Profit in Sharing

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Even free file-sharing of music has a potential upside for marketers in search of consumer data.

Karen Ohlrich isn't your typical Fatboy Slim fan. Until recently, this 39-year-old account representative for a Web development firm in Cleveland couldn't tell the difference between Fatboy Slim and The Chemical Brothers. But one day last September, she visited the Napster Web site, and downloaded "Rockafeller Skank," off Fatboy's album, "You've Come A Long Way, Baby." The sample was enough to get her hooked. So hooked, in fact, that she clicked over to and ordered the CD.

Shared-music sites, such as Napster, have exposed Ohlrich to musical styles she didn't even know she liked. And this "informed consumerism," has translated into some unexpected sales, Ohlrich says - such as the Appalachian dulcimer CD she ordered this past October. In fact, Ohlrich is so enamored with the idea of sampling music online that she'd even "pay some type of fee," she says. "Radio is limited in what it promotes and plays. These file-sharing applications are as good as it gets. I listen to new music, get out my credit card, and buy a CD I know I'll like. What's better than that?"

Not much, if you're a music executive. Forget copyright worries, the advent of digitally downloadable music is creating powerful new opportunities for music marketers. Recent studies show that music aficionados who feed their "music jones" through file-sharing services actually make more music purchases. And keeping track of just who these online samplers are, is getting easier as well - as digitization makes data collection even more efficient for music marketers.

Although there's a "very complicated relationship between emerging technologies, copyright infringement, and traditional marketing," music execs shouldn't despair, says Mark Fusco of Connecticut-based research firm Greenfield Online. According to a recent study by Greenfield and YouthStream Media Networks, nearly 75 percent of college students have downloaded music from the Internet; 58 percent of those students have used Napster. Those numbers are enough to make Metallica burst a guitar string. But consider this: nearly two-thirds of the 1,135 college students surveyed, download music from the Internet as a way to sample tunes before opening their wallets. "That's music to a marketer," says Fusco.

In fact, the proliferation of music online is introducing consumers to artists they may have missed during their drive time. A survey by Yankelovich Partners for the Digital Media Association, found that about half of the music fans in the United States turn to the Internet to search for artists they don't hear on local radio stations. Nearly two-thirds of those who downloaded music from the Web say that the search ended in a music purchase. Even dreaded Napster users are proving to be good customers. Jupiter Research discovered that 45 percent of online music fans are more likely to have increased the amount of music they purchase, than online music fans who do not use Napster.

According to rock artist personal manager David Spero, "Napster is just a kind of high-tech cassette recorder." And just like the venerable cassette recorder, it's technology that can only help musicians pick up new fans. Spero says that artists such as David Bowie, for example, would never have broken into smaller markets if kids hadn't recorded tunes off the radio and passed those recordings on to their friends. (Spero worked with Bowie in the 1970s.) "What we always hoped was that the kid down the street would share some breaking artist with a friend," explains Spero. "That's not a very efficient way to market. Now, with a more streamlined ability to drill down and take a look at your potential audience, new artists and those people responsible for marketing new artists, might actually be able to cobble together a real plan."

Spero says that although most music marketers understand the demographics of core audiences for particular musical styles, it's the "fringe" elements, the unexpected buyers, as well as promotions and concert touring that can make a real difference for artists and execs. "Who would think that some 49-year-old guy is listening to the Wallflowers," says Spero, as he pops the group's latest offering into his CD player. "Marketers will now know more about the wild cards ... people like me."

In fact, these wild cards could be welcome relief for all types of marketers. Those who buy tunes over the Web are more likely to buy other products online, according to Cyber Dialogue. People who use the Web to get their music also have deeper pockets than their average online counterparts, spending up to $100 more per year by e-commerce. On average, adults online spent $509 by modem in the past 12 months, while the average music user spent $610 online. Plus, those who download music are apt to have a variety of enabling software programs such as Real Audio, Shockwave, or MP3 on their PCs. This allows them access to a broad range of entertainment content, not just music. "This points to clear customer retention and partnership opportunities for providers of online entertainment," explains Peter Clemente, vice president of Cyber Dialogue.

But it just drives artists and record labels crazy to think about all of those consumers bopping to their tunes for free. And although they'd like to put an end to all of that by placing a toll on the downloading highway, pay-per-song is not likely to be the business model of the future. In the Jupiter study of Napster users, 71 percent of those who use the music site said that they were willing to pay to download an entire album. But in a Greenfield Online survey of 5,200 online music shoppers, nearly 70 percent say that they have not paid - and will not pay - for digital music downloads. That's why Jupiter projects that revenue from digital distribution will only reach $147 million by 2003, accounting for less than 6 percent of online music sales, while the sales figures for actual CDs online is projected to exceed $2.6 billion by 2003.

So what does lie ahead for the music industry? Although the new killer application has yet to be discovered, subscription-based services are definitely on the horizon, and may be more viable than a per-song fee scheme, says Steve Forti, director of the research division of Yankelovich Digital Media. "If there was a service that charged $10 or $20 a month, that would give access to anything they'd want, that would be something the consumer would think is reasonable," he says.

In fact, change is already underway. Late last year, Bertelsmann AG and Napster announced a strategic alliance to further develop the Napster person-to-person file-sharing service. The business model seems like a winner for both the Napster community and the music industry. With the new, secure, membership-based service, the "Napster experience" is preserved: members will still be able to share music files. But at the same time, the model provides payments to those who hold the rights, including recording artists, songwriters, recording companies, and music publishers.

Yet, even with such models, the end result is that the entertainment industry has to become savvy about partnerships, gathering and using consumer data, and working free digital downloads into their business plans. Willie Walker, president of Wizer Home Systems, an Austin, Texas-based home networking company, believes that entertainment and leisure are "hot buttons" with clients who want to make their castles 21st century friendly. "Music of the past will continually be pirated until the entertainment industry wakes up and realizes the digital world is all about bits," says Walker. "MP3, streaming audio, streaming video, audio books, TV-on-demand, and IP telephony (phone service over the Internet), are all just bits waiting to be transferred."

In other words, there is no real difference between music, movies, magazines, and television, and in the face of the continuing trend of media mergers, new partnerships that mine data and deliver these bits to consumers in innovative ways will make money - whether it's through royalties, sponsorship deals, or ad revenue. There will be more than a catchy beat carried on tomorrow's airwaves to music consumers - the only question is how to make the most money while the musicians make consumers dance.

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