How Warner Music Killed Facebook Music

[Lex Paul]

TechCrunch.com

Interesting to hear about LaLa in this story.

How Warner Music Killed Facebook Music

Michael Arrington
TechCrunch.com
Wednesday, January 14, 2009; 11:23 PM

Facebook's ongoing effort to launch a free streaming music service is stalled, according to multiple sources familiar with the situation. The company was close to a deal that would bring free streaming music from three of the four big labels (Universal, Sony, EMI) through the Total Music joint venture. But the deal stalled when the lone holdout, Warner Music, refused to participate.

Through most of 2008 Facebook said on and off record that they had no real interest in their own music service and that third parties like iLike could continue to build their Facebook music applications without fear of competition directly from Facebook.

News leaked in the Fall, though, that Facebook had approached a number of third parties to power the official Facebook music application:

We believe, based on discussions with a number of sources, that Buzznet, iLike, iMeem, LaLa, Last.fm, Rhapsody and other services were contacted and provided with a document (sometimes referred to by sources as a RFP (request for proposal), other times called a term sheet) that outlined certain goals of the new Facebook music service.The RFP requires the third party service to build and power a new Facebook Music Service that offers free music streaming and playlists, music downloads for a fee, and other music merchandising services such as ringtones, concert ticket sales and physical goods like tshirts (if this sounds like MySpace Music, it?s because it is exactly their model). The service must not only handle front end user requirements but must also be able to handle the very tricky tracking issues required by the labels to monitor music streams and fees.The RFP also includes onerous termination provisions that allow Facebook to take ownership and control of the service and the user data under certain circumstances. In return, say our sources, Facebook will offer the third party a split on revenues generated from the service.We?ve heard conflicting accounts of who will pay for the big up front fees labels require to get a music service up and running. Some estimates of prepaid royalty requirements are as high as $100 million, which Facebook is looking to avoid paying themselves. Other sources say that Facebook may be willing to pay these fees if they can?t force the third party to take them on.

Many people, us included, saw this as a new effort by Facebook to tackle the music opportunity. But our sources say it was actually near the end of a year-long effort by Facebook to launch their own free streaming music service in partnership with Total Music. Only when those discussion faltered did Facebook reach out to other third parties.

Total Music And Facebook

Total Music, a joint venture by Universal and Sony BMG, has had Facebook target from the beginning. The labels approach the Internet from two directions. The first is the command and conquer approach, which is how imeem, MySpace and others were neutered. Sue the hell out of whoever dares to host music online, then cut a deal with them that brings in millions of dollars in penalties and fees.

The second approach is what Total Music is all about. The service, which acquired Ruckus to handle the back end, is striving to cut two types of deals. The first is with device makers to allow music to be accessed directly from the device for free. The device makers pay a fee to Total Music, which is passed on to the consumer. The second type of deal is with websites - who get to stream music for free with advertising. The revenue from those ads, plus a lot of user data, is owned by Total Music.

That's the deal that Total Music approached Facebook with. Facebook would get free streaming music (while rival MySpace paid a fee per song played). Total Music would serve advertising and keep all the revenue. Facebook would also hand over user data to allow Total Music to port playlists to supported devices and other services.

The deal never happened and looks like it never will. Some sources say it was because Facebook didn't want to hand over all the revenue and user data, and so they reached out to third parties to get a better deal. But others have a different explanation which makes more sense. Warner Music refused to allow their music to be accessed for free.

Warner, a big shareholder in LaLa (a service we've raved about) - they took most of the company's recent $20 million venture round. They've been pushing LaLa heavily to Facebook.

But LaLa's model requires users to pay to stream music, a non-starter for Facebook and any serious rival to MySpace.

That leaves Facebook in a tough spot. Venture dollars to fund a big new streaming music service have dried up, so its unlikely that any third party will be able to pay the tens of millions of dollars it will require to get a MySpace Music-like deal done. The Total Music deal is being blocked by Warner. And LaLa's business model just doesn't work with what Facebook wants to do (free).

That means Facebook either needs to pay, or Warner needs to budge. Neither may happen, and rumor is that Total Music's political capital at Universal and Sony has all but dried up as they struggle to complete the Facebook or any other deal.
© 2009 TechCrunch

[DaveD]

A lot of words in the article to say...?

In the end, there's no story at all. Only an unattributed assertion that Warners killed Facebooks music (which is pretty much debunked by the rest of the article that explores other solutions Facebook elected to ignore on their own). No story, just words.

This is the kind of FUD (Fear Uncertainty and Doubt) being used by both sides in a battle over ethics. The labels love to paint themselves as victims, everyone else loves to paint the labels as the aggressors. In truth labels are more like, tortured, cornered animals at this point with no chance to escape. The Consumer Electronics industry will beat this dying horse long past it's inevitable expiration to make a couple extra bucks.

Every model mentioned here is flawed by the interests of it's purveyor. Each side sees this as a zero-sum battle, where there's no such thing as win-win, only win/lose. That's why the tactics are so brutal and harsh. That's why we're still fighting over the same scraps, with no progress whatsoever, 5 years after the opening of the iTunes store. Hell, Apple just allowed market-based pricing LAST WEEK! It may well be that all of these beasts go belly up to fix what's broken. Fortunately W has done his level best to bankrupt everything but oil, so realignment is more possible than ever.

If there's a story here, it's that Facebook is chasing MySpace, a passe first draft at social networking rather than rolling their own concept. It suggests that unlike Google, Facebook lacks vision and in-house expertise to get things done. I see lots of artists and peers graduating from MySpace to Facebook of late, but the truth is both are pretty old hat, more Web 1.9 than 2.0. Facebook is just a grown-up MySpace, and MySpace is just a fluke of it's times, flush with Murdoch cash to inflate it. Neither has proven much benefit to artists - a lot of bands with thousands of friends still can't buy groceries. That's not progress, that's devolution.

Ad-supported music remains mostly a pipe dream on the web. It will get there, and Facebook seems to realize monetizing user data is the key, based on this article. They just can't figure out what to do with it. Don't blame Warners for Facebook's inability to make a deal... in fact forget the majors entirely! The failure is all Facebooks. This is a story about Facebook's hollow core, not major label greed.

-d-

[Lex Paul]

The article was somewhat of a "who done it" for what is still an open case.
I don't know that Facebook are chasing Myspace at all. They are simply realizing like minded opportunities, that people socialize through music and friends. But it's important that the majors (i.e. WB) be mentioned, as they play a very important role in the changing of the industry, whether they play a role in its future or not. And Myspace is important, even if bands are still struggling, because it represents one fairly large avenue for exposure and sales.

Here is yet another story on this Facebook music service topic on Venturebeat.

Lala, Qloud may be leading contenders for Facebook music deal
By Eric Eldon | January 15th, 2009

Two online music companies, Lala and Qloud, are the leading contenders for a partnership with Facebook on its prospective streaming music initiative, I’m hearing. They’re not the most prominent companies Facebook has talked to about a potential deal, but from my understanding, that’s the point. Facebook will undoubtedly call the shots in any partnership. Neither company is especially established, and both could have more to gain from a Facebook partnership than continuing solo.

However, it’s not clear how serious the entire initiative is at this point. Facebook has also been considering scrapping the music idea or even building its own music service. It’s also spoken with a number of other music companies, including Last.fm, imeem, Rhapsody, iLike, and others about a possible deal — and I hear it is still talking with some of them. The problem is that those other companies are established. Among other issues, they’re not in positions to change their services based on what Facebook might want to offer.

I’ve asked Facebook for comment — although it’s about midnight right now and based on previous responses about their music initiative, I don’t expect them to say much now. I’ve also emailed Lala and Qloud. For what it’s worth, Lala gave me a non-denial denial when I wrote about them being in the running for a Facebook partnership, several weeks ago.

What might a Facebook music service look like? Sources have previously told me that it’d be similar to some of the other music services already out there, except more directly integrated into Facebook. You might be able to create and share playlists of full songs with your Facebook friends, for example. Songs or playlists could then appear on your profile feed and in your friends’ news feeds. There might be options to purchase tracks, find concert tickets, and other related, money-making features.

It sounds pretty cool. It would certainly be a great fit with Facebook’s overall vision of helping people share information with those they care about. I’ve also heard there’s quite a bit of internal turmoil about the project within Facebook. One issue is that iLike has already developed many music-sharing features — although not the crucial feature of letting any Facebook user stream a limitless number of full songs. That feature is restricted for iLike — and for most other music services — due to licensing limitations imposed by music record labels.

Facebook has previously promised to compete with third parties such as iLike on a “level playing field,” but it has also given its own applications special privileges. As I covered in a very long-winded piece last month, Facebook has the tough choice of either standing by old promises to developers on the platform or, at least in some cases, changing its stance to try to better fulfill its broader vision.

Music licensing, in any case, isn’t just about iLike. If Facebook goes ahead with a music service of any sort, it would also have to confront licensing issues, but it could possibly have the clout to work out a better deal. Or maybe not.

As one of my sources for this story put it:

So if iMeem paid [the labels] tens of millions, and Myspace paid $120 million, the [labels] have been licking their chops over Facebook for a long time and cannot wait for the kill. The labels are also equally eager to perpetuate the perception that Facebook is very close to doing a deal. There are individuals at these labels whose job for the last 12 to18 months has simply been to hound Facebook. Meanwhile, the whole point of Facebook’s strategy in the last few months was, “maybe we can get music for free, by finding some hapless middleman to pay the pound of flesh.”

While some of the more established companies in contention may have been willing to put up $100 million or more to deal with the labels before the economy tanked last September, they’re no longer in a position to. They don’t have access to that kind of money for such a plan. Meanwhile, record labels aren’t seeing lots of revenue from other streaming music services — they want the upfront cash. If a Facebook music initiative happens, they’ll likely try to get money from Facebook, too. Finally, Facebook can’t really afford to offer anything more restrictive than rival MySpace’s free, streaming music service

If the apparent front-runners are services like Lala — whose business model is to charge consumers for music streaming — it will be interesting to see whether Facebook can actually succeed in getting the one crucial feature it set out to secure: unlimited free streaming.

[DaveD]

One aspect of all of these stories that strikes me is the concept of "partnership" among Web 2.0 proponents. Without getting too deep, the world is shifting away from true zero-sum economics (there's a finite number of atoms on the planet that can be configured in a finite number of configurations) to a compounding-value economy (bits are limited purely by imagination and can be delivered anywhere on the planet nearly instantly on-demand). These perspectives are mutually incompatible and equally flawed in fundamental ways. Today we live in a zero-sum world, where physical value is compounded with data in infinite combinations. Facebook and MySpace are treating music providers as if their product is essentially worthless outside of a recognized branded container. Think: Bottled city water. At the same time, they're charging advertisers and attracting users with a big-fat compound-value lie: they're delivering infinite value to streams of captive users. But of course, as web advertising has expanded to every corner of the www, it's cost has steadily dropped because it's effectiveness is questionable.

I have to laugh when I read these "new ideas" and schemes. Facebook and MySpace are a pox on the houses of all music creators whom they insist should be satisfied with "valuable" "exposure" on their platforms. Major labels are a pox on the houses of all consumer electronics makers and web 2.0 vendors as they insist on getting paid for their content ear-by-ear. Fans have placed a pox on both their houses, as they've all proven themselves to be self-centered old-timey zero-sum players. Web 2.0? Gimme a break! You can't have a "social" world with scalable value until the vision is internally consistent, end to end. None of these ideas are.

Facebook wants to strip IP from smaller companies doing work they're either uninterested or incapable of doing. Rather than adapt their own aspirational goals to a working business model, they seek to adapt the working model to their aspirations. That's very post-modern, and mashups are a good short cut. But when the aspirations medieval and feudal in nature, well, not so much. Divide/conquer, aggregate/monopolize are at least as old as Alexander the Great. Nothing new there. Mashing grotesque industrialism with slick modernity and openness isn't just anachronistic, it's silly. It cannot work, as Facebook is discovering. Facebook is offering such self-serving, lousy terms, only the weakest and dumbest of companies will respond, dooming it before it's born.

If Facebook is serious they need a fundamental change in attitude, not a change in vendors or technology. A true "partnership" doesn't stack the deck in favor of the most powerful partner, but shares the wealth according to each parties real contributions. It's rare to never that "web 2.0" darlings enter into true partnerships. They're still run by backwards, 20th Century industrialist MBAs and lawyers who were brought up and educated in a zero-sum world. Boomers and many gen-x'ers are incapable of grokking non-zero sum models. Indeed, as recently as the 1980s, conventional wisdom in business schools formally rejected the possibility of "win-win" scenarios at the economic level (there is always a winner and a loser, a winner who surrenders a pre-existing advantage to a partner and negotiates an equitable deal is by definition a loser). The biggest problem our economy faces today is this generational disconnect: the people sitting on corporate boards reject contemporary business and management strategies reflexively. So, younger managers must speak the language of their zero-sum bosses, which they really don't believe in, and subversively introduce real innovation. It's hard to sell truly revolutionary ideas to people who are wired to reject your thesis and emotionally invested in the idea that your gain is always their loss. All of these deals have that in common - Facebook wants hegemony over the creations of others, they want those others to assume all risk and give up most reward, and will ultimately saddle the partner with the blame for inevitable failure. It's all so 20th Century...

-d-