EMERGING SOUNDS IN IP COMMUNICATIONS FOR MUSIC BUSINESS Vol. I No.

9, (Rich Text version) August, 15, 2004 Contributing Editor: John Penn for InspireMedia PART I: INTRODUCTION: Last May, Mix Magazine a leading pro-audio publication presented The New Means of Production. a highly read and talked-about themed issue that rocked the audio community. Change is a constant in any technology-driven industry, whether you're talking about cellular communication, the Internet, GPS navigation, medical scanners, electronic cinema, digital photography or DAWs, and these days, digital is definitely the force behind the revolution. Audio pros are no different than other techno-artisans, who after years of creating with analog tape recorders analog instruments, out-board boxes, TT patch-bays and the like are resistant to give up their analog tools for a box of chips, RAM modules and an endless smattering of storage formats, but the lure of digital is great: DSP file manipulations can transform usable vocal performances, unimpressive images and lifeless wire-frame animal creatures into masterpieces of digital art in music, vivid film epics and heart-pumping action in interactive gaming. This article will be presented in two parts to give a comprehensive overview on two industries the music and the communications industries that are close relatives of each other and are both predisposed to the same disruptive technologies that has played out in rampant internet downloading of music and now in bypassing traditional long-distance telephone switches and related fees that is striking to the core as consumers discover the benefits of IP communications specifically peer-to peer and VoIP. This article is not intended to delve too deeply in any one subject or issue as there are many excellent research papers, articles and expert opinions available on any subject discussed here, but begs the question of IP communications as a viable distribution and broadcast model for the music industry. Lets step back and look at the big picture and eaves-drop on a new conversation and fresh perspective on the challenges and opportunities ahead to start building bridges between both industries. Audio capabilities in music recording were a close cousin of the telephone communications and broadcast industries steeped in technologies derived from both and once defined by signal routing through tinytelephone patch-bays like phone operators used to use before automated switching and recorders defined by track capacities of 8, 16, and 24-track,-yet such terms are of little relevance in a world of digital virtual tracking, virtual consoles, virtual instruments and plug-in equivalents of racks of hardware outboard gear, where the limits on system capabilities may be simply a matter of CPU architecture, power, speed DSP and RAM. The evolution in the relationship between record companies and artists should include a new vision of the role of the label as service providers. The well-publicized troubles in the music industry have claimed many victims: artists, producers, studio owners, and publishers to name a few. However, few sectors, have been hit as hard by these uncertain times as the record companies themselves. Over the last several years, labels have experienced double-digit declines in CD sales, stiff competition from emerging forms of entertainment and an adversarial climate in their relationships with artists, content producers and consumers alike. The majority of record executives blame the causes of the industry's woes on piracy whether in the form of unauthorized CD burning or file sharing as the biggest threat they face. Their first priority, was to create a legitimate and compelling online music marketplace that would attracts the very audience that is now downloading illegally. So far, barring the success of a non-record label entity, Apples I tunes and iPod, the major labels have failed miserably in giving consumers a legitimate alternative for online music, and they have gotten frustrated and have opt to get their dose of music from other forms of entertainment, including peer-to-peer networks than to buy music through traditional or legitimate channels. The music industry has to create a viable, legitimate music-distribution environment along with creating better content. The knee-jerk answer is to curb or stop illegal downloading through strong-arm legal tactics and lawsuits, but many agree the music industry as a whole need to embrace consumers instead of sue them and give consumers a secure, safe haven to download as many songs as they want for a reasonable price. Many believe that downloading right now is hurting us, but in the end, it might save us. ALL ABOARD THE INTERNET Slow adoption of new technologies means that convergence will be spread over a decade or more, and there will be continuing competition from traditional media, as well as increasing diversity of delivery mechanisms for content. This may mean that writers and artists will get a bigger share of the pie. That appears to have been the trend over the last few decades, with movie actors and professional sport stars increasing their share of the revenues their work brings in. It is less certain whether carriers will manage to improve their share of the content pie to the same extent. There will certainly be a shift of revenue towards broadband services, but content distribution may not be the largest contributor to it.

The dominant mode of operation is likely to be fast (eventually much faster than real time, but initially often slow) download to local storage, fast transfer to whatever display device one wishes to use (often a mobile information appliance), and then playback. That is already the model we see emerging with iTunes, Napster2, and even TiVo. The advantages of this model include the ability to implement it now, before the Internet can be made ready for real-time streaming media. It also accommodates gracefully the forecasted explosive growth in small mobile devices, which will often have small storage and low bandwidth over wireless links, and thus will be most useful if they can get data from local storage. This model also allows for easy integration with special hardware for intellectual property protection. The data that will be generated is likely to be shared using programs descended from Kazaa, Gnutella, and Napster. E-mail and the Web may not be flexible enough. These peer-to-peer sites attract huge attention because of the disruptive technology threat it poses to conventional music distribution channels. However, that may turn to be less important than its ability to facilitate sharing of files. Napster itself was too limited, as it is designed to handle just MP3 music files, and is also centralized. Yet it has already inspired creation of tools such as Gnutella, which are much more general and decentralized. Given the growth of local storage, and the increasing availability of tools to fill that storage with video clips and other material, it is possible that tools like Kazaa and Gnutella may become more important to the Internet than the Web. Currently services vary widely in terms of their specifics, but they generally offer a subscription on the order of $10 per month for streaming and approximately 99 cents per downloaded track. Some services, allow downloads to be burned on CDs, whereas others permit only tethered downloads i.e., ones that will work on the user's hard drive but cannot be transported to another device. While early versions of the labeloperated online music systems were limited to portions of those companies' recorded catalogs, new licensing agreements opened up a pool of approximately 250,000 tracks to all the major services, thereby leveling the playing field. No one is pretending that these label-operated online systems, even in their new-and-improved versions, will solve all of the industry's woes. Nevertheless, the moves represent a positive step. Investments are starting to happen to create a more sophisticated, legitimate music listening environment. Internet-based e-commerce in general will skyrocket, but only companies that develop and implement entirely new business models will succeed. That is one of the conclusions of the new 231-page study, Portals to Profit: E-Commerce Business Models and Enabling Technologies, released by Datacomm Research Company and Techvest International. "Traditional business models will be replaced by new models based on electronic information chains," said Michael Hentschel, veteran venture capitalist and principal author of the report, who identified and analyzed the 20 most significant Internet e-commerce business models. "The Internet is the most efficient market ever devised," he adds, "but the inexorable drive towards cost and below-cost pricing will compel vendors to discover new paths to profit." ITS ABOUT THE CONTENT. RIGHT? Whether content is king or not has direct relevance for the question of whether the Internet will continue to be an open network, or whether it will be balkanized. If content were to dominate, then the Internet would function primarily a broadcast network. With value proportional to the number of users, there would be few inherent advantages to an open network. The sum of the values of several completely or partially separate networks would be the same as of a unified network. On the other hand, if point-to-point communications were to dominate, there would be strong economic incentives to a unified network without barriers. The "content is king" position is shared by many people, and not just in the content industry, Although social uses are important to the telephone industry, most of the revenues historically come from businesses. Household spending on phone service brings in only about a third of the total revenues. (The figures for total revenues, $256 billion in 1997, and consumer spending, $85 billion, come from different sources. It is possible that consumers spend somewhat more, especially for cell phones, than is reported in the $85 billion figure. However, even if one makes the most likely adjustments, it still appears that business spending on telephony is far larger than that of households.) That has been the historical trend, and many communication services, including the phone, were initially devoted almost totally to business uses. Traditionally, commercial users have subsidized residential ones. Sometimes this was done involuntarily, as in higher rates dictated by carriers or by government regulators, and sometimes voluntarily, as in paying for toll-free 800 numbers. It appears probable that similar subsidies will also play a large role on the Internet. (That is also why toll-free numbers for wireless calls may be very important.) We may very well end up with a system in which the largest monetary contribution will come from commercial users, the second largest for households paying for point-to-point communication, and the smallest by the transport component of charges for content. Since connectivity is key to the growth of VoIP, broadband usage and IP communications as a whole, and voice usage in cellular systems is low, the main function of 3G wireless systems is likely to be in stimulating more voice calls. Content data services are likely to function primarily as enticements to induce more voice usage. General connectivity is likely to lead to demands for symmetrical links on the Internet. Hence fiber to the home may be needed sooner than is generally expected. Juniper Research reports in March that by 2009 the global VoIP market will contribute $32 billion to a total worldwide telephony market of $260 billion, or some 12% of revenues. The total market value for services using VoIP is forecast to grow almost ten fold over the next five years. During that time, VoIP will evolve from being a replacement service for the public switch telephone network

(PSTN) market to providing truly converged services to the home and business desktops. In other words, VoIP will be at the center of convergence. The challenge to service providers will be to manage this convergence, balancing new VoIP revenues against declines in traditional fixed-line revenues as flat-rate IPbased voice charge programs gradually replace time and distance-related charges. In fact, VoIP will morph into PoIP (Presence over Internet Protocol). Unlike traditional telephony that transmits over a PSTN, with PoIP, devices will automatically select the most appropriate form of communication for the time and place. As Ian Cox, Broadband Specialist at Juniper, says, "VoIP will bring new revenue-generating opportunities to the telephony market by combining voice services with other IP applications." This shift will fundamentally redefine the telephone and bring a host of new options to consumers. Telephones will soon offer services formerly associated only with the PC. According to Juniper, by 2009 the VoIP market will also become the key revenue generator for broadband service providers, contributing to an overall value-added services market of $47 billion. This will be in addition to the $43 billion spent on broadband access in the same period. Mr. Cox says, "Broadband penetration has now grown to a level where the industry is on the verge of a revolution, as it is now economically attractive to launch value-added services to a mass audience." A projection of the revenues from those services, made by Juniper earlier this year, is broken down in the following chart:

Although much attention has been paid to the more integrated and entertaining value-added services like video-on-demand (VOD) and online games, the biggest opportunity will be in voice services as broadband IP-voice takes over from traditional circuit-switched voice; driven by lower operating costs and competition between incumbents and new licensed operators. In a related report from The Yankee Group, the research firm projects that VoIP will have close to 1 million subscribers by the end of 2004, and serve 17.5 million US households by year-end 2008, growing from 131,000 at year-end 2003. New technologies and standards continue to arise that offer considerable performance benefits, however the limitations of the legacy VoIP software have hindered the ready adoption of these technologies. Compounding the issue is the paramount requirement to reduce costs, consolidate product lines, and increase efficiencies wherever possible. To help break this cycle and provide meaningful solutions for the VoIP market, the challenge is upon the software vendors to rise to the occasion and establish a new paradigm in VoIP application design. Complete and open system software solutions that view VoIP as an integrated and interoperable platform -not simply the sum of its functional parts -- offer the most promise for the industry. The value derived from a top-down, framework-based architecture is tangible and can be measured in terms of faster development time, higher performance under diverse scenarios, and greater protection against obsolescence. More importantly, this new approach will give the OEMs what they need most: The opportunity to innovate. By lifting the burden of integrating VoIP components, OEMs can place their R&D resources on the forefront of the technology curve and help lead the industry to meet the demands of tomorrow. In next months issue, well present the second half and conclusion of new sounds hopefully to include music emerging in IP Communications.stay tuned!
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