Don’t think you can learn something from the music industry? Think again!
An interview with Terry McBride
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.