Don’t think you can learn some­thing from the mu­sic in­dus­try? Think again!

An in­ter­view with Terry McBride

The Insider - - FRONT PAGE - By Gayle Moss

When one thinks about other in­dus­tries which have been racked by con­stant change, the two most ob­vi­ous ones that pop into our minds are mu­sic and video. At first I thought that the dif­fer­ences be­tween them and main­stream me­dia would dis­qual­ify them as bench­marks. Af­ter all, their con­tent is ev­er­green while mag­a­zine, and es­pe­cially news­pa­per con­tent, for the most part, is ephemeral.

But upon fur­ther study, I dis­cov­ered that many chal­lenges and op­por­tu­ni­ties in the mu­sic in­dus­try also hold true for pub­lish­ing. Both have ex­pe­ri­enced par­a­digm-break­ing dis­rup­tion that has rocked the very foun­da­tion of their ex­is­tence. Most peo­ple at­tribute that to the in­ter­net, and it’s true that dig­i­tal and mo­bile are en­ablers of mas­sive change. But I be­lieve an even big­ger con­trib­u­tor is the mas­sive changes in so­cial be­hav­ior that have oc­curred over the last decade – changes that con­tinue to shake the con­sumer land­scape.

So, even though we’re not com­par­ing ap­ples with ap­ples here, this in­ter­view is a must-read for pub­lish­ers who are still try­ing to put the ge­nie back into the bot­tle and re­turn to the glory days of print. Sorry, but we can’t bring the old ways back, no mat­ter how hard we try. It’s time to face the harsh re­al­ity that we are run­ning out of time.

It’s time to look to those who can help open our eyes to a new re­alty and more prof­itable fu­ture. One of those “rebels with a cause” the mu­sic in­dus­try didn’t want to hear from a decade ago, is Terry McBride, CEO and founder of the Net­twerk Mu­sic Group.

Terry, wel­come to The In­sider.

You and Net­twerk were in the heat of the tech­nol­ogy and so­cial changes that had been hap­pen­ing over the last decade. You’ve grown and pros­pered in those chal- leng­ing times. What did you do dif­fer­ently from the sta­tus quo to achieve your suc­cess?

Well, I didn’t pull up the draw­bridge and pro­tect the cas­tle till the drones flew over the bridge and bombed it. ;) No, I just saw an op­por­tu­nity.

It was re­ally very sim­ple. When we founded Net­twerk we un­der­stood that songs are not copy­rights; they’re not cho­ruses, verses and melodies. Songs are emo­tions.

So from Day One we were in the busi­ness of mon­e­tiz­ing emo­tions. Yes, I might own copy­rights which al­low me to mon­e­tize emo­tions, but I’m not in the copy­right busi­ness; I’m in the emo­tions busi­ness.

Un­der­stand­ing that our eco­nomic value was in a new form of mon­e­ti­za­tion shifted how we looked at ev­ery­thing. Net­twerk was all about cre­at­ing a re­la­tion­ship with mu­sic con­sumers – some­thing we were un­able to do in the busi­ness up to that point. Be­fore the in­ter­net, there was al­ways some­thing be­tween the artist and the per­son con­sum­ing the art.

For ex­am­ple, if some­one bought an al­bum at Tower Records, there was no way to build a re­la­tion­ship with the per­son who bought it. The same was true with ra­dio — we had no idea whether a lis­tener liked a song or hated it.

Back then, ma­jor la­bels bat­tled to con­trol, not only what was avail­able at phys­i­cal re­tail out­lets, but also what was on the ra­dio. We knew that was go­ing to dis­ap­pear when the mil­len­ni­als ar­rived. Mil­len­ni­als are not fans of mo­nop­o­lies and they were go­ing to go around them. Mil­len­ni­als were go­ing to flat­ten the world.

This dis­rup­tive ap­proach to con­sum­ing mu­sic was go­ing to hap­pen ev­ery­where, not just in our own back­yards. The bar­rier be­tween

artists and fans was go­ing to dis­ap­pear. Rather than fight it we just looked at ways that we could en­hance it. We looked for ways to en­gage with new au­di­ences in new ways.

Can you give me a few ex­am­ples?

In 2008 I co-au­thored and pub­lished a white pa­per called “Meet the Mil­len­ni­als.”

That pa­per came out of my frus­tra­tion talk­ing at con­fer­ences to a bunch of blank faces that were not un­der­stand­ing what I was talk­ing about, what I was see­ing al­ready hap­pen­ing, what I knew was go­ing to hap­pen; and the fear that was in their eyes.

The last time that I spoke at an event was at Cana­dian Mu­sic Week prob­a­bly eight or nine years ago and I had peo­ple yelling at me. There was so much anger in the room be­cause they be­lieved that their liv­ing was be­ing taken away from them. I don’t think I’ve done a key­note at an in­dus­try event since.

Not that I haven’t been asked, but I just said no to ev­ery­thing. I’ll talk at other types of events about how tech­nolo­gies are chang- ing ev­ery­thing, but not at mu­sic events.

The mu­sic busi­ness was set in its ways. It didn’t stop Net­twerk from chang­ing, but the busi­ness it­self wasn’t go­ing to change, and I got tired of talk­ing about it. So Brent and I wrote a pa­per of what we thought, at that spe­cific time and space.

And as we put down all of our thoughts, we came to re­al­ize the only way that the mu­sic busi­ness was go­ing to move for­ward was if there was a dig­i­tal valet that would add value to the ex­pe­ri­ence that we were try­ing to mon­e­tize. Those valets have since ar­rived, and they’re now adding value. Fi­nally, af­ter twelve years of de­cline, the mu­sic busi­ness is about to take off.

We also did not par­tic­i­pate in in­dus­try law­suits that were hap­pen­ing. In fact, we ac­tu­ally fought one of the law­suits the mu­sic busi­ness brought against some con­sumers. We de­fended a fam­ily in Texas be­cause we didn’t be­lieve that lit­i­gat­ing your own cus­tomer was the best busi­ness model.

You once wrote that…

“Tech­no­log­i­cal ad­vance­ment will pro­mote fur­ther di­ver­si­fi­ca­tion in the mu­sic in­dus­try, in terms of busi­ness mod­els, con­tent and

“Adding value into the ex­pe­ri­ence ac­tu­ally al­lows us to mon­e­tize the in­tel­lec­tual prop­erty, in­clud­ing how it’s de­liv­ered and the ease of de­liv­ery. That’s no dif­fer­ent than any other medium, whether it’s news­pa­pers, video or games.”

mech­a­nisms for artist-fan in­ter­ac­tion. No sin­gle ap­proach is ‘the next big thing’, and ex­per­i­men­ta­tion is strongly en­cour­aged. No one can af­ford to wait for proof of con­cept when the next big in­no­va­tion is al­ways just around the cor­ner. Mil­len­ni­als are con­stantly ex­per­i­ment­ing with and eval­u­at­ing their ex­pe­ri­ence as con­sumers: we sug­gest the mu­sic busi­ness does the same.”

You could sub­sti­tute a num­ber of busi­nesses for mu­sic in that state­ment (pub­lish­ing, movies, ca­ble TV, gam­ing, ho­tels, air­lines, au­to­mo­tive, etc.), but so few of them are di­ver­si­fy­ing, ex­per­i­ment­ing or en­gag­ing with their fans/cus­tomers.

Mu­sic re­ally was the first dig­i­tal for­mat to be dis­rupted in a ma­jor way. It was ahead of news­pa­pers, it was ahead of movies and it was ahead of video games. It’s be­cause of what mu­sic is.

You typ­i­cally don’t have an emo­tional con­nec­tion to a news­pa­per. You might have emo­tional con­nec­tion with a jour­nal­ist whose ar­ti­cles in­ter­est you. They’re some­one you’re likely to en­gage with, which is why peo­ple will fol­low them and colum­nists over news­pa­pers. That’s no dif­fer­ent than DJs and mu­si­cal artists.

Again, it’s about mon­e­tiz­ing a com­mod­ity by chang­ing the ex­pe­ri­ence. Take wa­ter for in­stance. It’s free, but when you put it into a bot­tle it has value be­cause the ex­pe­ri­ence has changed.

Mu­sic needed to go the same way; we needed to change the ex­pe­ri­ence. And the dig­i­tal valet con­cept that we talked about ear­lier al­lowed peo­ple to move beyond just lis­ten­ing to imag­in­ing, “What would hap­pen if I could...?” Here’s one ex­am­ple. Let’s say it’s my par­ents 40th wed­ding an­niver­sary. If I wanted to cre­ate a playlist for their party, the amount of re­search that I’d have to do to get a 50-song playlist for all of their friends and make them re­live that feel­ing of when they were young new­ly­weds, would take me hours. To­day, I just tell Spo­tify to get me the top hits from that pe­riod and, boom! I have my­self a playlist from the dig­i­tal valet.

Adding value into the ex­pe­ri­ence ac­tu­ally al­lows us to mon­e­tize the in­tel­lec­tual prop­erty, in­clud­ing how it’s de­liv­ered and the ease of de­liv­ery. That’s no dif­fer­ent than any other medium, whether it’s news­pa­pers, video or games.

That’s a good point. Mu­sic to­day of­fers con­ve­nience at the right price, trig­gered by iTunes back in 2003, when Steve Jobs set out to make ac­cess to songs eas­ier, cut­ting into the ram­pant mu­sic piracy hap­pen­ing at that time.

Yes, and al­though there will still be peo­ple who pi­rate, Spo­tify and Ap­ple Mu­sic are de­stroy­ing piracy be­cause of they are re­mov­ing the has­sle through ease of ac­cess. I’m happy to pay $10 a month to have that fric­tion re­moved.

It’s in­ter­est­ing. We were also see­ing sim­i­lar changes in the tech­nol­ogy space, with Mi­crosoft and Adobe’s move to sub­scrip­tion-based busi­ness mod­els rather than sell­ing CDs, in their hopes to com­bat soft­ware piracy.

The whole thought of sell­ing some­thing, the thought of own­er­ship, does not res­onate with the mil­len­nial gen­er­a­tion, and will not res­onate with any fu­ture gen­er­a­tion. It’s purely about ac­cess.

And for the mu­sic busi­ness it’s a shift into a per­for­mance so­ci­ety, where you’re paid based on the per­for­mance of what you ac­tu­ally own. There’s no sale.

There will al­ways be vinyl and there will al­ways be down­loads, but within five years from now, maybe ten at most, 95% will be stream­ing, pe­riod.

With the ex­po­nen­tial growth of broad­band and its im­pact on the grow of stream­ing, let’s talk about that five to ten years from now. Where do you think record la­bels will be at that point?

Grow­ing. They’ll get back to all the old shenani­gans they used to. They’ll try and dom­i­nate cer­tain things, they’ll try and mess with ev­ery­thing, so ba­si­cally it’s what they still do now.

You don’t think that’s go­ing to change? You don’t think the mil­len­ni­als will ba­si­cally walk away from them and say, “We don’t need you?”

No, be­cause they’re still in­ter­ested in the artist or in the mu­sic. They don’t care whether it’s on Univer­sal, Sony, or BMG or who­ever. It’s not what they care about. The artist might care be­cause of their busi­ness in­ter­est, but the con­sumer just doesn’t care about la­bels, never has.

In The Economist’s “The Mu­sic In­dus­try and the Dig­i­tal Rev­o­lu­tion” video they talked about how Ra­dio­head re­leased “In Rain­bows” on the in­ter­net them­selves af­ter their con­tract with EMI ended in 2007. The did the un­think­able by al­low­ing fans to pay what­ever they wanted to down­load the al­bum. But in the end they shocked the in­dus­try when the dig­i­tal in­come from the al­bum ex­ceed all of their other al­bums com­bined. Why do you think that busi­ness model worked so well?

Ac­tu­ally Jane Siberry did it first. Ra­dio­head got all the me­dia at­ten­tion, but Jane Siberry did it a year ahead of Ra­dio­head. It was her way of cre­at­ing re­la­tion­ships with her fans by say­ing, “This is what I would like to get paid, but pay what you want.” Dig­i­tal is scal­able, so there was no ex­tra cost to her whether she sold one or whether she sold a hun­dred.

I think in Ra­dio­head’s case they were get­ting, at best, 20% of the pro­ceeds when they were with EMI. They prob­a­bly thought, “What would hap­pen if we did half the sales, but re­ceived 100% of the pro­ceeds?”

Be­cause their in­tel­lec­tual prop­erty was such a small part of their busi­ness, they de­cided to let their fans pay what they wanted, and help drive their live busi­ness, which is the bulk of how they make money. They never ex­pected they’d end up grow­ing both.

Ma­jor record la­bels ar­gue that new artists still need them to mold and de­velop them. What are your thoughts on that?

If you’re aim­ing for the Top 40, then I think some coach­ing and some ex­pe­ri­ence gath­er­ing is prob­a­bly needed. But if you just want to re­lease mu­sic that you love and not aim for ra­dio, there’s now a way of hav­ing a suc­cess­ful ca­reer that didn’t ex­ist five years ago, with­out tour­ing your butt off 300 days of the year.

So over the next five to ten years we’re go­ing to see the rise of the mu­sic mid­dle class. We’re go­ing to see prob­a­bly ten, twenty, thirty, even forty thou­sand artists that are able to make enough of a liv­ing from their in­tel­lec­tual prop­erty that they won’t have to tour all the time.

That didn’t ex­ist within the phys­i­cal world, be­cause there were re­stric­tions. Only so many ti­tles could get into a record store, and there were mo­nop­o­lies that were con­trol­ling ev­ery­thing around that. In a flat world, as in stream­ing, there’s no con­trol.

Yes, the ma­jor play­ers will have more suc­cess­ful playlists than ev­ery­body else, but a good song has a much bet­ter chance of be­com­ing big enough that an artist can make a liv­ing. If you want to take it to ra­dio, then you need to layer on a team that ba­si­cally does that, and that usu­ally in­volves a ma­jor la­bel.

Af­ter over 30 years grow­ing Net­twerk into a suc­cess­ful world­wide record la­bel, pub­lish­ing & artist man­age­ment com­pany, you sold a

sig­nif­i­cant por­tion of your pub­lish­ing cat­a­log to Kobalt Capi­tol Ltd. Why did you sell it; or maybe I should ask, why now?

In­side the mu­sic space, pub­lish­ing is about 20% of the value equa­tion when it comes to in­tel­lec­tual prop­erty; mas­ters – the re­main­ing 80%.

Why would I want to have a bunch of my eq­uity tied up in the 20%, when I can sell that and in­vest more in the 80%? That’s not to say I’m not a pub­lisher be­cause I am. It’s not to say that I’m not sign­ing pub­lish­ing be­cause I am. But my fo­cus is mas­ters.

Eco­nom­i­cally, pub­lish­ing’s get­ting a very high mul­ti­ple now and mas­ters are about half that. And yet mas­ters are 80% of the ac­tual value. So there’s an ar­bi­trage there that is go­ing to hap­pen, and from a strate­gic point of view, it made more sense to move our as­set value from one part of our busi­ness to an­other part of our busi­ness. Pure strat­egy, noth­ing else.

You once said you started Net­twerk by… “imag­in­ing re­leas­ing the mu­sic that you love.” And that, “Imag­i­na­tion al­lows you to see the end, not to see the process. By al­ready know­ing the end you can work your way back from there and fol­low your dream be­cause you’re ac­tu­ally fol­low­ing it home. You’re not mov­ing to it; you’re mov­ing back from it.”

How can we teach in­cum­bent CEOs how to do the same - i.e. to imag­ine a new fu­ture for their busi­ness?

I think it’s gen­er­a­tional — an evolv­ing thing that’s al­ways go­ing to be there. There’s go­ing to be those in ev­ery busi­ness that when they dream of some­thing they know ex­actly what it looks like, and then work back­wards from there, not for­wards.

They cre­ate and look at things in a com­pletely dif­fer­ent light, be­cause they’re not be­holden to the way that it’s cur­rently done; they’re not locked into a per­spec­tive of that time. They are will­ing to delete fear, dis­miss logic and ac­tu­ally fol­low what their in­tu­ition says.

I’m not say­ing that I am one of those peo­ple, but we knew ex­actly what we wanted to do, and

couldn’t un­der­stand why ev­ery­body thought that we couldn’t do it. But a lot of busi­nesses that have been built on a brick-and-mor­tar type of men­tal­ity can’t do that be­cause logic dom­i­nates in­tu­ition.

In Leonard Brody’s book, The Great Rewrite, he said the in­ter­net has fu­eled the com­plete in­ver­sion of the “fun­nel of power” – a new re­al­ity where peo­ple are in con­trol of what, where, when and how they con­sume con­tent. There are a lot of par­al­lels be­tween mu­sic fans and news con­sumers in that model. What are your thoughts on that?

I wouldn’t say it’s an up­side down fun­nel. I just view it as a flat world, where you can tap into imag­i­na­tions of mil­lions of peo­ple.

The iPhone took off, not be­cause of the iPhone it­self, but be­cause of all the ap­pli­ca­tions that peo­ple devel­oped for it. Ap­ple tapped into the imag­i­na­tions of mil­lions of peo­ple on how to use a piece of hard­ware and in­ter­ac­tive soft­ware. That’s why the iPad took off too.

When it first launched I sat at a con­fer­ence in Stock­holm and thought to my­self, “This is the most amaz­ing thing. Be­cause there will come a day where we can plop it down, and sud­denly see the 3D map in which we can move around. It’s not just a screen, it’s an en­abler of imag­i­na­tion.”

Un­like the news­pa­per and mag­a­zine pub­lish­ers, record la­bels seem to be re­cov­er­ing fi­nan­cially. Why is that?

In the last two or three years, their top line rev­enues have flat­tened, while their profit mar­gins have dou­bled. If you look at the Nordic coun­tries, which were the first coun­tries to be af­fected by stream­ing, they’re back up to the same rev­enues that they were be­fore piracy in the late 1990s. Now their profit mar­gins are 65%, where back in the phys­i­cal world they were 20 or 30% at best.

North Amer­ica’s go­ing to end up in the same sit­u­a­tion. To­day they’re in a busi­ness that’s ac­tu­ally scal­able with­out mas­sive cap­i­tal in­put, un­like their phys­i­cal busi­ness.

How­ever, their be­hav­iors are not go­ing to change, or they’ve changed as much as they’re go­ing to. Things will only change when a younger gen­er­a­tion takes over. Un­til then, the mu­sic busi­ness will get more and more ar­ro­gant over the next ten to fif­teen years, which is un­for­tu­nate.

But it’s not just mu­sic that’s over-con­trol­ling. When I look at how Ap­ple does their stream­ing it’s the same thing. They want to cu­rate a whole pile of playlists, but they won’t let me cre­ate and share my own. If I can’t share my playlist with some­one else, if I can’t do a mixed cas­sette and give it to a girl like I used to when I was young and dat­ing, then Ap­ple’s com­pletely missed the emo­tional mon­e­ti­za­tion, which is key.

They’re not tap­ping into my imag­i­na­tion, which is what brought Ap­ple to where it is to­day. Their drive to con­trol ev­ery­thing is why they haven’t com­peted suc­cess­fully against Spo­tify. They re­ally need to shift that at­ti­tude in or­der to have their stream­ing take off; oth­er­wise they’re go­ing to get to a point where they’ll strug­gle.

The rea­son why they’re do­ing what they’re do­ing is that the peo­ple run­ning Ap­ple Mu­sic are 10-15 years older than I am and it’s locked into their gen­er­a­tional think­ing. It’s not that they shouldn’t cu­rate playlists. Spo­tify also cu­rates them, but over half of Spo­tify’s stream­ing is not com­ing from cu­rated playlists, while 95% of Ap­ple stream­ing comes from cu­rated playlists.

What about news­pa­per and mag­a­zine pub­lish­ing?

I ac­tu­ally think that there will be value in main­stream me­dia, es­pe­cially if the Euro­pean Union’s pro­posed copy­right laws come into

ef­fect. When that hap­pens Google won’t be able to cherry pick their con­tent. All of a sud­den there’ll be a mi­cro-pay­ment at­tached to those 15 or 20-word snip­pets that Google uses to ag­gre­gate and mon­e­tize of ev­ery­one else’s imag­i­na­tion. That could change ev­ery­thing.

In 2007 you diver­si­fied and launched YYoga, a chain of suc­cess­ful Cana­dian yoga stu­dios. That seems to be go­ing very well for you. So… what are you imag­in­ing for your­self next? :)

I am go­ing dis­rupt the whole busi­ness of yoga. To­day, it’s a brick-and-mor­tar model that re­quires a lot of cap­i­tal and is not scal­able. There’s some dig­i­tal to it, but there’s not a lot.

It’s usu­ally ei­ther big com­pa­nies or it’s mom-and­pop shops. And there’s no dig­i­tal plat­form that’s be­ing run by any of the big play­ers right now that has an emo­tional con­nec­tion to it. It’s all based upon the rock star phi­los­o­phy ver­sus lo­cal­iz­ing emo­tion.

So I’m go­ing to change that and then on top of that, layer in a fun­nel that’ll make it grow quicker, so the dig­i­tal will am­plify the fun­nel and the fun­nel will am­plify the dig­i­tal.

Any last piece of ad­vice you want to share about be­ing suc­cess­ful in a dig­i­tal world?

The best strat­egy in the world is to try some­thing, and if it doesn’t work, kill it. The fact that it doesn’t work means you’ve learned some­thing, and you keep learn­ing. Busi­nesses that don’t do that have a strat­egy that’s on pa­per, but it’s not ef­fec­tive be­cause they aren’t ac­tively work­ing it.

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