Warner Music: with EMI bid still up in the air, next stop Russia

Is it possible to run a profitable, legit business in a market that's already established a thriving but illegal trade in the same item? If you look at the music industry, and how it's tried to make money out of Internet music distribution in the wake of successful sites predicated on piracy (and of course cheaper/free content), it's not entirely impossible. But it may take a very long time, if it ever happens at all.

In the latest attempt by Big Music to create a market in a thriving but illicit environment, yesterday Warner Music and Sony BMG announced they would team up with Russian firm Access Industries to start a wholesale digital music distribution business in Russia and former Soviet-bloc countries.

Digital Access, as the JV will be called, will aim to create a new distribution channel for legitimate digital music, including wholesale deals for full-track downloads, ringtones and video clips. It anticipates its customers will be online music portals, mobile operators, rights owners and other content providers; and it doesn't have plans to launch its own retail operation.

The news comes at a time when the Russian digital music industry is thriving, but at a controversial cost. Sites like Allofmp3.com, owned by Media Services, have been hugely popular for music downloads, not just in the region but worldwide—it sells music by the megabyte, which works out to a fraction of what a track would cost on a site like iTunes. This has meant the site usually ranks as number-two or number-one for music downloads in different markets.

MediaServices says allofMP3.com has a license to operate from the Russian government, but in recent months, it has come under a lot of pressure to close down its international operation. Major credit card companies will no longer allow payments to the site, and it appears to be blocked in many countries. (In London, where I live, I cannot access the site or its mirror domain, allofMP3.ru.)

But like many a black market Lazarus, MediaServices has launched several other sites to siphon new business. Among them are the punny allTunes and mp3Sparks. These do allow credit card purchases and seem to work on the same business model as allofMP3.com. And I can access them in London.

Big music's domestic partner, Access Industries, is an interesting company to watch. It may hold the key for Western labels to at least get a foothold in the market, rather than continue to be taken for a ride by the likes of MediaServices. Access Industries is controlled by the uber-influential Russian-American billionaire Leonid Blavatnik, who also has investments in oil, aluminum, coal and telecoms (ie the typical portfolio of Russian ex-state commodities held by most oligarchs). He is on the board of Warner Music and owns Russian music labels Soyuz and Nikikin Records, which will also join the venture.

The plan is to launch Digital Access in the 4th quarter of this year.

Mobile music: to boldly go where no one has gone before

This was published last Friday on Total Content + Media's web site....

This week saw the launch of a new mobile music service called MusicStation.

For those of you who think that mobile music—downloading tracks over a cellular network and listening to them on your phone—has been a non-starter so far, you are right. In the UK, for example, only 1.7 million people used their phones to listen to music downloaded from operators in the course of a month, says M-Metrics; another 5.4 million used their phones to listen to sideloaded music (taken off PCs). But compare both of those figures to the number of MP3 players in use in the UK: nearly 19 million; or the number of mobile phones in the UK: over 60 million.

Even Rob Lewis, the CEO of Omnifone (the company behind MusicStation) admitted to me that “Mobile music today is not a grown up experience.”

But put your scepticism aside! MusicStation is hoping its new approach will prove you wrong. It claims to have the most comprehensive catalogue—having signed global agreements with the four major labels of Sony BMG, Universal Music, Warner Music and EMI, and many of the minor ones—the most deals with mobile operators to run the service, and the most agreements with important vendors to preload the service onto handsets (although it admits that the number-two handset maker Motorola, is not pre-loading it on its music models just yet).

And instead of selling a la carte tracks, it is based around a subscription model, where a user pays one price per week for an unlimited amount of music. (The catch is that you don’t get to own any of the tracks you listen to.)

It’s no surprise that the labels have signed up—after all, they couldn’t possibly be doing any worse in mobile music than they are now. What’s interesting is that the operators and vendors, who have usually relied on exclusivity in their data offerings, have all agreed to try out a collaborative approach. (Compare this for example to AT&T, which has a five-year exclusive agreement to distribute the iPhone in the US, hoping this will migrate mobile users to its network.)

Still, MusicStation is not going all guns blazing from the start: the service launched first this week in the tech-happy but small market of Sweden, not with the incumbent but with Telenor’s network, charging users €2.99 per week for the service. Lewis tells me that the “lion’s share” of the revenues—well over 50%—will go to the music labels. Operators will get a cut in the billing and also a provision for letting the data pass over the network for no charge.

Lewis says Omnifone does not want to target the US market at this point because of the high penetration of MP3 players and the patchy availability of high-speed mobile data networks, which are necessary for the service to work.

“It’s really a landgrab right now in the digital music market, and we can’t catch up in the US,” Lewis told me when I met him earlier this week. Omnifone will instead aim for Europe and Asia, where they want the service to be on 100 million devices in the next 12 months. But the company would not give a target for subscriptions, or indeed how many would be needed to break even as a business.

There’s a lot to be pointed out in how MusicStation will differ from what is already available on the market today.

For one, because the tracks you hear will not be download-to-own, they will be quicker to get from the network than ordinary tracks.

And given that people have not been prepared cough up much money at the price points set for a la carte mobile music today (or any digital music, for that matter), it’s about time that the subscription model be tried out, even it’s unfamiliar to the music industry (and crucially to music consumers). It’s worth noting MusicStation isn’t the only one trying to push this: both Yahoo and Rhapsody are also trying out subscription models in their PC-based music services.

Plus it’s launching at what Paul Goode, an analyst at M-Metrics, told me was “the perfect time,” with “a raft” of music phones about to hit the market later this year. He said that of the 730 phones in the UK market today, only about 10 could really be classified as “true music phones.” An appallingly low number like that goes some way towards explaining why mobile music hasn’t worked so far.