My company, Project Opus, will be releasing a new music service this week (cue wood knocking). It is quite a diversion from our original business, so I thought it might be useful to discuss our corporate change in direction before the launch. I think it might also serve as a helpful story for others trying to find their way in this industry. Sadly it is a bit too late for Snocap.

Big Opportunity In Music
We started Project Opus in 2004 with quite a bit of piss and vinegar. We really thought we were going to change the music industry. Let's chalk that up to youthful hubris or plain old ignorance, but there was great opportunity upon us. Major labels were rapidly losing their monopoly on distribution, and young new artists were able to use internet technologies to find an audience (no matter how niche) without a label deal. Our goal was to build a website that would enable artists to upload and sell their music. Fans would be able to listen to full tracks in MONO, and if they liked the music they could then buy the tracks in stereo. We thought the full track mono was better than 30 second samples, since indie bands and their music are relatively unknown.

Mission: Build music self-distribution website

Our first issue - unknown music needs to be heard
This was the first problem we ran into. We got dozens of e-mails a week from bands telling us they HATED the mono tracks. They couldn't stand how they sounded. Still others would say they could hear no difference for 99% of the tracks on the site and wanted to have 30 second samples. To the pro-stereo contingent, I would say, "why would anyone buy the songs if you are giving them away". To the 30 second advocates, I would say, "why would someone buy an unknown song from an unknown band based on a 30 second clip? Do you write 30 second songs?" I convinced most of the bands who complained to stick it out with us in mono. Though a few bands from both sides did leave in protest. The other issue was that fans needed an easy way to share music. This was a relatively easy decision as we adopted podcasting and XSPF.

Solution: Give mono tracks for free. Standardize on XSPF and podcasting for sharing.

Our second Issue - fans want access to everything.
Our beta site was launched in fall of 2005, and our present site was launched in spring 2006. We had the first (as far as we knew) flash based store widget (Opus Player) for selling music. We were getting quite a good number of quality bands to sign up, and we were getting some great community dialog from the bands. They liked the site. However, the fans were really nowhere to be seen. They were signing up to the site and then leaving. When we asked fans why they were leaving, many simply said that their favourite indie music was not on the site or that it was too hard to find music that they might like.

I had contacted Felix Miller (Last.FM) in 2005 to license Audioscrobler. We used Audioscrobler in our own simple algorithm to enabled "unknown" Project Opus music to show up as recommendations based on searches for any known/famous artists. It was based on using artist metadata for "sounds like" and "influenced by". Surprisingly, many independent artists are loath to fill out such metadata even when it will help them be found. Heaven forbid someone sounds like Nickelback?!? But a bigger issue was that we still didn't have enough tracks for the search engine to really work, and not show frequent null results. We needed more music, fast. We needed to go get a music library.

Solution: Close a deal with two music aggregators and get over a million songs onto our site

Our third issue - the economics of selling audio tracks is dismal
So in the summer of 2006, we entered into negotiations to license the libraries of two major and very large music aggregators. A digital music aggregator is a company that gets exclusive licenses from independent artists and labels to distribute their music to online retailers. The idea is that iTunes, Yahoo, Rhapsody, et al. don't really want to deal with tens of thousands of artists on a one-to-one basis. They would rather deal with just a few companies representing a large portion of artists. Conversely artist don't have to deal with the dozens of online retailers. They just need to deal with one aggregator and their music will be available on all the major services.

It all makes sense, but let me assure you that closing a deal with an aggregator is a very long process unless you sign their "starting terms", which are laughable. I am not able to go into details, I wish I could, because someone needs to talk about some of the absolute idiocy involved. However, I can say that there is a substantial fee for just doing the deal. As far as I know none of that upfront fee actually goes to the artists they represent. The aggregators I was talking to require that I pay for each encoding of the song. Meaning if I wanted to offer MP3s, Ogg Vorbis, and AAC I would pay more than if I just offered MP3s. There was also a minimum monthly fee if we did not sell enough of the aggregators music. However, what really got me was that none of the aggregators actually had a Web service that our store could hook into. We actually were told to send hard drives to their offices. Naturally, there was a fee for their labour to manually transfer the files over to our drives and then send them back. Here, you can do the math: a 4 minute song and let's be kind and say it is roughly 5 MB for the MP3, Ogg, and AAC each. Realtime transcoding is not allowed. You must have all three pre-encoded if you want to offer them. So for 3 formats of a 4 minutes song it's 15 MB of disk space. Now, we were negotiating deals for over 1 million songs. That's 15 million MB or about 15 terabytes. In reality we were negotiating a total of 1.4 million songs and the average song was larger than 5 MB. I don't need to go into too much more detail, but suffice it to say I would need plenty of infrastructure.

Fortunately as we were about to sign the deals in late 2006, we were beginning to understand own music numbers at Project Opus. They weren't what we had hoped for. The listen to purchase ratio for our top artists was 1/2 of 1 percent. This means a song was listened to 200 times before it was purchased. The site overall was closer to 350 to 1. About 40% of our library was purchased over a 9 month period (53% prorated over 12 months). So taking our aggregators 1 million songs, and assuming that we got a 100% of the library sold in 1 year. That's 1,000,000 songs; 1 million dollars in revenue. Less royalties which are over 70 cents, less transaction fees of 10 cents and we have 20 cents gross. Then we have bandwidth, infrastructure (servers/hard drives), and labour. There simply is NO money to be made selling an audio file. Even if we increased our turn from 100% to 200% to 1000% the numbers simply would NEVER add up. However, I think the lower estimates are more accurate.The margins were simply too small to license an aggregator's library.

Solution: Kill the aggregator deals.

Our fourth issue - no one LIKES buying audio files
It became clear soon after that our launch that our listen to buy ratio was way lower than we anticipated. People were obviously listening to songs. Some artists get 100s of listens a day but with very few sales to be had. We talked to a dozen people why they had not bought songs, but are actively creating and listening to playlists. In general they said, "Since artists know when a song is in a playlist, I use the playlists to tell them and my friends that I like their music. For the most part I support the artist by going to their shows or buying their CDs at the gig." Clearly, the audio track does not have significant tangible value for the fan. It represents a connection to the artist and a reflection of their personal taste.

Would it be different if we kept the songs to 30 seconds instead of full length? The answer was an emphatic, no. It would in fact, keep them from coming to the site in the future, and keep them from discovering the bands around town they hadn't bothered to previously check out.

Solution: Provide songs in stereo to give best experience, and figure out what we can do to enhance the value of music

(*I should also note that there is economic pressure that implies that MP3s will be priced at the margins, which means near the cost of delivery - think pennies.)

Our fifth issue - how can we enhance the value of an audio file?
Our focus for the last year has been to research technologies and explore business models that add value to digital audio files. I make a distinction between audio files and music. Music has enormous value, without question. The question is does a digital audio file have value anymore. We think it does. We do not believe an MP3 is just a loss leader to get people into a live concert or buy a t-shirt. Recorded music has value and it is not going to disappear. As such there must be economic models to support it. Models that do not rely on controlling distribution through DRM.

As far as we are concerned, figuring out how to find the value in recorded music is the most important issue that needs to be solved today. There are tons of quality recommendation engines out there, but what value are they if there is no economic model for supporting the music that is being recommended?

Solution: Still working on it.

Major labels need to start freeing up the audio files for their artists to new distribution schemes very soon as major artists are becoming indies and indies are taking over. Pretty soon it will actually not matter if they get on board or not. The major labels will be holding a dust collecting back catalog of musical artifacts.

Let me explain...
Gerd Leonhard's company Sonific, recently released an obvious FaceBook music application. We at Project Opus were going to release a very similar FaceBook application for our music library in July. We decided not to for ONE VERY GOOD REASON:
Our library is primarily indie artists, just like Sonific's. Indie artists are - out of necessity - embracing new distribution models and shunning traditional label contracts. Presently major labels don't dig our distribution models or technologies.

So given the circumstances, searching and browsing for music on Project Opus, Beta Records, or Sonific, even with a library of 100,000 or more INDIE songs can FEEL empty if it does not hold a significant amount of KNOWN music for a consumer to "latch on to". Admittedly is a really poor consumer experience. The low uptake on Sonfic's application is evident of not the worth of the application but the lack of KNOWN content on their site. So, we chose not to release the Opus Player into FaceBook - for now.

However, new distribution models from sites like Project Opus and Sonific will actually be making a great deal of sense very soon and begin to start attracting more and more users. The music world is changing very rapidly to suit these models:
Major acts are jumping ship and becoming INDEPENDENT. Radiohead is going it alone. But it's not just indie-minded acts like Radiohead that are going out on their own. Even the Queen of music's traditional model, Madonna, is striking out on her own with a new type of deal.

Music services like Yahoo! are not willing to play by their rules anymore. There is simply no value in selling restricted-experience-stripped audio files for anyone who is not selling iPods as part of the deal.
As Dave Winer has posted time and time again, (I'll paraphrase) if you are going to bring something to market, figure out how other people can make money from it first. By doing that you ensure you have a valuable product or service that will be consumed, used, and promoted by others. Then you can figure out how YOU can make money from your highly used (meaning valued by customers) service or product." The man is as right as right can be.

As established artists shift to new distribution models outside of major label control or influence, the more the major labels will become irrelevant. That time is much much closer than the RIAA or the industry thinks. Knowing this fate, don't you think it would be better for artists, fans, as well Sony, EMI, Warner, Universal, et al. shareholders to see the industry embrace progressive distribution models around revenue sharing that are not handcuffed by DRM NOW.

...or soon it won't matter.

Yahoo's Music's Head Honcho, Ian Rogers, recently posted a blog that has got me all fired up again. Thank's Ian. He's rightly upset at the music industry and he is not going to take it anymore. AMEN.

Let's all stop pussy-footing around the issues and let's make the tough decisions to deal with them. I want to bring up what I think are 4 fundamental rules for succeeding in selling recorded music. First, here are the facts. Music distribution cannot be controlled. If you think otherwise - you are wrong. You should pack up and go home. The world has passed you by and you're either too stupid or lazy to GET IT. Technology has changed the music industry AGAIN, and if you are a music exec you MUST adapt to it. Granted this is hard to do if you happen to be a lawyer. Which brings me to:

RULE #1 for thriving in the new music economy: If your company is headed by or overly influenced by a lawyer, fire him! These people support business strategy - they don't guide it. The fact that so many lawyers are top executives in the record industry is probably the biggest reason the recorded music industry is in the shitter like it is.

Lawyers will simply NEVER get their head around the facts which was originally rule #1, but got moved to rule #2, when I realized we had to get rid of the lawyers first. So, if you want to survive in the next 18 months let alone 50 years - you have to embrace this reality:

RULE #2: You have no control over music distribution.

You don't. ALL RECORDED MUSIC EVER MADE is now sitting on hard drives and flash memory sticks around the globe. The Internet exists. As the world gets more wired with near-free wireless internet access music will eventually flow like water as, Gerd Leonard likes to say. The vast majority of new bands are now offering their music freely on sites like MySpace, Project Opus, and Garage Band to their fans. They want it heard.

The reality of Rule #2 unfortunaltey has a nasty outcome that people really don't want to come to terms with either. Even though we are witnessing it today!

RULE #3: The value of an audio file will approach the cost of delivery. The cost of delivery is our Internet conectivity, which as I mentioned is approaching near zero.

Rule # 3 is the reason the RIAA is suing people. If people can get a song for free, they eventually will. It is already almost as easy and as reliable to browse and download from P2P networks as it is from iTunes or Amazon. When the convenience gap closes between the "illegal - free" versus the "legitimate - $" modes of music distribution, we would be naive to assume that a significant proportion of the population will not use the "free' alternative.

So we sue. Perhaps fear will keep music fans in-line and buying from the legitimate music sources. This "suing-thing" has been going on for 8 years and well the recorded music industry is closer to DEAD today than it was then. Suing music consumers has not changed anything and it WILL NOT save this industry. It's a strategy dreamed up by a lawyer. PLEASE, go see RULE #1.

RULE #4: Know what you are selling. And it ain't audio files. It's music experiences.

Music executives - which are mostly lawyers think they are selling audio files. They would be wrong. Let's remember that audio has for the most part ALWAYS been free for the fan. We listened to radio and got mixed tapes/CDs from friends. Yet, my generation was the largest purchasers of music in the industry's history. We bought music that we generally already had free access to. Why?

1. Convenience. If we bought the vinyl or the CD, we could listen to my favorite songs on demand.
2. Social interaction. Back in the eighties and nineties, listening to music was almost always a social interaction. Buying a new album or CD was a reason to invite your friends over. We listened together. We shared the experience.
3. Packaging. We got something else other than the music. We got stuff like liner notes, and artwork, but more than that, too. KISS ARMY, you know what I'm talking about! Hey, even Led Zeppelin's last album had an album sleeve that changed colour if you added water. It wasn't advertised, I FOUND it, which made it cooler than perhaps it was.
4. Connection. The social interaction and packaging gave us something else. Connection. We were more connected with the artists work, and subsequently with the artists themselves.

The above provided CONTEXT and CONVENIENCE to our music. It is WHY we bought music.

P2P, MP3s, and the iPod have improved convenience dramatically. How could we have been prepared for it? We had no idea how inconvenient it was to get music until it was at our finger tips. In our stampede for convenience, we have ripped all context out of music. Music files on our hard drives are devoid of context. Social interaction around our music has declined with the iPod's earbuds. We have no tangible stuff around our music. Without context music is missing much of the value. It is more disposable.

We still want context. We just don't want to give up our convenience to get it. Make buying music valuable - not because distribution is controlled, but because you are giving me a music experience. This is what we want and we will BUY it. Ian Rogers at Yahoo! is looking for it, and in doing so he has given a polite finger to the industry's lawyers. If we embrace technology rather than fight it, we can create experiences that will make those KISS ARMY tats seem cheesy in comparison, and those were cool!

I presented on a panel on Saturday for Music BC at Tom Lee Music Hall. The highlight of the evening was the keynote by Derek Sivers, the founder of CD Baby. This was the second time I heard Derek speak in 5 months, and although some of the anecdotes were similar, his presentation was different. Speaking as much as he does, I am sure it would be easy to just pull out the canned presentation, but he doesn't. It is a clear testament to the passion he has for the indie music scene. He is really inspirational to all those who are just starting out. He's moving to London next week for 6 months or more, so he may be difficult to catch but if you get the chance be sure to go hear him speak.

After the keynote Carter Marshall, Nettwerk, Tyler Bancroft, Frontside Promotions Inc, and myself joined Derek for a panel that was supposed to be a "workshop focusing on e-commerce, online distribution, and viral marketing. Find out how Myspace, Youtube, iTunes and the like are turning the music industry upside down, and how YOU can take advantage." I left the session feeling somewhat concerned, as I am not sure we as a panel delivered the goods on that subject, we got a bit side tracked on DRM, pricing, business models, and the like. This is very typical to many music panels these days. It's natural I guess.

However, there were some real gems that I think are worth passing on:
Tyler Bancroft:

• Don't just have a CD. Shoot video! Any video. Upload it everywhere (not just YouTube) and people will watch it. The video does not need to be expensive. Consumer MiniDV is fine.
• The thumbnail that is embedded in the page is critical for inducing people to click the video for viewing. Know how each video service selects the thumbnail that will be displayed. YouTube uses the centre of the video's first frame. A picture of a sexy woman will get clicked more often than the title of your song or band. Derek made a good point about truth in advertising, but if your video is original (you are artists and entertainers after all) and delivers the goods, you will be forgiven, I'm sure.

It's a bit of a shame that Tyler didn't get an opportunity to talk more about what he does to promote on the Internet, because I have a feeling he knew the most about the subject since he is actually up to his eyeballs "doing it". He is one of the driving forces behind the Jeremy Fisher campaign.

Derek Sivers:

• Do a cover song - in your band's musical style. Remember no one in Kentucky knows who you are. However, if a listener from kentucky looks up 99 Luftballoons on iTunes for example, and they see a cover of it by your band, they will likely listen to it as well. If they like what they hear, they will often buy it. If they buy it they will take a look at ALL your music. Derek sited a number of examples of this, and the numbers are impressive. I have to agree. it's a brilliant way of getting exposure for an unknown band. Oh.. he also mentioned don't do a cover Lennon's Imagine or any other song that has been covered to death as it defeats the purpose. Go find a one hit wonder.
• He mentioned my favourite self help book of all time. How to Win Friends and Influence People by Dale Carnagie. Read it. I agree.

Carter Marshall:

• Put your music EVERYWHERE.
• Derek made a comment to value your music and make people pay for it. In other words don't give it away for free. Carter agreed, but said that you do not have to value your music in a straight monetary sense - especially when you are starting out and trying to get it heard. Building a legitimate fan list is critical to your career. So considering giving tracks away for free in exchange for the listener's e-mail address.

To me this was a great piece of advice. An ongoing connection with your fans is critical. You can sell a CD once to a fan, but that same fan may come to all your shows, and tell all their friends if you can establish an ongoing relationship with them. To do that, you need their e-mail address.

Me:

• Don't spam - that goes for comments on Facebook, or MySpace. Be personal. Be it e-mail, MySpace, or what-have-you, make your correspondence personal. An e-mail that has my name on it, and says something to me personally as well as giving me the details of your next gig is much more likely to get me to your show, and I will bring friends. Sure it takes more time, but if you focus your e-mails and comments I can guarantee you that you will get better results and have longer lasting relationships with your fans and supporters.
• Make sure your music is exposed to search engines. So tell people what your band or particular song sounds like on all your websites. (Shameless plug: Project Opus is highly optimized for this type of thing.) If people tell you that a certain song sounds like Nickelback then say so. It doesn't matter if you don't agree or that you are not a fan. This goes to the same logic of Derek's "record a cover song" advice.

I hope people found the session worth their while, and I'm sorry if we got side tracked. Derek's inspirational keynote was most likely more than enough. I am going to try and track down Tyler to pick his brain for an interview to get more of his ideas down.

Many artists enable a number of their songs for free listening and download. They make it available on their site, but they also upload them to a number of services like:
Project Opus
MySpace
Garage Band
The Internet Archive
plus dozens more...

Some forward thinking labels like Magnatune make their artists' music available through a CC License.

Although the music is freely available for download and listening, fans have to hunt around looking for the music on all of the thousands of individual sites hosting legitimate free-to-listen music. Project Opus has decided to use the music sharing features built into the Opus Player to make the discovery and sharing of "web music" easy.

Copy a URL, XSPF, M3U, or Podcast.
Paste it into the Import Tool.
Paste your Opus Player anywhere on the Web.

Check it out.