Foundry Group recently invested in Next Big Sound, an online music analytics and insight business based in Colorado. Jason from Foundry writes:

As part of this future there will be new opportunities created to service these new direct-to-fan and Internet marketing models. We believe a key opportunity involves data. Currently, the industry-norm data report is from SoundScan. For thousands of dollars per month, industry professionals are able to see how many CDs and digital downloads have been purchased along with how many plays have occurred on terrestrial radio. We believe that this report is already mostly irrelevant. 

Sweet! This is encouraging as it further supports our investment thesis behind Feilio (Noank Media), a platform that measures digital content usage, that data will not only drive new opportunities in the music industry but also form the foundation for next generation business models. While it has taken longer then scripted for the industry to come around we remain optimistic that the tide is turning.

A new article about our portfolio company Feilio (Noank Media) in today’s New York Times titled “Building the Tools to Legalize P2P Video-Sharing” by Janko Roettgers. 

Would you be willing to pay your ISP five bucks a month to be allowed to download as much as you want from torrent sites and other file-sharing hubs? The idea of legalizing P2P through such a flat-rate licensing scheme has been getting more and more traction within the music industry in recent months. Noank Media CTO Devon Copley believes his company can be an essential part of such a flat-rate model.   

Click here for entire article. 

Today’s New York Times ran an article titled “Studios Try to Save the DVD” which mirrors an earlier post we filed titled “Why Warner Bros. did Toshiba a massive favor by going with Blu-ray (Rock Lobster)” after Toshiba bowed out of the HD format race in early Jan ’08. The Times article reads:

But the victory of Sony’s new Blu-ray high-definition disc over a rival format, Toshiba’s HD DVD, masks a problem facing the studios: the overall decline of the DVD market. [US] Domestic DVD sales fell 3.2 percent last year to $15.9 billion, according to Adams Media Research, the first annual drop in the medium’s history. Adams projects another decline in 2008, to $15.4 billion, and a similar dip for 2009.

We suspect the decline in DVD sales will accelerate in 2008 falling more than 11% to about US$14.3 billion in the US (need we even talk about China?) on the back of the proliferation and growing acceptance of the Internet based ad supported digital content model (free stuff), lower bandwidth costs and fatter pipes. Indeed, five years from now DVD sales will be 50% lower (conservatively) then where they are now.

Why the doom and gloom?! I mean, won’t the Studios come up with cool new interactive features that will pull consumers into their DVD web?! Not going to happen.

Okay, so what about all those ad supported models, you know those ones that give streams away for free yet charge for digital download or physical DVDs? This must be the answer the industry is looking for…right?! Hey, we’ve got all those social networks to monetize. Those dudes totally want our stuff. Hoorah! Hoorah! Hoorah! We’re saved…

Well, boys…you might want to sit down with Google and ask them about their ability to make money off social networking. Better yet…let’s chat with Google’s CFO George Reyes about 4Q 07 revenues. Hey Reyes, what’s up with Google’s US$900 million deal to supply ads to Myspace? According to a recent BusinessWeek article Reyes states:

“…[in 2007] social networking inventory is not monetizing as well as expected…”

Anyway you look at it…this whole selling content (both online and offline) is a genuine mess. Mark our words: 99% of all ad supported content models are doomed for failure. Why? For so many reasons, such as: (1) Because once a content provider does a deal with Google why would you go anywhere else to consume the same content? and (2) Ad revenues are going to polarize around “non-trendy, Web1.0 sites”, such as CNN.com where consumers are accustom to seeing advertising; and as a result of this polarization we’re going to get a lot of very unhappy dissatisfied studios, labels and artists hoodwinked by flashy sites promising sacks of cash. Whatever!

Moving forward, we think on-line ad supported content models will be the main catalyst (second only to online piracy) behind the continuing eyeball popping deflationary pressure on content for the foreseeable future. And no one will make any money (sans one or two sites) to boot. Talk about a pissed off world looking for CHANGE!

There is light at the end of the tunnel (cue soapbox) but a lot still needs to be done: The answer is blanket licensing at the ISP level…full stop. This is the only way to to properly compensate content providers and ensure some amount of recurring income those companies aggregating and distributing content on-line.

Lots of good stuff coming out of this week’s Midem Conference in Cannes, France – in particular, Kate Holton’s Reuters article titled “Music industry tries carrot after years of stick” where U2 manager Paul McGuinness comments that music could be provided as part of a subscription service for an Internet service provider. Holton writes:

“…the time had come for new thinking on how the music and technology sectors worked together, saying their ‘snouts have been at our trough feeding free for too long’. He touted the idea that music could be provided as part of a subscription service for an Internet service provider in the same way that some mobile phone companies have worked, with the revenue being shared…”

Below is the video from McGuinness’s speech that is posted on the MIDEM blog.Also coming out in support of this bundled sub model is International Music Managers’ Forum secretary general Peter Jenner in his blog titled “Thoughts on the Challenge of the New Digital Reality for the Recorded Music Industry“. Jenner notes:

“…this fee could be low…and be introduced as part of the bundle of features offered by the networks. The price should be negotiated by the music industry with the broadband and telecommunications companies and subject to renegotiation from time to time. A ‘feels free’ solution such as this makes sense for all parties and has the added benefits of making piracy economically unattractive as well as making the consumption of music free to consumers at the margin…”

For those keeping notes, this model was first suggested and implemented by Beijing’s very own Feilio.

We’ve been mouthing off for a long time (okay, a couple years) that eventually the stars will align and content providers (music labels, studios, publishers) with wake up to the benefits (and inevitability) of blanket licensing (BL) for digital content over the Web – we believe 2008 is the year that you’ll see BL jet in from obscurity and become “mainstream” in the digital content (music, video, and text) space.

Below are three articles/industry guys calling for the same thing:

Subscription Question Goes 2.0, Theoretical Possibilities Abound is from Digital Music News (thanks to Eric for emailing this to me) where leading music attorney Kenneth Hertz notes that…

“…this is the year that labels will embrace blanket licensing.”

Music Lessons is Seth Godin’s post where he lists 14 rules to live by in the music business – note that it takes him about 12 rules before he finally concludes that blanket licensing is the now but he gets there, and thus makes our list. Seth writes,

“The music business has thousands of labels and tens of thousands of copyright holders. It’s a mess. The biggest opportunity for the music business is to combine permission with subscription. The possibilities are endless.”

Last Major Label Gives Up DRM Related Issues, posted on Electronic Frontier Foundation by Fred von Lohmann knocks the covers off the bed with his posting and states:

“Next step (and I hear that at least one major label is considering it) will be a blanket license for music fans — pay a small monthly fee, and download whatever you like, from wherever you like, in whatever format you like. This is the inevitable end-game in a world where file sharing remains hugely popular and the labels want to prevent new retailers (like iTunes) from controlling distribution.”

Look, there are hundreds of content sites in China offering very similar experiences and content, all driving for that same advertising dollars – and yes, one or two of the free sites will remain, but by and large the odd US$200 million that has been invested in China’s user-generated/file sharing start-ups over the past couple of years will be earn a very low return (if anything at all).

Indeed, the business that learns (and is capable) to fully integrate blanket licensing, and thus can roll-out a legal digital content subscription model (on the back of fighting for those advert dollars, as an added revenue stream) is going to dominate this industry as they will have a sustainable business model.

And what’s more, think of the blue sky business opportunities (i.e. think lightweight applications running on top of this infrastructure) that present themselves once a developer/user has unrestricted access to 100% legal digital content – we’re talking virtual goods meets physical goods meets a online/off-line experience. To wit, this is the sort of excitement blanket licensing brings to the mix – to a digital content platform.

2008 is going to be a significant year in the content space – we’re expecting this year will kick-off several years of significant consolidation and flame-outs across the start-up board – putting premiums on ventures, such as Feilio, that have fully integrated blanket licensing at the core of their business models, and thus are positioned to weather the coming storm.

What’s missing from this excerpt of an article by Diane Garrett in Sunday’s Variety?

“…Warner Bros. will throw all its weight behind Blu-ray later this year, a decision that could serve as a death blow to the rival HD DVD format…”

I think something along the lines of “…Warner is doing Toshiba a favor by killing off their dinosaur…Sony should only be so lucky.” Indeed, Warner, in selecting Sony, just saved Toshiba over US$150 million in inceptive and junket fees – i.e. pay-offs to studios to adopt the HD DVD format – money that can now be used to invest in any number of content/community related start-ups/enterprises seeking to monetize digital content in such innovative ways that would never be possible in a clunky electronics behemoth.

Honestly, in a couple years, drawing hints from the performance of CD music sales (2007 Christmas shopping season saw CD music sales dropped 21% over last year) and the growing industry wide movement towards DRM free music tracks, where can the DVD industry go but down…down…down. (Rock Lobster, anyone?)

Hey, I get it, DVD sales still generate billions of dollars (about US$16 billion) in annual sales for studios…so, yeah, they’ve got to figure out a way to mellow the inevitable revenue erosion but is the solution Blu-ray and DRM?

No way…you can just smell the mindset of studio honchos…it just reeks of 2001 all over again (and yet, maybe we never left 2001). Isn’t it evident by now (after all the carnage from the music industry) that the solution is not new packaging or delivery format/technology but rather the solution is a complete 180 degree shift in the existing business model – or am I missing something?

Last week, Martin Soong, host of CNBC Asia Squawk Box, chatted Feilio CEO, Eric Priest, about why Feilio is one of China’s most innovative digital content services and how it could very well play an important role in resolving the ongoing screenwriter’s strike in America.You have the option to watch the video below or listen to the podcast.

Nokia’s new “Comes With Music” service – announced this past Tuesday – shows Feilio’s business model is right at the cutting edge. Nokia will bundle unlimited (though DRM compliant) music downloads with its very high-end mobile phones, for about US$5 per month.

Nokia still has some issues to overcome before its offering will be more attractive – like DRM. But we see this as a very positive move forward in the marketplace as it sets a good precedent for Feilio and their model. The bundled content strategy has now been endorsed by a major consumer electronics manufacturer (Nokia) and a major record company (Universal Music Group).

Nokia built its own back-end, which we believe will ultimately limit the Nokia service’s effectiveness. Feilio, on the other hand, has built the first open blanket licensing platform in the world that can service not only multiple licensees (e.g. many ISPs or handset manufacturers, not just one) but also multiple kinds of licensees (e.g. handset manufacturers, ISPs, and literally anyone that wants to bundle a content subscription as a value-add to any product or service). We believe Feilio’s right at the forefront of where media is headed.

On Tuesday, Sherman So from the South China Morning Post wrote “while the world’s big four music companies have failed to stamp out piracy in the mainland, Feilio, a Harvard university venture, may just have the solution…” read entire article

A couple days ago, HBO (Home Box Office) petitioned the FCC (Federal Communications Commission) in the United States to prevent consumers from recording their content (Subscription Video On Demand) – either with a VCR, DVD, or TiVo device. Sure this doesn’t have a direct impact on those of us living in Hong Kong and China – where HBO doesn’t have the traction it has in the US – yet HBO is representative of the losing battle the incumbents (broadcast networks) fighting – and losing dearly.

My general thesis is that all content will be free in the very near future and that DRM (Digital Rights Management) is not a sustainable technology. I’m not supporting piracy; I just believe it will be very difficult to generate any revenue from content alone. Where the money will be made is on product placements and side promotions, for example. Listed companies, such as Tom.com are spending a lot of money in rights to content that they won’t be able to control – in other words, their business strategy is dead wrong.

The companies that will be the winners, the next Google, will be the companies that develop technologies to harness, distribute and monetize this free content. Yahoo, for example, if a big buyer of networks and page views (note its purchase of Flickr’s 8 million users); yet they are not a buyer of technology…

The reason I believe this sector (e.g. BitTorrent) is a massive opportunity for start-ups is simply because there is: (1) demand, (2) users, (3) exits. The “demand” and “users” are clearly defined, but the “exits” – how will they come? I believe “exits” will come from the major portals, such as Baidu, Sina, and Tencent. The reason is simple: these listed companies can’t develop this technology in-house, but it isn’t because they don’t have the capability, it just that they can’t be seen publicly supporting file sharing, for example.

This is why technology start-ups (in this space), especially in China and Hong Kong, are so attractive (at least to us) and why we believe the next MONSTER company will come from this space.