SAN FRANCISCO (CNN/Money) -
The music industry surprised me this week. One of the major labels finally realized that the way to pull itself out of the industry's plummeting revenues and rocketing piracy problems was to reward and incentivize -- not punish -- its customers. That might seem like elementary business logic, but coming from the labels and in light of their previous digital strategies, it's pretty shocking stuff.
Here are the details: Vivendi Universal's (V: up $0.68 to $13.55, Research, Estimates) Universal Music Group announced that each CD of the new Bon Jovi album, "Bounce" (due out Oct. 8), will feature a unique serial number. Purchasers of the album can enter the serial number at www.bonjovi.com, fill out some personal information, and in turn receive access to a number of exclusive offerings -- such as first dibs on concert tickets, downloads, even the chance to hop up on stage with the band at a performance.
How is this revolutionary? It's one of the first times a record label has shown that it can compete with free -- that is, the free music widely available on the dozens of file-swapping programs -- by offering products and services that consumers can't get anywhere else. It's also one of the first times that a label has attempted to fight digital piracy by doing something other than filing lawsuits or targeting individual users.
The industry could use a jolt. Overall shipments dropped 10.3 percent in 2001; that came on top of an ugly 2000, when overall shipments were down 7 percent. This year isn't shaping up to be much better. Year-over-year comparisons for the first six months of 2002 show total shipments sliding another 10.1 percent. The industry places the blame squarely on online piracy, and its strategy has been to chase the pirates through the courts. But on Oct. 8, we'll get a first look at a kinder, gentler, possibly more sensible music industry.
"This is tremendous," says Jonathan Potter, executive director of Digital Media Assn., a Washington, D.C., trade group that represents online media companies such as Amazon (AMZN: up $0.45 to $17.80, Research, Estimates), Microsoft (MSFT: up $0.75 to $48.04, Research, Estimates), and RealNetworks. "The labels have been saying all along that they can't compete with free, but there is a way to compete with free: high value content that's virus-free and gives people the chance to be first in line to buy expensive concert tickets. This is like loyalty clubs at the supermarkets."
The program is a smart one any way you dice it, but in addition to merely getting good press and valuable information on the Bon Jovi fan base, some longer-term benefits come into play. First, it's low-cost. Representatives of Universal and Bon Jovi would not disclose actual costs, but the promotion involves little overhead for the band or the label. Second, "the offers are regenerative," a band spokesperson says. This isn't a one-off promotion; this could produce long-haul, direct relationships with the band's fans. Third, e-mailing news and promotional updates to the Bon Jovi faithful gives Universal the opportunity to suggest related artists and break new bands on the cheap.
That last benefit is particularly compelling. The traditional method for introducing new bands is through commercial radio, but in the last six years, radio has consolidated tremendously, with behemoths such as ClearChannel owning more than 1,200 stations nationwide. The result? Less diversification, and therefore less opportunity to break new acts, leading to overreliance on aging superstars, leading to diminished sales. This radio consolidation has made it "very costly for the labels to break new artists," says Phil Leigh, a digital-media analyst with Raymond James & Associates. Using promotions such as the Bon Jovi program as a Trojan horse to get new music to fans is "a peek at the future," he says.
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Of course, building a direct relationship with fans could put the labels at odds with retailers like Tower Records, which have traditionally enjoyed the direct relationship with consumers. "The labels going straight to the consumer has retailers more nervous than a cat with deaf kittens," Leigh says.
But the label/retail confrontation most likely is a long ways off, and it might not come to pass at all. DMA's Potter predicts that the record industry could work out a partnership with retail whereby retailers would get a cut of additional sales from the "qualified leads" they give the labels. For now, however, Universal and Bon Jovi are to be commended for pursuing a positive approach to combating piracy. Winning in a market as tough as this isn't done through the courtroom, but rather by treating the customer with respect. "You win in this market by innovating," Potter says. "You don't lose money by appealing to fans."
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