@ Digital Music Forum: Keynote Interview, Thomas Hesse, Digital Pres. SonyBMG; Physical Not Dead

The common theme through today’s Digital Music Forum East: physical music is for all intents and purposes dead, or if it’s not dead, its only role is as a collectible to complement the digital good. Last January, Sony (NYSE: SNE) BMG merged its digital and physical distribution businesses, appointing Thomas Hesse as president of global digital business & U.S. sales. Hesse, who still has a mandate to sell CDs, offered a more nuanced view on the interplay between physical and digital distribution during a keynote interview with John Frankenheimer of Loeb & Loeb… cynics, of course might say that the nuance is just a function of wishful thinking. You be the judge.

Physical: “I have a slightly more upbeat on physical than some people… in today’s world, not everyone is going online.” He noted that the US online penetration is at 70 percent right now and that number won’t grow very rapidly at this point. He cited some retailers who see opportunities in being the last store standing in the physical CD world. He also talked up things like download cards that can be sold in physical stores, or other physical items, like tickets and t-shirts that have a digital download attached to them. He also touted CDs that automatically connect the user to something digital when the user rips the disc. “Half of people who buy CDs end up putting them in their computer.”

Amazon: “It’s great to see a player that’s had such incredible success on the internet build a digital download store… It’s very early days.” Again, Hesse sees Amazon (NSDQ: AMZN) as being in a position to meld physical and digital sales.

Long tail: This is an important concept, but it’s easy to over apply or get too caught up in it. “What I find remarkable is that sometimes the long tail tends to be exaggerated … there’s a very large revenue that comes from still a small percentage (of titles).” Often, the economics don’t (yet) justify digging deeply into the unreleased archives. However, this is just a matter of time…”Ultimately we’ll get there, everything we’ve ever released in any territory ”

New digital models: Hesse predicts the rise, of niche, vertical online retailers. So, for example, there will be services that directly target fans of jazz or show tunes and can do a better job of selling than the mass vendors. Also, subscriptions: “The biggest opportunity we have is to create an access model to the consumer, where the consumer can consume the music in a virtually limitless way.” Earlier, though, he did note that, for now, subscription revenue is not a significant source of digital revenue, as compared to plain vanilla downloads.

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