Will Advertising Kill DRM?

On November 15^th, Ethan Smith of the Wall Street Journal authored an article describing the latest business model created to combat the troubled music industry. The new company, aptly named Recrd Lbl (Record Label) utilizes advertising to generate revenue enabling users to download the artist’s music for free (much like Spiral Frog). The company is a joint venture between Peter Rojas and Downtown Records with advertisers such as Virgin Air having signed on. The artists do not make money on the advertisements and are paid a one time amount per song, ranging from $500 to $5000. The company admittedly is an experiment for it’s owners to determine what the future landscape could look like. The most telling item in the article is a comment by John Deutsch, chairman of both Downtown Records and Rcrd Lbl.

“If you’re not trying to monetize the experience of sharing music, you’re slowly going out of business.”

Mr. Deutsch has identified an important distinction between monetizing the downloading of music and making money through file sharing. His awareness may end up being the primary reason for the success of this business, assuming they do succeed. I would also think that they would create a strategic partnership with someone like imeem which is currently one of the fastest growing social networks focused on music. Rcrd Lbl does have a social aspect in that a blog is there primary promotional method on the site. This advertising based model is different than the one that Edgar Bronfman the CEO of Warner music group talked about in a recent television interview, which defined the role of the music label as a marketing company for the bands that they have signed.

All of this shape-shifting comes as no surprise to anyone who has been following the slow painful death of DRM. From Steve Job’s open letter in early 2007 to Nine Inch Nails recent declaration of freedom the music industry has become the poster child for what is to come. The recent release of Radio Head’s all digital offering In Rainbows not only received a lot of press but was also another attempt to define a new model. On average people paid $6 for the download and the band will release the CD/vinyl on December 31st. I’m very curious to see how the hardcopy sells.

DRM obviously applies to all forms of media even though music has been getting the lion’s share of attention. In December 2004 Google announced it’s plans to begin scanning books with the goal of sharing knowledge unconditionally with anyone that has a computer and an internet connection. They of course were up front about supporting the endeavor by having links to buy the books and advertising. MIT also allows free access to its courses. (They most likely will not be supplanting their MITOPENCOURSEWARE with advertising as their endowment for 2007 totaled $9.98 Billion.) Google’s YouTube handed over the personal information of their users that illegally uploaded episodes of 24 and The Simpsons and in late August NBC left iTunes. These are a few examples of the struggles that exist in creating new business models and yet to date, advertising is playing a key role in all strategies.

These new models beg the question of whether or not we are going to receive all content in the near future in exchange for seeing ads. (Even with behavioral advertising that could be pretty painful.) Maybe we will be given the option. “Click button A to pay for your eBook or watch this branded entertainment moment by Audi before downloading your eBook for free.” That would be nice to have a choice. Radio Head’s model, in my opinion, is a little too permissive. Granted they did make an estimated $2.7 million in the first month but what if they were a new act and had caught fire? With 65% of listeners downloading for free they would have left an enormous amount of money on the table.

The next question is whether advertising provides a sustainable model for DRM free content? We have all seen Google’s transition from a search engine to an advertising empire but what if the economy turned South and ad spending decreased to a level that would not support these new models? (The economy is scheduled for a downturn next year due to all the factors we have been reading about: increasing price of oil, the ongoing wars, the decreasing value of the dollar, the Web 2.0 bubble and the continued subprime/real estate fallout.)

I recently met with a client that wanted to create an application that enabled Facebook and Salesforce users to access his online application. I explained to him that we would be able to do that since they both had APIs. I then went on to describe how the most popular applications were moving through those social networks and gave him a rough estimate of how many users we could have within six months. He said “That’s great. How do we monetize that?” I replied that advertising is currently the only way that I know of to monetize under this model and he asked about selling subscriptions at a discounted rate or giving them away for free for the first year. I explained that the subscription model simply does not work online. People are used to utilizing quality applications for free.

I guess the question really is; When will advertising kill DRM?