Netflix: The Future of The Music Business

A few weeks ago, thanks to a gift from my big brother (and only a 20 minute sales pitch) I finally came out of the stone ages, better known as On Demand cable viewing, and entered Netflix nation. Now, don’t get me wrong, I appreciate what the previous era had to offer in terms of channel variety. But similar to the feeling I get enjoying the many genre options of satellite radio only to get frustrated by an hour or so of badly programmed music; waiting and hoping every few weeks or each month for whomever selects the rotating playlist of cable’s premium viewing to get it right, is like gambling in Vegas – you lose more often than you win, and either way you’re never really in control.

I’ve known of Netflix for years, self-described as, “With more than 12 million subscribers, Netflix, Inc. [Nasdaq: NFLX] is the world’s largest subscription service streaming movies and TV episodes over the Internet and sending DVDs by mail. For $8.99 a month, Netflix members can instantly watch unlimited TV episodes and movies streamed to their TVs and computers and can receive unlimited DVDs delivered quickly to their homes.” But what I never appreciated about them, until now, is the real business that Netflix is in – placing creative artistic works in hierarchies and categories that add value to them. In other words, it is not as much the movies and shows themselves that people value when subscribing to Netflix it is also the way the movies are 1) released and presented (listed by category and described clearly) 2) packaged and made available (through the mail as DVDs or instantly on your screen) 3) priced (the subscription options feel like an all-you-can eat buffet with the doggy bag!) and allow you to 4) ‘select’ the content (you don’t wait on the anonymous On Demand programmer to guess the right flicks each month).

It is these four areas that Netflix excels at, which the music industry has collapsed under the weight of, the past 10 years.

Certainly there are a few significant differences between the movie and music industries but there are a great many more similarities that allow for general comparisons that show that the music industry is going to have to arrive at some kind of a ‘Netflix’ solution’ if it is not only going to survive but thrive this decade.

The music business has three problems. First it simply won’t accept that music is a commodity now and it doesn’t know how to make music a complimentary ingredient in a larger offering. The second problem comes from the 1st one – because the industry wants to keep selling ‘music,’ alone, it wastes its time trying to determine its price by dominating the supply of music, trying to make it harder to get, in a world of technology that makes it more and more available and easier to produce (for more on this see my AllHipHop Hip Hopppreneur commentary, “The Free Era: Music As Ingredient, Not Main Course”). The third problem is created by the second – because the industry tries to limit the supply of music in order to make it more valuable, it has ended up fighting technological platforms – mp3, satellite radio, streaming Internet media – that would have allowed it to bundle music as part of offerings where it would become more valuable, not less.

And in a classic example of not knowing your friends from your enemies, the industry mistook the marketing phenomenon known as the CD mixtape and the community and taste-making institution known as the Mom & Pop Record store as threats, going to war with both before thinking through the consequences – there was nothing to replace them or the sales they helped generate in the industry’s leading genre – rap music.

Want more details of the suicide mission the major record labels have been on? How about the over 30 years of existence of the music video without ever figuring out a way to sell it?

The industry has all of the elements it needs to be a success, it only needs to get its foot out of its own way, rid itself of some prehistoric dinosaur-like individuals who want to keep doing things the wrong way and accept that some creative destruction is in order (practices, traditions, companies and whole business models have to go, and now).

Here’s how it could start.

The business has to realize that its future lies not in the four major record labels – Warner, Universal, Sony and EMI – but in the integration (not merger) of the best of five entrepreneurial ventures: Spotify, Rhapsody, iTunes, VEVO, and Promo Only.

Spotify (which is not available yet in the U.S.) and Rhapsody may not survive on their own but their category/hierarchy and subscription-based model is the future of the industry if record labels, moguls, and entrepreneurs realize that you can sell music if you bundle it properly. Spotify and Rhapsody, even more than iTunes, beautifully place music in categories and hierarchies that allow the customer to search and bump into creative works in attractive and intriguing ways helping them become their own program director, A&R, or record store owner (remember her/him? the expert you trusted who could always influence you to try something new or old you had never heard of). Similar to how Netflix nudges you in the direction of a good film, show or documentary, Spotify and Rhapsody (if it can get its tech issues together) are the best hope of the industry to add value to music as a commodity with a pay model that works – not purely advertising and not free – if priced right. Cooperating with iTunes and the iPod rather than competing with them makes sure that the subscription based model has mobility (people can take and enjoy the music where they want, and are not forced to be near a computer or accept a product that is not as good as what Apple offers).

VEVO (the service launched by Sony and Universal powered by YouTube, that makes the videos of its artists’ available) and Promo Only (a small company that services radio station programmers and DJs with new music and videos) if they make changes, have the potential to solve two issues the industry has struggled with – how to make money from the music video and the declining CD format (which is still a significant factor, just look at Sade’s first week sales and all of us with players in our cars). VEVO, while still experiencing technical issues at times, is using the vast music video archives and filling a void with the decline of video rotation on places like MTV and BET (who move to original programming) to attract advertising revenue (the only significant way VEVO currently makes money). This approach will bring in money but it won’t succeed long-term because the advertisers will eventually influence what content is available, and the edgier and more controversial content (more likely to be put out by the Independents) will not be signed and featured. You can learn more about my thoughts on VEVO’s chances for success by clicking here.

Promo Only has a great product – and delivers it on disc and MP3 format – but is forced to sell it only to a small market of elite industry taste-makers. That model is outdated. Consumers want the best new music first, new and old videos at the same time that radio station program directors and DJs get it. The days of waiting on a station or music selector to tell you something is a ‘world premier’ or ‘classic’ are played out. The sooner Promo Only and the industry that has strait jacketed it for too long can figure this out, the more they will see subscriptions pouring in from the masses.

The solution is not necessarily Netflix moving into the music industry, but the emergence of a Netflix like enterprise appearing in the music industry. And unlike VEVO it can’t be something that the major record labels control from the top down.

The time has come for a service and place where folks can pay a monthly subscription and enjoy music and videos – across time and across music formats – delivered in disc format via mail or available instantly online. If the music and videos can be bundled with interviews, celebrity and reality footage, documentaries, and concerts for instance, and packaged in ways that people can ‘rent’ or ‘buy,’ the music industry would have tapped a goldmine with customers able to get music when they want it, how they want it, and where they want it.

Of course this would mean caring less about selling music by the unit and industry chatter and gossip over first week sales and who is going ‘gold’ and ‘platinum.’

Personally, I’d trade bulk sales for higher profit margins any day of the week.

Now, a final point: change that revolutionizes an industry often comes from the outside.

The music business would do well to accept this.

As recorded in Reuven Brenner’s Rivalry: In business, science, among nations, history shows it was synthetic fibers and chemical additives that reduced the need for manual dry cleaning. Had the dry cleaning industry realized this it could have been ‘saved.’ Hollywood industry leaders scorned and rejected TV when it was invented. The result – many studios and theaters became extinct when the public decided to substitute TV viewing for movie going. The public wanted entertainment and rejected the arrogance of Hollywood that thought only it could provide it (sound familiar in how long it took broadcasters to utilize the Internet as a viewing platform). Gillette came to dominate the shaving products business when King C. Gillette invented the disposable blade in the 19th century, and realized that convenience was a factor in what people wanted, not just a close shave. Not surprisingly, as Brenner points out – it would be a pen manufacturer – Bic – that would threaten Gillette’s grip on the industry it revolutionized.

If history repeats itself, we may one day read a book that explains it was Reed Hastings and not Jimmy Iovine, Edgar Bronfman, Jr. or Lyor Cohen that pointed the way to the future of music.

Cedric Muhammad is a business consultant, political strategist, and monetary economist. He is also a former GM of Wu-Tang Management and a Member of the African Union’s First Congress of African Economists. He is author of the book, ‘The Entrepreneurial Secret’ (http://theEsecret.com/). He can be contacted via e-mail at: cedric(at)cmcap.com

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