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New business models in the recording industry

September 3, 2007 by

The New York Times Sunday Magazine has a fascinating piece that interviews and discusses Columbia Records’ hiring of Rick Rubin as their new studio chieftain. Rubin has been a well-known music producer (among other things, he orchestrated the famous mash-up of Aerosmith and Run-DMC and worked with Johnny Cash later in his life), and is quoted in the article saying many things that Freedom-to-Tinker readers will find familiar.

For example, on DRM and spyware:

By the time [Columbia executive] Barnett first approached Rubin about coming to Columbia, Rubin had already decided that he would have nothing more to do with Columbia Records. This was because of the company’s handling of the Rubin-produced Neil Diamond record “12 Songs” in 2005. Diamond was a hero of Rubin’s, and he spent two years working on the album, persuading Diamond to record acoustically, something he hadn’t done since the ’60s.

“The CD debuted at No. 4,” Rubin told me at Hugo’s, still sounding upset. “It was the highest debut of Neil’s career, off to a great start. But Columbia — it was some kind of corporate thing — had put spyware on the CD. That kept people from copying it, but it also somehow recorded information about whoever bought the record. The spyware became public knowledge, and people freaked out. There were some lawsuits filed, and the CD was recalled by Columbia. Literally pulled from stores. We came out on a Tuesday, by the following week the CD was not available. Columbia released it again in a month, but we never recovered. Neil was furious, and I vowed never to make another album with Columbia.”

Still, Columbia managed to hire this guy and he’s now pretty much running the show. He thoroughly acknowledges that the music industry’s real problem is that its former business model isn’t going to work in the future and the solution is about completely changing the pricing model to be cheap enough and the quality of service to be good enough that piracy will no longer be rational for consumers.

Rubin has a bigger idea. To combat the devastating impact of file sharing, he, like others in the music business (Doug Morris and Jimmy Iovine at Universal, for instance), says that the future of the industry is a subscription model, much like paid cable on a television set. “You would subscribe to music,” Rubin explained, as he settled on the velvet couch in his library. “You’d pay, say, $19.95 a month, and the music will come anywhere you’d like. In this new world, there will be a virtual library that will be accessible from your car, from your cellphone, from your computer, from your television. Anywhere. The iPod will be obsolete, but there would be a Walkman-like device you could plug into speakers at home. You’ll say, ‘Today I want to listen to … Simon and Garfunkel,’ and there they are. The service can have demos, bootlegs, concerts, whatever context the artist wants to put out. And once that model is put into place, the industry will grow 10 times the size it is now.”

…

Rubin sees no other solution. “Either all the record companies will get together [for a unified subscription model] or the industry will fall apart and someone like Microsoft will come in and buy one of the companies at wholesale and do what needs to be done,” he said. “The future technology companies will either wait for the record companies to smarten up, or they’ll let them sink until they can buy them for 10 cents on the dollar and own the whole thing.”

I’ve always thought that something like this could be a successful business model. Of course, enforcing such a scheme (i.e., ensuring that the music dries up if you don’t keep spending your cash) requires a DRM strategy, which clearly isn’t going to fly.  Is there an alternative?  How good would a music service have to be that you would have no incentive to store local copies? If I’m totally comfortable keeping my email and calendar “out there” on the Internet, why shouldn’t I be comfortable keeping my CD collection (1500+ and growing) out there as well?

The article goes on to quote other industry experts on the difficulties of getting a subscription model correct, but I have to admire Rubin on his focus:

“I don’t want to waste time,” he said, sounding a little frustrated. “The existing people will either get smart, which is a question mark. Or new people will understand what a resource the music business is and change it without us.” Rubin paused. “I don’t want to watch that happen.”

It’s hard to argue with that. The primary focus of the article was on how Rubin is all about refining and polishing the music, and it’s great to know that somebody like that will help bring out the best in our artists. I just hope they can really sort out this whole business model thing in a technologically feasible fashion. My fear is that yet another new snake-oil company with yet another DRM scheme will promise to “solve” the piracy problem, when we all know that the real solution lies instead in completely rethinking the business model. Make the price cheap enough and the quality of the service compelling enough, and people will prefer it to the hit-or-miss world of piracy.  Let’s hope it can be a hit.  (Until then, I’ll stick with buying CDs.)

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Debate: Will Spam Get Worse?

August 31, 2007 by

This week I participated in Business Week Online’s Debate Room feature, where two people write short essays on opposite sides of a proposition.

The proposition: “Regardless of how hard IT experts work to intercept the trillions of junk e-mails that bombard hapless in-boxes, the spammers will find ways to defeat them.” I argued against, concluding that “We’ll never be totally free of spam, but in the long run it’s a nuisance—not a fundamental threat—to the flourishing of the Internet.”

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Does Apple Object to iPhone Unlocking?

August 29, 2007 by

I wrote Monday about efforts to “unlock” the iPhone so it worked on non-AT&T cell networks, and the associated legal and policy issues. AT&T lawyers have aggressively tried to stop unlocking; but Apple has been pretty silent. What position will Apple take?

It might seem that Apple has nothing to lose from unlocking, but that’s not true. AT&T can exploit customer lock-in by charging higher prices, so it has an obvious incentive to stop unlocking. But AT&T also (reportedly) give Apple a cut of iPhone users’ fees, reportedly $3/month for existing AT&T users and $11/month for new users. This isn’t surprising – in exchange for creating the lock-in, Apple gets to keep a (presumably) hefty share of the resulting revenue.

Apple’s incentive is much like AT&T’s. Apple makes more money from iPhone customers who use AT&T than from those who use other cell providers, so Apple gains by driving customers to AT&T. And it’s not pocket change – Apple gets roughly $150 per user – so even though Apple gets money for selling iPhones to non-AT&T users, they get considerably more if they can drive those users to AT&T.

Thus far, Apple seems happy to let AT&T take the blame for intimidating the unlockers. This mirrors Apple’s game plan regarding music copy-protection, where it gestures toward openness and blames the record companies for requiring restrictive technology. If this works, Apple gets the benefit of lock-in but AT&T gets the blame.

From Apple’s standpoint, an even better result might be to have iPhone unlocking be fairly painful and expensive, but not impossible. Then customers who are allergic to AT&T would still buy iPhones, but almost everybody else would stick with AT&T. So Apple would win both ways, selling iPhones to everybody while preserving its AT&T payments.

What a clever Jobsian trick – using a business model based on restriction, while planting the blame on somebody else.

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iPhone Unlocked; Legal Battle Looming?

August 27, 2007 by

In the past few days several groups declared victory in the battle to unlock the iPhone – to make the iPhone work on cellular networks other than AT&T’s. New Jersey teenager George Hotz published instructions (starting here) for a geeks-only unlock procedure involving hardware and software tweaks. An anonymous group called iPhoneSimFree reportedly has an easy all-software unlock procedure which they plan to sell. And a company called UniquePhones was set to sell a remote unlocking service.

(Technical background: The iPhone as initially sold worked only on the AT&T cell network – the device was pretty much useless until you activated AT&T wireless service on it. People figured out quickly that you could immediately cancel the wireless service to get an iPhone that worked only via WiFi; but you couldn’t use it on any other mobile phone/data network. This was not a fundamental technical limitation of the device, but was instead a technological tie designed by Apple to drive business to AT&T.)

Unlocking the iPhone helps everybody, except AT&T, which would prefer not to face competition in selling wireless services to iPhone users. So AT&T, predictably, seem to be sending its lawyers after the unlockers. UniquePhone, via their iphoneunlocking.com site, reports incoming lawyergrams from AT&T regarding “issues such as copyright infringement and illegal software dissemination”; UniquePhones has delayed its product release to consider its options. The iPhoneSimFree members are reportedly keeping anonymous because of legal concerns.

Can AT&T cook up a legal theory justifying a ban on iPhone unlocking? I’ll leave that question to the lawyers. It seems to me, though, that regardless of what the law does say, it ought to say that iPhone unlocking is fine. For starters, the law should hesitate to micromanage what people do with the devices they own. If you want to run different software on your phone, or if you want to use one cell provider rather than another, why should the government interfere?

I’ll grant that AT&T would prefer that you buy their service. Exxon would prefer that you be required to buy gasoline from them, but the government (rightly) doesn’t try to stop you from filling up elsewhere. The question is not what benefits AT&T or Exxon, but what benefits society as a whole. And the strong presumption is that letting the free market operate – letting customers decide which product to buy – is the best and most efficient policy. Absent some compelling argument that iPhone lock-in is actually necessary for the market to operate efficiently, government should let customers choose their cell operator. Indeed, government policy already tries to foster choice of carriers, for example by requiring phone number portability.

Regardless of what AT&T does, its effort to stop iPhone unlocking is likely doomed. Unlocking software is small and easily transmitted. AT&T’s lawyers can stick a few fingers in the dike, but they won’t be able to stop the unlocking software from getting to people who want it. This is yet another illustration that you can’t lock people out of their own digital devices.

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Why Was Skype Offline?

August 22, 2007 by

Last week Skype, the popular, free Net telephony service, was unavailable for a day or two due to technical problems. Failures of big systems are always interesting and this is no exception.

We have only limited information about what went wrong. Skype said very little at first but is now opening up a little. Based on their description, it appears that the self-organization mechanism in Skype’s peer-to-peer network became unstable. Let’s unpack that to understand what it means, and what it can tell us about systems like this.

One of the surprising facts about big information systems is that the sheer scale of a system changes the engineering problems you face. When a system grows from small to large, the existing problems naturally get harder. But you also see entirely new problems that didn’t even exist at small scale – and, worse yet, this will happen again and again as your system keeps growing.

Skype uses a peer-to-peer organization, in which the traffic flows through ordinary users’ computers rather than being routed through a set of central servers managed by Skype itself. The advantage of exploiting users’ computers is that they’re available at no cost and, conveniently, there are more of them to exploit when there are more users requesting service. The disadvantage is that users’ computers tend to reboot or go offline more than dedicated servers would.

To deal with the ever-changing population of user computers, Skype has to use a clever self-organization algorithm that allows the machines to organize themselves without relying (more than a tiny bit) on a central authority. Self-organization has two goals: (1) the system must respond quickly to changed conditions to get back into a good configuration soon, and (2) the system must maintain stability as conditions change. These two goals aren’t entirely contradictory, but they are at least in tension. Responding quickly to changes makes it difficult to maintain stability, and the system must be engineered to make this tradeoff wisely in a wide range of conditions. Getting this right in a huge P2P system like Skype is tricky.

Which brings us to the story of last week’s failure, as described by Skype. On Tuesday August 14, Microsoft released a new set of patches to Windows, according to their normal monthly cycle. Many Windows machines downloaded the patch, installed it, and then rebooted. Each such machine would leave the Skype network when it shut down, then rejoin after booting. So the effect of Microsoft’s patch release was to increase the turnover in Skype’s network.

The result, Skype says, is that the network became unstable as the respond-quickly mechanism outran the maintain-stability mechanism; and the problem snowballed as the growing instability caused ever stronger (but poorly aimed) responses. The Skype service was essentially unavailable for a day or two starting on Thursday August 16, until the company could track down the problem and fix a code bug that it said contributed to the problem.

The biggest remaining mystery is why the problem took so long to develop. Microsoft issued the patch on Tuesday, and Skype didn’t get into deep trouble until Thursday. We can explain away some of the delay by noting that Windows machines might take up to a day to download the patch and reboot, but this still means it took Skype’s network at least a day to melt down. I’d love to know more about how this happened.

I would hesitate to draw too many broad conclusions from a single failure like this. Large systems of all kinds, whether centralized or P2P, must fight difficult stability problems. When a problem like this does occur, it’s a useful natural experiment in how large systems behave. I only hope Skype has more to say about what went wrong.

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