates not only why the ringtone market is about to implode because of phones that can play MP3s as ringers, but also illustrates why the labels are reluctant to abandon DRM: it undermines their strategy of making consumers pay multiple times for the same content.

It’s easy to see that this is a short-sighted strategy that isn’t sustainable. In the case of ringtones, it worked just fine back in the day of monophonic tones that couldn’t get on a phone any other way than by SMS. But if people can just put an MP3 on a memory card and set it as their ringer, they’ll be hard pressed to cough up another $4 or whatever for a legit version if the version they’ve legitimately purchased is copy-protected — particularly when it’s so easy to just go download an MP3. And it’s not a much further step to just forget the whole purchasing thing to begin with, and download an MP3 from a P2P service.

So what’s the right long-term strategy? Quit ripping off consumers by selling them restricted files that will only work on certain devices, or for certain applications. Change the strategy from one that’s based on selling people content based on compatibility and control to one that’s based on value. Sell a user an unrestricted track for $1.25, making it clear that it can be used anywhere that can play MP3s, or bundle in special ringtone versions. Don’t worry that unprotected files will end up on file-sharing sites: they’re already there.

If mobile operators really wanted to hasten the end of standalone MP3 players and take a leading role as music vendors, they’d beat this drum — of course they, too, are paralyzed by the fear that users will trade around content among their friends. Newsflash: they’re already doing it.

[tags]mobile, mobile music, drm, jessica simpson, yahoo, yahoo music[/tags]

Within a matter of weeks, several wireless operators are expected to introduce musical “alert tones” — a snippet of a song lasting between two and five seconds, that users can assign to play when they receive incoming text messages and voice mail, similar to a ringtone.

Sony BMG offers a series of spoken-word alert tones from such artists as Anthony Hamilton and Cassidy, available on all major wireless carriers. Company sources say they will expand the selection to clips of actual songs as well once U.S. wireless operators request them. Sources say Universal Music Group has converted “hundreds” of tracks into alert tones, including Nirvana’s “Smells Like Teen Spirit,” 50 Cent’s “Candy Shop” and “In Da Club” and Gwen Stefani’s “Hollaback Girl.” Universal, the world’s biggest record company, also is creating original, made-for-mobile alerts tones by “key artists.”

And it doesn’t stop there. A company called Endtones seeks to replace the beeping that occurs when a call has been dropped, concluded or otherwise disconnected with a musical alert.

Endtones? Seriously? Is this anything other than greed-driven stupidity?

[tags]mobile, mobile music, ringtones, endtones[/tags]