New technologies and Cultural Diversity
World Social Forum, Porto Alegre
29.01.2005
The traditional value chain of the record business has comprised the following players:
1. the creator(s) and the and the performer of musical work. These can either be two separate bodies/persons or could be the same body /person
2. the publishers who manage the creators’ publishing rights and also may publish printed music of the creators works
3. the producer (record label) who produces a recording of the performed work, and usually owns the copyright in the recording
4. the distributor, who packages and distributes the copies of the recorded work. They may also do manufacturing, if they can provide all the infrastructure, such as the distribution companies owned my the major labels.
5. the retailer, who sells the copies to the audience.
6. The consumer, who buys music on various format.
During the 1990´íes and the introduction of the Internet and new methods for compressing (encoding) audio for delivery through narrow band networks, there have appeared three alternative scenarios for shortening the value chain:
1. Major record companies and international media companies have made alliances with Music On Demand Service Providers (Mod SP), such as AOL, Telecoms, etc… in order to retain their control of the entire value chain. However, this has created severe conflicts between the record companies and the retailer, who may be owned by the same entity, but who rely on each other for their existing business.
2. From the record label (independent producer) to the music buyers via a MoD SP.
3. From the creator to the music buyers via a MoD SP.
Most MoD SPs in the 90´íes were created by Venture Capital (VC) companies and Telecom/Internet Service Providers with no or very limited knowledge about the music business. The most severe mistake made by these players was to design business models not taking into consideration the legal aspects of the business, and the fact that the music business as a whole is more than just the record business. They underestimated the power of the broadcast and the live performance industries, which both have developed a vast experience in how to deal with their various target audiences. These sectors are still the most important marketing channels towards an audience, and cannot easily be replaced by an Internet service.
Although the net provided the possibility of disintermediation, the reality of “artist and career development + success” requires the provision of the telecoms for the consumers, as it required the traditional distributors in the old business model. This is usually called marketing, promotion and artist development. In the new media these functions will still be required – but who performs them and how they are performed could radically change. The same argument applies to investment.
In 1998 we realised that the gold rush of the Internet music business was over, and hundreds of millions of US dollars in venture capital (VC) money have been wasted. It is not fair to only put the blame on incompetent VC and Telecom companies. It is far more complex.
In order to understand the entire picture, it is important to understand the market forces that appeared together with some very significant technical developments and the fact that the rights holders and their associates had a severe lack of knowledge in the digital domain, which so far, had been an issue only for hardware and software manufacturers and audio engineers. The change from analogue storage media (LP, MC and Betacam/VHS) to digital storage media CD-Digital Audio (Music CD), CD-ROM (data CD), CD-I (Philips/Matsushita format for TV boxes) and DVD (Digital Video Disc) started already in the late 70’s and was a development being considered as an offline evolution only, which still was dependent on the traditional distribution and retail infra structure.
However, in the Broadcast industries, there had since the mid 80’s been developments for online exchange of music and video via satellite and terrestrial broadband networks. In order to increase the transmission speed, there was established an ISO (International Organisation for Standardisation) research group looking into encoding of audio and video data streams in order to reduce band width without significant losses of audio/video quality. The name of this group was MPEG (Moving Pictures Expert Group), and they launched the so called MPEG 1 (Layer I and Layer II) and MPEG 2 standards for professional users such as broadcast stations and audio/video producers having access to broadband network.
With the introduction of the ISDN (Integrated Services Digital Network) standard and more powerful PC processors (Pentium 90), some R&D projects looking to future consumer scenarios were initiated in the early 90’s -- in particular:
1. encoding of audio for use on CD-ROM that could be played by the new generation of PCs and Macintoshes with improved computing power
2. encoding of audio for transmissions via fixed telephone lines and the Internet
The software developed for these purposes was called MPEG1 Layer III, and was file named by the formula ”name.mp3”, similar to the naming of text documents as ”name.doc”.
Being involved in some of the very first MPEG-1 Layer III online trials and the development of one of the first MPEG-1 Layer III CD-ROMs in 1991 and 1992 (before the introduction of the World Wide Web), my colleagues and I clearly saw a potential of using these technologies for online production sessions and online/offline archival services.
The first software licenses of the MPEG 1 Layer III software were therefore targeted to professional users, and were tested by library networks and telecom R&D departments. However, by the time of introduction of the WWW, everyone discovered the potential of developing WWW towards an ”online CD-ROM” service and several commercial consumer services and investors discovered a theoretically enormous potential -- under the circumstances that the performance of online music services would compete with offline services, such as CD-players, jukeboxes etc…
There is no doubt that the best way to generate capital and energy to develop these future ”gold mines” was to release the MPEG 1 Layer III software to as many as possible, and that is what happened. The software was renamed mp3 and hundreds of VC companies and individual entrepreneurs started what we today may call the mp3 gold rush. This happened in 1995, and was headed by
1. telecom companies looking for new business opportunities in a deregulating telecom market
2. software companies being aware of a huge potential of becoming ”the” solution for integrating online streaming with search/retrieval and data management tools.
The dominating players could be separated into three groups with different strategies:
1. The software and hardware industries started the battle of industrial standards, which was a purely technology driven strategy. Better known brand names include Liquid Audio, Microsoft, Real Audio, Apple (QuickTime).
2. The telecom industries started the battle for new customers and more run time in a rapidly deregulating market, which was more a run time driven strategy. These included
a. Deutsche Telecom MOD (Music On Demand) project and Telenor Venture MODE project in 1995
b. AOL and hundreds of Internet companies that all tried to establish music or music-related sites by offering their services to record labels.
3. The multinational record companies were scared about what they saw, and started looking for new alliances that would help them to protect their rights and maintain their hegemony. For instance
a. AOL and Bertelsmann merged in 1995 in Europe, but separated again a few years later
b. The Record Institute of America (RIAA) in 1998 initiated the SDMI (Secure Digital Music Initiative); it failed this summer
c. the merger of TimeWarner/AOL and the attempted TimeWarnerAOL/EMI merger in 2000, which later failed.
However, very few of the above mentioned players were aware of the severe impact of the legal regulations which had been developed for years by publishers, collections societies and other players caring about the income of the artists. Most of the newcomers to the music business battle field were so focused on their technologies and gold rush opportunities that they forgot the rights holders (creators, performers, publishers and producers); they also forgot that most new artists are being recruited by independent producers, and that the most important brand name is the artist, and not a telecom or internet company, and especially not a multinational record company.
There is no doubt that the newcomers from the software and telecom industries have had enormous benefits from the so-called mp3 revolution, even though they have not yet succeeded in establishing a successful consumer service. Despite the fact that mp3 (the most used key word on the internet) has generated a lot of traffic, paradoxically, the music industry was probably the loosing party -- especially, the creators and the performers.
However, there are some very interesting long-term aspects that came of out the mp3 revolution. Some tremendous marketing tools have been developed (i.e. Napster and Gnutella, and forthcoming tools based on MPEG-7) and some very interesting monopoly breaking opportunities have appeared, which over time probably have benefited the creators and rights owners.
During the last 5 years another dimension has been added to the online music business, based on the recent development with mobile Internet services.
Everybody involved in the music and Internet business started to become aware that a desk top PC terminal never could become the ideal music terminal. The lack of portability and the fact that most PC desk top terminals are located in offices at work or at home, and not in the living room, made engineers start looking for devices for mp3 files that could be used as walkmans and discmans. The RIO player which came on the market in 1998 was the very first attempt to make the mp3 terminal portable.
Just as the ISDN and mp3 standard started the online business, so the new generation of wired portable devices and improved wireless networks and transmission protocols generated a new opportunity, especially for developing (or transforming) countries that have an underdeveloped telecommunication infrastructure. Since wireless networks are significantly more cost effective to build and maintain than terrestrial networks, it is obvious that the coming years will create an inverse situation for developing countries vs. industrialized countries when it comes to advanced personal telecom services.
Wireless services and the new wireless devices currently being introduced to the market will create a range of new models for marketing, distribution and usage of music, video, photo, text and other artistic works. Super Distribution, which makes the consumer become a distributor to his friends or very personal /local community creates tremendous opportunities for developing niche markets. Wireless networks also have a significant advantage by having an excellent infra structure for metering the use of artistic works territory by territory, which again can secure a better remuneration for the rights holders and new opportunities for localized and personalized services.
The fact that transforming countries will benefit from a more modern and more appropriate legal framework based on current and future services, may create what we call a leap frog opportunity for these countries within the adoption of new technologies as well as new legal/business models. To assure that this will happen it is of great importance to provide the creative communities in these countries with what I regard as the three power factors for creating a successful music industry.
The two first factors are essentially about cultural policy and information flow between those who have experienced the mistakes made by the western creative communities with the introduction of new technologies.
To develop mutually beneficial models between the creative communities and the driving forces behind the wireless revolution requires the separation of the roles of the two parties. The 90s clearly demonstrated that being the rights holder and the online distributor at the same time is a bad combination and only a source for tremendous internal conflicts. While the rights holders want to increase their income by having favourable licensing tariffs, the telecommunication service providers wants to provide their end users with as cheap (or even free) services as possible. When the same service providers, who do not understand the music business, also are fighting a desperate war with other service providers to conquer new markets through expensive licenses for new telecom services (i.e. the bid for the UMTS license in UK), there will appear:
1. numbers of hidden agendas behind noble incentives
2. ”tempting” offers to poor rights holders to acquire their exclusive and life time intellectual rights and copyrights
3. intense lobbying campaigns targeted at policy makers for e-commerce and international trade (i.e. WTO, WIPO, etc…)
One way of trying to secure a desirable income is to establish services controlled by the creative communities and individual rights holders. There are a few examples of such services.
1. The Phonofile service, which was developed by the Association of Norwegian Independent Record Labels (FONO) in co-operation with the commercial TV company TV2, has so far been one of the very few online music services running a viable commercial service at a very cost-effective level. The service has recently been strengthened by an unanimous decision by the general assembly of the Norwegian Association of Popular Composers and Songwriters to invest in Phonofile AS, followed by concrete negotiation with rights holder organisations from other countries. Similar entities has later been set-up in Denmark, Iceland and UK.
2. Sociedad Digital de Autores y Editores (Spain) is a company established by the Spanish collection society SGAE (Sociedad General des Autores y Editores) with a view to develop a promotional window for 55,000 Hispanic artists, publishers and producers. The service also comprises several tools for monitoring and reporting the use of artistic works.
3. Artspages International AS is a service established by a global team of arts managers and artist representatives, and is one of the very first services to open the Chinese market for mutual cultural exchange of artistic works and information in the digital domain. Artspages has signed co-operation agreements with Phonofile, SDAE and many other players around the world, with a view to jointly developing a sustainable e-commerce model based on future standards such as MPEG-7 and new wireless services. Artspages has also distribution deals with iTunes, MSN Music, Real Networks and the 2 biggest online services and mobile phoen companies in China, alltogether representing a potential of more than 1 billion end consumers.
During the Artspages Seminar in Oslo in 1999, hosted by The Royal Norwegian Ministry of Foreign Affairs and Artspages International AS, Mr. Elikunda Materu from the Tanzanian Directorate of Arts and Languages estimated that a sustainable culture industry in Tanzania could represent more than 30% of Tanzanias GNP. The most important basis for a sustainable culture industry is probably:
1. the cultural diversity that makes the industry unique, and
2. the freedom to choose among co-operation partners not only on the basis of a short term profit/loss analysis, but also with regards to national identity and pride, and more indirectly, economic development and social gains.
These should be two of the most important issues for the global creative community and their policy makers in this decade.
Artspages has been in China since 1998, when I conducted a feasibility study for NOKIA Ventures regarding wireless distribution of digital content. The main conclusion on this study was that the Wireless reveolution would start in 2005/2006. We are soon there, and what is the current status?
There are two major Internet companies in China, Sina.com and Sohu.com, each of them with more than 60 million subscribers. 15% of these have ADSL or broadband connections. In fact, China is the country in the world with the largest broadband penetration if we also include the 100 million broadband/cable subscribers.
China is thereby a very good example on a leap-frogging country, with the following key examples:
1. China went directly from movie on cinema to video on CD (no vide tape period)
2. China went directly from hardly no consumer fixed line phones to 300.000 million mobile phones subscribers
3. China went directly from a few paper magazines/news paper to hundreds of Internet magazines
4. China went directly from analogue TV to digital cable TV
Artspages has recently received grants from the Norwegian Agency for Development Cooperation to build an archive for producers in South Africa and other African countries. The archive will be located in Johannesburg and our main partner in South Africa is South-African Music Rights Organisation (SAMRO).
The archive will be the main hub for aggregating content for two purposes:
1. International distribution via the Artspages global network and its B2B clients in China and outside China
2. Domestic exploitation via public services, such as libraries, schools, broadcast and via commercial online services as soon as such services are launched in South Africa.
Other countries to follow will be India, Latin America, South-East Asia, whil Europe, and probably North America, will be far behind.
Summary:
- China is heading the technology development for the leap-frogging importunities, heavily pushed by wireless services and the wish by the Chinese government to make an exhibition window in 2008
- Africa, with it´s rich culture with a strong influence on western popular music, will be a key battlefield among the economic driven forces and the cultural diversity driven forces on how to adapt the new technologies
- “To avoid similar mistakes as in the 90íes” is maybe the most important goal to be addressed over the next few years
- Communities of independent rights holders are joining forces