Summary:

At the Digital Music Forum East in New York today, Thomas Hesse, President of Global Digital Bus., US Sales & Corp. Strategy at Sony (NYSE:…

Thomas Hesse
photo: Flickr/ TheStalwart

At the Digital Music Forum East in New York today, Thomas Hesse, President of Global Digital Bus., US Sales & Corp. Strategy at Sony (NYSE: SNE) Music Entertainment was the keynote interview, and he gave a lot of details on the company, state of the industry, and how he sees the market shaping up with services like Spotify, Mog etc.

State of revenues.
— Market has declined, and lower growth rates in digital acknowledged. Though, there are different businesses in digital that are showing different growth rates. Overall the value growth in digital downloads ‘continues to be strong.
— Ringtones. Hesse bucks the traditional thinking on ringtones, still ‘quite a bit of growth ahead in the ringtone business,’ based on improvements presentation, experience, platforms, packaging, etc. But ringtones declined 30 percent last year, per Hesse.
— Digital is a ‘portfolio of different businesses that perform differently,’ as the ‘s-curve of innovation has flattened out,’ Sony’s challenge is to get ‘a new s-curve growing’.

Subscription services, Spotify, etc.

– In the US, traditional subscription services, ‘in the aggregate there was no growth there,’ ‘principally an issue that we’ve had for a while,’ it has ‘exacerbated over time,’ ‘there hasn’t really been a great device-service component to these services.’
MOG? Referenced indirectly as the $5-per-month unlimited streaming service. Either way, ‘It doesn’t work on the iPod,’ and it’s ‘PC only,’ according to Hesse.
— Subscription development in the US may be flat, but newer services are coming out – bundled, with carriers, other services like Spotify, you could see, ‘100,000s of subscribers developing quite rapidly’
— Why no Spotify yet (or similar services)? Hesse vaguely pointed to licensing issues, though a major theme for Hesse is the connection between service and device.
— Also, for these services to be successful, presentation is critical, ‘we’ve got some services that have got that down’
— But Spotify again? When asked if he would bet $10 for or against the service launching in the US, ‘I would bet $10 for Spotify launching in the US,’ they ‘have a lot going for them.’
— Outside of that, in developing countries that ‘aren’t so PC-focused,’ there’s ‘a lot of life’ in phone-based services.

Broader picture?
— Mass market has not been addressed by digital music, according to Hesse. A ‘single-digit’ percentage of the US population – less than 5 percent – gives more than 80 percent of the download revenue. ‘The actual consumption of digital music has not yet reached the mass market,’ this is about ‘enticing them with something attractive’.
— Also pointed to massive piracy reductions from free services, noted that ‘conversion from free to paid’ are ‘really quite amazing’ on many free services (ostensibly in Europe)…
— What are the conversion percentages? ‘It’s high,’ including ‘single digit to double digit’ movements in some cases.

Vevo, good for artists?
— Yes, ‘we used to make videos purely for promotional purposes, but we didn’t get a dime,’ hence licensing deals and per-stream fees. Then, YouTube rolled in, eventually leading to more per-play fees. ‘Consumer interest in these videos were so vast,’ they were ‘even burning a hole in Google’s pocket,’ and that, coupled with serious affinity issues led to the creation of Vevo.
— Industry needed an environment in which ‘advertisers would have real interest,’ ‘hence Vevo,’ and integration within YouTube attempts to draw traffic.
— This is ‘actually a business that has a sustainable revenue base,’ we license the content to Vevo, then Vevo pays labels a fee, though ‘we’re funding those startup losses… we’re creating a company… it’s a business-building exercise.”
— The Vevo exercise ultimately creates ‘an income stream for the writer,’ according to Hesse.

The embed issue?
— Kenswil notes that many of those videos are having their embed switch now turned off. Vevo’s API once allowed ads to be stripped away, but Hesse noted that Vevo will be selling the advertising around its videos. Furthermore, artist sites themselves will be using Vevo vids.

Ultimately, where do future revenue streams come from?
— Major opportunity from devices coming into the market, users coming online (30 percent not online still in the US). Opportunities from bundling (carriers, hardware), and upselling into premium. In five years, CDs will probably account for 20 percent of the market, leaving 80 percent digital. Of which, downloads will still be a ‘very important component,’ followed by streaming.
— But will more revenues come from services or products? Always some sort of reliance on third-party retailers, though a direct-to-consumer business will also emerge. But currently that ‘we get the core business right,’ the ‘audio-visual component’ right.
— Also, the artist sites offer ‘completely new ways of artist retailing,’ especially for higher-end, superfan-focused products.

Music in the Cloud
— ‘Next innovation in music,’ ‘about creating a service environment that works regardless of the machine you’re using,’ meaning PC, cell phone, TV, stereo, etc. ‘All of the devices play in the cloud,’ so when a playlist changes on one device, ‘by miracle,’ it changes on all devices ‘as if by magic’.

The Rights Mess
— Kenwswil, ‘you need a good lawyer,’ a crowd member says you also need ‘a cheap one,’ to which Kenswil retorts that a good lawyer is never cheap.

This story has been provided by our content partner Digital Music News.

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