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IRIS
SPECIAL REPORT: SUBSCRIPTIONS vs. DOWNLOADS
Plus
An
IRIS Reading List Recommendation
&
Announcing New Label Additions to the IRIS roster
By
IRIS Research, Vic Sarjoo Ed.
THE AQUEDUCT
OR THE WELL
How will fans purchase music in the future? Will people
keep buying tracks for their personal libraries on
iTunes or will the subscription model proposed by
Napster, Real and others be the ultimate channel of
consumption? Should music become a utility? How should
the rest of us best position ourselves for the continuing
rapid evolution of the distribution models of content?
Do chickens really prefer more beautiful humans? These
are the questions we address in this edition of IRIS
Research.
PEOPLE WITH WIRES IN THEIR EARS
Until satellites can beam music directly into people's
cyber-implants those of us who aren't completely entertained
by only the voices in our heads will be packing earbuds.
The sales of the hardware attached to those earbuds
increasingly demonstrates that humans are interested
in carrying their music wherever they travel. IRIS
research can only comment on humans as our attempts
offer digital music our test subjects Myles the cat
(felis silvestris domesticus) and Holly the long haired
Chihuahua (canis familiaris) ended in failure.
 
Portable
Music Then & Now (iPod parody ad from iPodMyPhoto.Com)
MP3 hardware sales in
the U.S. in 2004 was $2.3 billion having grown 12%
over the prior year. Sales should be expected to grow
at 11% per year which is the same rate the sales of
portable CD players grew between 1987 and 1994. According
to Mintel Research we are now at the point where MP3
players outsell every other form of portable medial
player.
MUSIC
CONSUMPTION RISING AGAIN
Sales of recorded music have fallen over the past
few years from a peak in 1999 but are now beginning
to uptick again at a viagrous* rate. Executives in
our industry often conclude that online piracy is
the reason for the retreat of sales. Major label executives
nearly always conclude this and the "piracy is
killing sales theory" is apparently official
opinion of the RIAA. At IRIS research we conclude
that those who hold online piracy the sole reason
for a decline in CD sales are probably bad at math,
victims of group-think, require a scapegoat for their
mistakes, or all of the above. The biggest likely
reason for industry revenue peaking is that CD sales
topped out when the consumer had finished duplicating
their music collection. When CD's gained popularity
the fan was compelled to repurchase their entire music
library. That replacement cycle has concluded and
is no longer available to drive CD sales. That the
record industry would expect replacement sales to
continue is akin to your dentist hoping your fillings
wore out. Contributing to the peak in sales was that
the economy was in a massive bubble in 1999 and sales
of almost everything spent a few years in decline
after the burst of early 2000. Lastly, overall shelf
space for CD's has been falling rapidly as independent
music stores close and music-only retailers like Tower
fall under giants like Wal-Mart.
*viagrous rising vigorously
 
HOW WILL
MUSIC BE CONSUMED
Will iPod-people keep flocking to iTunes to forever
glean songs one-by-one to fill their sleek pearlescent
players as they stare down at the great unwashed skittering
about with their iRivers and Creative Zens -or- will
the Napster Cat and forces at Real/Rhapsody successfully
be the ones to conquer the market with their all-you-can-listen-to
monthly subscription fee?
At IRIS we believe that both models will compete neck
& neck for up to five years but that, on a dollar
basis, half or more of music consumed will be purchased
via subscription models offering unlimited listening.
As well it is not improbable that in 15 years the
pay-per-track model may only be a fractional, but
premium part of the marketplace.
There are many reasons that subscriptions will gain
momentum, with many facets of validity. We will touch
upon only a few in this post.
IN THE BEGINNING THERE WAS...CABLE (Historic)
Entertainment consumption in general has moved toward
a subscription model. Today a Netflix subscription
is an example but long ago cable television was the
early pioneer of consumers being conditioned to pay
for 24 hour content even though they do not use the
content 24 hours each day. As Robert Tercek the Chief
Strategy Officer of (m)FORMA remarked at the 2 March
05 DigitalMediaWire conference in NYC "Cable
is the best model for the cable companies because
the consumer is paying for content they don't even
use."
Only very ardent fans record every episode of shows
they wish for and even those fans don't record every
episode of every show they may happen to watch. Consumers
have been conditioned to shun ownership and adopt
ever more through subscription and rental models.
This applies not only to cable television but also
internet access, cell phone access and even car leasing.
"Ownership" as a property right matters
less and less in a world where the purchaser has instantaneous
access to whatever entertainment experience they desire.
GrAMpPA, HOW R U? WHAT WERE COMPACT DISCS LIKE?
(Futurist)
In the book The Future Of Music, Kusek & Leonhard
refer to the Millennial generation (those born after
1976) as consuming music very differently than prior
generations. Accustomed to having their entertainment
always readily available these young whippersnappers
have some behavior patterns that are vastly different
from their prior generations.
Millennials
in an Apple parody ad depicted on iPodMyPhoto.Com
The case
could be made that the Millennial generation has the
most lax regard for intellectual property rights as
it is members of this larval caste that are the primary
drivers behind Kazaa, Grokster and other P2P filesharing
networks. The case could also be made that the Millennial
generation will be the most reliable and profitable
consumer that any industry could ever want.
The Millennial generation from their inception is
conditioned and comfortable with buying their services
by subscription. This generation was born into a world
where people pay monthly for their cell phone service,
their internet service, their online gaming service
etc... The Millennial generation experiences music
differently. IRIS research has found the consistent
opinion among record industry executives that "consumers
want an experience, they want liner notes, they want
nice packaging." IRIS has not found this opinion
among the Millennials and our poll on the utility
of 'liner notes' just elicited confused looks from
the younger members of the focus group.
In consumer markets, demography is destiny, and even
the youngest Millennials at 29 years old have not,
as a generation, hit their peak earnings years. When
they do this generation will demand all their content
instantaneously or even pre-instantaneously. As Millennials
will expect their entertainment systems to predictively
meet their needs the iconic 50's services phrase "at
the push of a button" will plummet to further
obsolescence.
$CHA-CHING$! (Current)
IRIS has been observing steady growth in streaming
(subscription based) revenue collected for our labels.
Although the digital music market is still dominated
by Apple's iTunes, we are still witnessing an evolution
in the consumption model at retailers such as Napster
2.0 and Rhapsody which are ardently pushing their
subscription platforms. With some retailers streaming
revenue is in gross dollar terms approaching 70% of
the level of same-store download sales and rising
quickly. Streaming revenue is indeed rising fast,
but we cannot comment on rates as we do not yet have
enough datapoints. Qualitatively we believe the adoption
of subscriptions will be rapid.
At a recent lunch Real Networks commented to IRIS
that "we always find that whenever we drop the
price of music [that] consumption increases."
WHAT'S IN IT FOR ME?
More money. Over a longer period of time. CD buying
peaks for consumers when they are 14-22. After that
age the consumer has largely been ignored. From an
industry level, it makes a lot more sense to increase
the overall sales outcome of a consumer by capitalizing
on their entire lifespan. This is the case where a
$10 per month subscription, over the lifetime of a
consumer, far outstrips the amount of sales generated
during their post-teen years.
In The Future Of Music Kusek & Leonhard indicate
that the recent growth in sales has been to the older
demographics (think Norah Jones in Starbucks) while
the 13-17 year old category lost relative marketshare
(think Kazaa and Grokster).
Apple reported that every track in their iTunes catalog
had been purchased at least once, indicating the good
possibility of a broadening of the target age demographic
for music buyers. Although Big Champagne [P2P tracking
company] says the most popular downloads are usually
the ones being pushed by the record labels, they also
say there is a broad and diverse mix of files being
traded -- ubiquity may beget diversity, after all?
(Kusek & Leonhard The Future Of Music p. 104)
IRIS READING LIST
RECOMMENDATION
Get a copy of The Future Of Music by Kusek/Leonhard.
The U.S. edition omits the nudie-pics, but still this
is the best contemporary volume on the current and
future potential state of digital music.
IRIS Research's
Editors' Amazon review of the book is below.
 Expertly
Cogent And Still Layman Accessible, March 25, 2005
Reviewer: Vic G. Sarjoo "VicSarjoo" of IRIS
Distribution
Written with a smoothly flowing cadence this tome
engages both the expert and layman reader and offers
a survey of the digital music landscape from both
a 30,000-foot-view *and* on a rubber-meets-the-road
level. This book provocative, interesting and on appropriate
occasions humorous. The writer's occasional biting
statements are more cheeky than sarcastic as the authors'
genuine adoration of music and the business of music
is evident. This book can be appreciated by the casual
reader, industry members, fans of technology and students
of sociology, economics, history and even observers
of the human condition. Although the book is about
the impending world of music the book, like the subject
it covers, is really describing future cycles of patterns
springing from places deeply encoded in human nature.
A philosophical discussion, this volume is also an
industry handbook. I highly recommend this book to
anyone interested any aspect of music, or most aspects
of technology, philosophy, economics, social behavior,
law or history.
IRIS IS A FINALIST FOR INDUSTRY
AWARD
We're pleased
to announce that IRIS has been nominated for an industry
award. Although not *quite* in the right category,
Digital Hollywood, has selected IRIS Distribution
among other candidates (iTunes Music Store, AOL, Rhapsody
and Napster) as a finalist as Best Broadband Music
or Information Service for their OnDemandies awards.
These Industry Awards are to Recognize the Highest
Standards of Achievement in On-Demand Entertainment
& Technology.
VI. Best Broadband Music or Information Service
• AOL Music On Demand: AOL Music On Demand services
enable consumers to access AOL Music's comprehensive
library of music videos across a variety of devices
• Rhapsody: Digital Music Service with over 800,000
songs
• Apple iTunes & iTunes Music Store
• Napster: Over 1 Million Tracks – "All the Music
You Want, Any Way Your Want It"
• IRIS Distribution: Digital Music Distribution for
Independent Record Labels
IRIS PARTNERS WITH GOTUIT.COM FOR
VIDEO CONTENT
IRIS is
happy to announce our newly inked deal with Gotuit
Media Corp., the leading platform provider for next
generation video on demand. Powered by Gotuit On Demand
(TM), a patented navigation platform that combines
segment metadata with on demand video content, Gotuit
Music On Demand allows digital cable subscribers to
personalize their viewing experience by selecting
just the music videos they choose to watch, as well
as additional content - such as artist interviews,
discography, tour information and "making of"
footage to enable viewers to build a deeper connection
with their favorite artists.
IRIS welcomes
recent additions to our roster including
Baria Records * Gaelic Storm * IDN Distribution *
Redemption Records * Ropeadope * Ruffworld * Sabot
Productions * Signature Sounds * Smash Hit Recording
Company * Stanton Street Records
They join over 160 independent labels in the IRIS
family including:
Chemikal Underground * Fat Possum Records * Ghostly
International * K Records * kranky * Megaforce Records
* SCIFidelity Records
__________________________________
We service
a rapidly expanding number of both major and independent
digital retailers including:
iTunes (North America & Europe) * Napster 2.0
(US & Europe) * Rhapsody * MSN * MusicNet * AOL
* FYE * CTrax * RCN Music * Virgin Digital * MusicNow
* MusicMatch * Sony StreamMan (Europe) * Audio Lunchbox
* Beatport * Musicload (Germany) * Karmadownload (UK)
* Ruckus Networks * Download Punk * Future Trax
__________________________________
IRIS is
actively cultivating relationships with key players
in the digital realm and related markets. Our affiliates
include:
IDN Distribution * MRI Associated Labels * Burnside
Distribution Corporation * Sound Clash Distribution
* PolyphonicHMI * Activaire * Primed Entertainment
* Creative Metaphor * Xingtone * Live 365 * Zingy
__________________________________
Have something
to say? Write back! We're interested in your thoughts.
Have someone you think should be interviewed for IRIS
Research? Let us know!
__________________________________
Have encoding
needs? IRIS maintains its own full service high quality
encoding operation. Our encoding operation is in an
ISO 9001:2000 certified Total Quality Management (TQM)
facility.
Do chickens
really prefer beautiful humans? IRIS research recently
read this study which asks some provocative questions
about concepts of beauty and how they may originate
in perception at a central-nervous systems level.
In the next issue we'll address which species is a
more ardent fan of top 40 music: Sheep or Lemmings?
__________________________________
No analysts
were harmed in the writing of this paper.
IRIS Research
is written by the entire IRIS staff.
Vic Sarjoo, Editor.
CFO
Director of Business Development
111 New
Montgomery, Ste 301
San Francisco, CA 94107
Ofc: 415-995-2355
x 103
Cel: 914-572-1010
Fax 415-704-3327
http://www.irisdistribution.com
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Ariadne
Capital Journal - Through the Maze Volume
5, Edition 2
