When Competitors Team Up: Sirius and XM

Since the introduction of satellite radio into the music industry equation, there have been two superpowers competing with almost identical services: Sirus and XM satellite radio. On November 12th, after seven years as fierce competitors, they finally merged and consolidated many of their channels. This is a result of a merge in July where the two companies joined to become Sirius XM Radio, after the FCC deemed that the merge would not result in a monopoly on the market. The decision on this issue is due to the fact that while these companies were the only major satellite radio companies, the competition is against free radio, and all other forms of musical entertainment. Both of these companies have lost money since being formed in 2001, and this move to unify can help them to compete on a larger level for the attention of listeners, mostly made up of car commuters.

The commercial-free radio service now costs less for the basic package, but more channels can be added on. The lower prices will attract new users, yet the options will maximize profits. Both of the services still exist exclusive of each other, but now they share many channels in order to cut down on broadcasting costs. In the process of my research of this event, I made two comments on posts regarding the issue. The first is in Digital Noise by Matt Rosoff, where we discuss the reasons for, and responses to the merge. The second comment was on Wired's post by Eliot Van Buskirk where we discuss more the business side of the merge. For the sake of convenience, I have included my comments below.

Digital Noise: Sirius-XM channel merge begins next week

Satellite radio has truly become a product that does not inspire half-hearted users. Those who use and enjoy satellite radio do it with a passion, and seem to listen to it almost exclusively. While this creates a great and loyal consumer base, these types of customers are wary of change, especially when it comes to fraternizing, even merging with the “enemy.” Sirius users chose Sirius for a reason, and XM users chose XM for a reason. I think this is why I sense a lot of discontentment among the posters here. Regardless of the reactions of some of the users, the reasoning behind the merge was sound. It does not make sense for there to be two different 50’s stations for example. Those channels that are unique can now be purchased a la carte, if the user so chooses. They now have a lower subscription price as well, so there are a few extra dollars freed-up for possible extra features. Often those who are vocal are the only ones who care.

The merge between XM and Sirius, however was not all encompassing, they remain, in some points of view two very different services. The inability of both to make a profit necessitates more than a casual relationship between the two. They need to truly merge services and products and customer bases to create a solidified company, or else they will not survive against all of the other options that media consumers have today. It is possible that this is where Sirius XM is heading, but the move needs to be sooner rather than later to ensure that music lovers have the variety of options that they have enjoyed for so long.

Wired: Sirius, XM Complete Merger

While it is beneficial to the consumer, both past and present, that the new Sirius XM service has lowered its basic subscription prices, it does seem that the new a la carte options, and the premium options that are available are a way for Sirius XM to gauge a little bit of extra cash out of their customers. However, this may not be such a bad thing for users to subscribe to, if they want to see satellite radio continue to broadcast. Aaron Poehler was right in saying that this merge was necessary to keep satellite radio afloat, in spite of having almost 19 million customers. According to an LA Times article about the merge (http://www.latimes.com/entertainment/la-et-satradio13-2008nov13,0,3375813.story), the company does hope to break even next quarter, but reported a 4.8 billion dollar loss in the 3rd quarter of 2008. The new type of radios and the unique services may be exactly what it takes to help this company finally break even after both companies have consistently lost money from their very inception in 2001.

In reference to the discussion of whether or not they have a monopoly on the market, it is important to realize that while these companies have been each other’s main competitors for years, they both secondarily have competed against every other form of car or home entertainment. They have been keeping each other down, while iPod car adapters, web streaming radio, and Bluetooth headsets have emerged as other options for valuable car-time. Them coming together in this way and joining forces, merging content, and creating greater value can only be considered a monopoly if consumers had no other options, which they clearly do. They’ve created an entertainment service where it is no longer important which satellite radio company is better, what’s important is that consumers have options.

The New Deal: Every Piece of the Pie

It was only a little more than a year ago when Madonna and Live Nation announced an unprecedented new partnership. This new type of record deal, usually referred to as a "360 deal," allows for record labels to make money off of every aspect of an artist's career, not solely the record sales. The 360 deal, named for the number of degrees it encompasses, has been accepted by many musical behemoths, including Jay-Z (right), Nickelback, Shakira, and U2. When these deals first began to materialize, they were seen as outliers to the industry, however they have completely changed the way that major labels are doing business in a very short time. At last week's Web 2.0 summit in San Francisco, Edgar Bronfman, the CEO of Warner Music Group announced that from this point on, all record deals signed with WMG would be 360 deals. A response to the continual falling of record sales, this move will allow Warner to grab a piece of the money brought in not only by record sales, but by concert ticket sales, merchandise, websites, and endorsements as well. While taking money from more places may help to move major labels back towards the black in the short term, it stifles creativity, discourages small artists, and will hurt the labels in the long run.

The basic structure of a record deal has remained the same for as long as there have been major record labels. When an artist is signed, they are required to create a certain amount of albums for the label. The label advances the artist an agreed-upon amount of money to be used for the production of each album. Any advanced money not used in the production process can be kept by the artist, upon delivery of the album. Once the album is released, the royalty money that would be given to the artist is kept track of and kept by the label until every penny of the advance is repaid. This system is called recoupment. Only once the label is recouped will the artist see any money for their album. If the album doesn't sell enough to cover the cost of production, they will never make any money from record sales, but they are also not responsible for paying back the money that the record label gave them. The effect of this system is that many artists of all sizes today make most of their money from touring, merchandise, and however else they can monetize their fame, because the record labels do not have any claim in those areas. With the growing prominence of the 360 record deal, labels can take a piece of, and control, every income stream an artist has. This may not affect huge figureheads of the system like Madonna, or Jay-Z much, but it's a different story for small and medium sized artists who may never completely recoup, and require touring money to live.

In the case of Warner Music Group, and whichever labels go to exclusively 360 deals, the situation is viewed as a problem with return on investment. As Edgar Bronfman explained at the Web 2.0 summit: "it doesn’t make sense for labels to pour money into artist development when CD sales, their primary source of revenue, continue to decline. Without other ways to make money from an artist, they wouldn’t continue to promote artists." Music is becoming more and more easily and freely accessible, and labels don't want to get to a point where their product becomes free, and they have no other income streams. 360 deals, however, can't be a complete and long-term answer for major labels, as the money made from merchandising and ticket sales do not come close to the income from record sales. Labels must change their business structure and spending habits. It is understandable for the labels to want to prevent the loss of their income streams during the paradigm shift caused by new technology, but it creates an environment where musicians don't have much say in their career choices. Although they still currently have many options other than WMG, 360 deals seem to be the way that the industry is headed. The problem for the major labels in the long term is that these poor deals for artists will push musicians towards smaller independent labels who don't have the same requirements, ultimately digging the major labels into a deeper hole.

Interactive Tunes: A New Sort of "i"Tunes

Guitar Hero swept the nation a few years ago with the revolutionary idea that video games and recorded music could merge into one entity. After Guitar Hero, came Rock Band, which expanded and deepened the concept of engaging gamers with music. They then came out with an AC/DC expansion pack (left), showing how insightful artists can use these new technology trends to make new income from old songs and recordings. As the record sales figures continue their decline, artists are searching for, and seizing new opportunities to promote and sell their music. The newest trend to increase the interactivity of music, comes downloaded right into the fan's pocket. There are a couple of remarkable new applications available for Apple's iPhone and iPod Touch. The first is a sort of downloadable digital fan page that will provide updated information, artwork, pictures, even song lyrics for certain artists, and their albums. The first band to try out this channel of promotion is Snow Patrol, with their new album "A Hundred Million Suns." Liz Goodwin, Snow Patrol's manager described it as "an interactive element; a digital booklet that will take you into the videos and content." Such a page will certainly increase a fan's feeling of personal involvement with the band. Nine Inch Nails is using downloadable iPhone and iPod Touch technology to increase personal involvement as well. They are releasing their songs in a sort of Guitar Hero type game to be purchased for Apple's handheld devices called Tap Tap Revenge (seen at the right). Both of these applications are current examples of what may become a personal interactive music industry.

I came across these harbingers of interactive music as I was browsing a couple of the blogs listed in my linkroll, the first at Music Radar by Ben Rogerson, and the second at Wired by Eliot Van Buskirk. I commented on each, the comments are linked, but for the sake of convenience, I've included my comments below:


Snow Patrol to Release iPhone App With New Album:

I think it's incredibly forward thinking of Apple and of Snow Patrol to begin to distribute these "digital booklets." While I agree, "this is hardly the groundbreaking idea that the record industry really needs," a trend of mobile and virtual interactivity needs to start somewhere, and this may be just the place. As technology continues to advance, such a template can be built upon, and eventually could become a viable income stream for artists. Pink is already streaming samples of her upcoming tracks through a similar application (http://blog.wired.com/music/2008/10/iphone-apps-wil.html). Though I am no industry guru, it does seem extremely plausible that as the services offered are able to become more valuable, fans will be willing to pay for them. For example a "channel" devoted exclusively to news, music videos, advance songs etc. of a certain artist would not be too hard to develop and sell to fans. Or your suggestion of being able to download and remix such songs on an iPod would certainly prove lucrative. What other ways do you think that this basic idea could bloom into big business and sales for artists? I think that no matter where the next few years of technology takes us, artists will have to stay at the forefront of the developments and be creative in order to find new income streams to replace the income lost due to the trend of ever-declining record sales.


Nine Inch Nails To Distribute Music Through iPhone App:

It's true, Church, Trent Reznor has been at the forefront of reinventing the music industry for the past couple of years. When he released his last album without a record label to such great success, he made history, and helped create a new business model. This new game featuring Nine Inch Nails songs is a great example of how artists are using the new trends in technology and gaming to find interesting ways to make money. It seems like the next step after the Metallica and AC/DC expansion packs for Rock Band, and now they are even coming out with an independent Rock Band-type game featuring only Beatles songs! (check out http://www.musicnewsnet.com/2008/10/the-beatles-tunes-to-rock-band-game.html). In his book "All You Need To Know About the Music Business," Donald Passman explains that the licenses to songs in video games are purchased for a flat fee, and usually not more than $6,000. This is in the 2006 edition, and while that is fairly recent, it may not be recent enough to account for what happens when the music is not IN the video game, but the music IS the video game. Bringing the gamer into the direct hands-on virtual reproduction of music certainly brings more value to the music itself. I wonder how the payment structure works when it comes to Beatles Rock Band, or Nine Inch Nails Tap Tap Revenge? I would imagine it is a sort of royalty system, since there is no way of knowing how successful such ventures will be, and thus no way of putting a pre-determined "flat fee" value on the music.