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Google's music entreaties fall favorably on record companies' ears

September 2, 2010 |  3:32 pm

Google Inc., which is developing a digital music service, is finding a warm welcome at record companies that are hoping the technology company can loosen Apple Inc.’s grip on the digital music market with its iTunes music store.

The talks center on securing a sweeping set of licenses that would give Google the latitude to offer an array of products and services through its Android operating system for mobile phones as well as through computer browsers, said executives familiar with the discussions.

Music companies have all but rolled out the red carpet for Google, believing that the Mountain View, Calif., technology giant can serve as a counterweight against Apple, which controls more than 80% of digital music sales via its iTunes store. Though record companies collect 70% of the revenue generated by iTunes, they have bristled under Apple’s terms, which have in the past limited the prices music companies can charge, among other things.

With Google on the scene, the hope is that music companies can dilute their dependence on Apple.
“Google has smart people, and they recognize record companies need to be more than just suppliers,” said Jac Holzman, senior advisor to Warner Music Group Chief Executive Edgar Bronfman. “The attitude that you bring to the table is clearly the first step.”

For Google, the ability to offer a music service is ...

... key to the success of Android, a free operating system that runs millions of smart phones worldwide. Its entry into music is one of several efforts by Google in recent months to play a greater role in delivering digital content, including books, movies and television shows. An entry into music would put the company in more direct competition with Apple, a onetime Silicon Valley ally on whose board Google CEO Eric Schmidt sat until just a year ago.

The search company is said to be looking to settle its talks with the music companies in time to launch a service for the next release of its Android operating system, code named Gingerbread, due sometime in the fourth quarter of this year, said executives familiar with the talks.

Google declined to comment, as did several music companies involved in the negotiations, citing confidentiality agreements.

Another impetus for labels: new revenue streams. While digital music sales have steadily grown, overall industry revenue continues to fall. In the U.S., music sales were $7.7 billion in 2009, down 12% from $8.8 billion a year earlier, according to the Recording Industry Assn. of America. Worldwide, recorded music revenue fell 7% in 2009 to $17 billion, according to the International Federation of the Phonographic Industry.

With Android phone sales outpacing iPhone sales in the first half of the year, Google is in a position to bring millions of potential customers to the table. About 7.6 million subscribers in the U.S. had Android phones at the end of June, compared with 12.4 million iPhones, according to ComScore Inc., a market research firm.

And unlike in the PC environment, where consumers are loath to spend money on subscriptions, cellphone users are far more willing to pay for access to content, especially if the fees are embedded in the phone bill. Four in 10 Android owners listen to music on their phones (the figure is 6 in 10 for iPhone users), according to Brian Jurutka, a mobile analyst at ComScore. Most listen to music that they load into the device from their computers, but some, about 13%, downloaded the music to their phones via subscription or outright purchase from the phone, Jurutka said.

Among the scenarios raised in Google’s discussions with music companies are streaming music and paid downloads, according to music executives who say that the discussions are being led by Andy Rubin, who heads up Google’s Android business.

But there are many variations within those two models that have not been nailed down. Those include whether there will be a free streaming service and whether the cost would be supported by audio advertising or built into the price of the phone.

Nokia, the Finnish cellphone maker, sells phones in 20 countries that allow buyers to download unlimited songs. Phones with the feature, called Comes With Music, carry a premium price and, depending on the carrier, costs are rolled into the monthly phone bill. The feature is not available in the U.S., the world’s largest music market.

Music companies have been reluctant to embrace free, ad-supported services such as the one offered in Europe by Spotify, because the advertising revenue has been paltry. Labels have also expressed disappointment when Spotify customers switch from its free service to its premium subscription service. Such hybrid models, with a free entry-level tier and a paid premium tier, are often called "freemium" services.

Should Google go down the freemium path, music executives want Google to guarantee a minimum percentage of listeners who will spring for a paid service, sources said.

Google has not been secretive about its ambitions in digital music, but neither has the company outlined its plans beyond a few hints dropped in May during the company’s conference for software developers in San Francisco. There, Google’s vice president for mobile applications, Vic Gundotra, demonstrated the technical ability to download music from Google’s Android. He also showed off Android's ability to stream music from a PC, a technology Google adopted when it acquired Simplify Media in the spring.

The benefit of Simplify’s model is that Google would not have to pay licenses to music labels because users presumably had paid for the songs on their PC, entitling them to listen to that music on other devices that they own. The same arguably holds true for so-called music locker services, in which users upload their music to a server that’s connected to the Internet to stream their music from any device with a Web browser.

Google, it seems, is interested in doing more than that as it explores various licensing schemes with music labels and publishers that hold the rights to songs. And it’s hoping that its service, unlike numerous others that have gone before, will find willing ears.

“Consumers are constantly looking for new music, and discovering music is a key to monetization,” said Russ Crupnick, a music analyst with NPD Group Inc. “Lord knows people are using Google to learn and discover just about everything else. The labels are very aware of that.”

-- Alex Pham

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